2016 Annual Report
2 0 1 6 A N N U A L R E P O R T
Chairman’s Letter to Shareholders and Friends
Every Monday morning at Capital One, newly recruited associates walk into our buildings for the first time.
Engineers and analysts. Designers and data scientists. Commercial bankers and customer service
professionals. For some, it’s their first job. For others, it’s a new chapter in an established career. But for all
of them – whether they are in New York, Richmond, San Francisco, Chicago, Texas, Canada, the United
Kingdom, or our headquarters outside Washington D.C. – it’s an opportunity to challenge themselves.
To take a chance on something different. To join a growing, mission-driven company that is fully invested
in a digital transformation of who we are and how we work.
An Improbable Story
Twenty-five years ago, the world was changing. The availability of data was exploding. Advances in
technology were enabling new ways to leverage information and analytics to drive decisions. We were a
small start-up with a big dream to create an information-based technology company that could take on
the big banks and challenge the status quo, beginning with credit cards.
Most companies focus on where they are and what they can do to incrementally improve. We developed
our strategy by obsessing about where the world was going. We worked backward from what it takes to
win, and said, “If that’s where winning is, let’s go build that.” We obsessed about long-term resilience and
value creation. We focused on searching the world for great people and giving them the opportunity to be
great. We embraced a culture of openness, excellence, and “do the right thing.”
During the early years of Capital One, we developed and honed our ability to use data and scientific testing
to discover powerful insights about marketing, underwriting, and customer behavior. It didn’t come easy at
first. It took us years of testing and learning, and it wasn’t always clear that we’d succeed. In fact, many of
our ideas didn’t work. But when they did, we rolled them out in a big way. Our goal was to bring the right
product, to the right person, at the right time, and at the right price. We built products that smashed the
idea of “one size fits all” and slashed the price of credit for customers across the country. Capital One’s
“Information-Based Strategy” (IBS) was off and running, and it drove dramatic growth in customers, loans,
revenues, and earnings.
We applied IBS to other businesses and began to diversify and transform our company. Auto lending was
a fragmented business with an undiscovered opportunity to leverage data, analytics, and modern
underwriting to win in the marketplace. We entered the business in 1998 and have grown to be the third-
largest auto lender in America. We set our sights on retail branch banking, compelled by two powerful
opportunities. Deposits provide stable, low-cost funding. And traditional branch banking is fragmented,
2
2
33
built for physical distribution, and ripe for reinvention. We want to be
at the forefront of that transformation, and are now one of the top ten
banks in America.
We founded Capital One on the belief that information and technology
would revolutionize fi nancial services. Two decades later, our belief is
even stronger. The forces of digital disruption are accelerating and
taking new shape. Advances in technology present defi ning opportunities
and risks for banks. To win, banks must operate like leading tech
companies. Banking is moving from the branch on the corner to
the bank in your hand. And soon it will come to you in real time, on
whatever technology you choose, wherever you are, customized for
what you need and what you want. As digital changes everything,
our goal is to bring ingenuity, simplicity, and humanity to banking.
FLAGSHIP PRODUCTS
Millions of new customers joined
Capital One in 2016, and they are
increasingly making Capital One their
card of choice. Our clear, compelling
rewards cards off er great value with
no limits, restrictions, or fi ne print.
This is an extraordinary time at Capital One. For two decades, we’ve
built a talent model, technology foundation, and business strategy
that leverage information and analytics to make smarter decisions,
manage risk, and help our customers succeed. That momentum
continued in 2016.
Growth and Investments Shaped
Our 2016 Financial Performance
In 2016, we delivered solid fi nancial performance and growth at the
higher end of banks. We capitalized on a signifi cant growth window
in card and auto and continued to invest in our digital transformation.
Total company loans increased 7% and revenue was up 9%. 2016 was
our second consecutive year of industry-leading domestic credit card
growth. Loan balances grew 10% and purchase volumes were up 14%.
Auto originations grew 21%.
The costs of growth are front-loaded, particularly in our credit card
business. Credit card charge-off s tend to run higher early in the
customer relationship. And accounting principles require card lenders
to bring forward twelve months of projected credit losses into
reserves, adding to up-front costs. In our experience, loan growth
4
creates highly profi table annuities as front-loaded credit costs subside
and revenue momentum continues into the future. We expect the new
business we generated in 2016 to produce some of the highest value
of any year in Capital One’s history.
The front-loaded costs of growth lowered 2016 earnings and returns
relative to 2015. Net income was $3.8 billion, down $299 million, and
earnings per share were $6.89 compared to $7.07 in 2015. Return on
average tangible common equity was 11.9%. Despite the elevated
costs to support growth, we signifi cantly improved our effi ciency
ratio with a combination of higher revenue, productivity gains, and
careful cost management across the company. Our growth and
investments are “coiling the spring,” and we expect the benefi ts to be
increasingly evident in our fi nancial performance, including improvement
in revenue, earnings, and returns.
Strong capital levels, coupled with solid capital
management processes, enabled us to pass the 2016
Federal Reserve CCAR stress test and maintain our
quarterly dividend of forty cents per share. We also
completed $3.7 billion in common share repurchases
in 2016. We remain well-positioned to generate capital,
and we believe that capital distribution will continue to
be an important and enduring part of how we deliver
shareholder value.
Financial markets were volatile in 2016, but the stock market –
and bank stocks in particular – fi nished the year strong. The
KBW Bank Index increased 25.6%, with Capital One returning
23.8%. Our stock price fi nished the year at $87.24, its highest-
ever year-end close. Annual results are important, but so is
sustained performance, and we are well-positioned to deliver
exceptional value to our shareholders over the long term. Our
fi ve-year total shareholder return was 123%. Since we went public
in November 1994, Capital One has been one of the top-performing
public companies in America, with a shareholder return of 1,899%.
CAPITAL ONE CAFÉS
Our cafés encourage visitors
to experience Capital One’s
innovation up close. Learn about
our products, test drive our
digital tools on giant interactive
displays, or sit down with one of
our ambassadors over a cup of
coff ee. This is not traditional
banking – there’s no paper
but the napkins.
5
We Are Building a Leading Information-Based
Technology Company
The pace of the technology and digital transformation of our world
is breathtaking and accelerating. The battle for the front door to
banking has never been more intense. Our multiyear investments in
foundational technology and capabilities are paying off and having
a multiplicative impact on our ability to deliver innovative products at
digital speed. Our eff orts are getting noticed: InformationWeek ®
magazine ranked Capital One as the #1 Most Innovative User of
Business Technology in 2016.
Building a world-class technology and information
company starts with people. In 2016, we added
talented executives and associates in areas such
as information security, cloud infrastructure, data
technology, and mobile and web development. We’re
attracting top engineers, product managers, data
scientists, and designers from leading tech companies.
And our campus hiring continues to thrive. Our
college intern program for technology students,
a great source of talent, was ranked #1 across all
industries by Vault.com.
Engaging deeply in the technology community is essential to
attracting great digital talent. We sponsored SXSW and the
Grace Hopper Celebration of Women in Computing. We had
a signifi cant presence at leading technology events such as
AWS re:Invent. And the experience design fi rm Adaptive
Path, which we acquired in 2014, continued to host some
of the most well-attended design conferences worldwide, including
UX Week and Managing Experience.
We are arming our associates with cutting-edge tools and training,
and each year thousands of associates participate in customized
development programs that support personal and career growth. We
continued to transform our workspaces to attract and enable the best
ACTIVE LEADERS
IN TECHNOLOGY
Capital One is a leading voice at some
of the largest technology conferences
in the country, including SXSW.
We’re engaging with tech innovators,
unveiling new products, and sharing
our vision for the future of banking.
GRACE HOPPER
Attracting and empowering great
technologists with diverse backgrounds
and experiences are essential to our
quest to reimagine banking. Our Diamond
Sponsorship of Grace Hopper, the world’s
largest gathering of women technologists,
is one of many examples of our
commitment to diversity and inclusion.
6
talent and technology. Our open workspaces are
designed to support agile work environments and
increased collaboration. Our offi ces are also fun.
For the second time, we were named to Fortune’s
list of coolest offi ces.
While investments in foundational infrastructure
are not the most visible aspects of our digital
journey, they are the most critical. We are investing
in modern architecture and a technology stack that
enables rapid innovation and real-time soft ware
development. In 2016, we reached a landmark deal with
Amazon Web Services, which will support and accelerate our
move to the cloud. We’re building reusable services and have
embraced the open source movement. Great design
will be an important diff erentiator for banks, and we
have widely adopted leading-edge human-centered
design principles.
Our deep heritage as an information-based company
continues to enable our shift to big data technologies.
Advances in computing power and soft ware design
have begun to unleash the full potential of predictive
analytics and machine learning. Today, these approaches
are the backbone of online movie and shopping recommendations,
real-time navigation, self-driving cars, and the latest medical
breakthroughs. We are investing in these capabilities to drive
growth and effi ciency, improve risk management, and address
important challenges like fraud and cybersecurity. And we continue
to make investments in venture-based innovation. We have acquired
talented technology teams and capabilities that will support our
transformation and deliver valuable solutions to our customers. These
digital eff orts are helping to drive customer growth, increase associate
productivity, reduce analog costs, enhance risk management, and
improve the digital customer experience.
COOL OFFICE SPACES
We’re enabling great people with
great spaces. Our award-winning offi ce
designs encourage collaboration and
promote creativity. And they’re a fun
place to spend the day.
7
We’re Investing in Great Products, Caring
Service, and a Compelling Digital Experience
Millions of new customers joined Capital One for the fi rst time in 2016,
and millions more expanded or deepened an existing relationship. In our
credit card business, our customers are increasingly making Capital One
their card of choice, with high fi rst-in-wallet rates and low attrition.
Our simple and innovative products are delivering tremendous value to
customers. Venture® is a premier travel credit card that off ers unlimited
double miles that customers can actually use. Quicksilver® is our fl agship
cash-back card that pays 1.5% back on every purchase, every day,
with no games or limits. Our Spark Business® credit card provides savvy
business owners with the choice of unlimited double miles or 2% cash
back. Auto Navigator® allows buyers to compare cars, search national
inventories, and get pre-approved for fi nancing. On any device, anywhere.
Thousands of associates serve our customers every day.
Whether it’s a call center associate welcoming a new
customer to Capital One, or an experienced teller greeting
a long-time neighborhood client, our service associates
bring skill and care to every interaction. And our experienced
commercial bankers serve clients from coast to coast,
working side by side to support the dreams of America’s
entrepreneurs and business leaders.
In our Capital One cafés, we’re reimagining our brand
experience and fi nding new ways to help our customers
succeed. We’re opening iconic locations in attractive
markets like Boston, Los Angeles, San Francisco, Seattle,
and Miami. Local café ambassadors help
customers understand their fi nances and
meet their money goals using innovative
solutions like smart ATMs, side-by-side tablets,
interactive displays, and the full suite of
Capital One tools and apps. Our cafés are
warm, inviting, and comfortable spaces, where
DIGITAL EXPERIENCE
Banking is coming to you, in
real time, on whatever device you
prefer. Capital One is investing in
modern digital tools and capabilities,
including award-winning apps like
the Capital One Wallet
SM
.
8
visitors enjoy great coff ee, local food, complimentary
WiFi, and free community meeting spaces. Stop by if
you’re in the neighborhood.
In 2016 we continued to bring innovative digital
capabilities and experiences to our customers. Every
week millions of customers visit our website or open
our highly rated mobile apps. Our fl agship mobile
servicing app has earned industry awards for design and
functionality. Mobile customers enjoy the expanded features
of the Capital One Wallet
SM
, including purchase alerts and
enhanced controls for security and fraud prevention.
Customers and non-customers are using CreditWise® to
understand, monitor, and improve their credit scores. In 2016,
Capital One was the fi rst bank to introduce voice-enabled
transactions on Amazon’s Alexa® platform. Customers can ask Alexa to
check their balance, make payments, and review recent transactions.
And our new API-driven, cloud-based messaging system allows
seamless communication with customers across any platform.
A BOLD, POWERFUL BRAND
Our long-term investments in brand
are driving growth. We continued
iconic advertising campaigns with
Samuel L. Jackson and Jennifer Garner,
and we expanded our presence in
college sports and across social media.
We continued our long-term investments to create a unique
and powerful brand. Our iconic ad campaigns with Samuel L.
Jackson for Quicksilver and Jennifer Garner for Venture helped
drive industry-leading card growth. We expanded our already
strong position in college sports. We are the Offi cial Bank and
Credit Card of the College Football Playoff s and the NCAA®, with
high-profi le events such as the Capital One Orange Bowl and
the NCAA basketball tournament and Final Four®. And we won
three Sports CLIO® awards for our “Road Trip” Final Four
campaign, featuring Sam, Spike Lee, and Charles Barkley. We
maintained our strong social media presence across every
major platform, and our social servicing eff orts helped us
engage with customers in an authentic, helpful, and human way.
At Capital One we measure our eff orts by the success our customers
enjoy and the advocacy they exhibit. Customers continue to
9
recommend Capital One to their friends and family, and high
Net Promoter® Scores refl ect growing advocacy for our products
and our brand. Our customers’ success is powering our growth
and strengthening our franchise.
We Are Helping Our Associates
and Our Communities Thrive
For over twenty years, we have worked tirelessly to assemble an
amazing team of associates. I am profoundly grateful for their talents,
their heart, and their service. They represent a diversity of backgrounds,
perspectives, and experiences. In 2016, we welcomed thousands of new
associates who are adding tremendous value to our company, our
communities, and our nation. Our people thrive in an environment
where collaboration and openness are valued. And we’ve built a culture
based on the meritocracy of ideas – no matter their origin – and
a company where performance is celebrated and rewarded.
™
Capital One continues to be widely recognized as a great place to work.
In 2016, Fortune magazine named Capital One a “Blue Ribbon
Company,” and we were once again included on Fortune’s “100 Best
Companies to Work For,” our 10th time on the list and one of only
thirteen large companies on the list. In 2016, we were also named a
“Best Workplace” in the U.K. and Canada by the Great Place to Work
Institute and one of Working Mother’s “100 Best Companies for
Working Mothers.”
We are deeply committed to hiring military veterans and spouses, and
we were named as one of Military Times’ “Best for Vets.” The Disability
Equality Index named Capital One a “Best Place to Work.” We were also
named one of the “Top Companies for Executive Women” by the
National Association for Female Executives and one of the Human
Rights Campaign Foundation’s “Best Places to Work for LGBT Equality.”
Capital One was once again recognized as one of America’s most
community-minded companies in The Civic 50, an annual award
sponsored by the Points of Light Foundation and Bloomberg L.P.
10
The award recognizes companies with revenues of $1 billion or more
for their commitment to improve the quality of life in the communities
where they do business.
Our associates are incredibly generous with their talents
and their time outside of the offi ce. In 2016, Capital One
associates spent more than 394,000 hours in volunteer
service, working in thousands of community and charitable
programs across the world. The company gave $50 million
to nonprofi t organizations that help build economic
opportunity in communities where our associates and
customers live and work. And we continue to invest in
community-based partnerships through Future Edge®,
a fi ve-year program we launched in 2015 to invest $150
million in community grants and initiatives to help people
develop digital skills for the jobs of today and tomorrow.
Join Us on Our Journey
This is a remarkable moment in human history and an
extraordinary time at Capital One. I hope you get the chance to
experience Capital One up close. Whether you are a customer,
an investor, a partner, or a friend, I encourage you to try one of
our products. Talk to one of our associates. Or apply to work at
Capital One and join us on our journey. We are on a mission to
Change Banking for Good and build one of America’s great companies.
Richard D. Fairbank
Chair, Chief Executive Offi cer and President
MAKING A DIFFERENCE
IN OUR COMMUNITIES
Our businesses are successful
only when our communities
thrive. We are investing in local
communities with programs like
Future Edge, which helps people
develop digital skills for the jobs
of today and tomorrow. Our
associates make a positive impact
in our communities by spending
thousands of hours volunteering
with local charitable organizations.
11
Financial Summary
LOANS HELD FOR INVESTMENT ($ IN BILLIONS)
$246
’94
’95
’96
’97
’98
’99
’00
’01
’02
’03
’04
’05
’06
’07
’08
’09
’10
’11
’12
’13
’14
’15
’16
Source: COF Forms 10-K published at sec.gov
TOTAL REVENUE ($ IN MILLIONS)
$25,501
’94
’95
’96
’97
’98
’99
’00
’01
’02
’03
’04
’05
’06
’07
’08
’09
’10
’11
’12
’13
’14
’15
’16
Source: COF Forms 10-K published at sec.gov
Note: Figures prior to 2005 do not include the effects of securitization transactions qualifying as sales under GAAP
DILUTED EARNINGS PER SHARE (DOLLARS)
$6.89
’94
’95
’96
’97
’98
’99
’00
’01
’02
’03
’04
’05
’06
’07
’08
’09
’10
’11
’12
’13
’14
’15
’16
Source: COF Forms 10-K and earnings release materials published at sec.gov
Note: 2008 represents adjusted earnings per common share from continuing operations of $2.28 per share and does not include an $811 million ($2.14 per share) non-cash goodwill
impairment and the associated $7 million tax effect of the impairment ($0.01 per share) related to our Auto Finance business. 2008 loss as reported under GAAP was $0.21 per share.
12
Dollars in millions, except per share data
Income Statement:
Net interest income
Non-interest income
Total revenue
Provision for credit losses
Non-interest expense
Income from continuing operations before income taxes
Income tax provision
Income from continuing operations, net of tax
Income (loss) from discontinued operations, net of tax
Net income
Dividends and undistributed earnings allocated to participating securities
Preferred stock dividends
Net income available to common stockholders
Common Share Statistics:
Basic earnings per share:
Income from continuing operations, net of tax
Income (loss) from discontinued operations, net of tax
Net income per common share
Diluted earnings per common share:
Income from continuing operations, net of tax
Income (loss) from discontinued operations, net of tax
Net income per common share
Dividends per common share
Balance Sheet:
Loans held for investment
Interest-earning assets
Total assets
Interest-bearing deposits
Total deposits
Borrowings
Common equity
Total stockholders’ equity
Average Balances:
Loans held for investment
Interest-earning assets
Total assets
Interest-bearing deposits
Total deposits
Borrowings
Common equity
Total stockholders’ equity
Credit Quality Metrics:
Allowance for loan and lease losses
Allowance as a % of loans held for investment
Net charge-offs
Net charge-off rate
30+ day performing delinquency rate
30+ day total delinquency rate
Performance Metrics:
Purchase volume
Total net revenue margin
Net interest margin
Return on average assets
Return on average common equity
Return on average tangible common equity
Efficiency ratio
Effective income tax rate on continuing operations
Employees (in thousands), period end
Capital Ratios:
Common equity Tier 1 capital ratio
Tier 1 risk-based capital ratio
Total risk-based capital ratio
Tier 1 leverage ratio
Tangible common equity ratio
2016
2015
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
20,873
4,628
25,501
6,459
13,558
5,484
1,714
3,770
(19)
3,751
(24)
(214)
3,513
7.00
(0.04)
6.96
6.93
(0.04)
6.89
1.60
245,586
321,807
357,033
211,266
236,768
60,460
43,154
47,514
233,272
307,796
339,974
198,304
223,714
56,878
45,162
48,753
6,503
2.65 %
5,062
2.17 %
2.93
3.27
307,138
8.29 %
6.78
1.11
7.82
11.93
53.17
31.3
47.3
10.1 %
11.6
14.3
9.9
8.1
18,834
4,579
23,413
4,536
12,996
5,881
1,869
4,012
38
4,050
(20)
(158)
3,872
7.08
0.07
7.15
7.00
0.07
7.07
1.50
229,851
302,007
334,048
191,874
217,721
59,115
43,990
47,284
210,745
282,581
313,474
185,677
210,989
45,420
45,072
47,713
5,130
2.23 %
3,695
1.75 %
2.69
3.00
271,167
8.29 %
6.66
1.28
8.51
12.87
55.51
31.8
45.4
11.1 %
12.4
14.6
10.6
8.9
13
Directors and Executive Officers
Capital One Financial Corporation
Board of Directors
Capital One Financial Corporation
Executive Officers
Richard D. Fairbank
Chair, CEO and President
Capital One Financial Corporation
Patrick W. Gross C, G, R
Chairman
The Lovell Group
Ann Fritz Hackett C, G, R
Partner and Co-Founder
Personal Pathways, LLC
Lewis Hay, III C, G, R
Former Chairman, CEO and President
NextEra Energy, Inc.
Benjamin P. Jenkins, III A, C, R
Former Senior Advisor, Managing Director
and Vice Chairman for Retail Banking
Morgan Stanley & Co.
Peter Thomas Killalea C, R
Owner and President
Aoinle, LLC
Pierre E. Leroy A, C, R
Managing Partner
Aspiture, LLC
Peter E. Raskind A, R
Owner
JMB Consulting, LLC
Mayo A. Shattuck III C, G, R
Chairman
Exelon Corporation
Bradford H. Warner A, R
Former President of Premier
and Small Business Banking
Bank of America Corporation
Catherine G. West A, R
Former Special Advisor
Promontory Financial Group
Richard D. Fairbank
Chair, CEO and President
Robert M. Alexander
Chief Information Officer
Jory A. Berson
Chief Human Resources Officer
R. Scott Blackley
Chief Financial Officer
Kevin S. Borgmann
Chief Risk Officer
Stephen S. Crawford
Head of Finance and Corporate Development
Noelle K. Eder
Chief Card Customer Experience Officer
John G. Finneran, Jr.
General Counsel and Corporate Secretary
Frank G. LaPrade, III
Chief Enterprise Services Officer and
Chief of Staff to the CEO
Christopher T. Newkirk
President, International and Small Business Card
Michael C. Slocum
President, Commercial Banking
Michael J. Wassmer
President, U.S. Card
Jonathan W. Witter
President, Retail and Direct Banking
Sanjiv Yajnik
President, Financial Services
A Audit Committee
C Compensation Committee
G Governance and Nominating Committee
R Risk Committee
14
_______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
_______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________
FORM 10-K
____________________________________
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
Commission File No. 1-13300
____________________________________
to
CAPITAL ONE FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
____________________________________
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
Delaware
54-1719854
1680 Capital One Drive,
McLean, Virginia
(Address of Principal Executive Offices)
22102
(Zip Code)
Registrant’s telephone number, including area code: (703) 720-1000
____________________________________
Securities registered pursuant to section 12(b) of the act:
Title of Each Class
Common Stock (par value $.01 per share)
Warrants (expiring November 14, 2018)
Name of Each Exchange on
Which Registered
New York Stock Exchange
New York Stock Exchange
Depositary Shares, Each Representing a 1/40th Interest in a Share of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series B
New York Stock Exchange
Depositary Shares, Each Representing a 1/40th Interest in a Share of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series C
New York Stock Exchange
Depositary Shares, Each Representing a 1/40th Interest in a Share of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series D
New York Stock Exchange
Depositary Shares, Each Representing a 1/40th Interest in a Share of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series F
New York Stock Exchange
Depositary Shares, Each Representing a 1/40th Interest in a Share of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series G
New York Stock Exchange
Depositary Shares, Each Representing a 1/40th Interest in a Share of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series H
New York Stock Exchange
Securities registered pursuant to section 12(g) of the act: None
____________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
No
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
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
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment
to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a Shell Company (as defined in Rule 12b-2 of the Exchange Act) Yes
No
The aggregate market value of the voting stock held by non-affiliates of the registrant as of the close of business on June 30, 2016 was approximately
$31,929,010,767. As of January 31, 2017, there were 480,641,838 shares of the registrant’s Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Proxy Statement for the annual meeting of stockholders to be held on May 4, 2017, are incorporated by reference into Part III.
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TABLE OF CONTENTS
PART I
Item 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operations and Business Segments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supervision and Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forward-Looking Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6.
Summary of Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) . . .
Executive Summary and Business Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Off-Balance Sheet Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Business Segment Financial Performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Critical Accounting Policies and Estimates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounting Changes and Developments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit Risk Profile. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liquidity Risk Profile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Market Risk Profile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supplemental Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Glossary and Acronyms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7A. Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Financial Statements and Supplementary Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Changes in Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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Capital One Financial Corporation (COF)
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 1—Summary of Significant Accounting Policies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 2—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—Premises, Equipment and Lease Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 9—Deposits and Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 10—Derivative Instruments and Hedging Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 11—Stockholders’ Equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 12—Regulatory and Capital Adequacy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 13—Earnings Per Common Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 14—Stock-Based Compensation Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 15—Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 16—Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 17—Fair Value Measurement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 18—Business Segments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 19—Commitments, Contingencies, Guarantees and Others . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 20—Capital One Financial Corporation (Parent Company Only) . . . . . . . . . . . . . . . . . . . . . . . .
Note 21—Related Party Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Quarterly Financial Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . .
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III
Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. . . .
Item 13. Certain Relationships and Related Transactions and Director Independence. . . . . . . . . . . . . . . . . . . . . . . . .
Item 14. Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART IV
Item 15. Exhibits, Financial Statements Schedules. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EXHIBIT INDEX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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164
169
172
173
176
181
184
186
187
191
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199
210
213
221
223
224
225
225
225
226
226
226
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Capital One Financial Corporation (COF)
MD&A Tables:
INDEX OF MD&A AND SUPPLEMENTAL TABLES
1
2
3
4
5
6
7
8
9
9.1
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
Average Balances, Net Interest Income and Net Interest Margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate/Volume Analysis of Net Interest Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-Interest Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-Agency Investment Securities Credit Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans Held for Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Business Segment Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit Card Business Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Domestic Card Business Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer Banking Business Results. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial Banking Business Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Category Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital Ratios under Basel III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Regulatory Capital Reconciliations between Basel III Transition to Fully Phased-in. . . . . . . . . . . . . . . . . . . .
Preferred Stock Dividends Paid Per Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans Held for Investment Portfolio Composition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial Loans by Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home Loans—Risk Profile by Lien Priority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sensitivity Analysis—PCI Home Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan Maturity Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit Score Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30+ Day Delinquencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aging and Geography of 30+ Day Delinquent Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
90+ Day Delinquent Loans Accruing Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonperforming Loans and Other Nonperforming Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Charge-Offs (Recoveries) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Troubled Debt Restructurings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments Activity . . . . . . . .
Allowance Coverage Ratios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liquidity Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposit Composition and Average Deposit Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturities of Large-Denomination Domestic Time Deposits—$100,000 or More. . . . . . . . . . . . . . . . . . . . . .
Senior Unsecured Long-Term Debt Credit Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contractual Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest Rate Sensitivity Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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Supplemental Tables:
A
B
C
D
E
F
Loans Held for Investment Portfolio Composition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Performing Delinquencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonperforming Loans and Other Nonperforming Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Charge-Offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary of Allowance for Loan and Lease Losses and Unfunded Lending Commitments . . . . . . . . . . . . . .
Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures . . . . . . . . . . . . . . .
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Capital One Financial Corporation (COF)
PART I
Item 1. Business
OVERVIEW
General
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 December 31, 2016, our principal subsidiaries included:
• Capital One Bank (USA), National Association (“COBNA”), which offers credit and debit card products, other lending
products and deposit products; and
• Capital One, National Association (“CONA”), which offers a broad spectrum of banking products and financial services
to consumers, small businesses and commercial clients.
The Company is hereafter collectively referred to as “we,” “us” or “our.” COBNA and CONA are collectively referred to as the
“Banks.” References to “this Report” or our “2016 Form 10-K” or “2016 Annual Report” are to our Annual Report on Form 10-
K for the fiscal year ended December 31, 2016. All references to 2016, 2015, 2014, 2013 and 2012, refer to our fiscal years ended,
or the dates, as the context requires, December 31, 2016, December 31, 2015, December 31, 2014, December 31, 2013
and December 31, 2012, respectively. 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.
As one of the nation’s ten largest banks based on deposits as of December 31, 2016, we service banking customer accounts through
the internet and mobile banking, as well as through cafés, ATMs and branch locations primarily across New York, Louisiana,
Texas, Maryland, Virginia, New Jersey and the District of Columbia. We also operate the largest online direct banking institution
in the United States (“U.S.”) by deposits. In addition to bank lending, treasury management and depository services, we offer
credit and debit card products, auto loans and mortgage banking in markets across the United States. We were the third largest
issuer of Visa® (“Visa”) and MasterCard® (“MasterCard”) credit cards in the United States based on the outstanding balance of
credit card loans as of December 31, 2016.
We also offer products outside of the United States principally through Capital One (Europe) plc (“COEP”), an indirect subsidiary
of COBNA organized and located in the United Kingdom (“U.K.”), and through a branch of COBNA in Canada. Both COEP and
our branch of COBNA in Canada have the authority to provide credit card loans.
Recent Acquisitions and Dispositions
We regularly explore and evaluate opportunities to acquire financial services and financial assets, including credit card and other
loan portfolios, and enter into strategic partnerships as part of our growth strategy. We also explore opportunities to acquire digital
companies and related assets to improve our information technology infrastructure and to deliver on our digital strategy. We also
regularly consider the potential disposition of certain of our assets, branches, partnership agreements or lines of business. We may
issue equity or debt in connection with acquisitions, including public offerings, to fund such acquisitions.
On October 3, 2016, we announced that we have entered into a 10-year program agreement to become the exclusive issuing partner
of co-branded credit cards to Cabela’s customers. In connection with this credit card program, we have entered into a definitive
agreement under which we will acquire the credit card operations from Cabela’s, including approximately $5.2 billion in credit
card receivables and other assets and approximately $5.0 billion in associated funding liabilities. This transaction is subject to the
satisfaction of customary closing conditions, including receipt of various regulatory approvals and the approval of the stockholders
of Cabela’s. In determining whether to approve the proposed acquisition under the Bank Merger Act (“BMA”), the Office of the
Comptroller of the Currency (“OCC”) will consider, among other factors, the convenience and needs of the communities we serve
and our effectiveness in combating money laundering, including the acceptability to the OCC of our progress in addressing the
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Capital One Financial Corporation (COF)
requirements of the consent order with the OCC that we previously disclosed in our Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2015 (the “AML Consent Order”).
On January 28, 2017, Capital One withdrew its BMA application from the OCC and we do not expect to receive regulatory approval
of any BMA application for this transaction prior to October 3, 2017. This is the date when any of the parties involved in the
agreement can terminate the agreement. We will not be in a position to refile a BMA application until after we have completed
our work under the AML Consent Order.
We will continue to work with Cabela’s toward completing the transaction. We cannot be certain when or if, or on what terms and
conditions, required regulatory approvals will be granted to complete the acquisition.
On December 1, 2015, we completed the acquisition of the Healthcare Financial Services business of General Electric Capital
Corporation (“HFS acquisition”). Including post-closing purchase price adjustments, we recorded approximately $9.2 billion in
assets, including $8.2 billion of loans.
Additional Information
Our common stock trades on the New York Stock Exchange (“NYSE”) under the symbol “COF” and is included in the Standard
& Poor’s (“S&P”) 100 Index. Our principal executive office is located at 1680 Capital One Drive, McLean, Virginia 22102,
telephone number (703) 720-1000. We maintain a website at www.capitalone.com. Documents available on our website include:
•
•
•
our Code of Business Conduct and Ethics for the Corporation;
our Corporate Governance Guidelines; and
charters for the Audit, Compensation, Governance and Nominating, and Risk Committees of the Board of Directors.
These documents also are available in print to any stockholder who requests a copy.
In addition, we make available free of charge through our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-
Q, Current Reports on Form 8-K and amendments to those reports as soon as reasonably practicable after electronically filing or
furnishing such material to the U.S. Securities and Exchange Commission (“SEC”).
OPERATIONS AND BUSINESS SEGMENTS
Our consolidated total net revenues are derived primarily from lending to consumer and commercial customers net of funding
costs associated with 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 currently organized for management reporting purposes into three primary business segments, which
are defined primarily based on the products and services provided or the type of customer served: Credit Card, Consumer Banking
and Commercial Banking. The operations of acquired businesses have been integrated into our existing business segments. Certain
activities that are not part of a segment, such as management of our corporate investment portfolio and asset/liability management
by our centralized Corporate Treasury group, are included in the Other category.
• Credit Card: Consists of our domestic consumer and small business card lending, and international card lending businesses
in Canada and the United Kingdom.
• Consumer Banking: Consists of our branch-based lending and deposit gathering activities for consumers and small
businesses, national deposit gathering, national auto lending and consumer home loan lending and servicing activities.
• Commercial Banking: Consists of our lending, deposit gathering and treasury management services to commercial real
estate and commercial and industrial customers. Our commercial and industrial customers typically include companies with
annual revenues between $10 million and $1 billion.
Customer usage and payment patterns, credit quality, levels of marketing expense and operating efficiency all affect our profitability.
In our Credit Card business, we experience fluctuations in purchase volume and the level of outstanding loan receivables due to
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Capital One Financial Corporation (COF)
seasonal variances in consumer spending and payment patterns which, for example, are highest around the winter holiday season.
No individual quarter in 2016, 2015 or 2014 accounted for more than 30% of our total revenues in any of these fiscal years. Net
charge-off rates in our Credit Card and Consumer Banking businesses also have historically exhibited seasonal patterns and
generally tend to be the highest in the first and fourth quarters of the year.
For additional information on our business segments, including the financial performance of each business, see “Part II—Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)—Executive Summary and
Business Outlook,” “MD&A—Business Segment Financial Performance” and “Note 18—Business Segments” of this Report.
SUPERVISION AND REGULATION
General
Capital One Financial Corporation is a bank holding company (“BHC”) under Section 3 of the Bank Holding Company Act of
1956, as amended (12 U.S.C. § 1842) (“BHC Act”) and is subject to the requirements of the BHC Act, including its approval
requirements for investments in or acquisitions of banking organizations, capital adequacy standards and limitations on our
nonbanking activities. We are also subject to supervision, examination and regulation by the Board of Governors of the Federal
Reserve System (“Federal Reserve”). Permissible activities for a BHC include those activities that are so closely related to banking
as to be a proper incident thereto, such as consumer lending and other activities that have been approved by the Federal Reserve
by regulation or order. Certain servicing activities are also permissible for a BHC if conducted for or on behalf of the BHC or any
of its affiliates. Impermissible activities for BHCs generally include nonfinancial activities such as sales of commercial products.
On May 27, 2005, we became a “financial holding company” under the BHC Act. In addition to the activities permissible for a
BHC, a financial holding company, and the nonbank companies under its control, are permitted to engage in activities considered
to be financial in nature (including, for example, insurance underwriting, agency sales and brokerage, securities underwriting and
dealing and merchant banking activities), incidental to financial activities or, if the Federal Reserve determines that they pose no
risk to the safety or soundness of depository institutions or the financial system in general, activities complementary to financial
activities.
To become and remain eligible for financial holding company status, a BHC and its subsidiary depository institutions must meet
certain criteria, including capital, management and Community Reinvestment Act (“CRA”) requirements. Failure to meet such
criteria could result, depending on which requirements were not met, in the Company facing restrictions on new financial activities
or acquisitions or being required to discontinue existing activities that are not generally permissible for BHCs.
The Banks are national associations chartered under the laws of the United States, the deposits of which are insured by the Deposit
Insurance Fund (“DIF”) of the Federal Deposit Insurance Corporation (“FDIC”) up to applicable limits. The Banks are subject to
comprehensive regulation and periodic examination by the Office of the Comptroller of the Currency (“OCC”), the FDIC and the
Consumer Financial Protection Bureau (“CFPB”).
We are also registered as a financial institution holding company under the law of the Commonwealth of Virginia and, as such,
we are subject to periodic examination by the Virginia Bureau of Financial Institutions. We also face regulation in the international
jurisdictions in which we conduct business (see below under “Regulation of Businesses by Authorities Outside the United States”).
Regulation of Business Activities
The business activities of the Company and Banks are also subject to regulation and supervision under various laws and regulations.
Regulations of Consumer Lending Activities
The activities of the Banks as consumer lenders are subject to regulation under various federal laws, including the Truth in Lending
Act (“TILA”), the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the CRA, the Servicemembers Civil Relief Act
and the Military Lending Act, as well as under various state laws. We are also subject to the Credit Card Accountability Responsibility
and Disclosure Act, which amended the TILA, and which imposes a number of restrictions on credit card practices impacting rates
and fees, requires that a consumer’s ability to pay be taken into account before issuing credit or increasing credit limits, and imposes
revised disclosures required for open-end credit.
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Capital One Financial Corporation (COF)
Depending on the underlying issue and applicable law, regulators may be authorized to impose penalties for violations of these
statutes and, in certain cases, to order banks to compensate injured borrowers. Borrowers may also have a private right of action
for certain violations. Federal bankruptcy and state debtor relief and collection laws may also affect the ability of a bank, including
the Banks, to collect outstanding balances owed by borrowers.
Mortgage Lending
The CFPB has issued several final rules pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-
Frank Act”) that provide additional disclosure requirements and substantive limitations on our mortgage lending activities. These
rules, which include the amendments to the Ability to Repay, Qualified Mortgage Standards and Mortgage Servicing regulations
under the TILA (Regulation Z) and the Real Estate Settlement Procedures Act (Regulation X), could impact the type and amount
of mortgage loans CONA offers and services.
Debit Interchange Fees
The Dodd-Frank Act requires that the amount of any interchange fee received by a debit card issuer with respect to debit card
transactions be reasonable and proportional to the cost incurred by the issuer with respect to the transaction. Final rules adopted
by the Federal Reserve to implement these requirements limit interchange fees per debit card transaction to $0.21 plus five basis
points of the transaction amount and provide for an additional $0.01 fraud prevention adjustment to the interchange fee for issuers
that meet certain fraud prevention requirements.
Bank Secrecy Act and USA PATRIOT Act of 2001
The Bank Secrecy Act and the USA PATRIOT Act of 2001 (“Patriot Act”) require financial institutions, among other things, to
implement a risk-based program reasonably designed to prevent money laundering and to combat the financing of terrorism,
including through suspicious activity and currency transaction reporting, compliance, record-keeping and customer due diligence.
In May 2016, the United States Department of the Treasury’s Financial Crimes Enforcement Network issued a final rule making
customer due diligence a required, stand-alone part of the anti-money laundering programs financial institutions must maintain
under the Bank Secrecy Act. For these purposes, the term “customer due diligence” refers to customer identification and verification,
beneficial ownership identification and verification, understanding the nature and purpose of customer relationships to develop a
customer risk profile, ongoing monitoring for reporting suspicious transactions and, on a risk-adjusted basis, maintaining and
updating customer information. The rule became effective on July 11, 2016 and requires full compliance by May 11, 2018 for
Capital One and all other covered financial institutions.
The Patriot Act also contains financial transparency laws and provides enhanced information collection tools and enforcement
mechanisms to the United States government, including due diligence and record-keeping requirements for private banking and
correspondent accounts; standards for verifying customer identification at account opening; rules to produce certain records upon
request of a regulator or law enforcement agency; and rules to promote cooperation among financial institutions, regulators and
law enforcement agencies in identifying parties that may be involved in terrorism, money laundering and other crimes.
Funding
Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), as discussed in “MD&A—Liquidity
Risk Profile,” only well capitalized and adequately capitalized institutions may accept brokered deposits. Adequately capitalized
institutions, however, must obtain a waiver from the FDIC before accepting brokered deposits, and such institutions may not pay
rates that significantly exceed the rates paid on deposits of similar maturity obtained from the institution’s normal market area or,
for deposits obtained from outside the institution’s normal market area, the national rate on deposits of comparable maturity. The
FDIC is authorized to terminate a bank’s deposit insurance upon a finding by the FDIC that the bank’s financial condition is unsafe
or unsound or that the institution has engaged in unsafe or unsound practices or has violated any applicable rule, regulation, order
or condition enacted or imposed by the bank’s regulatory agency. The termination of deposit insurance could have a material
adverse effect on a bank’s liquidity and earnings.
Nonbank Activities
Certain of our nonbank subsidiaries are subject to supervision and regulation by various other federal and state authorities. Capital
One Securities, Inc. and Capital One Investing, LLC are registered broker-dealers regulated by the SEC and the Financial Industry
Regulatory Authority. Our broker-dealer subsidiaries are subject, among other things, to net capital rules designed to measure the
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Capital One Financial Corporation (COF)
general financial condition and liquidity of a broker-dealer. Under these rules, broker-dealers are required to maintain the minimum
net capital deemed necessary to meet their continuing commitments to customers and others, and to keep a substantial portion of
their assets in relatively liquid form. These rules also limit the ability of a broker-dealer to transfer capital to its parent companies
and other affiliates. Broker-dealers are also subject to regulations covering their business operations, including sales and trading
practices, public offerings, publication of research reports, use and safekeeping of client funds and securities, capital structure,
record-keeping and the conduct of directors, officers and employees.
Capital One Asset Management, LLC and Capital One Advisors, LLC are SEC-registered investment advisers regulated under the
Investment Advisers Act of 1940. Capital One Asset Management, LLC, whose sole client is CONA, provides investment advice
to CONA’s private banking customers, including trusts, high net worth individuals, institutions, foundations, endowments and
other organizations.
Capital One Agency LLC is a licensed insurance agency that provides both personal and business insurance services to retail and
commercial clients. It is regulated by state insurance regulatory agencies in the states in which it operates.
Derivatives Activities
The Commodity Futures Trading Commission (“CFTC”) and the SEC have jointly issued final rules further defining the Dodd-
Frank Act’s “swap dealer” definitions. Based on these rules, no Capital One entity is currently required to register with the CFTC
or SEC as a swap dealer. The Dodd-Frank Act also requires all swap market participants to keep certain swap transaction records
and report pertinent information to swap data repositories on a real-time and on-going basis. Further, each swap, group, category,
type or class of swap that the CFTC or SEC determines must be cleared through a derivatives clearinghouse (unless the swap is
eligible for a clearing exemption) must also be executed on a designated contract market (“DCM”), exchange or swap execution
facility (“SEF”), unless no DCM, exchange or SEF has made the swap available for trading.
Volcker Rule
We and each of our subsidiaries, including the Banks, are subject to the “Volcker Rule,” a provision of the Dodd-Frank Act that
contains prohibitions on proprietary trading and certain investments in, and relationships with, covered funds (hedge funds, private
equity funds and similar funds), subject to certain exemptions, in each case as the applicable terms are defined in the Volcker Rule
and the implementing regulations. The implementing regulations also require that we, as a banking entity with $50 billion or more
in total assets, establish and maintain an enhanced compliance program designed to ensure that we comply with the requirements
of such regulations.
Capital and Liquidity Regulation
The Company and the Banks are subject to capital adequacy guidelines adopted by the Federal Reserve and OCC. For a further
discussion of the capital adequacy guidelines, see “MD&A—Capital Management” and “Note 12—Regulatory and Capital
Adequacy.” The Company and the Banks exceeded minimum regulatory requirements under these guidelines as of December 31,
2016.
Basel III and United States Capital Rules
In December 2010, the Basel Committee on Banking Supervision (“Basel Committee”) published a framework for additional
capital and liquidity requirements (“Basel III”), which included detailed capital ratios and buffers, subject to transition periods.
The Federal Reserve, OCC and FDIC (collectively, the “Federal Banking Agencies”) issued a final rule that implemented Basel
III and certain Dodd-Frank Act and other capital provisions and updated the prompt corrective action (“PCA”) framework to reflect
the new regulatory capital minimums (“Basel III Capital Rule”). The Basel III Capital Rule increased the minimum capital that
we and other institutions are required to hold. The Basel III Capital Rule includes the “Basel III Standardized Approach” and the
“Basel III Advanced Approaches.” The Basel Committee continues to evaluate further modifications to these and other capital
standards which, if finalized, would require rulemaking in the United States prior to their effectiveness for United States banking
organizations. There is uncertainty around any final modifications that the Basel Committee might adopt, which of those changes
thereafter may be adopted in the United States, and how those changes may impact U.S. capital standards.
The Basel III Advanced Approaches are mandatory for institutions with total consolidated assets of $250 billion or more or total
consolidated on-balance-sheet foreign exposure of $10 billion or more. We became subject to the predecessor of these rules at the
end of 2012. Prior to full implementation of the Basel III Advanced Approaches, however, a covered organization must complete
a qualification period, known as the parallel run, during which it must demonstrate that it meets the requirements of the rule to the
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Capital One Financial Corporation (COF)
satisfaction of its primary United States banking regulator. We entered parallel run on January 1, 2015. A parallel run must last at
least four quarters, but in practice United States banks have taken considerably longer to complete parallel runs.
Notwithstanding the Basel III Advanced Approaches, the Basel III Capital Rule also established a capital floor so that organizations
subject to the Basel III Advanced Approaches may not hold less capital than would be required using the Basel III Standardized
Approach capital calculations.
The Basel III Capital Rule revised the definition of regulatory capital, established a new common equity Tier 1 capital requirement,
set higher minimum capital ratio requirements, introduced a new capital conservation buffer of 2.5%, introduced a new
countercyclical capital buffer (currently set at 0.0%) and updated the PCA framework. Compliance with certain aspects of the
Basel III Capital Rule went into effect for Capital One as of January 1, 2014 and other provisions have gone or will go into effect
according to various start dates and phase-in periods. As of January 1, 2014, the minimum risk-based and leverage capital
requirements for Advanced Approaches banking organizations included a common equity Tier 1 capital ratio of at least 4.0%, a
Tier 1 risk-based capital ratio of at least 5.5%, a total risk-based capital ratio of at least 8.0% and a Tier 1 leverage capital ratio of
at least 4.0%. On January 1, 2015, the minimum risk-based capital ratio requirements increased to 4.5% for the common equity
Tier 1 capital ratio and to 6.0% for the Tier 1 risk-based capital ratio, and the minimum requirements for the total risk-based capital
ratio and Tier 1 leverage capital ratio remained the same. Both the capital conservation buffer and the countercyclical capital buffer
are being phased-in over a transition period of four years that commenced on January 1, 2016. On January 1, 2014, we began to
use the Basel III Capital Rule, with transition provisions, to calculate our regulatory capital, including for purposes of calculating
our regulatory capital ratios. On January 1, 2015, we began to use the Basel III Standardized Approach for calculating our risk-
weighted assets in our regulatory capital ratios.
The Basel III Capital Rule also introduced a new 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. The
supplementary leverage ratio will become effective on 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. For
further information, see “MD&A—Capital Management.”
In July 2015 the Federal Reserve approved a final rule that imposes an additional common equity Tier 1 capital requirement on
global systemically important banks (“G-SIBs”) that are based in the United States (“G-SIB Surcharge”). United States BHCs
with total consolidated assets of $250 billion or more or total consolidated on-balance-sheet foreign exposure of $10 billion or
more are required to determine annually whether they are considered to be a G-SIB for purposes of the G-SIB Surcharge. A BHC
whose score using the prescribed methodology equals or exceeds 130 must maintain additional capital in an amount prescribed
by the methodologies set out in the G-SIB Surcharge rule. We are not a G-SIB based on the most recent available data and thus
we are not subject to a G-SIB Surcharge.
Market Risk Rule
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 applies to institutions with aggregate trading assets and liabilities equal to the lesser of:
•
•
10% or more of total assets; or
$1 billion or more.
See “MD&A—Market Risk Profile” below for additional information. We began reporting risk-based capital ratios, including
market risk-weighted assets for the Company and CONA, pursuant to the Market Risk Rule for positions covered by such rule in
the third quarter of 2016. The imposition of the rule did not have a material impact on the risk-based capital ratios of these two
entities. As of December 31, 2016, COBNA is not subject to the Market Risk Rule.
Basel III and United States Liquidity Rules
The Basel Committee has published a liquidity framework, which includes two standards for liquidity risk supervision, each subject
to observation periods and transitional arrangements. One standard, the liquidity coverage ratio (“LCR”), seeks to promote short-
term resilience by requiring organizations to hold sufficient high-quality liquid assets to survive a stress scenario lasting for 30
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Capital One Financial Corporation (COF)
days. The other standard, the net stable funding ratio (“NSFR”), seeks to promote longer-term resilience by requiring sufficient
stable funding over a one-year period based on the liquidity characteristics of its assets and activities.
In September 2014, the Federal Banking Agencies issued final rules implementing the LCR in the United States. The rule (“LCR
Rule”) applies to institutions with total consolidated assets of $250 billion or more or total consolidated on-balance sheet foreign
exposure of $10 billion or more, and their respective consolidated subsidiary depository institutions with $10 billion or more in
total consolidated assets. As a result, the Company and the Banks are subject to the LCR Rule. The rule requires the Company and
each of the Banks to hold an amount of eligible high-quality, liquid assets that equals or exceeds 100% of their respective projected
net cash outflows over a 30-day period, each as calculated in accordance with the LCR Rule. The LCR Rule phases in a minimum
LCR standard as follows: 80% by January 1, 2015; 90% by January 1, 2016; and 100% by January 1, 2017 and thereafter. The
LCR Rule came into effect in January 2015 and required us to calculate the LCR as of the last business day of each month from
January 2015 through June 2016, and daily as of July 1, 2016. Each company subject to the LCR Rule is required to make quarterly
public disclosures of its LCR and certain related quantitative liquidity metrics, along with a qualitative discussion of its LCR. The
Company is required to comply with these disclosure requirements beginning April 1, 2018.
In April 2016, the Federal Banking Agencies issued an interagency notice of proposed rulemaking regarding the United States
implementation of the Basel III NSFR (the “Proposed NSFR”), which would apply to the same institutions subject to the LCR
Rule. The Proposed NSFR would require us to maintain a sufficient amount of stable funding in relation to our assets, derivatives
exposures and commitments over a one-year horizon period. The Proposed NSFR would begin to take effect in January 2018.
While the Proposed NSFR is generally consistent with the Basel NSFR standard, it is more stringent in certain areas. The financial
and operational impact on us of a final NSFR rule remains uncertain until a final rule is published.
In general, United States implementation of the above capital and liquidity rules has increased capital and liquidity requirements
for us and other institutions. We will continue to monitor regulators’ implementation of the new capital and liquidity rules and
assess the potential impact to us.
FDICIA and Prompt Corrective Action
The FDICIA requires Federal Banking Agencies to take “prompt corrective action” for banks that do not meet minimum capital
requirements. The FDICIA establishes five capital ratio levels: well capitalized; adequately capitalized; undercapitalized;
significantly undercapitalized; and critically undercapitalized. The three undercapitalized categories are based upon the amount
by which a bank falls below the ratios applicable to an adequately capitalized institution. The capital categories are determined
solely for purposes of applying the FDICIA’s PCA provisions, and such capital categories may not constitute an accurate
representation of the Banks’ overall financial condition or prospects.
As noted above, the Basel III Capital Rule updated the PCA framework to reflect new, higher regulatory capital minimums. For
an insured depository institution to be well capitalized, it must maintain a total risk-based capital ratio of 10% or more; a Tier 1
capital ratio of 8% or more; a common equity Tier 1 capital ratio of 6.5% or more; and a leverage ratio of 5% or more. An adequately
capitalized depository institution must maintain a total risk-based capital ratio of 8% or more; a Tier 1 capital ratio of 6% or more;
a common equity Tier 1 capital ratio of 4.5% or more; a leverage ratio of 4% or more; and, for Basel III Advanced Approaches
institutions, a supplementary leverage ratio, which incorporates a broader set of exposures as noted above, of 3% or more. The
revised PCA requirements became effective on January 1, 2015, other than the supplementary leverage ratio, which becomes
effective on January 1, 2018. As of December 31, 2016, each of the Banks met the requirements for a well capitalized institution.
Under applicable regulations for 2014, an insured depository institution was considered to be well capitalized if it maintained a
total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital ratio of at least 6%, a Tier 1 leverage capital ratio of at least
5% and was not subject to any supervisory agreement, order or directive to meet and maintain a specific capital level for any capital
measure. An insured depository institution was considered to be adequately capitalized if it maintained a total risk-based capital
ratio of at least 8%, a Tier 1 risk-based capital ratio of at least 4% and a Tier 1 leverage capital ratio of at least 4% (3% for certain
highly rated institutions), and did not otherwise meet the definition of well capitalized.
As an additional means to identify problems in the financial management of depository institutions, the FDICIA required the
Federal Banking Agencies to establish certain non-capital safety and soundness standards. The standards relate generally to
operations and management, asset quality, interest rate exposure and executive compensation. The Federal Banking Agencies are
authorized to take action against institutions that fail to meet such standards.
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Capital One Financial Corporation (COF)
Enhanced Prudential Standards and Other Requirements Under the Dodd-Frank Act
As a BHC with total consolidated assets of $50 billion or more (a “covered company”), we are subject under the Dodd-Frank Act
to certain enhanced prudential standards, including requirements that may be recommended by the Financial Stability Oversight
Council (“Council”) and implemented by the Federal Reserve and other regulators. As a result, we are subject to more stringent
standards and requirements than those applicable to smaller institutions. The Council may also issue recommendations to the
Federal Reserve or other primary financial regulatory agencies to apply new or heightened standards to risky financial activities
or practices.
The Federal Reserve and FDIC have issued rules requiring covered companies to implement resolution planning for orderly
resolution in the event the Company faces material financial distress or failure. The FDIC issued similar rules regarding resolution
planning applicable to the Banks. In addition, the OCC issued final guidelines in September 2016 that require the Banks to develop
recovery plans detailing the actions they would take to remain a going concern when they experience considerable financial or
operational stress, but have not deteriorated to the point that resolution is imminent.
The Federal Reserve established a rule that implements the requirement in the Dodd-Frank Act that the Federal Reserve conduct
annual stress tests on the capacity of our capital to absorb losses as a result of adverse economic conditions. The stress test rule
also implements the requirement that we conduct our own semiannual stress tests and requires us to publish the results of the stress
tests on our website or other public forum. The OCC adopted a similar stress test rule to implement the requirement that each of
the Banks conduct annual stress tests.
The Federal Reserve has finalized other rules implementing certain other aspects of the enhanced prudential standards under the
Dodd-Frank Act, which were applicable to us beginning on January 1, 2015 (“Enhanced Standards Rule”). Under the Enhanced
Standards Rule, we must meet liquidity risk management standards, conduct internal liquidity stress tests, and maintain a 30-day
buffer of highly liquid assets, in each case, consistent with the requirements of the rule. These requirements are in addition to the
LCR, discussed above in “Basel III and United States Liquidity Rules.” The Enhanced Standards Rule also requires that we comply
with, and hold capital commensurate with, the requirements of, any regulations adopted by the Federal Reserve relating to capital
planning and stress tests. Stress testing and capital planning regulations are discussed further below under “Dividends, Stock
Repurchases and Transfers of Funds.” The Enhanced Standards Rule also requires that we establish and maintain an enterprise-
wide risk management framework that includes a risk committee and a chief risk officer.
While not a requirement of the Dodd-Frank Act, the OCC established regulatory guidelines (“Heightened Standards Guidelines”)
that apply heightened standards for risk management to large institutions subject to its supervision, including the Banks. The
Heightened Standards Guidelines establish standards for the development and implementation by the Banks of a risk governance
framework.
The Dodd-Frank Act also imposes new, more stringent standards and requirements with respect to bank and nonbank acquisitions
and mergers and affiliate transactions. The Dodd-Frank Act also includes provisions related to corporate governance and executive
compensation and new fees and assessments, among others.
Investment in the Company and the Banks
Certain acquisitions of our capital stock may be subject to regulatory approval or notice under federal or state law. Investors are
responsible for ensuring that they do not, directly or indirectly, acquire shares of our capital stock in excess of the amount that can
be acquired without regulatory approval, including under the BHC Act and the Change in Bank Control Act.
Federal law and regulations prohibit any person or company from acquiring control of the Company or the Banks without, in most
cases, prior written approval of the Federal Reserve or the OCC, as applicable. Control exists if, among other things, a person or
company acquires more than 25% of any class of our voting stock or otherwise has a controlling influence over us. For a publicly
traded BHC like us, a rebuttable presumption of control arises if a person or company acquires more than 10% of any class of our
voting stock.
Additionally, COBNA and CONA are “banks” within the meaning of Chapter 13 of Title 6.1 of the Code of Virginia governing
the acquisition of interests in Virginia financial institutions (“Financial Institution Holding Company Act”). The Financial Institution
Holding Company Act prohibits any person or entity from acquiring, or making any public offer to acquire, control of a Virginia
financial institution or its holding company without making application to, and receiving prior approval from, the Virginia Bureau
of Financial Institutions.
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Capital One Financial Corporation (COF)
Dividends, Stock Repurchases and Transfers of Funds
Under the Federal Reserve’s capital planning rules applicable to large BHCs including us (commonly referred to as Comprehensive
Capital Analysis and Review or “CCAR”), a BHC with total consolidated assets of $50 billion or more must submit a capital plan
to the Federal Reserve on an annual basis that contains a description of all planned capital actions, including dividends or stock
repurchases, over a nine-quarter planning horizon beginning with the fourth quarter of the calendar year prior to the submission
of the capital plan (“CCAR cycle”). A covered BHC may take the proposed capital actions if the Federal Reserve does not object
to the plan.
Dodd-Frank Act stress testing, described above in “Enhanced Prudential Standards and Other Requirements under the Dodd-Frank
Act,” is a complementary exercise to CCAR. It is a forward-looking exercise conducted by the Federal Reserve and covered
financial companies to help assess whether a company has sufficient capital to absorb losses and support operations during adverse
economic conditions. The supervisory stress test, after incorporating a firm’s planned capital actions, is used for quantitative
assessment in CCAR.
As part of its evaluation of a large BHC’s capital plan, the Federal Reserve will consider how comprehensive the plan is, the
reasonableness of the assumptions, analysis and methodologies used therein to assess capital adequacy and the ability of the BHC
to maintain capital above each minimum regulatory capital ratio on a pro forma basis under expected and stressful conditions
throughout a planning horizon of at least nine quarters. The 2017 CCAR cycle will measure our capital levels under the Basel III
Standardized Approach, with appropriate phase-in provisions applicable to Capital One. The Federal Reserve has indefinitely
delayed incorporation of the Basel III Advanced Approaches into the capital planning and stress testing process. For the 2017
CCAR cycle, the Company must file its capital plan and stress testing results with the Federal Reserve by April 5, 2017, using
data as of December 31, 2016. The Federal Reserve is expected to provide its objection or non-objection to the 2017 capital plan
in June 2017. The Federal Reserve’s objection or non-objection applies to planned capital actions from the third quarter of 2017
through the end of the second quarter of 2018. The Company, along with other BHCs subject to the supplementary leverage ratio,
must incorporate for the first time an estimate of its supplementary leverage ratio into its 2017 capital plan and stress tests.
For annual company-run stress tests, a covered BHC is required to disclose the results within 15 calendar days after the Federal
Reserve discloses the results of the BHC’s supervisory stress test, unless that time period is extended by the Federal Reserve. For
the mid-cycle company-run stress test, a BHC must disclose the results within 30 calendar days after the BHC submits the results
of the test to the Federal Reserve, unless that time period is extended by the Federal Reserve.
The current capital planning and stress testing rules place supervisory focus on quarterly capital issuances and distributions by
establishing a cumulative net distribution requirement. With certain limited exceptions, to the extent a BHC does not issue the
amount of a given class of regulatory capital instrument that it projected in its capital plan, as measured on an aggregate basis
beginning in the third quarter of the planning horizon, the BHC must reduce its capital distributions.
In December 2015, the Federal Reserve issued guidance on its supervisory expectations for the capital planning process, capital
positions and modeling of “large and complex firms” such as the Company in connection with their capital planning and stress
testing activities. In January 2017, the Federal Reserve issued revisions to its capital planning and stress testing rules for the 2017
cycle. Among other changes not applicable to Capital One, the revisions decrease the amount of capital a company subject to the
quantitative requirements of CCAR can distribute to shareholders outside of an approved capital plan without seeking prior approval
from the Federal Reserve (known as the “de minimis exception”). Beginning April 1, 2017, if a company does not receive an
objection to its capital plan, it may distribute up to 0.25% of its tier 1 capital above the distributions in its capital plan, a reduction
from the 1% of tier 1 capital permitted previously. The revisions also impose a “blackout period,” starting with the 2017 CCAR
exercise, during the second calendar quarter on the ability of a firm subject to CCAR to submit prior notice of its intention to rely
on the aforementioned de minimis exception or to submit a request for prior approval for a capital distribution that is not reflected
in the firm’s capital plan for which it has received a non-objection from the Federal Reserve.
Historically, dividends from the Company’s direct and indirect subsidiaries have represented a major source of the funds we have
used to pay dividends on our stock, make payments on corporate debt securities and meet our other obligations. There are various
federal law limitations on the extent to which the Banks can finance or otherwise supply funds to us through dividends and loans.
These limitations include minimum regulatory capital requirements, federal banking law requirements concerning the payment of
dividends out of net profits or surplus, provisions of Sections 23A and 23B of the Federal Reserve Act and Regulation W governing
transactions between an insured depository institution and its affiliates, as well as general federal regulatory oversight to prevent
unsafe or unsound practices. In general, federal and applicable state banking laws prohibit insured depository institutions, such as
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Capital One Financial Corporation (COF)
the Banks, from making dividend distributions without first obtaining regulatory approval if such distributions are not paid out of
available earnings or would cause the institution to fail to meet applicable capital adequacy standards.
Deposit Insurance Assessments
Each of CONA and COBNA, as an insured depository institution, is a member of the DIF maintained by the FDIC. Through the
DIF, the FDIC insures the deposits of insured depository institutions up to prescribed limits for each depositor. The FDIC sets a
Designated Reserve Ratio (“DRR”) for the DIF. To maintain the DIF, member institutions may be assessed an insurance premium,
and the FDIC may take action to increase insurance premiums if the DRR falls below its required level.
The Dodd-Frank Act reformed the management of the DIF in several ways. It raised the minimum DRR to 1.35% (from the former
minimum of 1.15%); removed the upper limit on the DRR; required that the reserve ratio reach 1.35% by September 30, 2020;
required the FDIC, when setting deposit insurance assessments, to offset the effect on small insured depository institutions of
meeting the increased reserve ratio; and eliminated the requirement that the FDIC pay dividends from the DIF when the reserve
ratio reached certain levels. The FDIC has set the DRR at 2% and, in lieu of dividends, has established progressively lower
assessment rate schedules as the reserve ratio meets certain trigger levels. The Dodd-Frank Act also required the FDIC to change
the deposit insurance assessment base from deposits to average total consolidated assets minus average tangible equity.
On March 15, 2016, the FDIC issued a final rule implementing Section 334(e) of the Dodd-Frank Act, which requires the FDIC
to offset the effect on community banks of increasing the DIF reserve ratio from 1.15% to 1.35%. The rule imposes a new quarterly
deposit insurance surcharge assessment, with an annual rate of 4.5 basis points, on insured depository institutions with assets of
$10 billion or more, including the Banks. On August 30, 2016, the FDIC provided notice that the DIF Reserve Ratio exceeded the
1.15% threshold level, which triggered two changes in the deposit insurance assessments of the Banks. First, the initial assessment
rates for all insured depository institutions, including the Banks, declined. Second, the surcharge assessment was applied. The
FDIC has estimated that the reserve ratio will reach 1.35% by June 2018; however, under the final rule, if the reserve ratio does
not reach 1.35% by December 31, 2018, the FDIC will impose a one-time shortfall assessment on March 31, 2019 on depository
institutions subject to the surcharge, including the Banks.
Source of Strength and Liability for Commonly Controlled Institutions
Under regulations issued by the Federal Reserve, a BHC must serve as a source of financial and managerial strength to its subsidiary
banks (the so-called “source of strength doctrine”). The Dodd-Frank Act codified this doctrine.
Under the “cross-guarantee” provision of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”),
insured depository institutions such as the Banks may be liable to the FDIC with respect to any loss incurred, or reasonably
anticipated to be incurred, by the FDIC in connection with the default of, or FDIC assistance to, any commonly controlled insured
depository institution. The Banks are commonly controlled within the meaning of the FIRREA cross-guarantee provision.
FDIC Orderly Liquidation Authority
The Dodd-Frank Act provides the FDIC with liquidation authority that may be used to liquidate nonbank financial companies and
BHCs if the Treasury Secretary, in consultation with the President and based on the recommendation of the Federal Reserve and
another federal agency, determines that doing so is necessary, among other criteria, to mitigate serious adverse effects on United
States financial stability. Upon such a determination, the FDIC would be appointed receiver and must liquidate the company in a
way that mitigates significant risks to financial stability and minimizes moral hazard. The costs of a liquidation of a financial
company would be borne by shareholders and unsecured creditors and then, if necessary, by risk-based assessments on large
financial companies. The FDIC has issued rules implementing certain provisions of its liquidation authority and may issue additional
rules in the future.
In December 2016, the Federal Reserve finalized rules designed to promote United States financial stability and orderly liquidation
authority by requiring United States BHCs identified as G-SIBs to maintain outstanding a minimum amount of loss absorbing
instruments, including a minimum amount of unsecured long-term debt, and related buffers. Capital One is not subject to this
requirement because it is not currently identified as a G-SIB.
Regulation of Businesses by Authorities Outside the United States
COBNA is subject to regulation in foreign jurisdictions where it operates, currently in the United Kingdom and Canada.
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Capital One Financial Corporation (COF)
United Kingdom
In the United Kingdom, COBNA operates through COEP, which was established in 2000 and is an authorized payment institution
regulated by the Financial Conduct Authority (“FCA”) under the Payment Services Regulations 2009 and the Financial Services
and Markets Act 2000. COEP’s indirect parent, Capital One Global Corporation, is wholly-owned by COBNA and is subject to
regulation by the Federal Reserve as an “agreement corporation” under the Federal Reserve’s Regulation K.
In April 2014, the FCA took over regulation of the U.K. consumer credit regime previously regulated by the Office of Fair Trading.
The FCA’s regulatory purview includes credit card lending activities. In addition to enacting a new framework of rules from that
date, the FCA only “semi-grandfathered” relevant firms, granting them where appropriate “interim” permissions for consumer
credit related activities. COEP, in common with other market participants, was required to apply for “full” permissions for consumer
credit related activities; such application was made in October 2015 and approval granted by FCA in September 2016.
Regulatory focus on Payment Protection Insurance (“PPI”) complaint handling has continued as PPI continues to be a key driver
of consumer complaints to the Financial Ombudsman Service (“FOS”). In January 2015, the FCA announced it would gather
evidence on current trends in PPI complaints to assess whether further interventions were required. In May 2015, the FCA also
announced that it was considering whether further rules and/or guidance were required to deal with the impact of the decision in
the case of Plevin v. Paragon Personal Finance (“Plevin”) to the effect that failure to disclose the amount of commission included
in the price of the single premium PPI sold to the plaintiff created an unfair relationship between the lender and the borrower under
section 140A of the Consumer Credit Act 1974. In November 2015, the FCA launched a consultation on proposed new rules relating
to PPI complaint handling, including the introduction of a two-year deadline by which consumers would need to make their PPI
complaints or else lose their right to have them assessed by firms or by the FOS. In August 2016, the FCA issued an additional
consultation paper, providing feedback on responses it received to its November 2015 consultation and seeking views on suggested
amendments to its proposed rules. Among other things, the amendments proposed inclusion of profit share in the assessment of
whether a relationship is unfair and in any redress calculation. The FCA did not issue the proposed rules by the end of December
2016, but instead stated that it would make a further announcement in the first quarter of 2017.
In July 2016, the FCA published the final findings report for its Credit Card Market Study. The report confirmed that the FCA will
seek certain remedies through new rules (subject to consultation).
COEP was a party to the Sentinel Card Protection (“SCP”) redress scheme which enabled customers who bought SCP provided
by Affinion International Limited to seek compensation. The redress scheme became effective in August 2015 and closed to all
claims on September 18, 2016.
On June 23, 2016 a public referendum was held and the U.K. voted to leave the European Union (“Brexit”). Although COEP has
not seen any obvious signs of worsening in portfolio or headline economics as a result of the Brexit vote, this issue may continue
to cause uncertainty in the macroeconomic environment affecting COEP.
Canada
In Canada, COBNA operates as an authorized foreign bank pursuant to the Bank Act (Canada) (“Bank Act”) and is permitted to
conduct its credit card business in Canada through its Canadian branch, Capital One Bank (Canada Branch) (“Capital One Canada”).
The primary regulator of Capital One Canada is the Office of the Superintendent of Financial Institutions Canada. Other regulators
include the Financial Consumer Agency of Canada, the Office of the Privacy Commissioner of Canada, and the Financial
Transactions and Reports Analysis Centre of Canada. Capital One Canada is subject to regulation under various Canadian federal
laws, including the Bank Act and its regulations, the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and the
Personal Information Protection and Electronic Documents Act.
In September 2014, the Supreme Court of Canada (“Court”) released its decision in Bank of Montreal v. Marcotte. The Court
found that certain provisions of Quebec provincial consumer protection legislation apply to credit cards issued by federally chartered
banks. In October 2016, amendments to the Bank Act to modernize the financial consumer protection framework and reaffirm the
intent to have exclusive national standards applicable to banks were tabled in Parliament, however in December 2016, such proposed
amendments were removed from the proposed legislation. It is unclear when these amendments will be reintroduced and/or whether
the amendments will be revised.
In April 2015, a voluntary agreement to reduce interchange fees among the Canadian federal government, MasterCard Canada
and Visa Canada came into effect. The agreement contains a commitment to reduce interchange fees for consumer credit cards to
an average of 1.5% and will remain in effect for 5 years. While the Canadian federal government acknowledges independent audit
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Capital One Financial Corporation (COF)
findings that Visa and MasterCard have met their commitments to reduce interchange fees, the government will be conducting a
further assessment of the fees charged by the networks and reviewing the effects of such fee reduction.
COMPETITION
Each of our business segments operates in a highly competitive environment, and we face competition in all aspects of our business
from numerous bank and non-bank providers of financial services.
Our Credit Card business competes with international, national, regional and local issuers of Visa and MasterCard credit cards, as
well as with American Express®, Discover Card®, private-label card brands, and, to a certain extent, issuers of debit cards. In
general, customers are attracted to credit card issuers largely on the basis of price, credit limit, reward programs and other product
features.
Our Consumer Banking and Commercial Banking businesses compete with national, state and direct banks for deposits, commercial
and auto loans, mortgages and trust accounts, as well as with savings and loan associations and credit unions for loans and deposits.
Our competitors also include automotive finance companies, mortgage banking companies and other financial services providers
that provide loans, deposits, and other similar services and products. In addition, we compete against non-depository institutions
that are able to offer these products and services. Securities firms and insurance companies that elect to become financial holding
companies may acquire banks and other financial institutions. Combinations of this type could significantly change the competitive
environment in which we conduct business. The financial services industry is also likely to become more competitive as further
technological advances enable more companies to provide financial services. These technological advances may diminish the
importance of depository institutions and other financial intermediaries in the transfer of funds between parties. In addition,
competition among direct banks is intense because online banking provides customers the ability to rapidly deposit and withdraw
funds and open and close accounts in favor of products and services offered by competitors.
Our businesses generally compete on the basis of the quality and range of their products and services, transaction execution,
innovation and price. Competition varies based on the types of clients, customers, industries and geographies served. Our ability
to compete depends, in part, on our ability to attract and retain our associates and on our reputation. We believe that we are able
to compete effectively in our current markets. There can be no assurance, however, that our ability to market products and services
successfully or to obtain adequate returns on our products and services will not be impacted by the nature of the competition that
now exists or may later develop, or by the broader economic environment. For a discussion of the risks related to our competitive
environment, please refer to “Part I—Item 1A. Risk Factors.”
EMPLOYEES
A central part of our philosophy is to attract and retain highly capable staff. We had approximately 47,300 employees, whom we
refer to as “associates,” as of December 31, 2016. None of our associates are covered under a collective bargaining agreement,
and management considers our associate relations to be satisfactory.
ADDITIONAL INFORMATION
Technology/Systems
We leverage information technology to achieve our business objectives and to develop and deliver products and services that
satisfy our customers’ needs. A key part of our strategic focus is the development and use of efficient, flexible computer and
operational systems, such as cloud technology, to support complex marketing and account management strategies, the servicing
of our customers, and the development of new and diversified products. We believe that the continued development and integration
of these systems is an important part of our efforts to reduce costs, improve quality and provide faster, more flexible technology
services. Consequently, we continuously review capabilities and develop or acquire systems, processes and competencies to meet
our unique business requirements.
As part of our continuous efforts to review and improve our technologies, we may either develop such capabilities internally or
rely on third-party outsourcers who have the ability to deliver technology that is of higher quality, lower cost, or both. We continue
to rely on third-party outsourcers to help us deliver systems and operational infrastructure. These relationships include (but are
not limited to): Amazon Web Services, Inc. (“AWS”) for our cloud infrastructure, Total System Services, Inc. (“TSYS”) for
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Capital One Financial Corporation (COF)
processing services for our North American and U.K. portfolios of consumer, commercial and small business credit card accounts,
and Fidelity Information Services (“FIS”) for certain of our banking systems.
To protect our systems and technologies, we employ security measures, backup and recovery systems and generally require the
same of our third-party service providers. In addition, we perform a variety of vulnerability and penetration testing on the network,
platforms, systems and applications used to provide our products and services, conducted internally and by independent third
parties, in an effort to ensure the security of the systems and data and mitigate against known vulnerabilities and attacks.
Intellectual Property
As part of our overall and ongoing strategy to protect and enhance our intellectual property, we rely on a variety of protections,
including copyrights, trademarks, trade secrets, patents and certain restrictions on disclosure, solicitation and competition. We also
undertake other measures to control access to, or distribution of, our other proprietary information. Despite these precautions, it
may be possible for a third party to copy or otherwise obtain and use certain intellectual property or proprietary information without
authorization. Our precautions may not prevent misappropriation or infringement of our intellectual property or proprietary
information. In addition, our competitors and other third parties also file patent applications for innovations that are used in our
industry. The ability of our competitors and other third parties to obtain such patents may adversely affect our ability to compete.
Conversely, our ability to obtain such patents may increase our competitive advantage and/or preserve our freedom to operate
certain technologies via cross-licenses or other arrangements with third parties. There can be no assurance that we will be successful
in such efforts, or that the ability of our competitors to obtain such patents may not adversely impact our financial results.
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;
financial, legal, regulatory, tax or accounting changes or actions, including the impact of the Dodd-Frank Act and the
regulations promulgated thereunder, and other regulatory reforms and regulations governing bank capital and liquidity
standards, including Basel-related initiatives and potential changes to financial accounting and reporting standards;
developments, changes or actions relating to any litigation, 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;
the success of our marketing efforts in attracting and retaining customers;
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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 level of future repurchase or indemnification requests we may receive, the actual future performance of mortgage loans
relating to such requests, the success rates of claimants against us, any developments in litigation and the actual recoveries
we may make on any collateral relating to claims against us;
the amount and rate of deposit growth;
changes in the reputation of, or expectations regarding, the financial services industry or us with respect to practices, products
or financial condition;
changes in retail distribution strategies and channels, including in the behavior and expectations of our customers;
any significant disruption in our operations or in the technology platforms on which we rely, including 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 digital technology that addresses the needs of our customers, including the challenges relating to rapid
significant technological changes;
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;
our ability to execute on our strategic and operational plans;
the extensive use of models in our business, including those to aggregate and assess various risk exposures and estimate
certain financial values;
any significant disruption of, or loss of public confidence in, the internet affecting the ability of our customers to access
their accounts and conduct banking transactions;
our ability to recruit and retain talented and experienced personnel;
changes in the labor and employment markets;
fraud or misconduct by our customers, employees, business partners or third parties;
competition from providers of products and services that compete with our businesses;
increased competition for rewards customers resulting in higher rewards expense, or impairing our ability to attract and
retain credit card customers;
• merchants’ increasing focus on the fees charged by credit card networks; and
•
other risk factors listed from time to time in reports that we file with the SEC.
Any forward-looking statements made by us or on our behalf speak only as of the date they are made or as of the date indicated,
and we do not undertake any obligation to update forward-looking statements as a result of new information, future events or
otherwise. You should carefully consider the factors discussed above in evaluating these forward-looking statements. For additional
information on factors that could materially influence forward-looking statements included in this Report, see the risk factors set
forth under “Part I—Item 1A. Risk Factors” in this Report.
Item 1A. Risk Factors
This section highlights specific risks that could affect our business. Although we have tried to discuss all material risks of which
we are aware at the time this Report has been filed, other risks may prove to be important in the future, including those that are
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Capital One Financial Corporation (COF)
not currently ascertainable. In addition to the factors discussed elsewhere in this Report, other factors that could cause actual results
to differ materially from our forward looking statements include:
General Economic and Market Risks
Changes And Instability In The Macroeconomic Environment May Adversely Affect Our Industry, Business, Results Of
Operations And Financial Condition.
We offer a broad array of financial products and services to consumers, small businesses and commercial clients. We market our
credit card products on a national basis throughout the United States, Canada and the United Kingdom and offer banking and other
services in many regions within the United States. A prolonged period of slow economic growth or a significant deterioration in
economic conditions in the United States or one of these countries could have a material adverse effect on our financial condition
and results of operations as customers default on their loans or maintain lower deposit levels or, in the case of credit card accounts,
carry lower balances and reduce credit card purchase activity.
Although certain economic conditions in the United States have generally recovered in recent years, the macroeconomic
environment remains unstable and uneven, and the U.S. economy remains susceptible to global events and volatility. Geopolitical
matters, including international political unrest or disturbances, continued concerns over energy prices, and economic instability
or recession in certain regions, may impact the stability of financial markets and the U.S. economy.
Some of the risks we may face in connection with adverse changes and instability in macroeconomic environment include the
following:
•
•
Payment patterns may change, causing increases in delinquencies and default rates, which could have a negative impact on
our results of operations. In addition, changes in consumer confidence levels and behavior, including decreased consumer
spending, lower demand for credit and a shift in consumer payment behavior towards avoiding late fees, finance charges
and other fees, could have a negative impact on our results of operations.
Increases in bankruptcies could cause increases in our charge-off rates, which could have a negative impact on our results
of operations.
• Our ability to recover debt that we have previously charged-off may be limited, which could have a negative impact on our
results of operations.
• The process and models we use to estimate our allowance for loan and lease losses may become less reliable if actual losses
diverge from the projections of our models as a result of changes in customer behavior, volatile economic conditions or
other unexpected variations in key inputs and assumptions. As a result, our estimates for credit losses may become
increasingly subject to management’s judgment and high levels of volatility over short periods of time, which could negatively
impact our results of operations. See “There Are Risks Resulting From The Extensive Use Of Models In Our Business.”
• Risks associated with financial market instability and volatility could cause a material adverse effect on our liquidity and
our funding costs. For example, increases in interest rates and our credit spreads could negatively impact our results of
operations. An inability to accept or maintain deposits or to obtain other sources of funding could materially affect our
ability to fund our business and our liquidity position. Many other financial institutions have also increased their reliance
on deposit funding and, as such, we expect continued competition in the deposit markets. We cannot predict how this
competition will affect our costs. If we are required to offer higher interest rates to attract or maintain deposits, our funding
costs will be adversely impacted.
• Our ability to borrow from other financial institutions or to engage in funding transactions on favorable terms or at all could
be adversely affected by disruptions in the capital markets or other events, including actions by rating agencies and
deteriorating investor expectations, which could limit our access to funding. The interest rates that we pay on the securities
we have issued are also influenced by, among other things, applicable credit ratings from recognized rating agencies. A
downgrade to any of these credit ratings could affect our ability to access the capital markets, increase our borrowing costs
and have a negative impact on our results of operations. Increased charge-offs, rising London Interbank Offering Rate
(“LIBOR”) and other events may cause our securitization transactions to amortize earlier than scheduled, which could
accelerate our need for additional funding from other sources.
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Capital One Financial Corporation (COF)
• While interest rates recently rose off historic lows set in July 2016, both shorter-term and longer-term interest rates remain
below historical averages, as well as the yield curve, which has been relatively flat compared to recent years. A flat yield
curve combined with low interest rates generally leads to lower revenue and reduced margins because it tends to limit our
ability to increase the spread between asset yields and funding costs. Sustained periods of time with a flat yield curve coupled
with low interest rates could have a material adverse effect on our earnings and our net interest margin.
• A low interest rate environment increases our exposure to prepayment risk in our mortgage portfolio and the mortgage-
backed securities in our investment portfolio. Increased prepayments, refinancing or other factors that impact loan balances
could reduce expected revenue associated with mortgage assets and could also lead to a reduction in the value of our mortgage
servicing rights, which could have a negative impact on our financial results. Although the Federal Reserve’s recent decision
to raise short-term interest rates may reduce prepayment risk, debt service requirements for some of our borrowers will
increase, which may adversely affect those borrowers’ ability to pay as contractually obligated. This could result in additional
delinquencies or charge-offs and negatively impact our results of operations.
Regulatory Risk
Compliance With New And Existing Laws, Regulations And Regulatory Expectations May Increase Our Costs, Reduce Our
Revenue, Limit Our Ability To Pursue Business Opportunities And Increase Compliance Challenges.
Legislation and regulation with respect to the financial services industry has increased in recent years, and we expect that oversight
of our business may continue to expand in scope and complexity. A wide and increasing array of banking and consumer lending
laws apply to almost every aspect of our business. Failure to comply with these laws and regulations could result in financial,
structural and operational penalties, including significant fines and criminal sanctions, and could result in negative publicity or
damage to our reputation with regulators or the public. In addition, establishing systems and processes to achieve compliance with
these laws and regulations may increase our costs and limit our ability to pursue certain business opportunities.
We are subject to heightened regulatory oversight by the federal banking regulators to ensure that we build systems and processes
that are commensurate with the nature of our business and that meet the heightened risk management and enhanced prudential
standards issued by our regulators. For example, over the last several years, state and federal regulators have focused on compliance
with the Bank Secrecy Act and anti-money laundering laws, data integrity and security, use of service providers, fair lending and
other consumer protection issues. In July 2015, Capital One entered into a consent order with the OCC to address concerns about
our anti-money laundering (“AML”) program (“AML Program”). Although we are making substantial progress in taking the steps
and making the improvements required by the OCC consent order, we expect heightened oversight of our AML Program will
continue for the foreseeable future.
The Dodd-Frank Act, other regulatory reforms and implementing regulations have increased our need to build new compliance
processes and infrastructure and to otherwise enhance our risk management throughout all aspects of our business. The cumulative
impact of these changes also includes higher expectations for the amount of capital and liquidity we must maintain, as discussed
in more detail below under the heading “We May Not Be Able To Maintain Adequate Capital Or Liquidity Levels, Which Could
Have A Negative Impact On Our Financial Results And Our Ability To Return Capital To Our Shareholders,” and higher operational
costs, which may further increase as regulators continue to implement such reforms. United States government agencies charged
with adopting and interpreting laws, rules and regulations, including under the Dodd-Frank Act, may do so in an unforeseen manner,
including in ways that potentially expand the reach of the laws, rules or regulations more than initially contemplated or currently
anticipated.
We have a large number of customer accounts in our credit card and auto lending businesses and we have made the strategic choice
to originate and service subprime credit cards and auto loans which typically have higher delinquencies and charge-offs than prime
customers. Accordingly, we have significant involvement with credit bureau reporting and the collection and recovery of delinquent
and charged-off debt, primarily through customer communications, the filing of litigation against customers in default, the periodic
sale of charged-off debt and vehicle repossession. The banking industry is subject to enhanced legal and regulatory scrutiny
regarding credit bureau reporting and debt collection practices from regulators, courts and legislators. Any future changes to our
business practices in these areas, including our debt collection practices, whether mandated by regulators, courts, legislators or
otherwise, or any legal liabilities resulting from our business practices, including our debt collection practices, could have a material
adverse impact on our financial condition.
The legislative and regulatory environment is beyond our control, may change rapidly and unpredictably and may negatively
influence our revenue, costs, earnings, growth, liquidity and capital levels. In addition, some rules and regulations may be subject
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Capital One Financial Corporation (COF)
to litigation or other challenges that delay or modify their implementation and impact on us. Following the November 2016 federal
elections, we expect a higher volume of legislative and regulatory activity. These activities may include changes to the corporate
tax code and the Dodd-Frank Act, as well as changes in leadership of key bank regulatory agencies that could change the regulatory,
supervisory, or enforcement activity of these agencies. For example, legislative changes to the corporate tax code could result in
material impacts to our results of operations due to changes to the valuation of our deferred tax assets, the valuation of other tax
assets, customer behavior, tax expense and the effective tax rate.
Certain laws and regulations, and any interpretations and applications with respect thereto, may benefit consumers, borrowers and
depositors, but not stockholders. Our success depends on our ability to maintain compliance with both existing and new laws and
regulations. For a description of the material laws and regulations to which we are subject, please refer to “Part I—Item 1. Business
—Supervision and Regulation.”
Credit Risk
We May Experience Increased Delinquencies, Credit Losses, Inaccurate Estimates And Inadequate Reserves.
Like other lenders, we face the risk that our customers will not repay their loans. Rising losses or leading indicators of rising losses
(such as higher delinquencies, higher rates of non-performing loans, higher bankruptcy rates, lower collateral values or elevated
unemployment rates) may require us to increase our allowance for loan and lease losses, which may degrade our profitability if
we are unable to raise revenue or reduce costs to compensate for higher losses. In particular, we face the following risks in this
area:
• Missed Payments: Our customers may miss payments. Loan charge-offs (including from bankruptcies) are generally
preceded by missed payments or other indications of worsening financial condition for our customers. Customers are more
likely to miss payments during an economic downturn or prolonged periods of slow economic growth. In addition, we face
the risk that consumer and commercial customer behavior may change (for example, an increase in the unwillingness or
inability of customers to repay debt, which may be heightened by increasing levels of consumer debt generally), causing a
long-term rise in delinquencies and charge-offs.
• Estimates of Inherent Losses: The credit quality of our portfolio can have a significant impact on our earnings. We allow
for and reserve against credit risks based on our assessment of credit losses inherent in our loan portfolios. This process,
which is critical to our financial results and condition, requires complex judgments, including forecasts of economic
conditions. We may underestimate our inherent losses and fail to hold an allowance for loan and lease losses sufficient to
account for these losses. Incorrect assumptions could lead to material underestimations of inherent losses and inadequate
allowance for loan and lease losses. In cases where we modify a loan, if the modifications do not perform as anticipated
we may be required to build additional allowance on these loans. The build or release of allowances impacts our current
financial results.
• Underwriting: Our ability to assess the creditworthiness of our customers may diminish, which could result in an increase
in our credit losses and a deterioration of our returns. See “Our Risk Management Strategies May Not Be Fully Effective In
Mitigating Our Risk Exposures In All Market Environments Or Against All Types Of Risk.”
• Business Mix: We engage in a diverse mix of businesses with a broad range of potential credit exposure. Our business mix
could change in ways that could adversely affect the credit quality of our portfolio. Because we originate a relatively greater
proportion of consumer loans in our loan portfolio compared to other large bank peers and originate both prime and subprime
credit card accounts and auto loans, we may experience higher delinquencies and a greater number of accounts charging
off compared to other large bank peers, which could result in increased credit losses, operating costs and regulatory scrutiny.
• Charge-off Recognition / Allowance for Loan and Lease Losses: We account for the allowance for loan and lease losses
according to accounting and regulatory guidelines and rules, including Financial Accounting Standards Board (“FASB”)
standards and the Federal Financial Institutions Examination Council (“FFIEC”) Account Management Guidance. In June
2016, the FASB issued revised guidance for impairments on financial instruments. The guidance, which becomes effective
on January 1, 2020 with early adoption permitted no earlier than January 1, 2019, requires use of a current expected credit
loss (“CECL”) model that is based on expected rather than incurred losses. Adoption of the CECL model could require
changes in our account management or allowance for loan and lease losses practices, and may cause our allowance for loan
and lease losses and credit losses to change materially.
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Capital One Financial Corporation (COF)
•
Industry Developments: Our charge-off and delinquency rates may be negatively impacted by industry developments,
including new regulations applicable to our industry.
• Collateral: The collateral we have on secured loans could be insufficient to compensate us for loan losses. When customers
default on their secured loans, we attempt to recover collateral where permissible and appropriate. However, the value of
the collateral may not be sufficient to compensate us for the amount of the unpaid loan, and we may be unsuccessful in
recovering the remaining balance from our customers. Decreases in real estate values adversely affect the collateral value
for our commercial lending and home loan activities, while the auto business is similarly exposed to collateral risks arising
from the auction markets that determine used car prices. Therefore, the recovery of such property could be insufficient to
compensate us for the value of these loans. Borrowers may be less likely to continue making payments on loans if the value
of the property used as collateral for the loan is less than what the borrower owes, even if the borrower is still financially
able to make the payments. Trends in home prices are a driver of credit costs in our home loan business as they impact both
the probability of default and the loss severity of defaults. Additionally, the potential volatility in the number of defaulted
and modified loans from changes in home prices can create material impacts on the servicing costs of the business, fluctuations
in credit marks and profitability in acquired portfolios and volatility in mortgage servicing rights valuations. Although home
prices have generally appreciated recently, the slow economic recovery, shifts in monetary policy and potentially diminishing
demands from investors could threaten or limit the recovery. In our auto business, if vehicle prices experience declines, we
could be adversely affected. For example, business and economic conditions that negatively affect household incomes,
housing prices, and consumer behavior related to our businesses could decrease (i) the demand for new and used vehicles
and (ii) the value of the collateral underlying our portfolio of auto loans, which could cause the number of consumers who
become delinquent or default on their loans to increase.
• Geographic and Industry Concentration: Although our consumer lending is geographically diversified, approximately 31%
of our commercial loan portfolio is concentrated in the tri-state area of New York, New Jersey and Connecticut. The regional
economic conditions in the tri-state area affect the demand for our commercial products and services as well as the ability
of our customers to repay their commercial loans and the value of the collateral securing these loans. An economic downturn
or prolonged period of slow economic growth in, or a catastrophic event that disproportionately affects, the tri-state area
could have a material adverse effect on the performance of our commercial loan portfolio and our results of operations. In
addition, our Commercial Banking strategy includes an industry-specific focus. If any of the industries that we focus in
experience changes, we may experience increased credit losses and our results of operations could be adversely impacted.
For example, as of December 31, 2016, energy-related loan balances represented approximately 4% of our total commercial
loan portfolio. This amount is comprised of loans to commercial entities in the energy industry, such as exploration and
production, oil field services, and pipeline transportation of gas and crude oil, as well as loans to entities in industries that
are indirectly impacted by energy prices, such as petroleum wholesalers, oil and gas equipment manufacturing, air
transportation, and petroleum bulk stations and terminals. In recent years, oil prices have been declining, which has had an
adverse effect on many of the borrowers in this portfolio and on the value of the collateral securing our loans to these
borrowers, which could impair their ability to service loans outstanding to them and/or reduce demand for loans. If energy-
related industries or any of the other industries that we focus on experience adverse changes, we may experience increased
credit losses and our results of operations could be adversely impacted.
We May Experience Increased Losses And Inadequate Reserves Associated With Mortgage Repurchases And Indemnification
Obligations.
Certain of our subsidiaries, including GreenPoint Mortgage Funding, Inc. (“GreenPoint”), Capital One Home Loans, LLC and
Capital One, N.A., as successor to Chevy Chase Bank (“CCB”), may be required to repurchase mortgage loans that have been
sold to investors in the event there are breaches of certain representations and warranties contained within the sales agreements.
We may be required to repurchase mortgage loans that we sell to investors in the event that there was improper underwriting or
fraud or in the event that the loans become delinquent shortly after they are originated. These subsidiaries also may be required
to indemnify certain purchasers and others against losses they incur in the event of breaches of representations and warranties and
in various other circumstances, including securities fraud or other public disclosure-related claims, and the amount of such losses
could exceed the repurchase amount of the related loans. Consequently, we may be exposed to credit risk associated with sold
loans.
We have established reserves in our consolidated financial statements for potential losses that are considered to be both probable
and reasonably estimable related to the mortgage loans sold by our originating subsidiaries. The adequacy of the reserve and the
ultimate amount of losses incurred will depend on, among other things, the actual future mortgage loan performance, the actual
level of future repurchase and indemnification requests, the actual success rate of claimants, developments in litigation and the
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Capital One Financial Corporation (COF)
regulatory environment related to us and the industry, actual recoveries on the collateral, and macroeconomic conditions (including
unemployment levels and housing prices). Due to uncertainties relating to these factors, there can be no assurance that our reserves
will be adequate or that the total amount of losses incurred will not have a material adverse effect upon our financial condition or
results of operations.
In addition to the subsidiaries discussed above, we originate, sell and service commercial mortgage loans that meet underwriting
guidelines established by government-sponsored enterprises (“GSEs”). We are required to meet minimum collateral requirements
and share a limited portion of the risk of loss during the remaining terms of these loans. The GSEs may change their collateral
requirements for these loans in the future and also increase our loss-sharing obligations if the loans do not meet specific underwriting
criteria or default within certain time periods following their sale to the GSEs. Our liability associated with these loss-sharing
agreements may not be sufficient to cover any future losses from these loans. We may also be required to share additional losses
with GSEs if loan defaults increase, which could impact our results of operations and liquidity.
For additional information related to our mortgage loan repurchase and indemnification obligations and related reserves and our
estimate of the reasonably possible future losses from representation and warranty claims beyond the current accrual levels, as
well as our loss-sharing agreements, as of December 31, 2016, see “Note 19—Commitments, Contingencies, Guarantees and
Others.”
Capital and Liquidity Risk
We May Not Be Able To Maintain Adequate Capital Or Liquidity Levels, Which Could Have A Negative Impact On Our Financial
Results And Our Ability To Return Capital To Our Shareholders.
As a result of the Dodd-Frank Act and the United States implementation of international accords, financial institutions are subject
to new and increased capital and liquidity requirements, and we expect further changes to these regulations. Although United States
regulators have finalized regulations for many of these requirements, continued uncertainty remains as to the form additional new
requirements will take or how and when they will apply to us. As a result, it is possible that we could be required to increase our
capital and/or liquidity levels above the levels assumed in our current financial plans. These new requirements could have a negative
impact on our ability to lend, grow deposit balances or make acquisitions and limit our ability to make most capital
distributions. Higher capital levels also lower our return on equity.
In addition, as described further above in “Part I—Item 1. Business—Supervision and Regulation,” for regulatory capital purposes
we entered parallel run on January 1, 2015. We will become subject to the Basel III Advanced Approaches framework for purposes
of determining our regulatory capital requirements once we receive regulatory approval to do so, although the exact timing of
when such approval may be granted is uncertain. Although we have current estimates of risk-weighted asset calculations under
that framework, there remains uncertainty around future regulatory interpretations of certain aspects of those calculations. Moreover,
the so-called Collins Amendment to the Dodd-Frank Act, as implemented in the Basel III Capital Rule, establishes a capital floor
so that organizations subject to the Basel III Advanced Approaches may not hold less capital than would be required using the
Basel III Standardized Approach capital calculations. Additionally, the Basel Committee on Banking Supervision continues to
evaluate modifications to the Standardized and Advanced Approaches which, if finalized by the Basel Committee and thereafter
implemented by the United States federal banking agencies, could alter regulatory capital requirements. Therefore, we cannot
assure you that our current estimates will be correct, and we may need to hold significantly more regulatory capital in the future
than we currently estimate to maintain a given capital ratio.
In September 2014, the Federal Banking Agencies issued the Final Liquidity Coverage Rules (“Final LCR Rule”) and in April
2016, the United States federal banking agencies proposed a rule regarding the United States implementation of the net stable
funding ratio (“Proposed NSFR”). See “Part I—Item 1. Business—Supervision and Regulation” for further details regarding the
Final LCR Rule and Proposed NSFR. The financial and operational impact on us of a final NSFR rule remains uncertain until a
final rule is published, and there remains further uncertainty as to the combined impact of the LCR and any final NSFR on how
we manage our business. See “Note 12—Regulatory and Capital Adequacy” and “Part I—Item 1. Business—Supervision and
Regulation—Dividends, Stock Repurchases and Transfers of Funds” for additional information regarding recent developments in
capital and liquidity requirements.
We consider various factors in the management of capital, including the impact of stress on our capital levels, as determined by
both our internal modeling and the Federal Reserve’s modeling of our capital position in CCAR. In recent capital planning and
stress testing cycles, we have observed a large difference between our estimates of our capital levels under stress and the Federal
Reserve’s estimates of our capital levels under stress. Therefore, although our estimated capital levels under stress suggest that we
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Capital One Financial Corporation (COF)
have substantial capacity to return capital to shareholders and remain well capitalized under stress, it is possible that the Federal
Reserve’s modeling may result in a materially lower capacity to return capital to shareholders than our estimates. This in turn could
lead to restrictions on our ability to pay dividends and engage in share repurchase transactions. See “Part I—Item 1. Business—
Supervision and Regulation” for additional information.
Operational Risk
We Face Risks Related To Our Operational, Technological And Organizational Infrastructure.
Our ability to retain and attract new customers depends on our ability to build or acquire necessary operational, technological and
organizational infrastructure or adapt to technological advances involving such infrastructure, which can be a challenge due to the
fast pace of digital transformation and advances. We are embedding technology, data and software development deeply into our
business model and how we work.
Similar to other large corporations, we are exposed to operational risk that can manifest itself in many ways, such as errors related
to failed or inadequate processes, inaccurate models, faulty or disabled computer systems, fraud by employees or persons outside
of our company and exposure to external events. In addition, we are heavily dependent on the strength, capability and continuous
availability of the technology systems that we use to manage our internal financial and other systems, interface with our customers
and develop and implement effective marketing campaigns.
In addition, our businesses are dependent on our ability to process, record and monitor a large number of complex transactions.
If any of our financial, accounting or other data processing systems fail or have other significant shortcomings, our business and
reputation could be materially adversely affected. We may also be subject to disruptions of our operating systems arising from
events that are wholly or partially beyond our control, which may include, for example, computer viruses or electrical or
telecommunications outages, cyber-attacks, including Distributed Denial of Service (“DDOS”) attacks discussed below, natural
disasters, other damage to property or physical assets or events arising from local or larger scale politics, including terrorist acts.
Any of these occurrences could diminish our ability to operate our businesses, service customer accounts and protect customers’
information, or result in potential liability to customers, reputational damage, regulatory intervention and customers’ loss of
confidence in our businesses, any of which could result in a material adverse effect.
We also rely on the business infrastructure and systems of third parties with which we do business and to whom we outsource the
maintenance and development of operational and technological functionality. For example, we are in the process of migrating a
number of our core systems and customer-facing applications to Amazon Web Services, Inc., a third party cloud infrastructure
platform. If we do not execute the transition to these new environments in a well-managed, secure and effective manner, we may
experience unplanned service disruption or unforeseen costs which may harm our business and operating results. In addition, our
cloud infrastructure providers, or other service providers, could experience system breakdowns or failures, outages, downtime,
cyber-attacks, adverse changes to financial condition, bankruptcy or other adverse conditions, which could have a material adverse
effect on our business and reputation. Thus, our plans to increase the amount of our infrastructure that we outsource to “the cloud”
or to other third parties may increase our risk exposure.
Our ability to develop and deliver new products that meet the needs of our existing customers and attract new ones and to run our
business in compliance with applicable laws and regulations depends on the functionality and reliability of our operational and
technology systems. Any disruptions, failures or inaccuracies of our operational and technology systems and models, including
those associated with improvements or modifications to such systems and models, could cause us to be unable to market and
manage our products and services, manage our risk, meet our regulatory obligations or report our financial results in a timely and
accurate manner, all of which could have a negative impact on our results of operations. In addition, our ongoing investments in
infrastructure, which are necessary to maintain a competitive business, integrate acquisitions and establish scalable operations,
may increase our expenses. As our business develops, changes or expands, additional expenses can arise as a result of a reevaluation
of business strategies, management of outsourced services, asset purchases or other acquisitions, structural reorganization,
compliance with new laws or regulations or the integration of newly acquired businesses. If we are unable to successfully manage
our expenses, our financial results will be negatively affected.
We Could Incur Increased Costs Or Reductions In Revenue Or Suffer Reputational Damage And Business Disruptions In The
Event Of The Theft, Loss Or Misuse Of Information, Including As A Result Of A Cyber-Attack.
Our products and services involve the gathering, management, processing, storage and transmission of sensitive and confidential
information regarding our customers and their accounts, our employees and other third parties with which we do business. Our
ability to provide such products and services, many of which are web-based, depends upon the management and safeguarding of
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Capital One Financial Corporation (COF)
information, software, methodologies and business secrets. To provide these products and services, we use information systems
and infrastructure, including digital technologies, computer and email systems, software, networks and other web-based
technologies, that we and third-party service providers operate. We also have arrangements in place with third parties through
which we share and receive information about their customers who are or may become our customers.
Like other financial services firms, technologies, systems, networks and devices of Capital One or our customers, employees,
service providers or other third parties with whom we interact continue to be the subject of attempted unauthorized access,
mishandling or misuse of information, computer viruses or malware, phishing or other forms of social engineering, and other forms
of cyber-attacks designed to obtain confidential information, destroy data, disrupt or degrade service, sabotage systems or cause
other damage, denial of service attacks and other events. These threats may derive from human error, fraud or malice on the part
of our employees or third parties or may result from accidental technological failure. Any of these parties may also attempt to
fraudulently induce employees, customers or other third-party users of our systems to disclose sensitive information in order to
gain access to our data or that of our customers or third parties with whom we interact. Further, cyber and information security
risks for large financial institutions like us have generally increased in recent years in part because of the proliferation of new
technologies, the use of the Internet and telecommunications technologies to conduct financial transactions and the increased
sophistication and activities of organized crime, perpetrators of fraud, hackers, terrorists, activists, formal and informal
instrumentalities of foreign governments and other external parties. In addition, to access our products and services, our customers
may use computers, smartphones, tablet PCs and other mobile devices that are beyond our security control systems.
If our information systems or infrastructure or those of our customers, partners, service providers or other market participants
experience a significant disruption or breach, it could lead, depending on the nature of the disruption or breach, to the unauthorized
access to and release, gathering, monitoring, misuse, loss or destruction of our confidential information or personal or confidential
information of our customers, employees or other third parties in our possession. Further, such disruption or breach could also
result in unauthorized access to our proprietary information, software, methodologies and business secrets and in unauthorized
transactions in Capital One accounts or unauthorized access to personal or confidential information maintained by those entities.
For example, there has been a significant proliferation of consumer information available on the Internet resulting from breaches
of third-party entities, including personal information, log-in credentials and authentication data. While Capital One was not directly
involved in these third-party breach events, the stolen information can create a vulnerability for our customers if their Capital One
log-in credentials are the same as or similar to the credentials that have been compromised on other sites. This vulnerability could
include the risk of unauthorized account access, data loss and fraud. The use of automation software, or “bots,” can increase the
velocity and efficacy of these types of attacks.
As a financial institution, we are subject to and examined for compliance with an array of data protection laws, regulations and
guidance, as well as to our own internal privacy and information security policies and programs. However, because the methods
and techniques employed by perpetrators of fraud and others to attack, disable, degrade or sabotage platforms, systems and
applications change frequently, are increasingly sophisticated and often are not fully recognized or understood until after they have
occurred, we and our third-party service providers and partners may be unable to anticipate certain attack methods in order to
implement effective preventative measures or mitigate or remediate the damages caused in a timely manner. We may also be unable
to hire and develop talent capable of detecting, mitigating or remediating these risks. Although we believe we have a robust suite
of authentication and layered information security controls, including our cyber threat analytics, data encryption and tokenization
technologies, anti-malware defenses and vulnerability management program, any one or combination of these controls could fail
to detect, mitigate or remediate these risks in a timely manner.
A disruption or breach such as those discussed above could result in significant legal and financial exposure, regulatory intervention,
remediation costs, card reissuance, supervisory liability, damage to our reputation or loss of confidence in the security of our
systems, products and services that could adversely affect our business. We and other U.S. financial services providers continue
to be targeted with evolving and adaptive cybersecurity threats from sophisticated third parties. Although we have not experienced
any material losses relating to cyber incidents, there can be no assurance that unauthorized access or cyber incidents will not occur
or that we will not suffer such losses in the future. Unauthorized access or cyber incidents could occur more frequently and on a
more significant scale. If future attacks like these are successful or if customers are unable to access their accounts online for other
reasons, it could adversely impact our ability to service customer accounts or loans, complete financial transactions for our customers
or otherwise operate any of our businesses or services. In addition, a breach or attack affecting one of our third-party service
providers or partners could harm our business even if we do not control the service that is attacked.
In addition, the increasing prevalence and the evolution of cyber-attacks and other efforts to breach or disrupt our systems or those
of our partners, retailers or other market participants has led, and will likely continue to lead, to increased costs to us with respect
to preventing, mitigating and remediating these risks, as well as any related attempted fraud. We may be required to expend
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significant additional resources to continue to modify or strengthen our protective security measures, investigate and remediate
any vulnerabilities of our information systems and infrastructure or invest in new technology designed to mitigate security risks.
For example, various retailers have continued to be victims of cyber-attacks in which customer data, including debit and credit
card information, was obtained. In these situations, we incur a variety of costs, including those associated with replacing the
compromised cards and remediating fraudulent transaction activity. Further, successful cyber-attacks at other large financial
institutions or other market participants, whether or not we are impacted, could lead to a general loss of customer confidence in
financial institutions that could negatively affect us, including harming the market perception of the effectiveness of our security
measures or the financial system in general which could result in reduced use of our financial products. Though we have insurance
against some cyber-risks and attacks, it may not be sufficient to offset the impact of a material loss event.
Legal Risk
Our Businesses Are Subject To The Risk Of Increased Litigation, Government Investigations And Regulatory Enforcement.
Our businesses are subject to increased litigation, government investigations and other regulatory enforcement risks as a result of
a number of factors and from various sources, including the highly regulated nature of the financial services industry, the focus
of state and federal prosecutors on banks and the financial services industry, the structure of the credit card industry and business
practices in the mortgage lending business. Given the inherent uncertainties involved in litigation, government investigations and
regulatory enforcement decisions, and the very large or indeterminate damages sought in some matters asserted against us, there
can be significant uncertainty as to the ultimate liability we may incur from these kinds of matters. The finding, or even the assertion,
of substantial legal liability against us could have a material adverse effect on our business and financial condition and could cause
significant reputational harm to us, which could seriously harm our business.
In addition, financial institutions, including us, have faced significant regulatory scrutiny over the past several years, which has
increasingly led to public enforcement actions. We and our subsidiaries are subject to comprehensive regulation and periodic
examination by the Federal Reserve, the SEC, OCC, FDIC and CFPB. We have been subject to enforcement actions by many of
these and other regulators and may continue to be involved in such actions, including governmental inquiries, investigations and
enforcement proceedings, including by the Department of Justice. We expect that regulators and governmental enforcement bodies
will continue taking formal enforcement actions against financial institutions in addition to addressing supervisory concerns through
non-public supervisory actions or findings, which could involve restrictions on our activities, among other limitations that could
adversely affect our business. Litigation, government investigations and other regulatory actions generally could subject us to
significant fines, increased expenses, restrictions on our activities and damage to our reputation and our brand, and could adversely
affect our business, financial condition and results of operations.
Other Business Risks
We Face Intense Competition In All Of Our Markets.
We operate in a highly competitive environment, both in making loans and attracting deposits, and we expect competitive conditions
to continue to intensify with respect to most of our products. We compete on the basis of the rates we pay on deposits and the rates
and other terms we charge on the loans we originate or purchase, as well as the quality and range of our customer service, products,
innovation and experience. Price competition for loans might result in origination of fewer loans or earning less on our loans. In
our credit card business, competition for rewards customers may result in higher rewards expenses, or we may fail to attract new
customers or retain existing rewards customers due to increasing competition for these consumers.
Some of our competitors are substantially larger than we are, which may give those competitors advantages, including a more
diversified product and customer base, the ability to reach out to more customers and potential customers, operational efficiencies,
more versatile technology platforms, the ability to innovate faster, broad-based local distribution capabilities, lower-cost funding
and larger existing branch networks. In addition, some of our competitors, including new and emerging competitors in the digital
and mobile payments space and other financial technology providers, are not subject to the same regulatory requirements or
legislative scrutiny to which we are subject, which also could place us at a competitive disadvantage. Many of our competitors
are also focusing on cross-selling their products and developing new products or technologies, which could affect our ability to
maintain or grow existing customer relationships or require us to offer lower interest rates or fees on our lending products or higher
interest rates on deposits. This increasingly competitive environment is primarily a result of changes in regulation, changes in
technology and product delivery systems, as well as the consolidation of financial service providers, all of which may affect our
customers’ expectations and demands.
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As of December 31, 2016, we operate the largest online direct banking institution in the U.S. by deposits. While direct banking
represents a significant opportunity to attract new customers that value greater and more flexible access to banking services at
reduced costs, we face strong competition in the direct banking market. Aggressive pricing throughout the industry may adversely
affect the retention of existing balances and the cost-efficient acquisition of new deposit funds and may affect our growth and
profitability. In addition, the effects of a competitive environment may be exacerbated by the flexibility of direct banking and the
increasing financial and technological sophistication of our customer base. Customers could also close their online accounts or
reduce balances or deposits in favor of products and services offered by competitors for other reasons. These shifts, which could
be rapid, could result from general dissatisfaction with our products or services, including concerns over pricing, online security
or our reputation.
We have expanded our credit card partnership business over the past several years with the additions of a number of credit card
partnerships. The market for key business partners, especially in the credit card business, is very competitive, and we may not be
able to grow or maintain these partner relationships. We face the risk that we could lose partner relationships, even after we have
invested significant resources, time and expense into acquiring and developing the relationships. The loss of any of our key business
partners could have a negative impact on our results of operations, including lower returns, excess operating expense and excess
funding capacity.
In addition, the global payments industry is highly competitive and is rapidly changing and increasingly subject to regulatory
scrutiny. We compete with all forms of payments, including a variety of new and evolving alternative payment mechanisms,
systems and products, such as aggregators and web-based and wireless payment platforms or technologies, digital currencies,
prepaid systems and payment services targeting users of social networks and online gaming (including those offering billing to
the consumer’s mobile phone account). If we are unable to continue to keep pace with innovation, our business and results of
operations could be adversely affected.
In such a competitive environment, we may lose entire accounts or may lose account balances to competing firms, or we may find
it more costly to maintain our existing customer base. Customer attrition from any or all of our lending products, together with
any lowering of interest rates or fees that we might implement to retain customers, could reduce our revenues and therefore our
earnings. Similarly, unexpected customer attrition from our deposit products, in addition to an increase in rates or services that we
may offer to retain those deposits, may increase our expenses and therefore reduce our earnings.
Our Business, Financial Condition And Results Of Operations May Be Adversely Affected By Merchants’ Increasing Focus
On The Fees Charged By Credit Card Networks And By Regulation And Legislation Impacting Such Fees.
Credit card interchange fees are generally one of the largest components of the costs that merchants pay in connection with the
acceptance of credit cards and are a meaningful source of revenue for our credit card businesses. Interchange fees are the subject
of significant and intense global legal, regulatory and legislative focus, and the resulting decisions, regulations and legislation may
have a material adverse impact on our overall business, financial condition and results of operations.
Regulators and legislative bodies in a number of countries are seeking to reduce credit card interchange fees through legislation,
competition-related regulatory proceedings, central bank regulation and or litigation. Interchange reimbursement rates in the United
States are set by credit card networks such as MasterCard and Visa. In some jurisdictions, such as Canada and certain countries
in the European Union, interchange fees and related practices are subject to regulatory activity that have limited the ability of
certain networks to establish default rates, including in some cases imposing caps on permissible interchange fees. We have already
experienced these impacts in our international credit card portfolio. Legislators and regulators around the world are aware of each
other’s approaches to the regulation of the payments industry. Consequently, a development in one country, state or region may
influence regulatory approaches in another, such as our primary market, the United States.
In addition to this regulatory activity, merchants are also seeking avenues to reduce interchange fees. During the past few years,
merchants and their trade groups have filed numerous lawsuits against Visa, MasterCard, American Express and their card-issuing
banks, claiming that their practices toward merchants, including interchange and similar fees, violate federal antitrust laws. In
2005, a number of entities 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. In December 2013, the U.S.
District Court for the Eastern District of New York granted final approval of the proposed class settlement. The settlement provided,
among other things, that merchants would be entitled to join together to negotiate lower interchange fees. The settlement was
appealed to the Second Circuit Court of Appeals in January 2014; this litigation remains ongoing. See “Note 19—Commitments,
Contingencies, Guarantees and Others” for further details.
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Capital One Financial Corporation (COF)
Some major retailers may have sufficient bargaining power to independently negotiate lower interchange fees with MasterCard
and Visa, which could, in turn, result in lower interchange fees for us when our cardholders undertake purchase transactions with
these retailers. In 2016, some of the largest merchants individually negotiated lower interchange rates with MasterCard and/or
Visa. These and other merchants also continue to lobby aggressively for caps and restrictions on interchange fees and there can
be no assurance that their efforts will not be successful or that they will not in the future bring legal proceedings against us or other
credit card and debit card issuers and networks.
Beyond pursuing litigation, legislation and regulation, merchants may also promote forms of payment with lower fees, such as
ACH-based payments, or seek to impose surcharges at the point of sale for use of credit or debit cards. New payment systems,
particularly mobile-based payment technologies, could also gain widespread adoption and lead to issuer transaction fees or the
displacement of credit card accounts as a payment method.
The heightened focus by merchants and regulatory and legislative bodies on the fees charged by credit and debit card networks,
and the ability of certain merchants to successfully negotiate discounts to interchange fees with MasterCard and Visa or develop
alternative payment systems could result in a reduction of interchange fees. Any resulting loss in income to us could have a material
adverse effect on our business, financial condition and results of operations.
If We Are Not Able To Invest Successfully In And Introduce Digital And Other Technological Developments Across All Our
Businesses, Our Financial Performance May Suffer.
Our industry is subject to rapid and significant technological changes and our ability to meet our customers’ needs and expectations
is key to our ability to grow revenue and earnings. We expect digital technologies to have a significant impact on banking over
time. Consumers increasingly expect robust digital experiences from their financial services providers. The ability for customers
to access their accounts and conduct financial transactions using digital technology, including mobile applications, is an increasingly
important aspect of the financial services industry and it impacts our ability to deliver products and services to our customers. To
that end, financial institutions are rapidly introducing new digital and other technology-driven products and services, which aim
to offer a better customer experience and to reduce costs. We continue to invest in digital technology designed to attract new
customers, facilitate the ability of existing customers to conduct financial transactions and enhance the customer experience related
to our products and services.
Our continued success depends, in part, upon our ability to address the needs of our customers by using digital technology to
provide products and services that efficiently meet their expectations in a cost-effective manner. The development and launch of
new digital products and services depends in large part on our capacity to invest in and build the technology platforms that can
enable them. We continue to actively invest in such technology platforms, however, we may fail to implement the correct technology,
or may fail to do so in a timely manner as discussed in more detail above under the headings “We Face Intense Competition In All
Of Our Markets” and “We Face Risks Related To Our Operational, Technological And Organizational Infrastructure.”
Some of our competitors are substantially larger than we are, which may allow those competitors to invest more money into their
technology infrastructure and digital innovation than we do. In addition, we face intense competition from smaller companies
which experience lower cost structures and different regulatory requirements and scrutiny than we do, and which may allow them
to innovate more rapidly than we can. See “We Face Intense Competition In All Of Our Markets.” Further, our success depends
on our ability to attract and retain strong digital and technology leaders, engineers and other talent, and competition for such talent
is intense. If we are unable to attract and retain digital and technology talent, our ability to offer digital products and services and
build the necessary technology infrastructure could be negatively affected, which could negatively impact our business and financial
results. A failure to maintain or enhance our competitive position with respect to digital products and services, whether because
we fail to anticipate customer expectations or because our technological developments fail to perform as desired or are not
implemented in a timely or successful manner, could negatively impact our business and financial results.
We May Fail To Realize All Of The Anticipated Benefits Of Our Mergers, Acquisitions And Strategic Partnerships.
We have engaged in merger and acquisition activity and entered into strategic partnerships over the past several years and may
continue to engage in such activity in the future. We continue to evaluate and anticipate engaging in, among other merger and
acquisition activity, additional strategic partnerships and selected acquisitions of financial institutions and other financial assets,
including credit card and other loan portfolios.
Any merger, acquisition or strategic partnership we undertake entails certain risks, which may materially and adversely affect our
results of operations. If we experience greater than anticipated costs to integrate acquired businesses into our existing operations
or are not able to achieve the anticipated benefits of any merger, acquisition or strategic partnership, including cost savings and
24
Capital One Financial Corporation (COF)
other synergies, our business could be negatively affected. In addition, it is possible that the ongoing integration processes could
result in the loss of key employees, errors or delays in systems implementation, the disruption of our ongoing businesses or
inconsistencies in standards, controls, procedures and policies that adversely affect our ability to maintain relationships with
partners, clients, customers, depositors and employees or to achieve the anticipated benefits of any merger, acquisition or strategic
partnership. Integration efforts also may divert management attention and resources. These integration matters may have an adverse
effect on us during any transition period.
In addition, we may face the following risks in connection with any merger, acquisition or strategic partnership:
• New Businesses and Geographic or Other Markets: Our merger, acquisition or strategic partnership activity may involve
our entry into new businesses and new geographic areas or other markets which present risks resulting from our relative
inexperience in these new businesses or markets. These new businesses or markets may change the overall character of our
consolidated portfolio of businesses and could react differently to economic and other external factors. We face the risk that
we will not be successful in these new businesses or in these new markets.
•
Identification and Assessment of Merger and Acquisition Targets and Deployment of Acquired Assets: We cannot assure
you that we will identify or acquire suitable financial assets or institutions to supplement our organic growth through
acquisitions or strategic partnerships. In addition, we may incorrectly assess the asset quality and value of the particular
assets or institutions we acquire. Further, our ability to achieve the anticipated benefits of any merger, acquisition or strategic
partnership will depend on our ability to assess the asset quality and value of the particular assets or institutions we partner
with, merge with or acquire. We may be unable to profitably deploy any assets we acquire.
• Accuracy of Assumptions: In connection with any merger, acquisition or strategic partnership, we may make certain
assumptions relating to the proposed merger, acquisition or strategic partnership that may be, or may prove to be, inaccurate,
including as a result of the failure to realize the expected benefits of any merger, acquisition or strategic partnership. The
inaccuracy of any assumptions we may make could result in unanticipated consequences that could have a material adverse
effect on our results of operations or financial condition.
•
Target-specific Risk: Assets and companies that we acquire, or companies that we enter into strategic partnerships with,
will have their own risks that are specific to a particular asset or company. These risks include, but are not limited to,
particular or specific regulatory, accounting, operational, reputational and industry risks, any of which could have a material
adverse effect on our results of operations or financial condition. Indemnification rights, if any, may be insufficient to
compensate us for any losses or damages resulting from such risks. In addition to regulatory approvals discussed above,
certain of our merger, acquisition or partnership activity may require third-party consents in order for us to fully realize the
anticipated benefits of any such transaction.
Reputational Risk And Social Factors May Impact Our Results And Damage Our Brand.
Our ability to originate and maintain accounts is highly dependent upon the perceptions of consumer and commercial borrowers
and deposit holders and other external perceptions of our business and compliance practices or our financial health. In addition,
our brand has historically been, and we expect it to continue to be, very important to us. Maintaining and enhancing our brand
will depend largely on our ability to continue to provide high-quality products and services. Adverse perceptions regarding our
reputation in the consumer, commercial and funding markets could lead to difficulties in generating and maintaining accounts as
well as in financing them. In particular, negative public perceptions regarding our reputation could lead to decreases in the levels
of deposits that consumer and commercial customers and potential customers choose to maintain with us or significantly increase
the costs of attracting and retaining customers. In addition, negative perceptions regarding certain industries or clients could also
prompt us to cease business activities associated with those industries or clients.
Negative public opinion or damage to our brand could also result from actual or alleged conduct in any number of activities or
circumstances, including lending practices, regulatory compliance, security breaches (including the use and protection of customer
information), corporate governance, and sales and marketing, and from actions taken by regulators or other persons in response
to such conduct. Such conduct could fall short of our customers’ and the public’s heightened expectations of companies of our
size with rigorous data, privacy and compliance practices, and could further harm our reputation. In addition, third parties with
whom we have important relationships may take actions over which we have limited control that could negatively impact perceptions
about us or the financial services industry. The proliferation of social media may increase the likelihood that negative public opinion
from any of the events discussed above will impact our reputation and business.
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Capital One Financial Corporation (COF)
In addition, a variety of social factors may cause changes in borrowing activity, including credit card use, payment patterns and
the rate of defaults by accountholders and borrowers domestically and internationally. These social factors include changes in
consumer confidence levels, the public’s perception regarding consumer debt, including credit card use, and changing attitudes
about the stigma of bankruptcy. If consumers develop or maintain negative attitudes about incurring debt, or if consumption trends
decline or if we fail to maintain and enhance our brand, or we incur significant expenses in this effort, our business and financial
results could be materially and negatively affected.
If We Are Not Able To Protect Our Intellectual Property, Our Revenue And Profitability Could Be Negatively Affected.
We rely on a variety of measures to protect and enhance our intellectual property, including copyrights, trademarks, trade secrets,
patents and certain restrictions on disclosure, solicitation and competition. We also undertake other measures to control access to
and distribution of our other proprietary information. These measures may not prevent misappropriation of our proprietary
information or infringement of our intellectual property rights and a resulting loss of competitive advantage. In addition, our
competitors or other third parties may file patent applications for innovations that are used in our industry or allege that our systems,
processes or technologies infringe on their intellectual property rights. If our competitors or other third parties are successful in
obtaining such patents or prevail in intellectual property-related litigation against us, we could lose significant revenues, incur
significant license, royalty or technology development expenses, or pay significant damages.
There Are Risks Resulting From The Extensive Use Of Models In Our Business.
We rely on quantitative models to aggregate and assess our various risk exposures and to estimate certain financial values. Models
may be used in such processes as determining the pricing of various products, grading loans and extending credit, measuring
interest rate and other market risks, predicting losses, assessing capital adequacy and calculating economic and regulatory capital
levels, as well as to estimate the value of financial instruments and balance sheet items. Poorly designed or implemented models
present the risk that our business decisions based on information incorporating models will be adversely affected due to the
inadequacy of modeled results. Also, information we provide to the public or to our regulators based on poorly designed or
implemented models could be inaccurate or misleading. Some of the decisions that our regulators make, including those related
to capital distribution to our shareholders, could be affected adversely due to the perception that the quality of the models used to
generate the relevant information is insufficient. Any issues with the quality or effectiveness of our data aggregation and validation
procedures, as well as the quality and integrity of data inputs, could result in ineffective risk management practices or inaccurate
risk reporting. If our risk management framework proves ineffective, we could suffer unexpected losses which could materially
adversely affect our results of operation or financial condition.
Our Risk Management Strategies May Not Be Fully Effective In Mitigating Our Risk Exposures In All Market Environments
Or Against All Types Of Risk.
Management of risk, including market, credit, liquidity, compliance and strategic risks, requires, among other things, policies and
procedures to record properly and verify a large number of transactions and events. See “MD&A—Risk Management” for further
details. We have devoted significant resources to developing our risk management policies and procedures and expect to continue
to do so in the future. Nonetheless, our risk management strategies may not be fully effective in identifying and mitigating our
risk exposure in all market environments or against all types of risk, including risks that are unidentified or unanticipated, even if
our models for assessing risk are properly designed and implemented.
Some of our methods of managing risk are based upon our use of observed historical market behavior and management’s judgment.
These methods may not accurately predict future exposures, which could be significantly greater than the historical measures
indicate. For example, market conditions during the financial crisis involved unprecedented dislocations and highlight the
limitations inherent in using historical information to manage risk. In addition, credit risk is inherent in the financial services
business and results from, among other things, extending credit to customers. Our ability to assess the creditworthiness of our
customers may be impaired if the models and approaches we use to select, manage and underwrite our consumer and commercial
customers become less predictive of future charge-offs (due, for example, to rapid changes in the economy, including the
unemployment rate).
While we employ a broad and diversified set of risk monitoring and risk mitigation techniques, those techniques and the judgments
that accompany their application cannot anticipate every economic and financial outcome or the timing of such outcomes. For
example, our ability to implement our risk management strategies may be hindered by adverse changes in the volatility or liquidity
conditions in certain markets and as a result, may limit our ability to distribute such risks (for instance, when we seek to syndicate
26
Capital One Financial Corporation (COF)
exposure in bridge financing transactions we have underwritten). We may, therefore, incur losses in the course of our risk
management or investing activities.
Changes In Consumer Behavior And Their Adoption of Digital Technology May Change Retail Distribution Strategies And
May Adversely Impact Our Investments In Our Bank Premises And Equipment And Other Retail Distribution Assets, Lead To
Increased Expenditures And Expose Us To Additional Risk.
We have significant investments in bank premises and equipment for our branch network and other branch banking assets including
our full service banking centers, parcels of land held for the development of future banking centers and our retail work force.
Advances in technology such as digital and mobile banking, in-branch self-service technologies, proximity or remote payment
technologies, as well as progressively changing customer preferences for these other methods of banking, could decrease the value
of our branch network or other retail distribution assets. As a result, we may need to further change our retail distribution strategy
and close, sell and/or renovate additional branches or parcels of land held for development and restructure or reduce our remaining
branches and work force. These actions could lead to losses on these assets or could adversely impact the carrying value of other
long-lived assets, reduce our revenues, increase our expenditures, dilute our brand and/or reduce customer demand for our products
and services.
Further, to the extent that we change our retail distribution strategy and as a result expand into new business areas, we may face
more competitors with more experience in the new business areas and more established relationships with relevant customers,
regulators and industry participants, which could adversely affect our ability to compete. Our competitors may also be subject to
less burdensome regulations. See “We Face Intense Competition In All Our Markets.”
Fluctuations In Market Interest Rates Or Volatility In The Capital Markets Could Adversely Affect Our Income And Expense,
The Value Of Assets And Obligations, Our Regulatory Capital, Cost Of Capital Or Our Liquidity.
Like other financial institutions, our business may be sensitive to market interest rate movement and the performance of the capital
markets. Disruptions, uncertainty or volatility across the capital markets could negatively impact market liquidity and limit our
access to funding required to operate and grow our business. In addition, changes in interest rates or in valuations in the debt or
equity markets could directly impact us. For example, we borrow money from other institutions and depositors, which we use to
make loans to customers and invest in debt securities and other earning assets. We earn interest on these loans and assets and pay
interest on the money we borrow from institutions and depositors. Fluctuations in interest rates, including changes in the relationship
between short-term rates and long-term rates and in the relationship between our funding basis rate and our lending basis rate,
may have negative impacts on our net interest income and therefore our earnings. In addition, interest rate fluctuations and competitor
responses to those changes may affect the rate of customer prepayments for mortgage, auto and other term loans and may affect
the balances customers carry on their credit cards. These changes can reduce the overall yield on our earning asset portfolio.
Changes in interest rates and competitor responses to these changes may also impact customer decisions to maintain balances in
the deposit accounts they have with us. In addition, changes in valuations in the debt and equity markets could have a negative
impact on the assets we hold in our investment portfolio. Such market changes could also have a negative impact on the valuation
of assets for which we provide servicing. Finally, the Basel III Capital Rule requires that most amounts reported in Accumulated
Other Comprehensive Income (“AOCI”), including unrealized gains and losses on securities designated as available for sale, be
included in our regulatory capital calculations. Changes in interest rates or market valuations that result in unrealized losses on
components of AOCI could therefore impact our regulatory capital ratios negatively.
We assess our interest rate risk by estimating the effect on our earnings under various scenarios that differ based on assumptions
about the direction and the magnitude of interest rate changes. We take risk mitigation actions based on those assessments. We
face the risk that changes in interest rates could materially reduce our net interest income and our earnings, especially if actual
conditions turn out to be materially different than those we assumed. See “MD&A—Market Risk Management” for additional
information.
Our Business Could Be Negatively Affected If We Are Unable To Attract, Retain And Motivate Skilled Senior Leaders.
Our success depends, in large part, on our ability to retain key senior leaders, and competition for such senior leaders is intense.
The executive compensation provisions of the Dodd-Frank Act and the regulations issued thereunder, and any further legislation,
regulation or regulatory guidance restricting executive compensation, may limit the types of compensation arrangements that we
may enter into with our most senior leaders and could have a negative impact on our ability to attract, retain and motivate such
leaders in support of our long-term strategy. These laws and regulations may not apply in the same manner to all financial institutions,
and we therefore may face more restrictions than other institutions and companies with which we compete for talent. These laws
27
Capital One Financial Corporation (COF)
and regulations may also hinder our ability to compete for talent from other industries. If we are unable to retain talented senior
leadership, our business could be negatively affected.
We Face Risks From Unpredictable Catastrophic Events.
Despite our substantial business contingency plans, the impact from natural disasters and other catastrophic events, including
terrorist attacks, may have a negative effect on our business and infrastructure, including our information technology systems. In
addition, if a natural disaster or other catastrophic event occurs in certain regions where our business and customers are concentrated,
such as the mid-Atlantic and New York metropolitan area, we could be disproportionately impacted as compared to our competitors.
The impact of such events and other catastrophes on the overall economy may also adversely affect our financial condition and
results of operations.
We Face Risks From The Use Of Or Changes To Assumptions Or Estimates In Our Financial Statements.
Pursuant to generally accepted accounting principles in the U.S. (“U.S. GAAP”), we are required to use certain assumptions and
estimates in preparing our financial statements, including determining our allowance for loan and lease losses, the fair value of
certain assets and liabilities, and asset impairment, among other items. In addition, the FASB, the SEC and other regulatory bodies
may change the financial accounting and reporting standards, including those related to assumptions and estimates we use to
prepare our financial statements, in ways that we cannot predict and that could impact our financial statements. For example, in
June 2016, the FASB issued revised guidance for impairments on financial instruments. The guidance, which becomes effective
on January 1, 2020 with early adoption permitted no earlier than January 1, 2019, requires use of a CECL model that is based on
expected rather than incurred losses. We are currently assessing the potential impact of this guidance, which may be material to
our accounting for credit losses on financial instruments. If actual results differ from the assumptions or estimates underlying our
financial statements or if financial accounting and reporting standards are changed, we may experience unexpected material losses.
For a discussion of our use of estimates in the preparation of our consolidated financial statements, see “MD&A—Critical
Accounting Policies and Estimates” and “Note 1—Summary of Significant Accounting Policies.”
Limitations On Our Ability To Receive Dividends From Our Subsidiaries Could Affect Our Liquidity And Ability To Pay
Dividends And Repurchase Common Stock.
We are a separate and distinct legal entity from our subsidiaries, including the Banks. Dividends to us from our direct and indirect
subsidiaries, including the Banks, have represented a major source of funds for us to pay dividends on our common and preferred
stock, repurchase common stock, make payments on corporate debt securities and meet other obligations. There are various federal
law limitations on the extent to which the Banks can finance or otherwise supply funds to us through dividends and loans. These
limitations include minimum regulatory capital requirements, federal banking law requirements concerning the payment of
dividends out of net profits or surplus, Sections 23A and 23B of the Federal Reserve Act and Regulation W governing transactions
between an insured depository institution and its affiliates, as well as general federal regulatory oversight to prevent unsafe or
unsound practices. If our subsidiaries’ earnings are not sufficient to make dividend payments to us while maintaining adequate
capital levels, our liquidity may be affected and we may not be able to make dividend payments to our common or preferred
stockholders, repurchase our common stock, make payments on outstanding corporate debt securities or meet other obligations,
each and any of which could have a material adverse impact on our results of operations, financial position or perception of financial
health.
The Soundness Of Other Financial Institutions And Other Third Parties Could Adversely Affect Us.
Our ability to engage in routine funding and other transactions could be adversely affected by the stability and actions of other
financial services institutions. Financial services institutions are interrelated as a result of trading, clearing, servicing, counterparty
and other relationships. We have exposure to an increasing number of financial institutions and counterparties. These counterparties
include institutions that may be exposed to various risks over which we have little or no control, including European or U.S.
sovereign debt that is currently or may become in the future subject to significant price pressure, rating agency downgrade or
default risk.
In addition, we routinely execute transactions with counterparties in the financial services industry, including brokers and dealers,
commercial banks, investment banks, mutual and hedge funds and other institutional clients, resulting in a significant credit
concentration with respect to the financial services industry overall. As a result, defaults by, or even rumors or questions about,
one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems
and could lead to losses or defaults by us or by other institutions.
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Capital One Financial Corporation (COF)
Likewise, adverse developments affecting the overall strength and soundness of our competitors, the financial services industry
as a whole and the general economic climate or sovereign debt could have a negative impact on perceptions about the strength
and soundness of our business even if we are not subject to the same adverse developments. In addition, adverse developments
with respect to third parties with whom we have important relationships also could negatively impact perceptions about us. These
perceptions about us could cause our business to be negatively affected and exacerbate the other risks that we face.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our corporate and banking real estate portfolio consists of approximately 14.9 million square feet of owned or leased office and
retail space, used to support our business. Of this overall portfolio, approximately 10.8 million square feet of space is dedicated
for various corporate office uses and approximately 4.1 million square feet of space is for bank branches and related offices.
Our 10.8 million square feet of corporate office space consists of approximately 6.1 million square feet of leased space and 4.7
million square feet of owned space. Our headquarters is located in McLean, Virginia, and is included in our corporate office space.
We maintain corporate office space primarily in Virginia, Illinois, Texas, New York, Delaware, Louisiana and Maryland.
Our 4.1 million square feet of bank branch, café and office space consists of approximately 2.2 million square feet of leased space
and 1.9 million square feet of owned space, including branch locations primarily across New York, Louisiana, Texas, Maryland,
Virginia, New Jersey and the District of Columbia. See “Note 8—Premises, Equipment and Lease Commitments” for information
about our premises.
Item 3. Legal Proceedings
The information required by Item 103 of Regulation S-K is included in “Note 19—Commitments, Contingencies, Guarantees and
Others.”
Item 4. Mine Safety Disclosures
Not applicable.
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Capital One Financial Corporation (COF)
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is listed on the NYSE and is traded under the symbol “COF.” As of January 31, 2017, there were 11,545 holders
of record of our common stock. The table below presents the high and low closing trade prices of our common stock as reported
by the NYSE and cash dividends per common share declared by us during each quarter indicated.
For the Quarter Ended
December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
September 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
March 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
September 30, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 30, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
March 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trade Price
High
Low
Cash
Dividends
$
90.62
$
71.07
$
72.50
75.96
71.03
81.42
91.71
89.38
82.49
60.86
58.15
58.66
72.18
71.55
79.67
73.21
0.40
0.40
0.40
0.40
0.40
0.40
0.40
0.30
Dividend Restrictions
For information regarding our ability to pay dividends, see the discussion under “Part I—Item 1. Business—Supervision and
Regulation—Dividends, Stock Repurchases and Transfers of Funds,” “MD&A—Capital Management—Dividend Policy and
Stock Purchases,” and “Note 12—Regulatory and Capital Adequacy.”
Securities Authorized for Issuance Under Equity Compensation Plans
Information relating to compensation plans under which our equity securities are authorized for issuance is presented in Part III
of this Report under “Part III—Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.”
30
Capital One Financial Corporation (COF)
Common Stock Performance Graph
The following graph shows the cumulative total stockholder return on our common stock compared to an overall stock market
index, the S&P Composite 500 Stock Index (“S&P 500 Index”), and a published industry index, the S&P Financial Composite
Index (“S&P Financial Index”), over the five-year period commencing December 31, 2011 and ending December 31, 2016. The
stock performance graph assumes that $100 was invested in our common stock and each index and that all dividends were reinvested.
The stock price performance on the graph below is not necessarily indicative of future performance.
Comparison of 5-Year Cumulative Total Return
(Capital One, S&P 500 Index and S&P Financial Index)
$223
$221
$178
$250
$200
$150
$100
$50
$0
2011
2012
2013
2014
2015
2016
Capital One
S&P 500 Index
S&P Financial Index
Capital One . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 100.00
$ 137.50
$ 184.50
$ 201.95
$ 179.92
$ 222.66
S&P 500 Index. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
S&P Financial Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100.00
100.00
113.41
126.26
146.98
168.18
163.72
190.21
162.53
183.60
178.02
220.58
2011
2012
2013
2014
2015
2016
December 31,
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Capital One Financial Corporation (COF)
Recent Sales of Unregistered Securities
We did not have any sales of unregistered equity securities in 2016.
Issuer Purchases of Equity Securities
The following table presents information related to repurchases of shares of our common stock for each calendar month in the
fourth quarter of 2016.
(Dollars in millions, except per share information)
October . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
November . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,601,329
$
Total
Number
of Shares
Purchased(1)
Average
Price Paid
per Share(2)
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
Maximum
Amount That May
Yet be Purchased
Under the Plan
or Program(2)
7,461,115
$
3,418,507
721,707
73.33
75.14
87.84
74.77
7,461,115
$
3,353,519
721,707
11,536,341
759
507
443
__________
(1)
Primarily comprised of repurchases under the 2016 Stock Repurchase Program. On June 29, 2016, we announced that our Board of Directors had authorized
the repurchase of up to $2.5 billion of shares of our common stock from the third quarter of 2016 through the end of the second quarter of 2017. Also includes
64,988 shares purchased in November related to the withholding of shares to cover taxes on restricted stock awards whose restrictions have lapsed.
(2) Amounts exclude commission costs.
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Capital One Financial Corporation (COF)
Item 6. Summary of Selected Financial Data
The following table presents selected consolidated financial data and performance metrics for the five-year period ended
December 31, 2016. Certain prior period amounts have been recast to conform to the current period presentation. We prepare our
consolidated financial statements based on U.S. GAAP. This data should be reviewed in conjunction with our audited consolidated
financial statements and related notes and with the MD&A included in this Report. The historical financial information presented
may not be indicative of our future performance.
Five-Year Summary of Selected Financial Data(1)
(Dollars in millions, except per share data and as noted)
2016
2015
2014
2013
2012
Income statement
Year Ended December 31,
Change
2016 vs.
2015
2015 vs.
2014
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 22,891
$ 20,459
$ 19,397
$ 19,898
$ 18,964
12%
5%
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest income(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for credit losses(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest expense:
Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of intangibles . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations before income taxes . . . . .
Income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations, net of tax . . . . . . . . . . . . .
Income (loss) from discontinued operations, net of tax . . . . . . .
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends and undistributed earnings allocated to
participating securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income available to common stockholders . . . . . . . . . . .
Common share statistics
Basic earnings per common share:
Net income from continuing operations. . . . . . . . . . . . . . . . . . .
Income (loss) from discontinued operations . . . . . . . . . . . . . . .
Net income per basic common share . . . . . . . . . . . . . . . . . . . . .
Diluted earnings per common share:
Net income from continuing operations. . . . . . . . . . . . . . . . . . .
Income (loss) from discontinued operations . . . . . . . . . . . . . . .
Net income per diluted common share. . . . . . . . . . . . . . . . . . . .
Common shares outstanding (period-end, in millions) . . . . . . .
Dividends paid per common share . . . . . . . . . . . . . . . . . . . . . . .
Tangible book value per common share (period-end)(4). . . . . . .
Common dividend payout ratio(5). . . . . . . . . . . . . . . . . . . . . . . .
Stock price per common share at period end . . . . . . . . . . . . . . .
Book value per common share at period end . . . . . . . . . . . . . . .
Total market capitalization at period end . . . . . . . . . . . . . . . . . .
Balance sheet (average balances)
2,018
20,873
4,628
25,501
6,459
1,811
386
11,361
13,558
5,484
1,714
3,770
(19)
3,751
(24)
(214)
1,625
18,834
4,579
23,413
4,536
1,744
430
10,822
12,996
5,881
1,869
4,012
38
4,050
1,579
17,818
4,472
22,290
3,541
1,561
532
10,087
12,180
6,569
2,146
4,423
5
4,428
(20)
(158)
(18)
(67)
1,792
18,106
4,278
22,384
3,453
1,373
671
10,309
12,353
6,578
2,224
4,354
(233)
4,121
(17)
(53)
2,375
16,589
4,807
21,396
4,415
1,364
609
9,824
11,797
5,184
1,475
3,709
(217)
3,492
(15)
(15)
$
3,513
$
3,872
$
4,343
$
4,051
$
3,462
24
11
1
9
42
4
(10)
5
4
(7)
(8)
(6)
**
(7)
20
35
(9)
3
6
2
5
28
12
(19)
7
7
(10)
(13)
(9)
**
(9)
11
136
(11)
$
$
$
$
$
$
$
$
$
$
$
7.00
(0.04)
6.96
6.93
(0.04)
6.89
480.2
1.60
57.76
22.99%
$
87.24
98.95
41,893
7.08
0.07
7.15
7.00
0.07
7.07
527.3
1.50
53.65
20.98%
72.18
89.67
38,061
$
$
$
$
$
$
7.70
0.01
7.71
7.58
0.01
7.59
553.4
1.20
50.32
15.56%
82.55
81.41
45,683
$
$
$
$
$
$
$
$
$
$
$
$
7.39
(0.40)
6.99
7.28
(0.39)
6.89
572.7
0.95
43.64
13.59%
76.61
72.69
43,875
6.56
(0.39)
6.17
6.49
(0.38)
6.11
582.2
0.20
40.10
(1)%
(8)%
**
(3)
(1)
**
(3)
(9)
7
8
**
(7)
(8)
**
(7)
(5)
25
7
3.24%
201bps
542bps
57.93
69.43
33,727
Loans held for investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest-earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 233,272
307,796
$ 210,745
282,581
$ 197,925
267,174
$ 192,614
266,423
$ 187,915
255,079
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest-bearing deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
339,974
198,304
223,714
313,474
185,677
210,989
297,659
181,036
205,675
296,200
187,700
209,045
285,142
183,314
203,055
21%
(13)%
10
10
11%
9
8
7
6
10
(17)
6%
6
5
3
3
33
Capital One Financial Corporation (COF)
(Dollars in millions, except per share data and as noted)
2016
2015
2014
2013
2012
Year Ended December 31,
Change
2016 vs.
2015
2015 vs.
2014
Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 56,878
$ 45,420
$ 38,882
$ 37,807
$ 38,025
25%
17%
Common equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected performance metrics
Purchase volume(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total net revenue margin(7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest margin(8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on average tangible assets(9) . . . . . . . . . . . . . . . . . . . . . .
Return on average common equity(10) . . . . . . . . . . . . . . . . . . . .
Return on average tangible common equity (“TCE”)(11) . . . . . .
Equity-to-assets ratio(12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest expense as a percentage of average loans held for
investment(13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Efficiency ratio(14). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effective income tax rate from continuing operations . . . . . . . .
Net charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net charge-off rate(15) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
45,162
48,753
45,072
47,713
43,055
44,268
40,629
41,482
36,934
37,265
$ 307,138
$ 271,167
$ 224,750
$ 201,074
$ 180,599
8.29%
8.29%
8.34%
8.40%
8.39%
6.78
1.11
1.16
7.82
11.93
14.34
5.81
53.17
31.3
6.66
1.28
1.35
8.51
12.87
15.22
6.17
55.51
31.8
6.67
1.49
1.57
10.08
15.79
14.87
6.15
54.64
32.7
6.80
1.47
1.55
10.54
17.35
14.00
6.41
55.19
33.8
6.50
1.30
1.38
9.96
17.25
13.07
6.28
55.14
28.5
—
2
13%
—
5
8
21%
(5)bps
12bps
(1)
(17)
(19)
(69)
(94)
(88)
(36)
(234)
(50)
(21)
(22)
(157)
(292)
35
2
87
(90)
$
5,062
$
3,695
$
3,414
$
3,934
$
3,555
2.17%
1.75%
1.72%
2.04%
1.89%
37%
42bps
8%
3bps
(Dollars in millions, except as noted)
Balance sheet (period-end)
December 31,
2016
2015
2014
2013
2012
Change
2016 vs.
2015
2015 vs.
2014
Loans held for investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 245,586
$ 229,851
$ 208,316
$ 197,199
$ 205,889
7%
10%
Interest-earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest-bearing deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit quality metrics
Allowance for loan and lease losses. . . . . . . . . . . . . . . . . . . . . .
Allowance as a percentage of loans held for investment
(“allowance coverage ratio”) . . . . . . . . . . . . . . . . . . . . . . . . . . .
30+ day performing delinquency rate . . . . . . . . . . . . . . . . . . . .
30+ day delinquency rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital ratios
Common equity Tier 1 capital(16) . . . . . . . . . . . . . . . . . . . . . . . .
Tier 1 common ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier 1 capital(16) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total capital(16) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier 1 leverage(16) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tangible common equity(17) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supplementary leverage(16) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
Employees (period end, in thousands) . . . . . . . . . . . . . . . . . . . .
321,807
357,033
211,266
236,768
60,460
43,154
47,514
302,007
334,048
191,874
217,721
59,115
43,990
47,284
277,849
308,167
180,467
205,548
48,457
43,231
45,053
265,170
296,064
181,880
204,523
40,654
40,779
41,632
280,096
311,682
190,018
212,485
49,910
39,572
40,425
7
7
10
9
2
(2)
—
9
8
6
6
22
2
5
$
6,503
$
5,130
$
4,383
$
4,315
$
5,156
27%
17%
2.65%
2.23%
2.10%
2.19%
2.50%
42bps
13bps
2.93
3.27
2.69
3.00
2.62
2.91
10.1%
11.1%
12.5%
N/A
12.4
14.6
10.6
8.9
9.2
N/A
13.2
15.1
10.8
9.5
N/A
N/A
11.6
14.3
9.9
8.1
8.6
47.3
2.63
2.96
N/A
12.2
12.6
14.7
10.1
8.9
N/A
2.70
3.09
N/A
10.9
11.3
13.5
8.6
7.9
N/A
24
27
7
9
(100)bps
(140)bps
**
(80)
(30)
(70)
(80)
(60)
**
(80)
(50)
(20)
(60)
**
45.4
46.0
45.4
42.2
4%
(1)%
__________
(1) As of January 1, 2015, we changed our accounting principle to move from a gross basis of presentation to a net basis, for presenting qualifying derivative
assets and liabilities, as well as the related right to reclaim cash collateral or obligation to return cash collateral. See “Note 1—Summary of Significant
Accounting Policies” for additional information. Prior period results, excluding regulatory ratios, have been recast to conform to this presentation.
(2)
Includes a bargain purchase gain of $594 million attributable to the ING Direct acquisition recognized in non-interest income in the first quarter of 2012.
The bargain purchase gain represents the excess of the fair value of the net assets acquired from ING Direct as of the acquisition date over the consideration
transferred. See “MD&A—Glossary and Acronyms” for the definition of ING Direct acquisition.
34
Capital One Financial Corporation (COF)
(3)
(4)
Provision for credit losses for 2012 includes expense of $1.2 billion to establish an initial allowance for the receivables acquired in the 2012 U.S. card
acquisition accounted for based on contractual cash flows. See “MD&A—Glossary and Acronyms” for the definition of 2012 U.S. card acquisition.
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 F—Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures” for additional information on non-GAAP
measures.
(5) Common dividend payout ratio is calculated based on dividends per common share for the period divided by basic earnings per common share for the period.
(6)
Purchase volume consists of purchase transactions, net of returns, for the period for loans both classified as held for investment and held for sale. Excludes
cash advance and balance transfer transactions.
(7)
Total net revenue margin is calculated based on total net revenue for the period divided by average interest-earning assets for the period.
(8) Net interest margin is calculated based on net interest income for the period divided by average interest-earning assets for the period.
(9) Return on average tangible assets is a non-GAAP measure calculated based on income from continuing operations, net of tax, for the period divided by
average tangible assets for the period. See “MD&A—Table F—Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures”
for additional information on non-GAAP measures.
(10) Return on average common equity is 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.
(11) Return on average tangible common equity (“TCE”) is a non-GAAP 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; (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 F—
Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures” for additional information on non-GAAP measures.
(12) Equity-to-assets ratio is calculated based on average stockholders’ equity for the period divided by average total assets for the period.
(13) Non-interest expense as a percentage of average loans held for investment is calculated based on non-interest expense for the period divided by average loans
held for investment for the period.
(14) Efficiency ratio is calculated based on non-interest expense for the period divided by total net revenue for the period.
(15) Net charge-off rate is calculated based on net charge-offs for the period divided by average loans held for investment for the period.
(16) Beginning on January 1, 2014, we calculate our regulatory capital under Basel III Standardized Approach subject to transition provisions. Prior to January
1, 2014, we calculated regulatory capital measures under Basel I. See “MD&A—Capital Management” and “MD&A—Table F—Reconciliation of Non-
GAAP Measures and Calculation of Regulatory Capital Measures” for additional information, including the calculation of each of these ratios.
(17) TCE ratio is a non-GAAP measure calculated based on TCE divided by tangible assets. See “MD&A—Table F—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.
** Change is not meaningful.
35
Capital One Financial Corporation (COF)
Item 7. 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 2016 Annual Report on Form 10-K (“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 I—Item 1A. Risk Factors” in this Report. Unless otherwise specified, references to notes to our consolidated
financial statements refer to the notes to our consolidated financial statements as of December 31, 2016 included in this Report.
Management monitors a variety of key indicators to evaluate our business results and financial condition. The following MD&A
is intended to provide the reader with an understanding of our results of operations, financial condition and liquidity by focusing
on changes from year to year in certain key measures used by management to evaluate performance, such as profitability, growth
and credit quality metrics. MD&A is provided as a supplement to, and should be read in conjunction with, our audited consolidated
financial statements as of and for the year ended December 31, 2016 and accompanying notes. MD&A is organized in the following
sections:
• Executive Summary and Business Outlook
• Consolidated Results of Operations
• Consolidated Balance Sheets Analysis
• Off-Balance Sheet Arrangements
• Business Segment Financial Performance
• Critical Accounting Policies and Estimates
• Capital Management
• Risk Management
• Credit Risk Profile
• Liquidity Risk Profile
• Market Risk Profile
• Supplemental Tables
• Accounting Changes and Developments
• Glossary and Acronyms
EXECUTIVE SUMMARY AND BUSINESS OUTLOOK
Financial Highlights
We reported net income of $3.8 billion ($6.89 per diluted common share) on total net revenue of $25.5 billion for 2016. In
comparison, we reported net income of $4.1 billion ($7.07 per diluted common share) on total net revenue of $23.4 billion for
2015 and $4.4 billion ($7.59 per diluted common share) on total net revenue of $22.3 billion for 2014.
Our common equity Tier 1 capital ratio as calculated under the Basel III Standardized Approach, including transition provisions,
was 10.1% and 11.1% as of December 31, 2016 and 2015, respectively. See “MD&A—Capital Management” below for additional
information.
On June 29, 2016, we announced that our Board of Directors authorized the repurchase of up to $2.5 billion in shares of our
common stock (“2016 Stock Repurchase Program”) from the third quarter of 2016 through the end of the second quarter of 2017.
Through the end of 2016, we repurchased approximately $2.1 billion of common stock as part of the 2016 Stock Repurchase
Program and expect to complete the 2016 Stock Repurchase Program by the end of the second quarter of 2017. See “MD&A—
Capital Management” below for additional information.
Below are additional highlights of our performance in 2016. These highlights are generally based on a comparison between the
results of 2016 and 2015, except as otherwise noted. The changes in our financial condition and credit performance are generally
based on our financial condition and credit performance as of December 31, 2016 compared to our financial condition and credit
performance as of December 31, 2015. We provide a more detailed discussion of our financial performance in the sections following
this “Executive Summary and Business Outlook.”
36
Capital One Financial Corporation (COF)
Total Company Performance
• Earnings: Our net income decreased by $299 million to $3.8 billion in 2016 compared to 2015. The decrease was primarily
due to:
higher provision for credit losses driven by higher charge-offs in our credit card, taxi medallion, and oil and gas
lending portfolios, as well as larger allowance builds in our credit card and auto loan portfolios; and
higher operating and marketing expenses associated with loan growth, as well as continued investments in technology
and infrastructure.
These higher expenses were partially offset by:
higher interest income due to growth in our credit card and commercial loan portfolios.
•
Loans Held for Investment:
Period-end loans held for investment increased by $15.7 billion to $245.6 billion as of December 31, 2016 from
December 31, 2015 primarily driven by growth in our credit card, auto and commercial loan portfolios, partially
offset by the continued run-off of our acquired home loan portfolio.
Average loans held for investment increased by $22.5 billion to $233.3 billion in 2016 compared to 2015, primarily
driven by continued growth in our commercial, credit card and auto loan portfolios, including loans acquired in the
HFS acquisition, partially offset by the continued run-off of our acquired home loan portfolio.
• Net Charge-Off and Delinquency Metrics: Our net charge-off rate increased by 42 basis points to 2.17% in 2016 compared
to 2015, primarily due to:
growth and seasoning of recent credit card loan originations; and
rising losses in our taxi medallion and oil and gas lending portfolios.
These increases were partially offset by:
continued growth in our domestic credit card loan portfolio.
Our 30+ day delinquency rate increased by 27 basis points to 3.27% as of December 31, 2016 from December 31, 2015,
primarily due to growth and seasoning of recent credit card loan originations, partially offset by continued growth in our
domestic credit card and auto loan portfolios.
We provide additional information on our credit quality metrics below under “MD&A—Business Segment Financial
Performance” and “MD&A —Credit Risk Profile.”
• Allowance for Loan and Lease Losses: Our allowance for loan and lease losses increased by $1.4 billion to $6.5 billion as
of December 31, 2016 from December 31, 2015, and the allowance coverage ratio increased by 42 basis points to 2.65%
as of December 31, 2016 from December 31, 2015. The increases were primarily driven by:
continued growth and seasoning in our credit card loan portfolio;
continued growth in our auto loan portfolio, increasing loss expectations on recent originations and a build reflecting
a change in accounting estimate of the timing of charge-offs of bankrupt accounts; and
continued adverse industry conditions impacting our taxi medallion and oil and gas lending portfolios in our
Commercial Banking business.
Business Outlook
We discuss below our current expectations regarding our total company performance over the near-term based on market conditions,
the regulatory environment and our business strategies as of the time we filed this Annual Report on Form 10-K. 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
37
Capital One Financial Corporation (COF)
analysis of our business as discussed in “Part I—Item 1. Business” and “Part II—Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations” of this Report. 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 “Part I—Item 1. Business—Forward-Looking Statements” in this Report for more information on the forward-looking
statements included in this Report and “Part I—Item 1A. Risk Factors” in this Report for factors that could materially influence
our results.
We believe we are positioned to deliver attractive growth and returns, as well as significant capital distribution, subject to regulatory
approval.
We have improved efficiency by growing revenues and managing costs across the company, realizing analog cost savings and
other efficiency gains as we become more digital. We expect that our near-term annual efficiency ratio, excluding adjusting items,
will be in the 52%s, plus or minus a reasonable margin of volatility. Over the longer-term, we believe that we should be able to
achieve gradual efficiency improvement, driven by growth and digital productivity gains.
We expect our strong growth over the last two years puts us in a position to deliver solid EPS growth in 2017, excluding adjusting
items, assuming no substantial change in the broader credit and economic cycles.
We believe our actions have created a well-positioned balance sheet with strong capital and liquidity. Pursuant to our approved
2016 capital plan, our Board of Directors has authorized repurchases of up to $2.5 billion of common stock through the end of the
second quarter of 2017. We reduced our net share count by 47 million shares in 2016. The timing and exact amount of any common
stock repurchases will depend on various factors, including market conditions, opportunities for growth, utilizing Rule 10b5-1
programs, and may be suspended at any time. See “MD&A—Capital Management—Dividend Policy and Stock Purchases” for
more information.
CONSOLIDATED RESULTS OF OPERATIONS
The section below provides a comparative discussion of our consolidated financial performance for 2016 and 2015. 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
other interest-earning assets, while our interest-bearing liabilities include interest-bearing deposits, securitized debt obligations,
senior and subordinated notes, and other borrowings. Generally, we include in interest income any past due fees on loans that we
deem collectible. Our net interest margin, based on our consolidated results, represents the difference between the yield on our
interest-earning assets and the cost of our interest-bearing liabilities, including the notional impact of non-interest-bearing funding.
We expect net interest income and our net interest margin to fluctuate based on changes in interest rates and changes in the amount
and composition of our interest-earning assets and interest-bearing liabilities.
38
Capital One Financial Corporation (COF)
Table 1 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, average yield for 2016, 2015 and 2014.
Table 1: Average Balances, Net Interest Income and Net Interest Margin
Year Ended December 31,
2016
Interest
Income/
Expense
Average
Balance
Average
Yield/
Rate
Average
Balance
2015
Interest
Income/
Expense
Average
Yield/
Rate
Average
Balance
2014
Interest
Income/
Expense
Average
Yield/
Rate
(Dollars in millions)
Assets:
Interest-earning assets:
Loans:(1)
Credit card . . . . . . . . . . . . . . . . . . . .
$ 96,596
$
14,173
14.67% $ 86,923
$
12,387
14.25% $ 78,956
$
11,430
14.48%
71,631
66,033
78
234,338
66,260
4,537
2,290
6.33
3.47
203
260.26
21,203
1,599
71,365
53,161
100
211,549
63,738
4,460
1,710
6.25
3.22
228
228.00
18,785
1,575
Consumer banking . . . . . . . . . . . . . .
Commercial banking(2) . . . . . . . . . . .
Other(3) . . . . . . . . . . . . . . . . . . . . . . .
Total loans, including loans held for
sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities . . . . . . . . . . . . . . .
Cash equivalents and other interest-
earning assets . . . . . . . . . . . . . . . . . . . . .
7,198
89
Total interest-earning assets . . . . . . . . . .
307,796
22,891
Cash and due from banks . . . . . . . . . . . .
Allowance for loan and lease losses. . . .
Premises and equipment, net . . . . . . . . .
Other assets. . . . . . . . . . . . . . . . . . . . . . .
3,235
(5,675)
3,671
30,947
Total assets . . . . . . . . . . . . . . . . . . . . . . .
$ 339,974
Liabilities and stockholders’ equity:
Interest-bearing liabilities:(3)
Deposits . . . . . . . . . . . . . . . . . . . . . .
$ 198,304
$
1,213
Securitized debt obligations . . . . . . .
Senior and subordinated notes . . . . .
Other borrowings and liabilities . . . .
16,576
22,417
18,736
216
476
113
Total interest-bearing liabilities . . . . . . .
256,033
2,018
Non-interest-bearing deposits. . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . .
25,410
9,778
Total liabilities . . . . . . . . . . . . . . . . . . . .
291,221
Stockholders’ equity. . . . . . . . . . . . . . . .
48,753
9.05
2.41
1.24
7.44
0.61
1.30
2.12
0.60
0.79
7,294
99
282,581
20,459
2,970
(4,582)
3,701
28,804
$ 313,474
$ 185,677
$
1,091
151
330
53
1,625
13,929
20,935
11,297
231,838
25,312
8,611
265,761
47,713
8.88
2.47
1.36
7.24
0.59
1.08
1.58
0.47
0.70
4,447
1,649
6.25
3.42
136
107.94
17,662
1,628
107
19,397
8.90
2.60
1.72
7.26
71,127
48,210
126
198,419
62,547
6,208
267,174
2,994
(4,151)
3,790
27,852
$297,659
0.60
1.36
1.81
0.38
0.72
$181,036
$
1,088
145
299
47
1,579
10,686
16,543
12,325
220,590
24,639
8,162
253,391
44,268
$297,659
Total liabilities and stockholders’ equity
$ 339,974
$ 313,474
Net interest income/spread. . . . . . . . . . . . . . . . . . . . . .
$
20,873
Impact of non-interest-bearing funding . . . . . . . . . . . . . . . . . . . . . . .
6.65
0.13
Net interest margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.78%
$
18,834
6.54
0.12
6.66%
$
17,818
6.54
0.13
6.67%
__________
(1)
Past due fees included in interest income totaled approximately $1.5 billion in 2016 and $1.4 billion in both 2015 and 2014.
(2)
(3)
Some of our tax-related commercial investments generate tax-exempt income or tax credits. Accordingly, we make certain reclassifications within our
Commercial Banking business results to present revenues and yields on a taxable-equivalent basis, calculated assuming an effective tax rate approximately
equal to our federal statutory rate of 35% with offsetting reclassifications to the Other category.
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.
39
Capital One Financial Corporation (COF)
Net interest income increased by $2.0 billion to $20.9 billion in 2016 compared to 2015 primarily driven by:
•
•
growth in our credit card and commercial loan portfolios, including loans acquired from the HFS acquisition; and
higher yields as a result of higher interest rates.
Net interest margin increased by 12 basis points to 6.78% in 2016 compared to 2015 primarily driven by:
•
•
continued growth in our credit card loan portfolio; and
continued run-off of our acquired home loan portfolio in our Consumer Banking business.
This increase was partially offset by:
•
the impact of loans acquired from the HFS acquisition, which generally have lower net interest margins compared to our
total company portfolio; and
• margin compression in our auto loan portfolio.
Net interest income increased by $1.0 billion to $18.8 billion in 2015 compared to 2014. The increase was primarily driven by
growth in our credit card and commercial loan portfolios, as well as our auto loan portfolio in our Consumer Banking business.
Net interest margin decreased by 1 basis point to 6.66% in 2015 compared to 2014 primarily driven by:
•
the decline of yields in our auto, commercial, credit card and investment securities portfolios.
The decrease was substantially offset by:
•
continued growth in our domestic credit card loan portfolio and the continued run-off of the acquired home loan portfolio
in our Consumer Banking business; and
•
lower wholesale funding costs.
Table 2 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.
40
Capital One Financial Corporation (COF)
Table 2: Rate/Volume Analysis of Net Interest Income(1)
(Dollars in millions)
Interest income:
Loans:
2016 vs. 2015
2015 vs. 2014
Total
Variance
Volume
Rate
Total
Variance
Volume
Rate
Credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial banking(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans, including loans held for sale. . . . . . . . . . . . . . . . . . . . . .
Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash equivalents and other interest-earning assets . . . . . . . . . . . . . .
Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense:
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securitized debt obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Senior and subordinated notes . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other borrowings and liabilities . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,786
$ 1,410
$
376
$
957
$ 1,135
$
(178)
77
580
(25)
17
437
(50)
2,418
1,814
24
(10)
61
(1)
2,432
1,874
122
65
146
60
393
76
31
25
41
173
$ 2,039
$ 1,701
$
60
143
25
604
(37)
(9)
558
46
34
121
19
220
338
13
61
92
15
159
(28)
1,123
1,281
(53)
(8)
30
15
1,062
1,326
3
6
31
6
46
27
35
70
(4)
128
$ 1,016
$ 1,198
$
(2)
(98)
120
(158)
(83)
(23)
(264)
(24)
(29)
(39)
10
(82)
(182)
__________
(1) We calculate the change in interest income and interest expense separately for each item. The portion of interest income or interest expense attributable to
both volume and rate is allocated proportionately when the calculation results in a positive value. When the portion of interest income or interest expense
attributable to both volume and rate results in a negative value, the total amount is allocated to volume or rate, depending on which amount is positive.
(2)
Some of our tax-related commercial investments generate tax-exempt income or tax credits. Accordingly, we make certain reclassifications within our
Commercial Banking business results to present revenues and yields on a taxable-equivalent basis, calculated assuming an effective tax rate approximately
equal to our federal statutory rate of 35% with offsetting reclassifications to the Other category.
Non-Interest Income
Non-interest income primarily consists of interchange fees net of rewards expense, service charges and other customer-related
fees and other non-interest income. Other non-interest income includes the pre-tax net benefit (provision) for mortgage
representation and warranty losses related to continuing operations, gains and losses on free-standing derivatives not accounted
for in hedge accounting relationships and hedge ineffectiveness.
41
Capital One Financial Corporation (COF)
Table 3 displays the components of non-interest income for 2016, 2015 and 2014.
Table 3: Non-Interest Income
(Dollars in millions)
Year Ended December 31,
2015(1)
2014(1)
2016
Interchange fees, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2,452
$
2,264
$
Service charges and other customer-related fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net securities gains (losses)
Other non-interest income:
Benefit for mortgage representation and warranty losses(2) . . . . . . . . . . . . . . . . . . . . . . . . . .
Net fair value gains on free-standing derivatives. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other non-interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,646
(11)
1,856
(32)
2
95
444
541
16
66
409
491
2,046
2,008
(3)
26
52
343
421
Total non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
4,628
$
4,579
$
4,472
__________
(1) We made certain non-interest income reclassifications in the fourth quarter of 2016 to conform to the current period presentation. The primary net effects of
the reclassifications for the years ended December 31, 2015 and 2014 were (i) increases to Service charges and other customer-related fees of $141 million
for both periods and (ii) decreases to Other non-interest income of $168 million and $187 million, respectively. We have also consolidated the Non-interest
income presentation of Other-than-temporary impairment (“OTTI”) with net realized gains or losses from investment securities into a new Net securities
gains (losses) line. See “Note 1—Summary of Significant Accounting Policies” for additional information.
(2) Represents the benefit (provision) for mortgage representation and warranty losses recorded in continuing operations.
Non-interest income increased by $49 million to $4.6 billion in 2016 compared to 2015, primarily driven by:
•
an increase in interchange fees driven by higher purchase volume in our Credit Card business, net of rewards expense from
the continued expansion of our rewards franchise; and
•
higher revenue attributable to our multifamily business in our Commercial Banking business.
These increases were partially offset by:
•
lower service charges and other customer-related fees primarily due to the exit of our legacy payment protection products
in our Domestic Card business during the first quarter of 2016.
Non-interest income increased by $107 million to $4.6 billion in 2015 compared to 2014 primarily driven by:
•
an increase in interchange fees due to higher purchase volume in our Credit Card business.
This increase was partially offset by:
•
•
increased rewards expense due to a greater proportion of customers with rewards coupled with increased spend on products
with higher rewards; and
lower service charges and other customer-related fees primarily due to the continued run-off of our payment protection
products in our Domestic Card business.
Provision for Credit Losses
Our provision for credit losses in each period is driven by net charge-offs, changes to the allowance for loan and lease losses and
changes to the reserve for unfunded lending commitments. We recorded a provision for credit losses of $6.5 billion, $4.5 billion
and $3.5 billion in 2016, 2015 and 2014, respectively. The provision for credit losses as a percentage of net interest income was
30.9%, 24.1% and 19.9% in 2016, 2015 and 2014, respectively.
42
Capital One Financial Corporation (COF)
Our provision for credit losses increased by $1.9 billion in 2016 compared to 2015, primarily driven by:
•
•
•
higher charge-offs and a larger allowance build in our credit card loan portfolio due to growth and portfolio seasoning;
higher charge-offs in our commercial loan portfolio as a result of continued adverse industry conditions impacting our taxi
medallion and oil and gas lending portfolios; and
higher allowance in our auto loan portfolio due to continued loan growth, increasing loss expectations on recent originations
and a build reflecting a change in accounting estimate of the timing of charge-offs of bankrupt accounts.
The increase in provision for credit losses of $995 million in 2015 compared to 2014 was primarily driven by:
•
•
a larger allowance build in our domestic credit card loan portfolio in 2015 due to continued loan growth coupled with our
expectations for rising charge-off rates; and
a larger build in both the allowance and reserve for unfunded lending commitments resulting from adverse market conditions
impacting our oil and gas portfolio and taxi medallion lending portfolio in our Commercial Banking business.
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.”
Non-Interest Expense
Non-interest expense consists of ongoing operating expenses, such as salaries and associate benefits, occupancy and equipment
costs, professional services, communications and data processing expenses and other non-interest expenses, as well as marketing
costs and amortization of intangibles.
Table 4 displays the components of non-interest expense for 2016, 2015 and 2014.
Table 4: Non-Interest Expense
(Dollars in millions)
Salaries and associate benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Occupancy and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Professional services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Communications and data processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of intangibles. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-interest expense:
Collections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fraud losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bankcard, regulatory and other fee assessments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total non-interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2015 (1)
2014 (1)
2016
$
5,202
$
4,975
$
1,944
1,811
1,075
1,169
386
313
331
540
787
1,829
1,744
1,120
1,055
430
322
316
444
761
1,971
1,843
$
13,558
$
12,996
$
4,593
1,745
1,561
1,053
961
532
372
275
465
623
1,735
12,180
__________
(1) We made certain non-interest expense reclassifications in the fourth quarter of 2016. The net effects of the reclassifications for the year ended 2015 and year
ended 2014 were increased Communications and data processing expense by $172 million and $163 million, respectively, with corresponding decreases to
Professional services. See “Note 1—Summary of Significant Accounting Policies” for additional information.
Non-interest expense increased by $562 million to $13.6 billion in 2016 compared to 2015, primarily due to:
•
higher operating and marketing expenses associated with loan growth, as well as continued investments in technology and
infrastructure;
43
Capital One Financial Corporation (COF)
•
•
higher bank optimization charges; and
higher FDIC surcharges and premiums.
Non-interest expense increased by $816 million to $13.0 billion in 2015 compared to 2014. The increase was primarily due to:
•
•
higher personnel expenses and charges for severance and related benefits pursuant to our ongoing benefit programs and
certain site closures, as a result of the realignment of our workforce;
higher operating and marketing expenses associated with loan growth, as well as acquisition and operating expenses related
to the HFS acquisition; and
•
continued technology and infrastructure investments.
These increases in 2015 compared to 2014 were partially offset by a decline in the amortization of intangibles.
Income (Loss) from Discontinued Operations, Net of Tax
Income (loss) from discontinued operations consists of results from the discontinued mortgage origination operations of our
wholesale mortgage banking unit, GreenPoint Mortgage Funding, Inc. (“GreenPoint”) and the discontinued 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. Loss from discontinued operations, net of tax, was $19 million
in 2016, compared to income of $38 million in 2015 and income of $5 million in 2014. We recorded a provision net of tax for
mortgage representation and warranty reserve of $13 million ($21 million before tax) in 2016, compared to benefit net of tax of
$41 million ($64 million before tax) in 2015 and a benefit net of tax of $4 million ($7 million before tax) in 2014.
We provide additional information on the discontinued operations in “Note 2—Discontinued Operations” and on the net benefit
(provision) for mortgage representation and warranty losses and the related reserve for representation and warranty claims in
“MD&A—Consolidated Balance Sheets Analysis—Mortgage Representation and Warranty Reserve” and “Note 19—
Commitments, Contingencies, Guarantees and Others.”
Income Taxes
We recorded income tax provisions of $1.7 billion (31.3% effective income tax rate), $1.9 billion (31.8% effective income tax
rate) and $2.1 billion (32.7% effective income tax rate) in 2016, 2015 and 2014, respectively. Our effective tax rate on income
from continuing operations varies between periods due, in part, to fluctuations in our pre-tax earnings, which affects the relative
tax benefit of tax-exempt income, tax credits and other permanent tax items.
The decrease in our effective income tax rate in 2016, compared to 2015, was primarily due to lower income before taxes and
increased tax credits. This decrease was partially offset by reduced discrete tax benefits and a reduced benefit of lower taxed
foreign earnings.
The decrease in our effective income tax rate in 2015, compared to 2014, was primarily due to lower income before taxes, higher
discrete tax benefits and increased net tax credits. This decrease was partially offset by a reduced benefit of lower taxed foreign
earnings.
We recorded net discrete tax benefits of $2 million and $15 million in 2016 and 2015, respectively, and net discrete tax expenses
of $33 million in 2014. Our effective income tax rate, excluding the impact of discrete tax items discussed above, was 31.3%,
32.0% and 32.2% in 2016, 2015 and 2014, respectively.
We provide additional information on items affecting our income taxes and effective tax rate under “Note 16—Income Taxes.”
44
Capital One Financial Corporation (COF)
CONSOLIDATED BALANCE SHEETS ANALYSIS
Total assets increased by $23.0 billion to $357.0 billion as of December 31, 2016 from December 31, 2015, primarily due to:
•
an increase of $15.7 billion in loans held for investment primarily driven by growth in our credit card, auto and commercial
loan portfolios, partially offset by the continued run-off of our acquired home loan portfolio.
Total liabilities increased by $22.8 billion to $309.5 billion as of December 31, 2016, primarily driven by:
•
an increase in deposits primarily driven by the issuance of brokered deposits and growth in our Consumer Banking business.
Stockholders’ equity increased by $230 million to $47.5 billion as of December 31, 2016, primarily due to:
•
•
our net income of $3.8 billion in 2016; and
$1.1 billion of proceeds from the issuance of preferred stock.
These increases were partially offset by:
•
•
$3.7 billion of share repurchases under our 2015 and 2016 Stock Repurchase Programs; and
$1.0 billion of dividend payments to our common and preferred stockholders.
The following is a discussion of material changes in the major components of our assets and liabilities during 2016. 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 and our customers
and our market risk exposure in accordance with our risk appetite.
Investment Securities
Our investment portfolio consists primarily of the following: U.S. Treasury securities; U.S. government-sponsored enterprise or
agency (“Agency”) and non-agency residential mortgage-backed securities (“RMBS”); Agency and non-agency commercial
mortgage-backed securities (“CMBS”); other asset-backed securities (“ABS”); and other securities. The carrying value of our
investments in U.S. Treasury and Agency securities represented 91% and 90% of our total investment securities as of December
31, 2016 and 2015, respectively.
The fair value of our available for sale securities portfolio was $40.7 billion as of December 31, 2016, an increase of $1.7 billion
from $39.1 billion as of December 31, 2015. The fair value of our held to maturity securities portfolio was $26.2 billion as of
December 31, 2016, an increase of $879 million from $25.3 billion as of December 31, 2015. The increase in the fair value of
both of these portfolios was primarily driven by purchase volume activities, partially offset by decreases in fair value due to higher
interest rates.
Gross unrealized gains on our available for sale securities portfolio decreased to $539 million as of December 31, 2016 compared
to $578 million as of December 31, 2015 and gross unrealized losses on this portfolio increased to $535 million as of December 31,
2016 compared to $321 million as of December 31, 2015, both of which were primarily driven by an increase in interest rates. Of
the $535 million gross unrealized losses as of December 31, 2016, $116 million was related to securities that had been in a loss
position for 12 months or longer. We provide information on OTTI recognized in earnings on our investment securities above in
“MD&A—Consolidated Results of Operations—Non-Interest Income.”
45
Capital One Financial Corporation (COF)
Table 5 presents the amortized cost, carrying value and fair value for the major categories of our investment securities portfolio
as of December 31, 2016, 2015 and 2014.
Table 5: Investment Securities
(Dollars in millions)
Investment securities available for sale:
2016
December 31,
2015
2014
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
U.S. Treasury securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
5,103
$
5,065
$
4,664
$
4,660
$
4,114
$
4,118
Corporate debt securities guaranteed by U.S. government
agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
RMBS:
Agency(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-agency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total RMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CMBS:
Agency(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-agency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total CMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other ABS(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other securities(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total investment securities available for sale . . . . . . . . . . . . . .
—
—
—
—
819
800
26,830
2,349
29,179
3,335
1,676
5,011
714
726
26,527
2,722
29,249
3,304
1,684
4,988
714
721
24,332
2,680
27,012
3,690
1,723
5,413
1,345
370
24,285
3,026
27,311
3,664
1,715
5,379
1,340
371
21,804
2,938
24,742
3,751
1,780
5,531
2,618
1,035
21,995
3,386
25,381
3,723
1,796
5,519
2,662
1,028
$ 40,733
$ 40,737
$ 38,804
$ 39,061
$ 38,859
$ 39,508
(Dollars in millions)
Investment securities held to maturity:
Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
U.S. Treasury securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
199
$
199
$
199
$
198
—
—
Agency RMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Agency CMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22,125
3,388
22,573
3,424
21,513
2,907
22,133
$ 20,163
$ 21,210
2,986
2,337
2,424
Total investment securities held to maturity . . . . . . . . . . . . . . .
$ 25,712
$ 26,196
$ 24,619
$ 25,317
$ 22,500
$ 23,634
__________
(1)
Includes securities guaranteed by Government National Mortgage Association (“Ginnie Mae”) and securities issued by Federal National Mortgage Association
(“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”).
(2) ABS collateralized by credit card loans constituted approximately 57% and 71% of the other ABS portfolio as of December 31, 2016 and 2015, respectively,
and ABS collateralized by auto dealer floor plan inventory loans and leases constituted approximately 23% and 11% of the other ABS portfolio as of
December 31, 2016 and 2015, respectively.
(3)
Includes supranational bonds, foreign government bonds and equity investments.
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. As of both in December 31, 2016 and
2015, approximately 95% of our total investment securities portfolio was rated AA+ or its equivalent, or better, while approximately
4% and 5% was below investment grade, respectively. We categorize the credit ratings of our investment securities based on the
lowest credit rating as issued by the following rating agencies: Standard & Poor’s Ratings Services (“S&P”), Moody’s Investors
Service (“Moody’s”) and Fitch Ratings (“Fitch”).
Table 6 provides information on the credit ratings of our non-agency RMBS, non-agency CMBS, other ABS and other securities
in our portfolio as of December 31, 2016 and 2015.
46
Capital One Financial Corporation (COF)
Table 6: Non-Agency Investment Securities Credit Ratings
December 31, 2016
December 31, 2015
(Dollars in millions)
Fair
Value
Non-agency RMBS . . . . . . . . . . . . . . . . . . . .
$ 2,722
Other
Investment
Grade
Below
Investment
Grade(1)
Fair
Value
3%
97% $ 3,026
AAA
—
Non-agency CMBS . . . . . . . . . . . . . . . . . . . .
1,684
100%
Other ABS . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other securities. . . . . . . . . . . . . . . . . . . . . . . .
714
721
99
62
—
1
25
—
—
13
1,715
1,340
371
Other
Investment
Grade
Below
Investment
Grade(1)
3%
97%
—
1
64
—
—
28
AAA
—
100%
99
8
__________
(1)
Includes investment securities that were not rated.
For additional information on our investment securities, see “Note 3—Investment Securities.”
Loans Held for Investment
Total loans held for investment (“HFI”) consists of both unsecuritized loans and loans held in our consolidated trusts. Table 7
summarizes the carrying value of our portfolio of loans held for investment by portfolio segment, net of the allowance for loan
and lease losses, as of December 31, 2016 and 2015.
Table 7: Loans Held for Investment
December 31, 2016
December 31, 2015
(Dollars in millions)
Credit Card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans
$ 105,552
73,054
66,916
64
$ 245,586
Allowance Net Loans
$ 100,946
$
71,952
66,123
62
$ 239,083
4,606
1,102
793
2
6,503
$
Loans
$ 96,125
70,372
63,266
88
$ 229,851
Allowance Net Loans
$ 92,471
$
69,504
62,662
84
$ 224,721
3,654
868
604
4
5,130
$
Loans held for investment increased by $15.7 billion to $245.6 billion as of December 31, 2016 from December 31, 2015, primarily
driven by growth in our credit card, auto and commercial loan portfolios, partially offset by the continued run-off of our acquired
home loan portfolio.
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.”
Deposits
Our deposits represent our largest source of funding for our operations and provide a consistent source of low-cost funds. Total
deposits increased by $19.0 billion to $236.8 billion as of December 31, 2016 from December 31, 2015. The increase in deposits
was primarily driven by the issuance of brokered deposits and growth in our Consumer Banking business. We provide information
on the composition of our deposits, average outstanding balances, interest expense and yield in “MD&A—Liquidity Risk Profile.”
Securitized Debt Obligations
Securitized debt obligations increased to $18.8 billion as of December 31, 2016, from $16.2 billion as of December 31, 2015, as
debt issuances exceeded maturities during 2016. We provide additional information on our borrowings in “MD&A—Liquidity
Risk Profile” and in “Note 9—Deposits and Borrowings.”
Other Debt
Other debt, which consists primarily of federal funds purchased and securities loaned or sold under agreements to repurchase,
senior and subordinated notes, and Federal Home Loan Banks (“FHLB”) advances, totaled $41.6 billion as of December 31, 2016,
of which $40.6 billion represented long-term debt and the remainder represented short-term borrowings. Other debt totaled $42.9
billion as of December 31, 2015, of which $42.0 billion represented long-term debt and the remainder represented short-term
borrowings.
47
Capital One Financial Corporation (COF)
The decrease in other debt of $1.3 billion in 2016 was primarily attributable to a decrease in our FHLB advances outstanding,
partially offset by an increase in our senior and subordinated notes. We provide additional information on our borrowings in
“MD&A—Liquidity Risk Profile” and in “Note 9—Deposits and Borrowings.”
Mortgage Representation and Warranty Reserve
We acquired three subsidiaries that originated residential mortgage loans and sold these loans to various purchasers, including
purchasers who created securitization trusts. These subsidiaries are Capital One Home Loans, LLC, which was acquired in February
2005; GreenPoint, which was acquired in December 2006 as part of the North Fork acquisition; and CCB, which was acquired in
February 2009 and subsequently merged into CONA.
We have established representation and warranty reserves for losses associated with the mortgage loans sold by each subsidiary
that we consider to be both probable and reasonably estimable, including both litigation and non-litigation liabilities. These reserves
are reported on our consolidated balance sheets as a component of other liabilities. The reserve setting process relies heavily on
estimates, which are inherently uncertain, and requires judgment. We evaluate these estimates on a quarterly basis. We build our
representation and warranty reserves through the provision for mortgage representation and warranty losses, which we report in
our consolidated statements of income as a component of non-interest income for loans originated and sold by CCB and Capital
One Home Loans, LLC and as a component of discontinued operations for loans originated and sold by GreenPoint. The aggregate
reserve for all three entities totaled $630 million as of December 31, 2016, compared to $610 million as of December 31, 2015.
As part of our business planning processes, we have considered various outcomes relating to the future representation and warranty
liabilities of our subsidiaries that are possible but do not rise to the level of being both probable and reasonably estimable outcomes
justifying an incremental reserve under applicable accounting standards. Our current best estimate of reasonably possible future
losses from representation and warranty claims beyond what was in our reserve as of December 31, 2016, is approximately $1.5
billion, a decline from our estimate of $1.6 billion as of December 31, 2015. The decrease in this estimate was primarily driven
by favorable rulings in representation and warranty-related litigation.
We provide additional information related to the representation and warranty reserve, including factors that may impact the adequacy
of the reserve and the ultimate amount of losses incurred by our subsidiaries, in “Note 19—Commitments, Contingencies,
Guarantees and Others.”
Deferred Tax Assets and Liabilities
Deferred tax assets and liabilities represent decreases or increases in taxes expected to be paid in the future because of future
reversals of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as from net
operating loss and tax credit carryforwards. Deferred tax assets are recognized subject to management’s judgment that realization
is more likely than not. We evaluate the recoverability of these future tax deductions by assessing the adequacy of expected taxable
income from all sources, including taxable income in carryback years, reversal of taxable temporary differences, forecasted
operating earnings and available tax planning strategies. These sources of income rely heavily on estimates. We use our historical
experience and our short and long-range business forecasts to provide insight.
As of December 31, 2016, we have recorded deferred tax assets, net of deferred tax liabilities and valuation allowances, of
approximately $4.3 billion, which is an increase of $648 million from December 31, 2015. We have recorded a valuation allowance
of $179 million and $166 million as of December 31, 2016 and 2015, respectively. We expect to fully realize the 2016 net deferred
tax asset amounts in future periods. If changes in circumstances lead us to change our judgment about our ability to realize deferred
tax assets in future years, we will adjust our valuation allowances in the period that our change in judgment occurs and record a
corresponding increase or charge to income.
We provide additional information on income taxes in “MD&A—Consolidated Results of Operations” and in “Note 16—Income
Taxes.”
48
Capital One Financial Corporation (COF)
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 letter of credits, 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 the “MD&A—Liquidity Risk Profile” as well as “Note 6—Variable Interest Entities and Securitizations” and “Note 19—
Commitments, Contingencies, Guarantees and Others.”
BUSINESS SEGMENT FINANCIAL PERFORMANCE
Our principal operations are currently organized into three major business segments, which are defined based on the products and
services provided or the type of customer served: Credit Card, Consumer Banking and Commercial Banking. The operations of
acquired businesses have been integrated into our existing business segments. Certain activities that are not part of a segment,
such as management of our corporate investment portfolio and asset/liability management by our centralized Corporate Treasury
group, are included in the Other category.
The results of our individual businesses, which we report on a continuing operations basis, reflect the manner in which management
evaluates performance and makes decisions about funding our operations and allocating resources.We may periodically change
our business segments or reclassify business segment results based on modifications to our management reporting methodologies
and changes in organizational alignment. Our business segment results are intended to reflect each segment as if it were a stand-
alone business. We use an internal management and reporting process to derive our business segment results. Our internal
management and reporting process 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. Total interest income and net fees are directly attributable to the segment in which they are reported. The net
interest income of each segment reflects the results of our funds transfer pricing process, which is primarily based on a matched
maturity method that takes into consideration of market interest rates. 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. The allocation process is unique to each business segment and acquired businesses.
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 refer to the business segment results derived from our internal management accounting and reporting process as our “managed”
presentation, which differs in some cases from our reported results prepared based on U.S. GAAP. There is no comprehensive
authoritative body of guidance for management accounting equivalent to U.S. GAAP; therefore, the managed presentation of our
business segment results may not be comparable to similar information provided by other financial services companies. In addition,
our individual business segment results should not be used as a substitute for comparable results determined in accordance with
U.S. GAAP.
Below we summarize our business segment results for 2016, 2015 and 2014 and provide a comparative discussion of these results,
as well as changes in our financial condition and credit performance metrics as of December 31, 2016 compared to December 31,
2015. We also provide information on the outlook for each of our business segments. We provide a reconciliation of our total
business segment results to our reported consolidated results in “Note 18—Business Segments.”
Business Segment Financial Performance
Table 8 summarizes our business segment results, which we report based on revenue and income from continuing operations, net
of tax, for the years ended December 31, 2016, 2015 and 2014. We provide information on the allocation methodologies used to
derive our business segment results in “Note 18—Business Segments.”
49
Capital One Financial Corporation (COF)
Table 8: Business Segment Results
Year Ended December 31,
2016
2015
2014
Total Net
Revenue(1)
Net Income(2)
Total Net
Revenue(1)
Net Income(2)
Total Net
Revenue(1)
Net Income(2)
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
$ 16,015
62% $ 2,160
58% $ 14,582
62% $ 2,354
59% $ 13,621
61% $ 2,479
56%
6,562
2,794
130
26
11
1
870
575
165
23
15
4
6,465
2,352
14
28
10
—
1,034
570
54
26
14
1
6,432
2,201
36
29
10
—
1,195
659
90
27
15
2
$ 25,501
100% $ 3,770
100% $ 23,413
100% $ 4,012
100% $ 22,290
100% $ 4,423
100%
(Dollars in millions)
Credit Card . . . . . . . . . . . . . .
Consumer Banking . . . . . . . .
Commercial Banking(3). . . . .
Other(4) . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . .
__________
(1)
Total net revenue (loss) consists of net interest income and non-interest income.
(2) Net income (loss) for our business segments and the Other category is based on income (loss) from continuing operations, net of tax.
(3)
Some of our tax-related commercial investments generate tax-exempt income or tax credits. Accordingly, we make certain reclassifications within our
Commercial Banking business results to present revenues and yields on a taxable-equivalent basis, calculated assuming an effective tax rate approximately
equal to our federal statutory tax rate of 35% with offsetting reclassifications to the Other category.
(4)
The Other category includes the residual impact of the allocation of our centralized Corporate Treasury group activities, unallocated corporate expenses that
do not directly support the operations of the business segments and other items as described in “Note 18—Business Segments.”
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 $2.2 billion, $2.4 billion and $2.5 billion in 2016,
2015 and 2014, respectively.
Table 9 summarizes the financial results of our Credit Card business and displays selected key metrics for the periods indicated.
Table 9: Credit Card Business Results
(Dollars in millions)
Selected income statement data:
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total net revenue(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations before income taxes . . . . . . . . . . . .
Income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations, net of tax . . . . . . . . . . . . . . . . . . . .
Selected performance metrics:
Average loans held for investment(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average yield on loans held for investment(3) . . . . . . . . . . . . . . . . . . . . .
Total net revenue margin(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net charge-off rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchased credit card relationship (“PCCR”) intangible amortization . .
Purchase volume(5). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
Change
2016
2015
2014
2016 vs.
2015
2015 vs.
2014
$
12,635
$
11,161
$ 10,310
3,380
16,015
4,926
7,703
3,386
1,226
2,160
96,560
14.68%
16.59
3,953
4.09%
257
307,138
$
$
$
$
$
$
$
$
3,421
14,582
3,417
7,502
3,663
1,309
2,354
3,311
13,621
2,750
7,063
3,808
1,329
2,479
$
13%
(1)
10
44
3
(8)
(6)
(8)
8%
3
7
24
6
(4)
(2)
(5)
86,735
$ 78,946
11
10
14.28%
14.48%
40bps
(20)bps
16.81
2,918
3.36%
316
$
$
17.25
2,728
(22)
35%
(44)
7%
3.46%
73bps
(10)bps
369
(19)% (14)%
271,167
224,750
13
21
50
Capital One Financial Corporation (COF)
(Dollars in millions)
December 31,
2016
December 31,
2015
Change
Selected period-end data:
Loans held for investment(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30+ day performing delinquency rate . . . . . . . . . . . . . . . . . . . . . . . . . . .
30+ day delinquency rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonperforming loan rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan and lease losses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance coverage ratio(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 105,552
$
96,125
3.91%
3.94
0.04
3.36%
3.40
0.06
$
4,606
$
3,654
4.36%
3.80%
10%
55bps
54
(2)
26%
56bps
__________
(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 $1.1 billion, $732 million and $645 million in 2016, 2015 and 2014,
respectively, for the estimated uncollectible amount of billed finance charges and fees and related losses. The finance charge and fee reserve totaled $402
million and $262 million as of December 31, 2016 and 2015, 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 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)
(5)
Total net revenue margin is calculated by dividing 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.
Purchase volume consists of purchase transactions, net of returns, for the period for loans both classified as held for investment and held for sale. Excludes
cash advance and balance transfer transactions.
(6) Allowance coverage ratio is calculated by dividing the period-end allowance for loan and lease losses by period-end loans held for investment.
Key factors affecting the results of our Credit Card business for 2016 compared to 2015, and changes in financial condition and
credit performance between December 31, 2016 and December 31, 2015 include the following:
• Net Interest Income: Net interest income increased by $1.5 billion to $12.6 billion in 2016 primarily driven by loan growth
in our Domestic Card business.
• Non-Interest Income: Non-interest income was flat at $3.4 billion in 2016 as an increase in interchange fees driven by higher
purchase volume was largely offset by:
higher rewards expense from the continued expansion of our rewards franchise; and
lower service charges and other customer-related fees primarily due to the exit of our legacy payment protection
products in our Domestic Card business during the first quarter of 2016.
• Provision for Credit Losses: The provision for credit losses increased by $1.5 billion to $4.9 billion in 2016 primarily driven
by higher charge-offs and a larger allowance build due to continued loan growth and portfolio seasoning.
• Non-Interest Expense: Non-interest expense increased by $201 million to $7.7 billion in 2016 primarily attributable to
higher operating expenses associated with loan growth as well as continued investments in technology, partially offset by
operating efficiencies.
•
Loans Held for Investment: Period-end loans held for investment increased by $9.4 billion to $105.6 billion as of
December 31, 2016 from December 31, 2015, and average loans held for investment increased by $9.8 billion to $96.6
billion in 2016 compared to 2015, both primarily due to continued loan growth in our Domestic Card business.
• Net Charge-Off and Delinquency Metrics: The net charge-off rate increased by 73 basis points to 4.09% in 2016 compared
to 2015, and the 30+ day delinquency rate increased by 54 basis points to 3.94% as of December 31, 2016 from December 31,
2015. These increases were primarily driven by growth and seasoning of credit card loan originations, partially offset by
continued growth in our domestic credit card loan portfolio.
Key factors affecting the results of our Credit Card business for 2015 compared to 2014, and changes in financial condition and
credit performance between December 31, 2015 and December 31, 2014 include the following:
51
Capital One Financial Corporation (COF)
• Net Interest Income: Net interest income increased by $851 million to $11.2 billion in 2015 primarily driven by loan growth
in our Domestic Card business.
• Non-Interest Income: Non-interest income increased by $110 million to $3.4 billion in 2015. The increase was primarily
attributable to an increase in interchange fees driven by higher purchase volume, partially offset by:
increased rewards expense due to a greater proportion of customers with rewards coupled with increased spend on
products with higher rewards; and
lower service charges and other customer-related fees primarily due to the continued run-off of our payment protection
products in our Domestic Card business.
• Provision for Credit Losses: The provision for credit losses increased by $667 million to $3.4 billion in 2015 primarily
driven by:
a larger allowance build in our domestic credit card loan portfolio in 2015 due to continued loan growth coupled
with our expectations for rising charge-off rates; and
higher charge-offs as new loan balances season.
• Non-Interest Expense: Non-interest expense increased by $439 million to $7.5 billion in 2015. The increase was due to
higher operating and marketing expenses associated with loan growth, partially offset by operating efficiencies and lower
intangibles amortization expense.
•
Loans Held for Investment: Period-end loans held for investment increased by $10.2 billion to $96.1 billion as of
December 31, 2015 from December 31, 2014, and average loans held for investment increased by $7.8 billion to $86.7
billion in 2015 compared to 2014. The increases were primarily due to loan growth in our domestic credit card loan portfolio,
partially offset by the impact of foreign exchange rates in our international card loan portfolio driven by the strengthening
of the U.S. dollar in 2015.
• Net Charge-Off and Delinquency Statistics: The net charge-off rate decreased by 10 basis points to 3.36% in 2015 compared
to 2014 driven by our international card loan portfolio, which benefited from growth in our international portfolio in Canada.
The 30+ day delinquency rate increased by 10 basis points to 3.40% as of December 31, 2015 from December 31, 2014
due to the seasoning of our domestic credit card portfolio growth which has begun to put upward pressure on delinquencies.
Domestic Card Business Expectations
In our Domestic Card business, we expect the full-year 2017 charge-off rate will be in the mid-four percent range, with quarterly
variability. The impact of the upward pressure on delinquencies and charge-offs as new loans season and become a larger portion
of our overall portfolio is expected to moderate in 2017 and only have a modest effect beyond that.
Domestic Card Business
Domestic Card generated net income from continuing operations of $2.1 billion in 2016 and $2.2 billion in both 2015 and 2014.
Over 2016, 2015 and 2014, Domestic Card accounted for greater than 90% of both total net revenues and net income of our Credit
Card business.
52
Capital One Financial Corporation (COF)
Table 9.1 summarizes the financial results for Domestic Card and displays selected key metrics for the periods indicated.
Table 9.1: Domestic Card Business Results
Year Ended December 31,
Change
2016
2015
2014
2016 vs.
2015
2015 vs.
2014
(Dollars in millions)
Selected income statement data:
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total net revenue(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations before income taxes . . . . . . . . . . . .
Income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations, net of tax . . . . . . . . . . . . . . . . . . . .
Selected performance metrics:
Average loans held for investment(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average yield on loans held for investment(3) . . . . . . . . . . . . . . . . . . . . .
Total net revenue margin(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net charge-off rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PCCR intangible amortization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase volume(5). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Dollars in millions)
Selected period-end data:
Loans held for investment(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30+ day delinquency rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan and lease losses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance coverage ratio(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
11,571
$
10,147
$
3,116
14,687
4,555
6,895
3,237
1,178
2,059
88,394
14.62%
16.62
3,681
4.16%
257
$
$
$
$
$
$
$
$
3,183
13,330
3,204
6,627
3,499
1,267
2,232
$
9,241
3,001
12,242
2,493
6,264
3,485
1,246
2,239
78,743
$ 71,262
16.93
2,718
3.45%
316
$
$
17.18
2,445
3.43%
369
280,637
246,740
208,716
December 31,
2016
December 31,
2015
Change
$
$
$
$
97,120
3.95%
4,229
4.35%
87,939
3.39%
3,355
3.82%
10%
56bps
26%
53bps
14%
(2)
10
42
4
(7)
(7)
(8)
12
10%
6
9
29
6
—
2
—
10
(31)
35%
71bps
(25)
11%
2bps
(19)% (14)%
14
18
14.21%
14.26%
41bps
(5)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 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)
(5)
Total net revenue margin is calculated by dividing total net revenue for the period by average loans held for investment during the period.
Purchase volume consists of purchase transactions, net of returns, for the period for loans both classified as held for investment and held for sale. Excludes
cash advance and balance transfer transactions.
(6) Allowance coverage ratio is calculated by dividing the period-end allowance for loan and lease losses by period-end loans held for investment.
Because our Domestic Card business accounts for the substantial majority of our Credit Card business, the key factors driving the
results are similar to the key factors affecting our total Credit Card business. Net income for our Domestic Card business decreased
in 2016 compared to 2015 primarily driven by higher provision for credit losses and higher operating expenses associated with
continued loan growth, partially offset by higher net interest income resulting from loan growth.
Net income for our Domestic Card business remained flat in 2015 compared to 2014 as continued loan growth drove increases in
revenue, provision for credit losses, operating and marketing expenses.
53
Capital One Financial Corporation (COF)
Consumer Banking Business Segment Expectations
In our Consumer Banking business, we expect that decreasing margins and modestly rising charge-offs in the auto finance business,
as well as continued run-off of our acquired home loan portfolio, will negatively affect Consumer Banking revenues, efficiency
ratio and net income, even as we continue to manage costs.
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 $870 million, $1.0 billion and $1.2 billion
in 2016, 2015 and 2014, respectively.
Table 10 summarizes the financial results of our Consumer Banking business and displays selected key metrics for the periods
indicated.
Table 10: Consumer Banking Business Results
(Dollars in millions)
Selected income statement data:
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations before income taxes . . . . . . . . . . . .
Income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations, net of tax . . . . . . . . . . . . . . . . . . . .
Selected performance metrics:
Average loans held for investment:(1)
Auto . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retail banking. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total consumer banking. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average yield on loans held for investment(2) . . . . . . . . . . . . . . . . . . . . .
Average deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average deposit interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net charge-off rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net charge-off rate (excluding PCI loans)(3) . . . . . . . . . . . . . . . . . . . . . .
Auto loan originations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2016
2015
2014
Change
2016 vs.
2015
2015 vs.
2014
$
5,829
$
5,755
$
5,748
1%
733
6,562
1,055
4,139
1,368
498
870
$
710
6,465
819
4,026
1,620
586
684
6,432
703
3,869
1,860
665
$
1,034
$
1,195
$
44,521
$
39,967
$ 34,769
23,358
3,543
27,601
3,582
32,589
3,606
$
71,422
$
71,150
$ 70,964
3
2
29
3
(16)
(15)
(16)
11
(15)
(1)
—
—
4%
1
17
4
(13)
(12)
(13)
15
(15)
(1)
—
6.34%
6.26%
6.26%
8bps —
$ 177,129
$ 170,757
$ 168,623
0.56%
0.56%
0.57%
$
820
$
731
$
675
1.15%
1.49
1.03%
1.45
0.95%
1.49
$
25,719
$
21,185
$ 20,903
4%
—
12
12bps
4
21%
1%
(1)bps
8%
8bps
(4)
1%
54
Capital One Financial Corporation (COF)
(Dollars in millions)
Selected period-end data:
Loans held for investment:(1)
December 31,
2016
December 31,
2015
Change
Auto . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retail banking. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total consumer banking. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30+ day performing delinquency rate . . . . . . . . . . . . . . . . . . . . . . . . . . .
30+ day performing delinquency rate (excluding PCI loans)(3). . . . . . . .
30+ day delinquency rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30+ day delinquency rate (excluding PCI loans)(3) . . . . . . . . . . . . . . . . .
Nonperforming loan rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonperforming loan rate (excluding PCI loans)(3) . . . . . . . . . . . . . . . . .
Nonperforming asset rate(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonperforming asset rate (excluding PCI loans)(3)(4) . . . . . . . . . . . . . . .
Allowance for loan and lease losses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance coverage ratio(5)(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans serviced for others. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
47,916
21,584
3,554
73,054
$
$
41,549
25,227
3,596
70,372
4.10%
5.12
4.67
5.82
0.72
0.90
1.09
1.36
$
1,102
$
4.05%
5.50
4.67
6.34
0.79
1.08
1.10
1.50
868
1.51%
1.23%
$ 181,917
8,258
$ 172,702
7,530
15%
(14)
(1)
4
5bps
(38)
—
(52)
(7)
(18)
(1)
(14)
27%
28bps
5%
10
__________
(1) Average consumer banking loans held for investment includes purchased credit-impaired loans (“PCI loans”) of $16.4 billion, $20.7 billion and $25.6 billion
in 2016, 2015 and 2014, respectively. Period-end consumer banking loans held for investment includes PCI loans with carrying values of $14.5 billion and
$18.6 billion as of December 31, 2016 and 2015, respectively. See “MD&A—Glossary and Acronyms” for the definition of “PCI loans.”
(2) Average yield on loans held for investment is calculated by dividing interest income for the period by average loans held for investment during the period.
Interest income excludes various allocations including funds transfer pricing that assigns certain balance sheet assets, deposits and other liabilities and their
related revenue and expenses attributable to each business segment.
(3)
See “MD&A—Credit Risk Profile” and “Note 1—Summary of Significant Accounting Policies” for additional information on the impact of PCI loans on
our credit quality metrics.
(4) Nonperforming assets consist of nonperforming loans, real estate owned (“REO”) and other foreclosed assets. The 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. Prior to Q4 2016,
the nonperforming asset rate for our Consumer Banking business excluded the impact of REOs related to our acquired home loan portfolio which, if included,
would increase the nonperforming asset rate by approximately 10 basis points in each of the prior periods presented.
(5) Allowance coverage ratio is calculated by dividing the period-end allowance for loan and lease losses by period-end loans held for investment.
(6)
Excluding the impact of the PCI home loan amounts in footnote 1 above, the allowance coverage ratios for our home loan portfolio and total consumer
banking were 0.51% and 1.83%, respectively, as of December 31, 2016, compared to 0.50% and 1.60%, respectively, as of December 31, 2015.
Key factors affecting the results of our Consumer Banking business for 2016 compared to 2015, and changes in financial condition
and credit performance between December 31, 2016 and December 31, 2015 include the following:
• Net Interest Income: Net interest income was flat at $5.8 billion in 2016 as growth in our auto loan portfolio was offset by
the continued run-off of our acquired home loan portfolio and margin compression in our auto loan portfolio.
Consumer Banking loan yield increased by 8 basis points to 6.3% in 2016 compared to 2015. The increase was
primarily driven by changes in the product mix in Consumer Banking as a result of the continued run-off of our
acquired home loan portfolio and growth in our auto loan portfolio, partially offset by declining yield in our auto
loan portfolio.
Average yield on auto loans decreased by 33 basis points to 7.7% in 2016, primarily attributable to a higher proportion
of prime auto loans in 2016 compared to 2015.
The average yield on our home loan portfolio increased by 9 basis points to 4.0% in 2016 primarily as a result of
higher yield on our acquired home loan portfolio.
• Non-Interest Income: Non-interest income was substantially flat at $733 million in 2016.
55
Capital One Financial Corporation (COF)
• Provision for Credit Losses: The provision for credit losses increased by $236 million to $1.1 billion in 2016 primarily
driven by:
a higher allowance in our auto loan portfolio due to continued loan growth, increasing loss expectations on recent
originations and a build reflecting a change in accounting estimate of the timing of charge-offs of bankrupt accounts;
and
higher charge-offs in our auto loan portfolio due to seasoning of recent growth.
• Non-Interest Expense: Non-interest expense increased by $113 million to $4.1 billion in 2016 primarily due to:
higher operating expenses driven by growth in our auto loan portfolio; and
increased marketing expenses in our retail banking business.
•
Loans Held for Investment: Period-end loans held for investment increased by $2.7 billion to $73.1 billion as of December 31,
2016 from December 31, 2015, and average loans held for investment increased by $272 million to $71.4 billion in 2016
compared to 2015. The increases were primarily due to growth in our auto loan portfolio, partially offset by the continued
run-off of our acquired home loan portfolio.
• Deposits: Period-end deposits increased by $9.2 billion to $181.9 billion as of December 31, 2016 from December 31, 2015
as a result of strong growth in our deposit products that are sold directly to both existing and new customers.
• Net Charge-Off and Delinquency Metrics: The net charge-off rate increased by 12 basis points to 1.15% in 2016 compared
to 2015. The increase reflects the greater portion of auto loans in our total consumer banking loan portfolio, which generally
have higher charge-off rates than other products within this portfolio. The 30+ day delinquency rate was flat at 4.67% as
of both December 31, 2016 and December 31, 2015.
Key factors affecting the results of our Consumer Banking business for 2015 compared to 2014 and changes in financial condition
and credit performance between December 31, 2015 and December 31, 2014 include the following:
• Net Interest Income: Net interest income remained flat at $5.8 billion in 2015 as the higher net interest income generated
by the growth in our auto loan portfolio was partially offset by lower net interest income from our home loan portfolio
attributable to the continued run-off of the acquired portfolio and margin compression in auto loans.
Consumer Banking loan yield remained flat at 6.3% in 2015 as the decrease in average loan yield in our auto loan
portfolio was offset by changes in the product mix in Consumer Banking as a result of growth in our auto loan
portfolio and the continued run-off of the acquired home loan portfolio.
The increase in our auto loan portfolio in relation to our total consumer banking loan portfolio drove an increase in
the total Consumer Banking yield, even as the average yield on auto loans decreased by 65 basis points to 8.0% in
2015. This decrease was primarily attributable to a shift to a higher proportion of prime auto loans and continued
competition across the auto business.
The average yield on the home loan portfolio increased by 6 basis points to 3.9% in 2015, as a result of higher yield
on our acquired home loan portfolio.
• Non-Interest Income: Non-interest income increased by $26 million to $710 million in 2015 primarily due to the gain
recognized on loans originated and sold within our home loan portfolio.
• Provision for Credit Losses: The provision for credit losses increased by $116 million to $819 million in 2015 driven by
an allowance build across our consumer banking loan portfolios, coupled with higher net charge-offs due to continued
growth in our auto loan portfolio.
• Non-Interest Expense: Non-interest expense increased by $157 million to $4.0 billion in 2015 largely due to increased
operating expenses due to continued technology and infrastructure investments in our retail banking business and growth
in our auto loan portfolio.
•
Loans Held for Investment: Period-end loans held for investment decreased by $1.1 billion to $70.4 billion as of December 31,
2015 from December 31, 2014 primarily due to the continued run-off of our acquired home loan portfolio, partially offset
56
Capital One Financial Corporation (COF)
by growth in our auto loan portfolio. Average loans held for investment were substantially flat, increasing by $186 million,
or 0.3%, to $71.2 billion in 2015 compared to 2014.
• Deposits: Period-end deposits increased by $4.6 billion to $172.7 billion as of December 31, 2015 from December 31, 2014
as a result of strong growth in our deposit products, as well as modest growth in products sold through our local franchise.
• Net Charge-Off and Delinquency Statistics: The net charge-off rate increased by 8 basis points to 1.03% in 2015 compared
to 2014. The 30+ day delinquency rate increased by 44 basis points to 4.67% as of December 31, 2015 from December 31,
2014. The increases in the net charge-off and 30+ day delinquency rates reflected the continued run-off of our acquired
home loan portfolio, which generally does not have charge-offs or delinquencies since these loans were recorded at fair
value at acquisition, and a greater portion of auto loans in our portfolio, which have a higher charge-off and delinquency
rate than other products within the total consumer banking 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 we have some investments that generate tax-exempt income
or tax credits, we make certain reclassifications to our Commercial Banking business results to present revenues on a taxable-
equivalent basis. Expenses primarily consist of the provision for credit losses, operating costs and marketing expenses.
Our Commercial Banking business generated net income from continuing operations of $575 million, $570 million and $659
million in 2016, 2015 and 2014, respectively. Table 11 summarizes the financial results of our Commercial Banking business and
displays selected key metrics for the periods indicated.
Table 11: Commercial Banking Business Results
(Dollars in millions)
Selected income statement data:
Net interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total net revenue(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for credit losses(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations before income taxes . . . . . . . . . . .
Income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations, net of tax . . . . . . . . . . . . . . . . . . .
Selected performance metrics:
Average loans held for investment:(3)
Commercial and multifamily real estate . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total commercial lending. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Small-ticket commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . .
Total commercial banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average yield on loans held for investment(1)(4) . . . . . . . . . . . . . . . . . . .
Average deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average deposit interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net charge-off rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
$
$
Year Ended December 31,
Change
2016
2015
2014
2016 vs.
2015
2015 vs.
2014
2,216
578
2,794
483
1,407
904
329
575
25,821
38,852
64,673
548
65,221
3.47%
33,841
0.28%
292
0.45%
$
$
$
$
$
$
1,865
487
2,352
302
1,156
894
324
570
23,728
28,349
52,077
692
52,769
3.21%
33,058
0.25%
47
0.09%
$
$
$
$
$
$
1,751
450
2,201
93
1,083
1,025
366
659
22,003
25,028
47,031
868
47,899
3.42%
31,752
0.24%
10
0.02%
19%
19
19
60
22
1
2
1
9
37
24
(21)
24
26bps
2%
3bps
**
36bps
7%
8
7
225
7
(13)
(11)
(14)
8
13
11
(20)
10
(21)bps
4%
1bps
**
7bps
57
Capital One Financial Corporation (COF)
(Dollars in millions)
Selected period-end data:
Loans held for investment:(3)
December 31,
2016
December 31,
2015
Change
Commercial and multifamily real estate . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total commercial lending. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Small-ticket commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . .
Total commercial banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonperforming loan rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonperforming asset rate(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan and lease losses(2) . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance coverage ratio(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans serviced for others(7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
26,609
39,824
66,433
483
66,916
1.53%
1.54
793
1.19%
33,866
22,321
$
$
$
$
25,518
37,135
62,653
613
63,266
0.87%
0.87
604
0.95%
34,257
17,643
4%
7
6
(21)
6
66bps
67
31%
24bps
(1)
27%
__________
(1)
Some of our tax-related commercial investments generate tax-exempt income or tax credits. Accordingly, we make certain reclassifications within our
Commercial Banking business results to present revenues and yields on a taxable-equivalent basis, calculated assuming an effective tax rate approximately
equal to our federal statutory tax rate of 35% with offsetting reclassifications to the Other category.
(2)
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 $129 million, $161 million and $106 million as of December 31, 2016, 2015 and 2014, respectively.
(3) Average commercial banking loans held for investment includes PCI loans of $770 million, $215 million and $217 million in 2016, 2015 and 2014, respectively.
Period-end commercial banking loans held for investment includes PCI loans with carrying values of $613 million and $958 million as of December 31,
2016 and 2015, respectively. See “MD&A—Glossary and Acronyms” for the definition of “PCI loans.”
(4) Average yield on loans held for investment is calculated by dividing 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, 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.
(6) Allowance coverage ratio is calculated by dividing the period-end allowance for loan and lease losses by period-end loans held for investment.
(7)
Loans serviced for others represents our portfolio of loans serviced for third parties related to our multifamily finance business.
** Change is not meaningful.
Key factors affecting the results of our Commercial Banking business for 2016 compared to 2015, and changes in financial condition
and credit performance between December 31, 2016 and December 31, 2015 include the following:
• Net Interest Income: Net interest income increased by $351 million to $2.2 billion in 2016 primarily driven by loan growth,
including loans acquired in the HFS acquisition.
• Non-Interest Income: Non-interest income increased by $91 million to $578 million in 2016 primarily driven by fee-based
services, including impacts from the HFS acquisition, and products attributable to our multifamily finance business.
• Provision for Credit Losses: The provision for credit losses increased by $181 million to $483 million in 2016 primarily
driven by higher charge-offs, partially offset by a smaller allowance build, due to continued adverse industry conditions
impacting our taxi medallion and oil and gas lending portfolios.
• Non-Interest Expense: Non-interest expense increased by $251 million to $1.4 billion in 2016 driven by higher operating
expenses due to costs associated with the HFS acquisition and continued growth in our Commercial Banking business.
•
Loans Held for Investment: Period-end loans held for investment increased by $3.7 billion to $66.9 billion as of December 31,
2016 from December 31, 2015 driven by growth in our commercial loan portfolios. Average loans held for investment
increased by $12.5 billion to $65.2 billion in 2016 compared to 2015 primarily driven by the HFS acquisition and growth
in our commercial loan portfolios.
• Deposits: Period-end deposits decreased by $391 million to $33.9 billion as of December 31, 2016 from December 31,
2015.
58
Capital One Financial Corporation (COF)
• Net Charge-Off and Nonperforming Metrics: The net charge-off rate increased by 36 basis points to 0.45% in 2016 compared
to 2015, reflecting rising losses in our taxi medallion and oil and gas lending portfolios. Increased credit risk rating
downgrades in these same lending portfolios resulted in the nonperforming loan rate increasing by 66 basis points to 1.53%
as of December 31, 2016 from December 31, 2015.
Key factors affecting the results of our Commercial Banking business for 2015 compared to 2014, and changes in financial condition
and credit performance between December 31, 2015 and December 31, 2014 include the following:
• Net Interest Income: Net interest income increased by $114 million to $1.9 billion in 2015. The increase was due to growth
in commercial and industrial and commercial and multifamily real estate average loans, partially offset by lower loan yields
driven by market and competitive pressures.
• Non-Interest Income: Non-interest income increased by $37 million to $487 million in 2015 primarily driven by increased
revenue from products and services provided to our commercial customers.
• Provision for Credit Losses: The provision for credit losses increased by $209 million to $302 million in 2015. The increase
was primarily driven by a larger build in both the allowance and the reserve for unfunded lending commitments resulting
from adverse market conditions impacting our oil and gas portfolio and taxi medallion lending portfolio.
• Non-Interest Expense: Non-interest expense increased by $73 million to $1.2 billion in 2015 driven by higher operating
expenses due to costs associated with the HFS acquisition and continued growth in our Commercial Banking business.
•
Loans Held for Investment: Period-end loans held for investment increased by $12.4 billion to $63.3 billion as of
December 31, 2015 from December 31, 2014 driven by the HFS acquisition as well as growth in our commercial and
multifamily real estate loan portfolios. Average loans held for investment increased by $4.9 billion to $52.8 billion in 2015
compared to 2014 primarily driven by growth in our commercial and multifamily real estate loan portfolios.
• Deposits: Period-end deposits increased by $2.3 billion to $34.3 billion as of December 31, 2015 from December 31, 2014
driven by our strategy to strengthen existing relationships with and increase liquidity from our commercial customers.
• Net Charge-Off and Nonperforming Statistics: The net charge-off rate increased by 7 basis points to 0.09% in 2015 compared
to 2014. The nonperforming loans rate increased by 53 basis points to 0.87% as of December 31, 2015 from December 31,
2014. The increases in these rates reflect losses and credit risk rating downgrades in our oil and gas portfolio and taxi
medallion lending portfolio.
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 expenses that do not directly support the operations of the business segments or for which the business
segments are not considered financially accountable in evaluating their performance, such as certain acquisition and
restructuring charges;
a portion of the net benefit (provision) for representation and warranty losses related to continuing operations; and
offsets related to certain line-item reclassifications.
59
Capital One Financial Corporation (COF)
Table 12 summarizes the financial results of our Other category for the periods indicated.
Table 12: Other Category Results
(Dollars in millions)
Selected income statement data:
Year Ended December 31,
Change
2016
2015
2014
2016 vs.
2015
2015 vs.
2014
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total net revenue(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefit for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss from continuing operations before income taxes . . . . . . . . . . . . . .
Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations, net of tax . . . . . . . . . . . . . . . . . . . .
$
193
$
53
$
(63)
130
(5)
309
(174)
(339)
(39)
14
(2)
312
(296)
(350)
$
165
$
54
$
9
27
36
(5)
165
(124)
(214)
90
**
62%
**
150
(1)
(41)
(3)
**
**
**
(61)%
(60)
89
139
64
(40)
__________
(1)
Some of our tax-related commercial investments generate tax-exempt income or tax credits. Accordingly, we make certain reclassifications within our
Commercial Banking business results to present revenues and yields on a taxable-equivalent basis, calculated assuming an effective tax rate approximately
equal to our federal statutory tax rate of 35% with offsetting reclassifications to the Other category.
** Change is not meaningful.
Net income from continuing operations recorded in the Other category was $165 million in 2016 compared to $54 million in 2015.
The increase in 2016 was primarily driven by:
•
•
higher net interest income due to balance sheet growth, as well as the impact of rates on our other treasury-related activities;
and
lower restructuring charges for severance and related benefits pursuant to our ongoing benefit programs as a result of the
realignment of our workforce.
These drivers were partially offset by:
•
•
•
higher bank optimization charges and an impairment charge associated with certain acquired intangible and software assets
within non-interest expense;
lower non-interest income due to rate-driven hedge ineffectiveness; and
a reduced income tax benefit as a result of higher income before taxes and increased discrete tax expense, partially offset
by increased tax credits.
Net income from continuing operations recorded in the Other category was $54 million in 2015 compared to $90 million in 2014.
The reduction in net income in 2015 was primarily due to charges associated with:
•
•
severance and related benefits pursuant to our ongoing benefit program as a result of the realignment of our workforce; and
certain planned site closures.
These drivers were partially offset by higher discrete tax benefits and net tax credits.
60
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.”
We have identified the following accounting policies as critical because they require significant judgments and assumptions about
highly complex and inherently uncertain matters and the use of reasonably different estimates and assumptions could have a
material impact on our results of operations or financial condition. These critical accounting policies govern:
• Loan loss reserves
• Asset impairment
•
Fair value of financial instruments
• Representation and warranty reserves
• Customer rewards reserve
We evaluate our critical accounting estimates and judgments on an ongoing basis and update them, as necessary, based on changing
conditions. Management has discussed our critical accounting policies and estimates with the Audit Committee of the Board of
Directors.
Loan Loss Reserves
We maintain an allowance for loan and lease losses that represents management’s estimate of incurred loan and lease losses inherent
in our held-for-investment credit card, consumer banking and commercial banking loan portfolios as of each balance sheet date.
We also separately reserve for binding unfunded lending commitments, letters of credit and financial guarantees.
We build our allowance for loan and lease losses and reserve for unfunded lending commitments through the provision for credit
losses. Our provision for credit losses in each period is driven by charge-offs, changes to allowance for loan and lease losses, and
changes to the reserve for unfunded lending commitments. We recorded a provision for credit losses of $6.5 billion, $4.5 billion
and $3.5 billion in 2016, 2015 and 2014, respectively.
We have an established process, using analytical tools and management judgment, to determine our allowance for loan and lease
losses. Losses are inherent in our loan portfolio and we calculate the allowance for loan and lease losses by estimating incurred
losses for segments of our loan portfolio with similar risk characteristics and record a provision for credit losses. The allowance
totaled $6.5 billion as of December 31, 2016, compared to $5.1 billion as of December 31, 2015.
We review and assess our allowance methodologies and adequacy of the allowance for loan and lease losses on a quarterly basis.
Our assessment involves evaluating many factors including, but not limited to, historical loss and recovery experience, recent
trends in delinquencies and charge-offs, risk ratings, the impact of bankruptcy filings, the value of collateral underlying secured
loans, account seasoning, changes in our credit evaluation, underwriting and collection management policies, seasonality, general
economic conditions, changes in the legal and regulatory environment and uncertainties in forecasting and modeling techniques
used in estimating our allowance for loan and lease losses. Key factors that have a significant impact on our allowance for loan
and lease losses include assumptions about unemployment rates, home prices, and the valuation of commercial properties and
other collateral, consumer real estate, and automobiles.
In addition to the allowance for loan and lease losses, we review and assess our estimate of probable losses related to binding
unfunded lending commitments, such as letters of credit and financial guarantees, and unfunded loan commitments on a quarterly
basis. The factors impacting our assessment generally align with those considered in our evaluation of the allowance for loan and
lease losses for the Commercial Banking business. Changes to the reserve for losses on unfunded lending commitments are recorded
through the provision for credit losses in the consolidated statements of income and to other liabilities on the consolidated balance
sheets.
Although we examine a variety of externally available data, as well as our internal loan performance data, to determine our
allowance for loan and lease losses and reserve for unfunded lending commitments, our estimation process is subject to risks and
61
Capital One Financial Corporation (COF)
uncertainties, including a reliance on historical loss and trend information that may not be representative of current conditions and
indicative of future performance. Accordingly, our actual credit loss experience may not be in line with our expectations. We
provide additional information on the methodologies and key assumptions used in determining our allowance for loan and lease
losses for each of our loan portfolio segments in “Note 1—Summary of Significant Accounting Policies.” We provide information
on the components of our allowance, disaggregated by impairment methodology, and changes in our allowance in “Note 5—
Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments.”
Finance Charge and Fee Reserves
Finance charges and fees on credit card loans, net of amounts that we consider uncollectible, are included in loan receivables and
revenue when the finance charges and fees are earned. We continue to accrue finance charges and fees on credit card loans until
the account is charged-off; however, when we do not expect full payment of billed finance charges and fees, we reduce the balance
of our credit card loan receivables by the amount of finance charges and fees billed but not expected to be collected and exclude
this amount from revenue. Total net revenue was reduced by $1.1 billion, $732 million and $645 million in 2016, 2015 and 2014,
respectively, for the estimated uncollectible amount of billed finance charges and fees. The finance charge and fee reserve totaled
$402 million as of December 31, 2016, compared to $262 million as of December 31, 2015.
We review and assess the adequacy of the uncollectible finance charge and fee reserve on a quarterly basis. Our methodology for
estimating the uncollectible portion of billed finance charges and fees is consistent with the methodology we use to estimate the
allowance for incurred losses on the principal portion of our credit card loan receivables.
Asset Impairment
In addition to our loan portfolio, we review other assets for impairment on a regular basis in accordance with applicable impairment
accounting guidance. This process requires significant management judgment and involves various estimates and assumptions.
Our investment securities, goodwill and intangible assets represent a significant portion of our total assets excluding loans.
Accordingly, below we describe our process for assessing impairment of these assets and the key estimates and assumptions
involved in this process.
Investment Securities
We regularly review our investment securities for other-than-temporary impairment (“OTTI”) using both quantitative and
qualitative criteria. 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 income. If we do not intend to sell the security and it is not more likely than not that we will be
required to sell the security before recovery of our amortized cost, we evaluate other quantitative and qualitative criteria to determine
whether a credit loss exists. Our evaluation requires significant management judgment and a consideration of many factors,
including, but not limited to, the extent and duration of the impairment; the health of and specific prospects for the issuer, including
whether the issuer has failed to make scheduled interest or principal payments; recent events specific to the issuer and/or industry
to which the issuer belongs; the payment structure of the security; external credit ratings; the value of underlying collateral and
current market conditions. Quantitative criteria include assessing whether there has been an adverse change in expected future
cash flows. See “Note 3—Investment Securities” for additional information.
Goodwill and Intangible Assets
Goodwill represents the excess of the fair value of the consideration transferred, plus the fair value of any non-controlling interests
in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date.
Goodwill totaled $14.5 billion as of both December 31, 2016 and 2015. Intangible assets, which we report on our consolidated
balance sheets as a component of other assets, consist primarily of purchased credit card relationships (“PCCR”), core deposit and
other intangibles. The net carrying amount of intangible assets decreased to $665 million as of December 31, 2016, from $1.0
billion as of December 31, 2015 primarily due to amortization. Goodwill and intangible assets together represented 4% and 5%
of our total assets as of December 31, 2016 and 2015, respectively. We did not recognize any goodwill impairment in 2016, 2015
or 2014. See “Note 7—Goodwill and Intangible Assets” for additional information.
62
Capital One Financial Corporation (COF)
Goodwill
We perform our goodwill impairment test annually on October 1 at a reporting unit level. We are also required to test goodwill for
impairment whenever events or circumstances make it more-likely-than-not that impairment may have occurred. As of October
1, 2016, we had five reporting units which included Domestic Card, International Card, Auto, Other Consumer Banking and
Commercial Banking.
The goodwill impairment test is a two-step process. The first step involves a comparison of the estimated fair value of a reporting
unit to its carrying amount, including goodwill. If the estimated fair value exceeds its carrying amount, goodwill of the reporting
unit is not impaired and the second step is not necessary. If the estimated fair value of a reporting unit is below its carrying amount,
then the second step, which requires measurement of any potential impairment, must be performed. The second step of goodwill
impairment testing requires an extensive effort to build the specific reporting unit’s balance sheet for the test based on applicable
accounting guidance.
For the purpose of our goodwill impairment testing, we calculate the carrying amount of a reporting unit using an allocated capital
approach based on each reporting unit’s specific regulatory capital, economic capital requirements, and underlying risks. The
carrying amount for a reporting unit is the sum of its respective capital requirements, goodwill and intangibles balances. We then
compare the carrying amount to our total consolidated stockholders’ equity to assess the reasonableness of our methodology. The
total carrying amount of our five reporting units was $39.2 billion, as compared to consolidated stockholder’s equity of $48.2
billion as of October 1, 2016. The $9.0 billion excess in consolidated stockholder’s equity was primarily attributable to capital
allocated to our Other category, preferred stock and other future capital needs such as dividends and share buy-backs. There was
no remaining unallocated equity after factoring in these items.
Determining the fair value of a reporting unit and the associated assets, liabilities and intangible assets, is a subjective process that
requires the use of estimates and the exercise of significant judgment. The fair value of the Domestic Card, Auto, Other Consumer
Banking and Commercial Banking reporting units was calculated using a discounted cash flow (“DCF”) calculation, a form of the
income approach. This income approach calculation used projected cash flows based on each reporting unit’s internal forecast and
the perpetuity growth method to calculate terminal values. Our DCF analysis requires management to make estimates about future
loan, deposit and revenue growth, as well as credit losses and capital rates. These cash flows and terminal values were then
discounted using discount rates based on our external cost of equity with adjustments for the risk inherent in each reporting unit.
Discount rates used in 2016 ranged from 8% to 13%. The reasonableness of the DCF approach was assessed by reference to a
market-based approach using comparable market multiples and recent market transactions where available. The results of the 2016
annual impairment test for the Domestic Card, Auto, Other Consumer Banking and Commercial Banking reporting units indicated
that the estimated fair values of these four reporting units significantly exceeded their carrying amounts.
Our International Card businesses operate in Canada and the United Kingdom (“U.K.”) and as of October 1, 2016, had goodwill
of $913 million. As part of our internal analysis, management forecasted a decline in the excess of fair value above carrying value
of the International Card reporting unit as compared to the prior year. These declines were primarily attributable to the adverse
changes in foreign exchange rates due to the general uncertainties following the U.K. referendum to leave the European Union.
Although the referendum has raised uncertainties, we have not experienced any significant negative impacts to our results of
operations in the U.K. attributable specifically to it, nor do we currently forecast significant changes to this business due to the
referendum. Our operations in Canada continue to forecast loan growth and strong operating results. As a result of these uncertainties,
management engaged an independent valuation specialist to assist in the determination of the International Card reporting unit
fair value for the 2016 goodwill impairment test. We employed both the DCF and the market approach to calculate the fair value
of our International Card reporting unit. The outputs from both methods were relatively consistent and indicated that the International
Card reporting unit’s fair value exceed its carrying value by approximately 9%. As a result of this analysis, the second step of the
goodwill impairment test was not necessary for our International Card reporting unit.
During December 2016, subsequent to the annual goodwill impairment test described above, as a result of the evolution of the
business and certain leadership changes in the overall Credit Card business, management re-evaluated the organizational structure
of this business. We concluded the Domestic and International Card components of the Credit Card operating segment should be
aggregated into a single reporting unit because they share similar economic characteristics, products, types of customers, operations,
assets and other resources, and goodwill is recoverable from the businesses working in concert. The business has evolved since
the International Card reporting unit was created, in particular our Canadian business now comprises the majority of the reporting
unit’s assets, such that there are now more shared characteristics and resources with our domestic operations, such as common
technology platforms. As a result of this change, as of December 31, 2016, Capital One had four reporting units: Credit Card,
Auto, Other Consumer Banking and Commercial Banking for the purpose of testing goodwill for impairment. As this change only
63
Capital One Financial Corporation (COF)
impacted the two reporting units both under our Credit Card operating segment and did not impact the reporting units under the
Consumer Banking or Commercial Banking operating segments, the goodwill amounts previously allocated to the International
Card reporting unit of $913 million and Domestic Card reporting unit of $4.1 billion were combined into the new Credit Card
reporting unit. The change did not impact our operating segments and our Chief Executive Officer (“CEO”) continues to be the
Chief Operating Decision Maker (“CODM”).
By definition, assumptions used in estimating the fair value of a reporting unit are judgmental and inherently uncertain. A significant
change in the economic conditions of a reporting unit, such as declines in business performance, increases in credit losses, increases
in capital requirements, deterioration in market conditions, adverse estimates of regulatory or legislative changes or increases in
the estimated cost of equity, could cause the estimated fair values of our reporting units to decline in the future, and increase the
risk of a goodwill impairment charge to earnings in a future period.
Intangible Assets
Intangible assets with definitive useful lives are amortized over their estimated lives and evaluated for potential impairment
whenever events or changes in circumstances suggest that an asset’s or asset group’s carrying amount may not be fully recoverable.
An impairment loss, generally calculated as the difference between the estimated fair value and the carrying amount of an asset
or asset group, is recognized if the sum of the estimated undiscounted cash flows relating to the asset or asset group is less than
the corresponding carrying amount. During 2016, we recorded an impairment charge of $17 million related to certain other
intangibles. There were no meaningful intangible asset impairments in 2015 or 2014.
See “Note 7—Goodwill and Intangible Assets” for additional information.
Fair Value
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. 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: Quoted prices (unadjusted) in active markets for identical assets or liabilities
Level 2: Observable market-based inputs, other than quoted prices in active markets for identical assets or liabilities
Level 3: Unobservable inputs
The degree of management judgment involved in determining the fair value of a financial instrument is dependent upon the
availability of quoted prices in active markets or observable market parameters. When quoted prices and observable data in active
markets are not fully available, management judgment is necessary to estimate fair value. Changes in market conditions, such as
reduced liquidity in the capital markets or changes in secondary market activities, may reduce the availability and reliability of
quoted prices or observable data used to determine fair value.
We have developed policies and procedures to determine when markets for our financial assets and liabilities are inactive if the
level and volume of activity has declined significantly relative to normal conditions. If markets are determined to be inactive, it
may be appropriate to adjust price quotes received. When significant adjustments are required to price quotes or inputs, it may be
appropriate to utilize an estimate based primarily on unobservable inputs.
Significant judgment may be required to determine whether certain financial instruments measured at fair value are classified as
Level 2 or Level 3. In making this determination, we consider all available information that market participants use to measure
the fair value of the financial instrument, including observable market data, indications of market liquidity and orderliness, and
our understanding of the valuation techniques and significant inputs used. Based upon the specific facts and circumstances of each
instrument or instrument category, judgments are made regarding the significance of the Level 3 inputs to the instruments’ fair
value measurement in its entirety. If Level 3 inputs are considered significant, the instrument is classified as Level 3. The process
for determining fair value using unobservable inputs is generally more subjective and involves a high degree of management
judgment and assumptions. We discuss changes in the valuation inputs and assumptions used in determining the fair value of our
64
Capital One Financial Corporation (COF)
financial instruments, including the extent to which we have relied on significant unobservable inputs to estimate fair value and
our process for corroborating these inputs, in “Note 17—Fair Value Measurement.”
Fair Value Measurement
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 third-party 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 valuation 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.
Representation and Warranty Reserve
In connection with the sales of mortgage loans, certain subsidiaries entered into agreements containing varying representations
and warranties about, among other things, the ownership of the loan, the validity of the lien securing the loan, the loan’s compliance
with any applicable loan criteria established by the purchaser, including underwriting guidelines and the ongoing existence of
mortgage insurance, and the loan’s compliance with applicable federal, state and local laws. We may be required to repurchase
the mortgage loan, indemnify the investor or insurer, or reimburse the investor for losses incurred on the loan in the event of a
material breach of contractual representations or warranties.
We have established representation and warranty reserves for losses that we consider to be both probable and reasonably estimable
associated with the mortgage loans sold by each subsidiary, including both litigation and non-litigation liabilities. The reserve-
setting process relies heavily on estimates, which are inherently uncertain, and requires the application of judgment. In establishing
the representation and warranty reserves, we rely on historical data and consider a variety of factors, depending on the category
of purchaser. These factors include, but are not limited to, the historical relationship between loan losses and repurchase outcomes;
the percentage of current and future loan defaults that we anticipate will result in repurchase requests over the lifetime of the loans;
the percentage of those repurchase requests that we anticipate will result in actual repurchases; and estimated collateral valuations.
We evaluate these factors and update our loss forecast models on a quarterly basis to estimate our lifetime liability.
Our aggregate representation and warranty mortgage reserve, which we report as a component of other liabilities on our consolidated
balance sheets, totaled $630 million and $610 million as of December 31, 2016 and 2015, respectively. The adequacy of the reserve
and the ultimate amount of losses incurred by us or one of our subsidiaries will depend on, among other things, actual future
mortgage loan performance, the actual level of future repurchase and indemnification requests, the actual success rates of claimants,
developments in litigation, actual recoveries on the collateral and macroeconomic conditions (including unemployment levels and
housing prices).
As part of our business planning processes, we have considered various outcomes relating to the potential future representation
and warranty liabilities of our subsidiaries that are possible but do not rise to the level of being both probable and reasonably
estimable outcomes justifying an incremental accrual under applicable accounting standards. Our current best estimate of reasonably
possible future losses from representation and warranty claims beyond what was in our reserve as of December 31, 2016 is
approximately $1.5 billion, a decline from our estimate of $1.6 billion as of December 31, 2015. Notwithstanding our ongoing
65
Capital One Financial Corporation (COF)
attempts to estimate a reasonably possible amount of future losses beyond our current accrual levels based on current information,
it is possible that actual future losses will exceed both the current accrual level and our current estimate of the amount of reasonably
possible losses. This estimate involves considerable judgment, and reflects that there is still significant uncertainty regarding the
numerous factors that may impact the ultimate loss levels, including, but not limited to, anticipated litigation outcomes, future
repurchase and indemnification claim levels, ultimate repurchase and indemnification rates, future mortgage loan performance
levels, actual recoveries on the collateral and macroeconomic conditions (including unemployment levels and housing prices). In
light of the significant uncertainty as to the ultimate liability our subsidiaries may incur from these matters, an adverse outcome
in one or more of these matters could be material to our consolidated results of operations or cash flows for any particular reporting
period. See “Note 19—Commitments, Contingencies, Guarantees and Others” for additional information.
Customer Rewards Reserve
We offer products, primarily credit cards, which include programs that allow members to earn rewards, in the form of points, that
can be redeemed for cash (primarily in the form of statement credits), gift cards, airline tickets or merchandise, based on account
activity. The amount of rewards that a customer earns varies based on the terms and conditions of the rewards program and product.
The majority of our rewards do not expire and there is no limit on the number of rewards points an eligible card member can earn.
Customer rewards costs, which we generally record as an offset to interchange income, are driven by various factors, such as card
member purchase volume, the terms and conditions of the rewards program and rewards redemption cost. We establish a customer
rewards reserve that reflects management’s judgment regarding rewards earned that are expected to be redeemed and the estimated
redemption cost.
We use financial models to estimate ultimate redemption rates of rewards earned to date by current card members based on historical
redemption trends, current enrollee redemption behavior, card product type, year of program enrollment, enrollment tenure and
card spend levels. Our current assumption is that the vast majority of all rewards earned will eventually be redeemed. We use a
weighted-average cost per point redeemed during the previous twelve months, adjusted as appropriate for recent changes in
redemption costs, including mix of rewards redeemed, to estimate future redemption costs. We continually evaluate our reserve
and assumptions based on developments in redemption patterns, cost per point redeemed, changes to the terms and conditions of
the rewards program and other factors. Changes in the ultimate redemption rate and weighted-average cost per point have the
effect of either increasing or decreasing the reserve through the current period provision by an amount estimated to cover the cost
of all points previously earned but not yet redeemed by card members as of the end of the reporting period. We recognized customer
rewards expense of $3.2 billion, $2.7 billion and $2.0 billion in 2016, 2015 and 2014, respectively. Our customer rewards liability,
which is included in other liabilities on our consolidated balance sheets, totaled $3.6 billion and $3.2 billion as of December 31,
2016 and 2015, respectively.
ACCOUNTING CHANGES AND DEVELOPMENTS
See “Note 1—Summary of Significant Accounting Policies” for information on accounting standards adopted in 2016, as well as
recently issued accounting standards not yet required to be adopted and the expected impact of these changes in accounting
standards.
66
Capital One Financial Corporation (COF)
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, OCC and 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 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.”
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 Committee has proposed, but has not finalized, changes to the Basel III capital framework. There is uncertainty around
any final changes that the Basel Committee might adopt, which of those changes thereafter may be adopted in the United States,
and how those changes may impact the Basel III Standardized Approach and the Basel III Advanced Approaches.
For additional information about the capital adequacy guidelines we are subject to, see “Part 1—Item 1. Business—Supervision
and Regulation.”
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 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. See “MD&A—Market Risk Profile” below for additional information. We began reporting
risk-based capital ratios including market risk-weighted assets for the Company and CONA pursuant to the Market Risk Rule for
positions covered by such rule in the third quarter of 2016. This change did not have a material impact on the risk-based capital
ratios of these two entities. As of December 31, 2016, COBNA is not subject to the Market Risk Rule.
Table 13 provides a comparison of our regulatory capital ratios under the Basel III Standardized Approach subject to transition
provisions, the regulatory minimum capital adequacy ratios and the PCA well-capitalized level for each ratio (where applicable)
as of December 31, 2016 and 2015.
67
Capital One Financial Corporation (COF)
Table 13: Capital Ratios under Basel III(1)
Capital One Financial Corp:
Common equity Tier 1 capital(2) . . . . . . . . . . . . . . . . . . . .
Tier 1 capital(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total capital(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier 1 leverage(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supplementary leverage(6) . . . . . . . . . . . . . . . . . . . . . . . . .
Capital One Bank (USA), N.A.:
Common equity Tier 1 capital(2) . . . . . . . . . . . . . . . . . . . .
Tier 1 capital(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total capital(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier 1 leverage(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supplementary leverage(6) . . . . . . . . . . . . . . . . . . . . . . . . .
Capital One, N.A.:
Common equity Tier 1 capital(2) . . . . . . . . . . . . . . . . . . . .
Tier 1 capital(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total capital(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier 1 leverage(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supplementary leverage(6) . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2016
December 31, 2015
Capital
Ratio
Minimum
Capital
Adequacy
Well-
Capitalized
Capital
Ratio
Minimum
Capital
Adequacy
Well-
Capitalized
10.1%
4.5%
11.6
14.3
9.9
8.6
6.0
8.0
4.0
N/A
N/A
6.0%
10.0
N/A
N/A
11.1%
4.5%
12.4
14.6
10.6
9.2
6.0
8.0
4.0
N/A
N/A
6.0%
10.0
N/A
N/A
12.0%
4.5%
6.5%
12.2%
4.5%
6.5%
12.0
14.8
10.8
8.9
6.0
8.0
4.0
N/A
8.0
10.0
5.0
N/A
12.2
15.2
10.8
9.0
6.0
8.0
4.0
N/A
8.0
10.0
5.0
N/A
10.6%
4.5%
6.5%
11.8%
4.5%
6.5%
10.6
11.8
7.7
6.9
6.0
8.0
4.0
N/A
8.0
10.0
5.0
N/A
11.8
12.9
8.8
7.9
6.0
8.0
4.0
N/A
8.0
10.0
5.0
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 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 40% for 2015, 60% for 2016, 80% for 2017 and 100% for 2018.
(2) Common equity Tier 1 capital ratio is a regulatory capital measure calculated based on common equity Tier 1 capital divided by risk-weighted assets.
(3)
Tier 1 capital ratio is a regulatory capital measure calculated based on Tier 1 capital divided by risk-weighted assets.
(4)
(5)
(6)
Total capital ratio is a regulatory capital measure calculated based on total capital divided by risk-weighted assets.
Tier 1 leverage ratio is a regulatory capital measure calculated based on Tier 1 capital divided by adjusted average assets.
Supplementary leverage ratio (“SLR”) is a regulatory capital measure calculated based on Tier 1 capital divided by total leverage exposure.
In addition to the above statutory capital ratios, we also disclose a non-GAAP TCE ratio in “Part II—Item 6. Summary of Selected
Financial Data.” This capital measure is not necessarily comparable to similarly-titled capital measures reported by other companies.
We provide information on the calculation of this ratio in “MD&A—Table F—Reconciliation of Non-GAAP Measures and
Calculation of Regulatory Capital Measures.”
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 December 31, 2016 and 2015.
The Basel III Capital Rule requires banks to maintain a capital conservation buffer of common equity Tier 1 capital of 2.5% above
the regulatory minimum ratio and an incremental countercyclical capital buffer of up to 2.5% of common equity Tier 1 capital to
be set at the discretion of the Federal Banking Agencies (currently zero percent as of December 31, 2016). Both the capital
conservation buffer and the countercyclical capital buffer are being phased in over a transition period of four years that commenced
on January 1, 2016. The combined capital conservation buffer and countercyclical capital buffer is 0.625% in 2016 making the
minimum capital requirement plus regulatory buffers for common equity Tier 1 capital, Tier 1 capital and total capital ratios,
5.125%, 6.625% and 8.625%, respectively, for the Company and the Banks during 2016.
A common equity Tier 1 capital ratio, Tier 1 capital ratio, or total capital ratio below the applicable regulatory minimum ratio and
the combined capital conservation buffer and the countercyclical buffer might restrict a bank’s ability to distribute capital and
make discretionary bonus payments. As of December 31, 2016, the Company and each of the Banks are all above the applicable
combined thresholds.
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Capital One Financial Corporation (COF)
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.
The following table compares our common equity Tier 1 capital and risk-weighted assets as of December 31, 2016, subject to
applicable transition provisions, to our estimated fully phased-in common equity Tier 1 capital and risk-weighted assets, as it
applies for Advanced Approaches banks such as ourselves that have not yet exited parallel run. Our estimated common equity Tier
1 capital, risk-weighted assets and common equity Tier 1 capital ratio under the fully phased-in Basel III Standardized Approach
are non-GAAP financial measures that we believe provide useful information in evaluating compliance with regulatory capital
requirements that are not effective yet. They are calculated based on our interpretations, expectations and assumptions of relevant
regulations, as well as interpretations provided by our regulators, and is subject to change based on changes to future regulations
and interpretations. As we continue to engage with our regulators, there could be further changes to the calculation.
Table 14: Regulatory Capital Reconciliations between Basel III Transition to Fully Phased-in(1)
(Dollars in millions)
Common equity Tier 1 capital under Basel III Standardized Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments related to AOCI(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments related to intangibles(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Estimated common equity Tier 1 capital under fully phased-in Basel III Standardized Approach . . . . . . . . . . . . . .
Risk-weighted assets under Basel III Standardized Approach(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments for fully phased-in Basel III Standardized Approach(4). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Estimated risk-weighted assets under fully phased-in Basel III Standardized Approach . . . . . . . . . . . . . . . . . . . . . .
Estimated common equity Tier 1 capital ratio under fully phased-in Basel III Standardized Approach(5) . . . . . . . .
December 31, 2016
$
28,803
(275)
(256)
28,272
285,756
305
286,061
9.9%
$
$
$
__________
(1)
Estimated common equity Tier 1 capital, risk-weighted assets, and common equity Tier 1 capital ratio under the fully phased-in Basel III Standardized
Approach are non-GAAP financial measures.
(2) Assumes adjustments are fully phased-in.
(3)
Includes credit and market risk-weighted assets.
(4) Adjustments include higher risk weights for items that are included in capital based on the threshold deduction approach, such as mortgage servicing assets
and deferred tax assets. The adjustments also include removal of risk weights for items that are deducted from common equity Tier 1 capital.
(5) Calculated by dividing estimated common equity Tier 1 capital by estimated risk-weighted assets, which are both calculated under the Basel III Standardized
Approach, as it applies when fully phased-in for Advanced Approaches banks that have not yet exited parallel run.
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” 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, 2016, we submitted our capital plan to the Federal Reserve as part of the 2016 CCAR cycle. On June 29, 2016, the
Federal Reserve informed us that they had “no objection” to our CCAR 2016 Capital Plan submission. As a result of this non-
objection to our capital plan, the Board of Directors authorized the repurchase of up to $2.5 billion of shares of our common stock
from the third quarter of 2016 through the end of the second quarter of 2017, in addition to share repurchases related to employee
compensation. 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.”
69
Capital One Financial Corporation (COF)
Equity Offerings and Transactions
On July 29, 2016, the Company issued and sold 24,000,000 Depositary Shares, each representing a 1/40th interest in a share of
Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series G, $0.01 par value, with a liquidation preference of $25 per Depositary
Share (“Series G Preferred Stock”). The net proceeds of the offering of Series G Preferred Stock were approximately $583 million,
after deducting underwriting commissions and offering expenses. Dividends on the Series G Preferred Stock are payable quarterly
in arrears at a rate of 5.20% per annum.
On November 29, 2016, the Company issued and sold 20,000,000 Depositary Shares, each representing a 1/40th interest in a share
of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series H, $0.01 par value, with a liquidation preference of $25 per
Depositary Share (“Series H Preferred Stock”). The net proceeds of the offering of Series H Preferred Stock were approximately
$483 million, after deducting underwriting commissions and offering expenses. Dividends on the Series H Preferred Stock are
payable quarterly in arrears at a rate of 6.00% per annum.
Dividend Policy and Stock Purchases
On February 2, 2017, our Board of Directors declared a quarterly common stock dividend of $0.40 per share, payable on February
24, 2017 to stockholders of record at the close of the business on February 13, 2017. Our Board of Directors also approved quarterly
dividends on our 6.00% Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series B (“Series B Preferred Stock”), our 6.25%
Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series C (“Series C Preferred Stock”), our 6.70% Fixed Rate Non-
Cumulative Perpetual Preferred Stock, Series D (“Series D Preferred Stock”), our 6.20% Fixed Rate Non-Cumulative Perpetual
Preferred Stock, Series F (“Series F Preferred Stock”), our Series G Preferred Stock and Series H Preferred Stock, payable on
March 1, 2017 to stockholders of record at the close of business on February 15, 2017. Based on those declarations, we will pay
approximately $195 million in common equity dividends and approximately $53 million in total preferred dividends in the first
quarter of 2017. Under the terms of our outstanding preferred stock, our ability to pay dividends on, make distributions with respect
to, or to repurchase, redeem or acquire its common stock or any preferred stock ranking on parity with or junior to the preferred
stock, is subject to restrictions in the event that we do not declare and either pay or set aside a sum sufficient for payment of
dividends on the preferred stock for the immediately preceding dividend period.
We paid common stock dividends of $0.40 per share in each quarter of 2016. The following table summarizes the dividend paid
per share on our various series preferred stock in each quarter of 2016.
Table 15: Preferred Stock Dividends Paid Per Share
Series
Description
Issuance Date
Per Annum
Dividend Rate
Dividend Frequency
Q4
Q3
Q2
Q1
2016
Series B
Series C
Series D
Series E
Series F
Series G
Series H
6.00%
Non-Cumulative
6.25%
Non-Cumulative
6.70%
Non-Cumulative
Fixed-to-Floating
Rate Non-
Cumulative
6.20%
Non-Cumulative
5.20%
Non-Cumulative
6.00%
Non-Cumulative
August 20, 2012
6.00%
Quarterly
$15.00
$15.00
$15.00
$15.00
June 12, 2014
October 31, 2014
May 14, 2015
August 24, 2015
July 29, 2016
November 29, 2016
6.25
6.70
Quarterly
15.63
15.63
15.63
15.63
Quarterly
16.75
16.75
16.75
16.75
5.55% through
5/31/2020;
3-mo. LIBOR+ 380
bps thereafter
Semi-Annually
through 5/31/2020;
Quarterly thereafter
27.75
— 27.75
—
6.20
5.20
6.00
Quarterly
15.50
15.50
15.50
15.50
Quarterly
17.62
Quarterly
—
—
—
—
—
—
—
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 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
70
Capital One Financial Corporation (COF)
to transfer funds to our BHC. As of December 31, 2016, funds available for dividend payments from COBNA and CONA were
$3.9 billion and $1.0 billion, respectively. There can be no assurance that we will declare and pay any dividends to stockholders.
Consistent with our 2016 Stock Repurchase Program, our Board of Directors authorized the repurchase of up to $2.5 billion of
shares of common stock beginning in the third quarter of 2016 through the end of the second quarter of 2017. Through the end of
2016, we repurchased approximately $2.1 billion of shares of common stock as part of the 2016 Stock Repurchase Program.
The timing and exact amount of any future common stock repurchases will depend on various factors, including market conditions,
opportunities for growth, our capital position and 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.”
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
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.
Our risk framework, which is built around governance, processes and people, consists of the following eight key elements:
Establish Governance Processes, Accountabilities and Risk Appetites
The starting point of our risk framework is the establishment of governance processes, accountabilities and risk appetites. Our
Board of Directors and senior management establish the tone at the top regarding the importance of internal control, including
standards of conduct and the integrity and ethical values of the Company. Management reinforces expectations at the various levels
of the organization. This portion of the framework sets the foundation for the methods for governing risk taking, the interactions
within and among the lines of defense, and the risk appetites and tolerance limits for risk taking.
Identify and Assess Risks and Ownership
Identifying and assessing risks and ownership is the beginning of the more detailed day-to-day process of managing risk. This
portion of the framework clarifies the importance of strong first-line management and accountability for identifying and assessing
risk while specifying the role of the second line to identify and assess risk, particularly when taking on new initiatives.
Develop and Operate Controls, Monitoring and Mitigation Plans
We develop, operate and monitor controls to manage risk within tolerance levels. The first line develops controls to oversee and
manage identified risks. Controls may prevent risks from occurring or measure the amount of risk being taken so that the amount
may be proactively managed. Whenever possible, plans are implemented to mitigate risks or reduce them to lower levels. The first
line leads mitigation, control and monitoring actions. The second line is a consultant on control design when needed.
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Capital One Financial Corporation (COF)
Test and Detect Control Gaps and Perform Corrective Action
While the first line is principally accountable for taking, controlling and monitoring risk, the second line oversees and monitors
first line risk taking, including the effectiveness of first line controls, and the third line independently tests and oversees first and
second line risk taking. These activities provide the second and third lines of defense with the ability to reduce the likelihood of
unauthorized or unplanned risk taking within the organization. Control gaps are closed by first line corrective action.
Escalate Key Risks and Gaps to Executive Management and when appropriate, the Board of Directors
Escalation is an important component of our risk framework. Use of escalation is encouraged and does not necessarily indicate a
failure on the part of first, second, or third line risk management. Through escalation in the first line, decisions requiring judgment
can be raised to executives who have the broadest possible context and experience to make challenging decisions. Escalation in
the second and third lines of defense can also demonstrate part of their core responsibilities of effective challenge. If appropriate,
risks are escalated to the Board of Directors to ensure alignment with the most material risk decisions and/or transparency to the
largest risks facing the organization.
Calculate and Allocate Capital in Alignment with Risk Management and Measurement Processes (including Stress Testing)
Capital ultimately is held to protect the company from unforeseen risks or unexpected risk severity. As such, it is important that
capital planning processes be well linked with risk management practices to ensure the appropriate capital protections are in place
for the safety and soundness of the company. Stress testing and economic capital measurement, both of which incorporate inputs
from across the risk spectrum, are key tools for evaluating our capital position and risk adjusted returns.
Support with the Right Culture, Talent and Skills
The right culture, talent and skills are critical to effective risk management. Our risk framework is supported with the right culture
that promotes the foundation and values of the risk management organization. Skills necessary to effectively manage risk are
reinforced through performance management systems. When needed, risk talent is augmented through recruitment of industry
experts as well as training and development of internal associates.
Enabled by the Right Data, Infrastructure and Programs
Data, infrastructure and programs are key enablers of our risk management processes and practices. These core requirements enable
effective risk modeling, efficient first, second and third line risk activity performance, and cross-line interaction. In addition,
effective program design of each risk category is regularly assessed to ensure risk practices continue to evolve with leading industry
practices, and continue to interact across categories as desired for a strong overall risk management program.
Risk Appetite
Risk appetite defines the parameters for taking and accepting risks and are used by management and our Board of Directors to
make business decisions. Risk appetite refers to the level of risk our business is willing to take in pursuit of our corporate business
objectives. The Board of Directors approves our risk appetite including risk appetite statements and associated metrics, Board
Notification Thresholds, and Board Limits for each of our eight risk categories. We communicate risk appetite statements, limits
and thresholds to the appropriate levels in the organization and monitor adherence. While first line executives manage risk on a
day-to-day basis, the Chief Risk Officer provides effective challenge and independent oversight to ensure that risks are within the
appetite and specific limits established by the Board of Directors. The Chief Risk Officer reports to the Board of Directors regularly
on the nature and level of risk across all eight risk categories. In addition to his broader management responsibilities, our Chief
Executive Officer is responsible for developing the strategy and mission of our organization, determining and leading our culture,
and reviewing and providing input into our risk appetite.
Risk Categories
We apply our risk framework to protect our company from the eight major categories of risk that we are exposed to through our
business activities. Our eight major categories of risk are:
• Compliance Risk: Compliance risk is the risk to current or anticipated earnings or capital arising from violations of laws,
rules, or regulations. Compliance risk can also arise from nonconformance with prescribed practices, internal policies and
procedures, contractual obligations, or ethical standards that reinforce those laws, rules, or regulations;
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Capital One Financial Corporation (COF)
• Credit Risk: Credit risk is the risk to current or projected financial condition and resilience arising from an obligor’s failure
to meet the terms of any contract with the Company or otherwise perform as agreed;
•
•
Legal Risk: Legal risk is the risk of material adverse impact due to: new and changed laws and regulations; interpretations
of law; drafting, interpretation and enforceability of contracts; adverse decisions/consequences arising from litigation or
regulatory action; the establishment, management and governance of our legal entity structure; and the failure to seek/follow
appropriate Legal counsel when needed;
Liquidity Risk: Liquidity risk is the risk that the Company will not be able to meet its future financial obligations as they
come due, or invest in future asset growth because of an inability to obtain funds at a reasonable price within a reasonable
time period;
• Market Risk: Market risk is the risk that an institution’s earnings or the economic value of equity could be adversely impacted
by changes in interest rates, foreign exchange rates, or other market factors;
• Operational Risk: Operational risk is the risk of loss, capital impairment, adverse customer experience, or reputational
impact resulting from failure to comply with policies and procedures, failed internal processes or systems, or from external
events;
• Reputation Risk: Reputation risk is the risk to market value, recruitment and retention of talented associates and maintenance
of a loyal customer base due to the negative perceptions of our internal and external constituents regarding our business
strategies and activities; and
•
Strategic Risk: Strategic risk is the risk of a material impact on current or anticipated earnings, capital, franchise or enterprise
value arising from: (i) the Company’s competitive and market position and evolving forces in the industry that can affect
that position; (ii) lack of responsiveness to these conditions; (iii) strategic decisions to change the Company’s scale, market
position or operating model; or (iv) failure to appropriately consider implementation risks inherent in the Company’s strategy.
Below we provide an overview of how we manage our eight primary risk categories.
Compliance Risk Management
We recognize that compliance requirements for financial institutions are increasingly complex and that there are heightened
expectations from our regulators and our customers. In response, we continuously evaluate the regulatory environment and
proactively adjust our compliance risk program to fully address these expectations.
Our Compliance Management Program establishes expectations for determining compliance requirements, assessing the risk of
new product offerings, creating appropriate controls and training to address requirements, monitoring for control performance,
and independently testing for adherence to compliance requirements. The program also establishes regular compliance reporting
to senior business leaders, the executive committee and the Board of Directors.
The Chief Compliance Officer is responsible for establishing and overseeing our Compliance Risk Management Program. Business
areas incorporate compliance requirements and controls into their business policies, standards, processes and procedures. They
regularly monitor and report on the efficacy of their compliance controls and Corporate Compliance periodically independently
tests to validate the effectiveness of business controls.
Credit Risk Management
We recognize that we are exposed to cyclical changes in credit quality. Consequently, we try to ensure our credit portfolio is resilient
to economic downturns. Our most important tool in this endeavor is sound underwriting. In unsecured consumer loan underwriting,
we generally assume that loans will be subject to an environment in which losses are higher than those prevailing at the time of
underwriting. In commercial underwriting, we generally require strong cash flow, collateral and covenants and guarantees. In
addition to sound underwriting, we continually monitor our portfolio and take steps to collect or work out distressed loans.
The Chief Risk Officer, in conjunction with the Consumer and Commercial Chief Credit Officers, is responsible for establishing
credit risk policies and procedures, including underwriting and hold guidelines and credit approval authority, and monitoring credit
exposure and performance of our lending-related transactions. These responsibilities are fulfilled by the Chief Consumer Credit
Officer and the Chief Commercial Credit Officer who are responsible for evaluating the risk implications of credit strategy and
for oversight of credit for both the existing portfolio and any new credit investments. The Chief Consumer Credit Officer and the
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Capital One Financial Corporation (COF)
Chief Commercial Credit Officer have formal approval authority for various types and levels of credit decisions, including individual
commercial loan transactions. Division Presidents within each segment are responsible for managing the credit risk within their
divisions and maintaining processes to control credit risk and comply with credit policies and guidelines. In addition, the Chief
Risk Officer establishes policies, delegates approval authority and monitors performance for non-loan credit exposure entered into
with financial counterparties or through the purchase of credit sensitive securities in our investment portfolio.
Our credit policies establish standards in five areas: customer selection, underwriting, monitoring, remediation and portfolio
management. The standards in each area provide a framework comprising specific objectives and control processes. These standards
are supported by detailed policies and procedures for each component of the credit process. Starting with customer selection, our
goal is to generally provide credit on terms that generate above hurdle returns. We use a number of quantitative and qualitative
factors to manage credit risk, including setting credit risk limits and guidelines for each of our lines of business. We monitor
performance relative to these guidelines and report results and any required mitigating actions to appropriate senior management
committees and our Board of Directors.
Legal Risk Management
The General Counsel provides legal evaluation and guidance to the enterprise and business areas and partners with other risk
management functions such as Compliance and Internal Audit. This evaluation and guidance is based on an assessment of the type
and degree of legal risk associated with the internal business area practices and activities and of the controls the business has in
place to mitigate legal risks.
Liquidity Risk Management
The Head of Finance and Corporate Development and the Chief Risk Officer, in conjunction with the Chief Market and Liquidity
Risk Officer, are responsible for the establishment of liquidity risk management policies and standards for governance and
monitoring of liquidity risk at a corporate level. We assess liquidity strength by evaluating several different balance sheet metrics
under severe stress scenarios to ensure we can withstand significant funding degradation through idiosyncratic, systematic, and
combined liquidity stress scenarios. We continuously monitor market and economic conditions to evaluate emerging stress
conditions and appropriate action plans in accordance with our Contingency Funding Plan. Management reports liquidity metrics
to appropriate senior management committees and our Board of Directors no less than quarterly.
We seek to mitigate liquidity risk strategically and tactically. From a strategic perspective, we have acquired and built deposit
gathering businesses and significantly reduced our loan to deposit ratio. From a tactical perspective, we have accumulated a sizable
liquidity reserve comprised of cash, high-quality, unencumbered securities and committed collateralized credit lines. We also
continue to maintain access to secured and unsecured markets through ongoing issuance. This combination of stable and diversified
funding sources and our stockpile of liquidity reserves enables us to maintain confidence in our liquidity position.
Market Risk Management
The Head of Finance and Corporate Development and the Chief Risk Officer, in conjunction with the Chief Market and Liquidity
Risk Officer, are responsible for the establishment of market risk management policies and standards for the governance and
monitoring of market risk at a corporate level. Market risk is inherent from the financial instruments associated with our business
operations and activities including loans, deposits, securities, short-term borrowings, long-term debt and derivatives. We manage
market risk exposure, which is principally driven by balance sheet interest rate risk, centrally and establish quantitative risk limits
to monitor and control our exposure.
We recognize that interest rate and foreign exchange risk is inherent in the banking business due to the nature of the assets and
liabilities of banks. Banks typically manage the trade-off between near-term earnings volatility and market value volatility by
targeting moderate levels of each. In addition to using industry accepted techniques to analyze and measure interest rate and foreign
exchange risk, we perform sensitivity analysis to identify our risk exposures under a broad range of scenarios. Investment securities
and derivatives are the main levers for the management of interest rate and foreign exchange risk.
The market risk positions for the Company and each of the Banks are calculated separately and in aggregate, and analyzed against
pre-established limits. Results are reported to the Asset Liability Committee monthly and to the Risk Committee of the Board of
Directors no less than quarterly. Management is authorized to utilize financial instruments as outlined in our policy to actively
manage market risk exposure.
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Capital One Financial Corporation (COF)
Operational Risk Management
We recognize the criticality of managing operational risk on both a strategic and day-to-day basis and that there are heightened
expectations from our regulators and our customers. We have implemented appropriate operational risk management policies,
standards, processes and controls to enable the delivery of high quality and consistent customer experiences and to achieve business
objectives in a controlled manner.
The Chief Operational Risk Officer is responsible for establishing and overseeing our Operational Risk Management Program. In
accordance with Basel III Advanced Approaches requirements, the program establishes practices for assessing the operational risk
profile and executing key control processes for operational risks. Corporate Operational Risk Management enforces these practices
and delivers reporting of operational risk results to senior business leaders, the executive committee and the Board of Directors.
Reputation Risk Management
We recognize that reputation risk is of particular concern for financial institutions in the current environment marked by increased
scrutiny and widespread regulatory changes. We manage both strategic and tactical reputation issues and build our relationships
with government officials, media, community and consumer advocates, and other constituencies to help strengthen the reputations
of both our company and industry. Our actions include implementing pro-customer practices in our business and serving low to
moderate income communities in our market area consistent with a quality bank. The General Counsel is responsible for managing
our overall reputation risk program. Day-to-day activities are controlled by the frameworks set forth in our Reputation Risk
Management Policy and other risk management policies.
Strategic Risk Management
We monitor external market and industry developments to identify potential areas of strategic opportunity or risk. These items
provide input for development of the Company’s strategy led by the Chief Executive Officer and other senior executives. Through
the ongoing development and vetting of the corporate strategy, the Chief Risk Officer identifies and assesses risks associated with
the strategy across all risk categories and monitors them throughout the year.
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Capital One Financial Corporation (COF)
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 10—
Derivative Instruments and Hedging Activities.”
Primary Loan Products
We provide a variety of lending products. Our primary loan products include credit cards, auto, home loans and commercial.
• Credit cards: We originate both prime and subprime credit cards through a variety of channels. Our credit cards generally
have variable interest rates. Credit card accounts are primarily underwritten using an automated underwriting system based
on predictive models that we have developed. The underwriting criteria, which are customized for individual products and
marketing programs, are established based on an analysis of the net present value of expected revenues, expenses and losses,
subject to further analysis using a variety of stress conditions. Underwriting decisions are generally based on credit bureau
information, including payment history, debt burden and credit scores, such as FICO, and on other factors, such as applicant
income. We maintain a credit card securitization program and selectively sell charged-off credit card loans.
• Auto: We originate both prime and subprime auto loans. Customers are acquired through a network of auto dealers and
direct marketing. Our auto loans generally have fixed interest rates and loan terms of 75 months or less and can go up to
84 months. Loan size limits are customized by program and are generally less than $75,000. Similar to credit card accounts,
the underwriting criteria are customized for individual products and marketing programs and based on analysis of net present
value of expected revenues, expenses and losses, subject to maintaining resilience under a variety of stress conditions.
Underwriting decisions are generally based on an applicant’s income, estimated debt-to-income ratio, and credit bureau
information, along with collateral characteristics such as loan-to-value (“LTV”) ratio. We generally retain all of our auto
loans, though we have securitized and sold auto loans in the past and may do so in the future.
• Home loans: Most of the existing home loans in our loan portfolio were originated by banks we acquired. Currently, we
originate residential mortgage and home equity loans through our branches, direct marketing, and dedicated home loan
officers. Our home loan products include conforming and non-conforming fixed rate and adjustable rate mortgage loans,
as well as first and second lien home equity loans and lines of credit. In general, our underwriting policy limits for these
loans include:
a maximum LTV ratio of 80% for loans without mortgage insurance;
a maximum LTV ratio of 95% for loans with mortgage insurance or for home equity products;
a maximum debt-to-income ratio of 50%; and
a maximum loan amount of $3 million.
Our underwriting procedures are intended to verify the income of applicants and obtain appraisals to determine home values.
We may, in limited instances, use automated valuation models to determine home values. Our underwriting standards for
conforming loans are designed to meet the underwriting standards required by the agencies at a minimum, and we sell most
of our conforming loans to the agencies. We generally retain non-conforming mortgages and home equity loans and lines
of credit.
• Commercial: We offer a range of commercial lending products, including loans secured by commercial real estate and loans
to middle market commercial and industrial companies. Our commercial loans may have a fixed or variable interest rate;
however, the majority of our commercial loans have variable rates. Our underwriting standards require an analysis of the
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Capital One Financial Corporation (COF)
borrower’s financial condition and prospects, as well as an assessment of the industry in which the borrower operates. Where
relevant, we evaluate and appraise underlying collateral and guarantees. We maintain underwriting guidelines and limits
for major types of borrowers and loan products that specify, where applicable, guidelines for debt service coverage, leverage,
LTV ratio and standard covenants and conditions. We assign a risk rating and establish a monitoring schedule for loans
based on the risk profile of the borrower, industry segment, source of repayment, the underlying collateral and guarantees
(if any) and current market conditions. Although we generally retain commercial loans, we may syndicate positions for risk
mitigation purposes (including bridge financing transactions we have underwritten). In addition, we originate and service
multifamily commercial real estate loans which are sold to the government-sponsored enterprises.
Loans Held for Investment Portfolio Composition
Our loan portfolio consists of loans held for investment, including loans held in our consolidated trusts, and loans held for sale. Table
16 presents the composition of our portfolio of loans held for investment, including PCI loans, by portfolio segment as of
December 31, 2016 and 2015. Table 16 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 $1.0 billion and $904 million as of December 31, 2016 and 2015, respectively.
Table 16: Loans Held for Investment Portfolio Composition
(Dollars in millions)
Credit Card:
December 31, 2016
December 31, 2015
Loans
% of
Total
Loans
% of
Total
Domestic credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 97,120
39.6% $ 87,939
38.2%
International credit card. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,432
Total credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
105,552
Consumer Banking:
Auto . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retail banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total consumer banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial Banking:
Commercial and multifamily real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total commercial lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Small-ticket commercial real estate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
47,916
21,584
3,554
73,054
26,609
39,824
66,433
483
Total commercial banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
66,916
Other loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
64
3.4
43.0
19.5
8.8
1.4
29.7
10.9
16.2
27.1
0.2
27.3
—
8,186
96,125
41,549
25,227
3,596
70,372
25,518
37,135
62,653
613
63,266
88
3.6
41.8
18.1
11.0
1.5
30.6
11.1
16.2
27.3
0.3
27.6
—
Total loans held for investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 245,586
100.0% $ 229,851
100.0%
We market our credit card products throughout the United States, Canada and the United Kingdom. Our credit card loan portfolio
is geographically diversified due to our product and marketing approach, with higher concentrations in California, Texas, New
York, Florida, Illinois, Pennsylvania and Ohio.
Our auto loan portfolio is originated in most regions of the United States with a concentration in Texas, California, Florida, Georgia,
Louisiana, Illinois and Ohio. Our home loan portfolio is concentrated in California, New York, Maryland, Illinois, Virginia, New
Jersey and Louisiana, which reflects the characteristics of the ING Direct portfolio that comprises the majority of our home loans
portfolio. Retail banking includes small business loans and other consumer lending products originated through our branch network
with a concentration in Louisiana, New York, Texas, New Jersey, Maryland and Virginia.
Our commercial banking loan portfolio is originated in most regions of the United States with a concentration in the tri-state area
of New York, New Jersey and Connecticut, as well as in Texas, California and Louisiana. Our small ticket commercial real estate
portfolio, which was originated on a national basis through a broker network, is in a run-off mode.
We provide additional information on the geographic concentration, by loan category, of our loan portfolio in “Note 4—Loans.”
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Capital One Financial Corporation (COF)
Commercial Loans
For purposes of portfolio risk management, we aggregate our commercial loan portfolio according to market segmentation primarily
based on standard industry codes. Table 17 summarizes our commercial loans held for investment portfolio by industry classification
as of December 31, 2016 and 2015.
Table 17: Commercial Loans by Industry(1)
(Percentage of portfolio)
Real estate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Healthcare. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finance and insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Business services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Oil and gas(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Public administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Educational services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retail trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction and land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transportation(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2016
December 31,
2015
40%
14
13
5
4
4
4
4
3
2
7
39%
15
12
4
5
4
4
3
4
3
7
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100%
100%
__________
(1)
Industry categories are based on our interpretation of the North American Industry Classification System codes as they pertain to each individual loan.
(2)
(3)
In addition to loans outstanding, we also have unfunded lending commitments of approximately $2.9 billion and $3.4 billion to oil and gas companies as of
December 31, 2016 and 2015, respectively. For information on our total unfunded lending commitments to extend credit see “Note 19—Commitments,
Contingencies, Guarantees and Others.”
Includes our taxi medallion lending portfolio among other portfolios.
Purchased Credit-Impaired Loans
Our portfolio of loans includes certain of our consumer and commercial loans acquired in business acquisitions that were recorded
at fair value at acquisition and subsequently accounted for using the guidance for accounting for PCI loans and debt securities,
which is based upon expected cash flows. These PCI loans totaled $15.1 billion as of December 31, 2016 compared to $19.5 billion
as of December 31, 2015. See “MD&A—Glossary and Acronyms” for the definition of “PCI loans.”
The difference between the fair value at acquisition and expected cash flows represents the accretable yield, which is recognized
in interest income over the life of the loans. The difference between the contractual payments on the loans and expected cash flows
represents the nonaccretable difference or the amount of principal and interest not considered collectible, which incorporates future
expected credit losses over the life of the loans. We regularly update our estimate of expected principal and interest to be collected
from these loans and evaluate the results for each accounting pool that was established at acquisition based on loans with common
risk characteristics. Probable decreases in expected cash flows would trigger the recognition of an allowance for loan and lease
losses through our provision for credit losses. Probable and significant increases in expected cash flows would first reverse any
previously recorded allowance for loan and lease losses established subsequent to acquisition, with any remaining increase in
expected cash flows recognized prospectively in interest income over the remaining estimated life of the underlying loans. See
“Note 1—Summary of Significant Accounting Policies” for additional information on PCI Loans that are accounted for based on
expected cash flows.
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Capital One Financial Corporation (COF)
Home Loans
The majority of our home loan portfolio are PCI loans acquired from the ING Direct and CCB acquisitions, representing 67% and
73% of our total home loan portfolio as of December 31, 2016 and 2015, respectively. See “MD&A—Glossary and Acronyms”
for the definition of ING Direct and CCB acquisitions. The expected cash flows for the PCI loans in our home loan portfolio are
significantly impacted by future expectations of home prices and interest rates. Decreases in expected cash flows that result from
declining conditions, particularly associated with these variables, could result in an increase in the allowance for loan and lease
losses and reduction in accretable yield. Charge-offs on these loans are not recorded until the expected credit losses within the
nonaccretable difference are depleted. In addition, PCI loans are not classified as delinquent or nonperforming as we expect to
collect our net investment in these loans and the nonaccretable difference is expected to absorb the majority of the losses associated
with these loans.
Table 18 presents our total home loan portfolio and the break out of the PCI loans and remaining loans within our home loan
portfolio, by lien priority.
Table 18: Home Loans—Risk Profile by Lien Priority
(Dollars in millions)
Lien type:
December 31, 2016
Home Loans
PCI Loans
Total Home Loans
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
1st lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2nd lien. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
6,182
28.7% $ 14,159
65.5% $ 20,341
94.2%
974
4.5
269
1.3
1,243
5.8
$
7,156
33.2% $ 14,428
66.8% $ 21,584
100.0%
(Dollars in millions)
Lien type:
December 31, 2015
Home Loans
PCI Loans
Total Home Loans
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
1st lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2nd lien. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
5,705
22.6% $ 18,207
72.2% $ 23,912
94.8%
995
4.0
320
1.2
1,315
5.2
$
6,700
26.6% $ 18,527
73.4% $ 25,227
100.0%
See “Note 4—Loans” in this Report for additional credit quality information. See “Note 1—Summary of Significant Accounting
Policies” for information on our accounting policies for PCI loans, delinquent loans, nonperforming loans, net charge-offs and
troubled debt restructurings (“TDRs”) for each of our loan categories.
Table 19 provides a sensitivity analysis of PCI loans in our home loan portfolio as of December 31, 2016. The analysis reflects a
hypothetical decline of 10% in the home price index and its impact on lifetime future cash flow expectations, accretable yield and
allowance for loan and lease losses. Any significant economic events or variables not considered could impact results that are
presented below.
Table 19: Sensitivity Analysis—PCI Home Loans(1)
(Dollars in millions)
December 31,
2016
Estimated Impact
Increase (Decrease)
Expected cash flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
17,395
$
Accretable yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan and lease losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,996
29
(43)
77
120
__________
(1) Changes in the accretable yield would be recognized in interest income in our consolidated statements of income over the life of the loans. Changes in the
allowance for loan and lease losses would be recognized immediately in the provision for credit losses in the consolidated statements of income.
79
Capital One Financial Corporation (COF)
Loan Maturity Profile
Table 20 presents the maturities of our loans held for investment portfolio as of December 31, 2016.
Table 20: Loan Maturity Schedule
(Dollars in millions)
Fixed rate:
December 31, 2016
Due Up to
1 Year
> 1 Year
to 5 Years
> 5 Years
Total
Credit card(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial banking. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total fixed-rate loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Variable rate:
Credit card(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer banking(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial banking. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total variable-rate loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2,428
$
15,627
— $
18,055
674
1,354
—
4,456
87,496
11,823
50,562
44
149,925
31,160
$
23,302
5,716
—
7,476
17
55,136
14,546
17
52,503
30,795
87,754
1
5,400
1,176
—
6,577
—
695
632
3
87,497
17,918
52,370
47
1,330
157,832
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 154,381
$
59,080
$
32,125
$ 245,586
__________
(1) Due to the revolving nature of credit card loans, we report the majority of our variable-rate credit card loans as due in one year or less. We report fixed-rate
credit card loans with introductory rates that expire after a certain period of time as due in one year or less. We assume that the rest of our remaining fixed-
rate credit card loans will mature within one to three years.
(2) We report the maturity period for the home loans portfolio included in the Consumer Banking business based on the earlier of the next re-pricing or contractual
maturity date of the loan.
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 a primary indicator
of credit risk within our consumer loan portfolios, as changes in delinquency rates provide an early warning of changes in credit
losses. The primary indicator of credit risk in our commercial loan portfolios is 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.
80
Capital One Financial Corporation (COF)
The following table provides details on the credit scores of our domestic credit card and auto loans held for investment portfolios
as of December 31, 2016, and 2015.
Table 21: Credit Score Distribution
(Percentage of portfolio)
Domestic credit card—Refreshed FICO scores:(1)
December 31,
2016
December 31,
2015
Greater than 660 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
660 or below . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Auto—At origination FICO scores:(2)
Greater than 660 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
621 - 660 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
620 or below . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
64%
36
100%
52%
17
31
100%
66%
34
100%
51%
17
32
100%
__________
(1) 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) 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 section below on the credit performance of our loan portfolio, including the key metrics we use in
tracking changes in the credit quality of our loan portfolio.
See “Note 4—Loans” in this Report for additional credit quality information. Also, see “Note 1—Summary of Significant
Accounting Policies” for information on our accounting policies for delinquent and nonperforming loans, net charge-offs and
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 the reporting 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
are the same for domestic credit card loans, as we continue to classify 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” 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.”
81
Capital One Financial Corporation (COF)
Table 22 presents our 30+ day performing delinquency rates and 30+ day delinquency rates of our portfolio of loans held for
investment, including PCI loans, by portfolio segment, as of December 31, 2016 and 2015.
Table 22: 30+ Day Delinquencies
(Dollars in millions)
Credit Card:
December 31, 2016
December 31, 2015
30+ Day Performing
Delinquencies
30+ Day
Delinquencies
30+ Day Performing
Delinquencies
30+ Day
Delinquencies
Amount
Rate(1)
Amount
Rate(1)
Amount
Rate(1)
Amount
Rate(1)
Domestic credit card . . . . . . . . . . . . . . . . . . . . . .
$ 3,839
3.95% $ 3,839
3.95% $ 2,985
3.39% $ 2,985
3.39%
International credit card. . . . . . . . . . . . . . . . . . . .
Total credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer Banking:
Auto . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home loan(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retail banking . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total consumer banking(2) . . . . . . . . . . . . . . . . . . . . .
Commercial Banking:
Commercial and multifamily real estate . . . . . . .
Commercial and industrial. . . . . . . . . . . . . . . . . .
Total commercial lending . . . . . . . . . . . . . . . . .
Small-ticket commercial real estate. . . . . . . . . . .
Total commercial banking. . . . . . . . . . . . . . . . . . . . .
Other loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
283
4,122
2,931
43
25
2,999
20
36
56
6
62
2
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 7,185
3.36
3.91
6.12
0.20
0.70
4.10
0.07
0.09
0.08
1.31
0.09
3.66
2.93
317
4,156
3,154
205
49
3,408
45
408
453
10
463
3.76
3.94
6.58
0.95
1.39
4.67
0.17
1.02
0.68
2.14
0.69
8
12.90
244
3,229
2,781
40
28
2,849
34
66
100
2
102
3
$ 8,035
3.27
$ 6,183
2.98
3.36
6.69
0.16
0.76
4.05
0.13
0.18
0.16
0.37
0.16
3.61
2.69
283
3,268
3,000
235
49
3,284
38
288
326
6
332
11
$ 6,895
3.46
3.40
7.22
0.93
1.36
4.67
0.15
0.78
0.52
1.04
0.52
11.98
3.00
__________
(1)
The 30+ day performing and 30+ day delinquency rates are calculated by loan category by dividing 30+ day delinquent loans as of the end of the period by
period-end loans held for investment for the specified loan category, including PCI loans as applicable.
(2) Excluding the impact of PCI loans, the 30+ day performing delinquency rate for our home loan and total consumer banking portfolios was 0.59% and 5.12%,
respectively, as of December 31, 2016, and 0.60% and 5.50%, respectively, as of December 31, 2015. Excluding the impact of PCI loans, the 30+ day
delinquency rate for our home loan and total consumer banking portfolios was 2.86% and 5.82%, respectively, as of December 31, 2016, and 3.50% and
6.34%, respectively, as of December 31, 2015.
82
Capital One Financial Corporation (COF)
Table 23 presents an aging and geography of 30+ day delinquent loans as of December 31, 2016 and 2015.
Table 23: Aging and Geography of 30+ Day Delinquent Loans
(Dollars in millions)
Delinquency status:
December 31, 2016
December 31, 2015
Amount
% of
Total Loans(1)
Amount
% of
Total Loans(1)
30 – 59 days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
60 – 89 days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
> 90 days. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Geographic region:
Domestic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
3,466
1,920
2,649
8,035
7,718
317
8,035
1.41% $
0.78
1.08
3.27% $
3,069
1,668
2,158
6,895
3.14% $
6,612
0.13
283
3.27% $
6,895
1.33%
0.73
0.94
3.00%
2.88%
0.12
3.00%
Total loans held for investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 245,586
100.00% $ 229,851
100.00%
__________
(1) Delinquency rates are calculated by dividing loans in each delinquency status category or geographic region as of the end of the period by the total period-
end loans held for investment, including PCI loans.
Table 24 summarizes loans that were 90+ days delinquent as to interest or principal, and still accruing interest as of December 31,
2016 and 2015. These loans consist primarily of credit card accounts between 90 days and 179 days past due. As permitted by
regulatory guidance issued by the FFIEC, 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 24: 90+ Day Delinquent Loans Accruing Interest
(Dollars in millions)
Loan category:
December 31, 2016
December 31, 2015
Amount
% of
Total Loans(1)
Amount
% of
Total Loans(1)
Credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial banking. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Geographic region:
Domestic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
1,936
1.83% $
1,500
1.56%
—
—
1,936
1,840
96
1,936
—
—
0.79
0.78
1.14
0.79
$
$
$
—
5
1,505
1,426
79
1,505
—
0.01
0.65
0.64
0.96
0.65
__________
(1) Delinquency rates are calculated for each loan category by dividing 90+ day delinquent loans accruing interest by period-end loans held for investment,
including PCI loans, for the specified loan category.
Nonperforming Loans and Nonperforming Assets
Nonperforming assets consist of nonperforming loans, foreclosed properties and repossessed assets and the net realizable value
of auto loans that have been charged off as a result of a bankruptcy. Nonperforming loans include loans that have been placed on
nonaccrual status. See “Note 1—Summary of Significant Accounting Policies” for information on our policies for classifying loans
as nonperforming for each of our loan categories.
Table 25 presents comparative information on nonperforming loans, by portfolio segment, and other nonperforming assets as of
December 31, 2016 and 2015. Nonperforming loan rates are calculated based on nonperforming loans for each category divided
83
Capital One Financial Corporation (COF)
by period-end total loans held for investment for each respective category. 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 25: Nonperforming Loans and Other Nonperforming Assets(1)
(Dollars in millions)
Nonperforming loans held for investment:
Credit Card:
December 31, 2016
December 31, 2015
Amount
% of Total
Loans HFI
Amount
% of Total
Loans HFI
International credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total credit card. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Consumer Banking:
Auto . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home loan(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retail banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total consumer banking(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial Banking:
Commercial and multifamily real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total commercial lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Small-ticket commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total commercial banking. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total nonperforming loans held for investment(3) . . . . . . . . . . . . . . . . . . . . . . . . . .
Other nonperforming assets:(4)
Foreclosed property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other nonperforming assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total nonperforming assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
42
42
223
273
31
527
30
988
1,018
4
1,022
8
1,599
75
205
280
1,879
0.50% $
0.04
0.47
1.26
0.86
0.72
0.11
2.48
1.53
0.85
1.53
13.10
0.65
0.03
0.08
0.11
0.76
$
$
$
53
53
219
311
28
558
7
538
545
5
550
9
1,170
126
198
324
1,494
0.65%
0.06
0.53
1.23
0.77
0.79
0.03
1.45
0.87
0.83
0.87
9.42
0.51
0.05
0.09
0.14
0.65
__________
(1) We recognized interest income for loans classified as nonperforming of $45 million and $44 million in 2016 and 2015, respectively. Interest income foregone
related to nonperforming loans was $59 million and $53 million in 2016 and 2015, 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)
(3)
(4)
Excluding the impact of PCI loans, the nonperforming loan rates for our home loan and total consumer banking portfolios were 3.81% and 0.90%, respectively,
as of December 31, 2016, compared to 4.68% and 1.08%, respectively, as of December 31, 2015.
Excluding the impact of domestic credit card loans, nonperforming loans as a percentage of total loans held for investment was 1.08% and 0.83% as of
December 31, 2016 and 2015, respectively.
The denominator used in calculating the nonperforming asset ratios consists of total loans held for investment and total other nonperforming assets.
(5) Includes the net realizable value of auto loans that have been charged off as a result of a bankruptcy and repossessed assets obtained in satisfaction of auto
loans.
84
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. We exclude accrued and unpaid finance charges and fees and certain fraud losses from charge-offs. Generally, costs to
recover charged-off loans are recorded as collection expenses and included in our consolidated statements of income as a component
of other non-interest expense as incurred. Our charge-off policy for loans varies based on the loan type. See “Note 1—Summary
of Significant Accounting Policies” for information on our charge-off policy for each of our loan categories.
Table 26 presents our net charge-off amounts and rates, by portfolio segment, in 2016, 2015 and 2014.
Table 26: Net Charge-Offs (Recoveries)
(Dollars in millions)
Credit Card:
Domestic credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer Banking:
Auto. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home loan(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retail banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total consumer banking(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial Banking:
Commercial and multifamily real estate . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total commercial lending. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Small-ticket commercial real estate . . . . . . . . . . . . . . . . . . . . . . . .
Total commercial banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total net charge-offs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average loans held for investment . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2016
2015
2014
Amount
Rate(1)
Amount
Rate(1)
Amount
Rate(1)
$
3,681
4.16% $
2,718
3.45% $
2,445
3.43%
272
3,953
752
14
54
820
3.33
4.09
1.69
0.06
1.53
1.15
200
2,918
674
9
48
731
2.50
3.36
1.69
0.03
1.33
1.03
283
2,728
619
17
39
675
3.69
3.46
1.78
0.05
1.07
0.95
(3)
(0.01)
(15)
(0.06)
(5)
(0.02)
293
290
2
292
0.75
0.45
0.30
0.45
60
45
2
47
0.21
0.09
0.36
0.09
(3)
(3.89)
(1)
(1.66)
10
5
5
10
1
$
5,062
$233,272
2.17
$
3,695
1.75
$
3,414
$210,745
$ 197,925
0.04
0.01
0.52
0.02
0.36
1.72
__________
(1) Net charge-off (recovery) rates are calculated by dividing net charge-offs by average loans held for investment for the period for each loan category.
(2)
Excluding the impact of PCI loans, the net charge-off rates for our home loan and total consumer banking portfolios were 0.20% and 1.49%, respectively,
for the years ended December 31, 2016, compared to 0.13% and 1.45%, respectively, for the year ended December 31, 2015; and 0.24% and 1.49%,
respectively, for the year ended December 31, 2014.
For information regarding management’s expectations of net charge-offs, see the Business Outlook provided for each segment in
“MD&A—Business Segment Financial Performance.”
85
Capital One Financial Corporation (COF)
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.
Table 27 presents our recorded investment of loans modified in Troubled Debt Restructurings (TDRs) as of December 31, 2016
and 2015, which excludes loan modifications that do not meet the definition of a TDR and PCI loans, which we track and report
separately.
Table 27: Troubled Debt Restructurings
December 31, 2016
December 31, 2015
Amount
% of Total
Modifications
Amount
(Dollars in millions)
Credit card. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Consumer banking:
Auto . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retail banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total consumer banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial banking. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Status of TDRs:
Performing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonperforming . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
715
523
241
43
807
944
2,466
1,631
835
2,466
29.0% $
21.2
9.8
1.7
32.7
38.3
100.0% $
66.1% $
33.9
100.0% $
% of Total
Modifications
36.7%
26.8
12.6
2.3
41.7
21.6
666
488
229
42
759
392
1,817
100.0%
1,367
450
1,817
75.2%
24.8
100.0%
In the 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. In some cases, the interest rate on a credit card account automatically increases due to non-payment, late
payment or similar events. In all cases, we cancel the customer’s available line of credit on the credit card. If the customer does
not comply with the modified payment terms, then the credit card loan agreement may revert to its original payment terms, likely
resulting in any loan outstanding reflected in the appropriate delinquency category, and charged off in accordance with our standard
charge-off policy.
In the 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 both. 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. Their 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 the Commercial Banking business, the majority of loans modified in TDRs receive an extension, with a portion of these loans
receiving an interest rate reduction. The impairment on modified commercial loans is generally determined based on the underlying
collateral value. We provide additional information on modified loans accounted for as TDRs, including the performance of those
loans subsequent to modification, in “Note 4—Loans.”
Impaired Loans
A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect all
amounts due from the borrower in accordance with the original contractual terms of the loan. Generally, we report loans as impaired
based on the method for measuring impairment in accordance with applicable accounting guidance. Loans defined as individually
impaired include larger balance commercial nonperforming loans and 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 accounted for based on expected
cash flows because this accounting methodology takes into consideration future credit losses expected to be incurred.
86
Capital One Financial Corporation (COF)
Impaired loans, including TDRs, totaled $3.2 billion and $2.5 billion as of December 31, 2016 and 2015, respectively. Modified
TDR loans accounted for $2.5 billion and $1.8 billion of impaired loans as of December 31, 2016 and 2015, respectively. We
provide additional information on our impaired loans, including the allowance for loan and lease losses established for these loans,
in “Note 4—Loans” and “Note 5—Allowance for Loan and Lease Losses 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.”
Our allowance for loan and lease losses increased by $1.4 billion to $6.5 billion as of December 31, 2016 from December 31,
2015, and the allowance coverage ratio increased by 42 basis points to 2.65% as of December 31, 2016 from December 31, 2015.
The increases were primarily driven by:
•
•
•
continued growth and seasoning in our credit card loan portfolio;
continued growth in our auto loan portfolio, increasing loss expectations on recent originations and a build reflecting a
change in accounting estimate of the timing of charge-offs of bankrupt accounts; and
continued adverse industry conditions impacting our taxi medallion and oil and gas lending portfolios in our Commercial
Banking business.
Table 28 presents changes in our allowance for loan and lease losses and reserve for unfunded lending commitments for 2016 and
2015, and details by portfolio segment for the provision for credit losses, charge-offs and recoveries recognized in our consolidated
statements of income.
87
Capital One Financial Corporation (COF)
Table 28: Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments Activity
Credit Card
Consumer Banking
Domestic
Card
International
Card
Total
Credit
Card
Auto
Home
Loan
Retail
Banking
Total
Consumer
Banking
Commercial
Banking
Other(1)
Total
$ 2,878
$
326
$3,204
$
661
$
62
$
56
$
779
$
395
$
5
$ 4,383
(Dollars in millions)
Allowance for loan and lease losses:
Balance as of December 31, 2014 . . . . . .
Provision (benefit) for loan and lease
losses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charge-offs . . . . . . . . . . . . . . . . . . . . . . .
3,204
213
3,417
739
(3,641)
(387)
(4,028)
(998)
Recoveries . . . . . . . . . . . . . . . . . . . . . . . .
923
187
1,110
324
Net charge-offs . . . . . . . . . . . . . . . . . . . .
(2,718)
(200)
(2,918)
(674)
Other changes(2) . . . . . . . . . . . . . . . . . . . .
(9)
(40)
(49)
3,355
299
3,654
—
—
—
—
—
—
—
—
—
—
—
—
—
726
—
—
—
—
Balance as of December 31, 2015 . . . . . .
Reserve for unfunded lending
commitments:
Balance as of December 31, 2014 . . . . . .
Provision (benefit) for losses on
unfunded lending commitments . . . . . . .
Other changes(2) . . . . . . . . . . . . . . . . . . . .
Balance as of December 31, 2015 . . . . . .
Combined allowance and reserve as of
December 31, 2015. . . . . . . . . . . . . . . . .
Allowance for loan and lease losses:
16
(20)
11
(9)
1
70
—
—
—
—
64
819
(64)
(1,082)
16
(48)
—
72
7
—
—
7
351
(731)
1
868
7
—
—
7
256
(76)
29
(47)
—
604
106
46
9
161
(2)
(7)
8
1
—
4
—
—
—
—
4,490
(5,193)
1,498
(3,695)
(48)
5,130
113
46
9
168
515
(307)
15
(292)
(34)
793
161
(32)
129
(5)
(3)
6
3
—
2
—
—
—
6,491
(6,555)
1,493
(5,062)
(56)
6,503
168
(32)
136
15
(54)
(1)
80
7
—
7
406
(820)
(1)
1,102
7
—
7
$ 3,355
$
299
$3,654
$
726
$
70
$
79
$
875
$
765
$
4
$ 5,298
Balance as of December 31, 2015 . . . . . .
$ 3,355
$
299
$3,654
$
726
$
70
$
72
$
868
$
604
$
4
$ 5,130
Provision (benefit) for loan and lease
losses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,555
371
4,926
983
9
63
1,055
Charge-offs . . . . . . . . . . . . . . . . . . . . . . .
(4,586)
(433)
(5,019)
(1,135)
(22)
(69)
(1,226)
Recoveries . . . . . . . . . . . . . . . . . . . . . . . .
905
161
1,066
383
8
Net charge-offs . . . . . . . . . . . . . . . . . . . .
(3,681)
(272)
(3,953)
(752)
(14)
Other changes(2) . . . . . . . . . . . . . . . . . . . .
Balance as of December 31, 2016
Reserve for unfunded lending
commitments:
Balance as of December 31, 2015 . . . . . .
Provision (benefit) for losses on
unfunded lending commitments . . . . . . .
Balance as of December 31, 2016
Combined allowance and reserve as of
December 31, 2016. . . . . . . . . . . . . . . . .
—
4,229
—
—
—
(21)
(21)
377
4,606
—
—
—
—
—
—
—
957
—
—
—
—
65
—
—
—
$ 4,229
$
377
$4,606
$
957
$
65
$
87
$
1,109
$
922
$
2
$ 6,639
__________
(1) Primarily consists of the legacy loan portfolio of our discontinued GreenPoint mortgage operations.
(2) Represents foreign currency translation adjustments and the net impact of loan transfers and sales.
88
Capital One Financial Corporation (COF)
Table 29 presents the allowance coverage ratios as of December 31, 2016 and 2015.
Table 29: Allowance Coverage Ratios
Total allowance coverage ratio(1)
Allowance coverage ratios by loan category:(1)
Credit card (30+ day delinquent loans) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer banking (30+ day delinquent loans) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial banking (nonperforming loans) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2016
2015
2.65%
2.23%
110.83
32.32
77.58
111.81
26.42
109.76
__________
(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.
LIQUIDITY RISK PROFILE
We have established liquidity practices that are intended to ensure that we have sufficient asset-based liquidity to withstand the
potential impact of deposit attrition or diminished liquidity in the funding markets. Our practices are intended to maintain adequate
liquidity reserves to cover our funding requirements as well as any potential deposit run-off and maintain access to diversified
funding sources to avoid over-dependence on volatile, less reliable funding markets. Our liquidity reserves consist of readily-
marketable or pledgable assets which can be used as a source of liquidity, if needed.
Table 30 below presents the composition of our liquidity reserves as of December 31, 2016 and 2015.
Table 30: Liquidity Reserves
(Dollars in millions)
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities available for sale, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities held to maturity, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total investment securities portfolio(1)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FHLB borrowing capacity secured by loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding FHLB advances and letters of credit secured by loans . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities encumbered for Public Funds and others . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liquidity reserves. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2016
December 31, 2015
$
9,976
$
40,737
26,196
66,933
24,078
(17,646)
(9,265)
$
74,076
$
8,023
39,061
25,317
64,378
30,661
(20,514)
(10,602)
71,946
__________
(1)
The weighted-average life of our securities was approximately 6.0 years and 5.8 years as of December 31, 2016 and 2015, respectively.
(2) As part of our liquidity management strategy, we pledge securities to secure borrowings from counterparties and to secure trust and public deposits and other
purposes as required or permitted by law. We pledged securities available for sale with a fair value of $1.9 billion and $1.7 billion as of December 31, 2016
and 2015, respectively. We also pledged securities held to maturity with a carrying value of $8.1 billion and $8.7 billion as of December 31, 2016 and 2015,
respectively.
Our liquidity reserves increased by $2.1 billion to $74.1 billion as of December 31, 2016 from December 31, 2015 primarily due
to an increase in our investment securities portfolio. See “MD&A—Risk Management” for additional information on our
management of liquidity risk.
We are subject to the Final LCR Rule issued by the Federal Banking Agencies. The Final LCR Rule came into effect in January
2015 and required us to calculate the LCR as of the last business day of each month from January 2015 until June 2016, and
requires us to calculate the LCR on a daily basis as of July 1, 2016. The minimum LCR standard is phased-in at 80% by January
1, 2015, 90% by January 1, 2016 and 100% by January 1, 2017 and thereafter. At December 31, 2016, we exceeded the fully
phased-in LCR requirement. 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
89
Capital One Financial Corporation (COF)
changes to future regulations and interpretations. See “Part I—Item 1. Business—Supervision and Regulation” for additional
information.
Borrowing Capacity
We filed a shelf registration statement with the SEC on March 31, 2015, which expires in March 2018. 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 new shelf registration
statement with the SEC on January 12, 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 with a maximum
borrowing capacity of $24.9 billion as of December 31, 2016, of which $7.3 billion was still available to us to borrow as of
December 31, 2016. We pledged loan collateral with an outstanding balance of $29.3 billion to secure this borrowing capacity.
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 $760 million and $884 million as of December 31,
2016 and 2015, 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 $7.9 billion as of December 31, 2016. Although available,
we do not view this borrowing capacity as a primary source of liquidity and did not utilize it during 2016 or 2015.
Funding
The Company’s primary source of funding comes from deposits, which provide us with a stable and relatively low cost of funds. In
addition to deposits, the Company raises funding through the issuance of senior and subordinated notes, FHLB advances secured
by certain portions of our loan and securities portfolios, the issuance of securitized debt obligations, the issuance of brokered
deposits, federal funds purchased and other borrowings. A key objective in our use of these markets is to maintain access to a
diversified mix of wholesale funding sources.
Deposits
Table 31 provides the composition of deposits as of December 31, 2016, 2015 and 2014, as well as a comparison of average
balances, interest expense and average deposit rates for the years ended December 31, 2016, 2015 and 2014.
Table 31: Deposit Composition and Average Deposit Rates
(Dollars in millions)
Non-interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest-bearing checking accounts(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Saving deposits(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time deposits less than $100,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total core deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time deposits of $100,000 or more . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2016
2015
2014
$
$
25,502
45,820
145,142
16,949
233,413
2,875
480
$
25,847
44,720
134,075
10,347
214,989
1,889
843
$
236,768
$
217,721
$
25,081
41,022
130,156
6,051
202,310
2,261
977
205,548
90
Capital One Financial Corporation (COF)
(Dollars in millions)
Interest-bearing checking accounts(1). . .
Saving deposits(2) . . . . . . . . . . . . . . . . . .
Time deposits less than $100,000 . . . . .
Total interest-bearing core deposits .
Time deposits of $100,000 or more . . . .
Foreign deposits . . . . . . . . . . . . . . . . . . .
Total interest-bearing deposits. . . . . . . .
2016
Average
Balance
Interest
Expense
$ 45,339
$
137,753
12,062
218
814
144
195,154
1,176
2,511
639
35
2
$198,304
$ 1,213
__________
(1)
Includes Negotiable Order of Withdrawal (“NOW”) accounts.
(2)
Includes Money Market Deposit Accounts (“MMDA”).
Year Ended December 31,
Average
Deposit
Average
Rate
Balance
0.48% $ 42,785
0.59
132,658
7,213
2015
Interest
Expense
$
208
769
74
Average
Deposit
Average
Rate
Balance
0.49% $ 41,702
0.58
129,868
5,856
2014
Interest
Expense
$
204
752
75
1.19
0.60
1.39
0.35
0.61
182,656
1,051
2,043
978
36
4
$185,677
$ 1,091
1.03
0.58
1.76
0.34
0.59
177,426
1,031
2,560
1,050
53
4
$181,036
$ 1,088
Average
Deposit
Rate
0.49%
0.58
1.29
0.58
2.07
0.34
0.60
Our deposits include brokered deposits, which we obtained through the use of third-party intermediaries. Those brokered deposits
are reported as interest-bearing checking, saving deposits and time deposits in the above table and totaled $22.5 billion and $12.0
billion as of December 31, 2016 and 2015, respectively.
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 December 31, 2016 and 2015. See “Part I—Item 1. Business—Supervision and Regulation” for
additional information.
Table 32 presents the contractual maturities of large-denomination domestic time deposits of $100,000 or more as of December 31,
2016 and 2015. Our funding and liquidity management activities factor into the expected maturities of these deposits.
Table 32: Maturities of Large-Denomination Domestic Time Deposits—$100,000 or More
December 31,
2016
2015
(Dollars in millions)
Amount % of Total Amount % of Total
Up to three months. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
> 3 months to 6 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
> 6 months to 12 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
656
282
559
> 12 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,378
22.8% $
9.8
19.5
47.9
271
213
315
1,090
14.3%
11.3
16.7
57.7
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,875
100.0% $ 1,889
100.0%
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, residential home loans, multifamily real estate
loans, commercial real estate loans and home equity lines of credit. Substantially all of our long-term FHLB advances are structured
with either a one-month or a three-month call option at our discretion.
Our short-term borrowings include those borrowings with an original contractual maturity of one year or less and do not include
the current portion of long-term debt. The short-term borrowings, which consist of federal funds purchased and securities loaned
or sold under agreements to repurchase, and short-term FHLB advances, increased by $11 million to $992 million as of December 31,
2016 from December 31, 2015.
Our long-term debt, which primarily consists of securitized debt obligations, senior and subordinated notes, and long-term FHLB
advances, increased by $1.3 billion to $59.5 billion as of December 31, 2016 from December 31, 2015, as issuances outpaced
maturities.
91
Capital One Financial Corporation (COF)
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. Such ratings help to support our cost effective unsecured
funding as part of our overall financing programs.
Table 33 provides a summary of the credit ratings for the senior unsecured long-term debt of Capital One Financial Corporation,
COBNA and CONA as of December 31, 2016 and 2015.
Table 33: Senior Unsecured Long-Term Debt Credit Ratings
December 31, 2016
December 31, 2015
Capital One
Financial
Corporation COBNA
CONA
Capital One
Financial
Corporation
COBNA
CONA
Moody’s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
S&P . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fitch. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Baa1
BBB
A-
Baa1
BBB+
A-
Baa1
Baa1
Baa1
BBB+
A-
BBB
A-
BBB+
A-
Baa1
BBB+
A-
As of February 21, 2017, Moody’s, S&P and Fitch have us on a stable outlook.
Contractual Obligations
In the normal course of business, we enter into various contractual obligations that may require future cash payments that affect
our short-term and long-term liquidity and capital resource needs. Our future cash outflows primarily relate to deposits, borrowings
and operating leases. Table 34 summarizes, by remaining contractual maturity, our significant contractual cash obligations based
on the undiscounted future cash payments as of December 31, 2016. The actual timing and amounts of future cash payments may
differ from the amounts presented below due to a number of factors, such as discretionary debt repurchases. Table 34 excludes
certain obligations where the obligation is short-term or subject to valuation based on market factors, such as trade payables and
trading liabilities. The table also excludes the representation and warranty reserve of $630 million as of December 31, 2016 and
obligations for pension and post-retirement benefit plans, which are discussed in more detail in “Note 15—Employee Benefit
Plans.”
Table 34: Contractual Obligations
December 31, 2016
(Dollars in millions)
Interest-bearing time deposits(1)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securitized debt obligations(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Up to
1 Year
> 1 Years
to 3 Years
> 3 Years
to 5 Years
> 5 Years
Total
$
6,543
$
7,835
$
5,196
$
7,233
8,003
3,260
250
330
$ 19,824
18,826
Other debt:
Federal funds purchased and securities loaned or sold under agreements
to repurchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Senior and subordinated notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other borrowings(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other debt(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase obligations(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
992
2,814
19
3,825
317
236
—
10,385
1,262
11,647
598
329
—
3,474
6,652
10,126
498
161
—
6,758
9,278
16,036
1,173
4
992
23,431
17,211
41,634
2,586
730
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 18,154
$ 28,412
$ 19,241
$ 17,793
$ 83,600
__________
(1)
Includes only those interest-bearing deposits which have a contractual maturity date.
(2) Does not include amounts related to contractual interest obligations. Total contractual interest obligations, including interest-bearing time deposits, securitized
debt obligations and total other debt, were approximately $4.3 billion as of December 31, 2016. Interest obligations on floating-rate instruments were calculated
using the contractual interest rate in effect as of December 31, 2016. These amounts include the impact of hedge accounting.
(3) Other borrowings include FHLB advances and capital lease obligations.
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Capital One Financial Corporation (COF)
(4) Represents substantial agreements to purchase goods or services that are enforceable and legally binding and specify all significant terms. The purchase
obligations are included through the termination date of the agreements even if the contract is renewable. These include capital expenditures, contractual
commitments to purchase equipment and services, software acquisition/license commitments, contractual minimum media commitments and any contractually
required cash payments for acquisitions, and exclude funding commitments entered into in the ordinary course of business. See “Note 19—Commitments,
Contingencies, Guarantees and Others” for further details.
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 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. As of December 31, 2016, we apply hedge accounting to both our intercompany funding hedges and our net
investment hedges, with the primary net investments subject to hedging those denominated in GBP.
The intercompany borrowings to our international businesses were 786 million GBP and 893 million GBP as of December 31,
2016 and 2015, respectively, and 6.2 billion CAD and 5.9 billion CAD as of December 31, 2016 and 2015, respectively. We hedge
all the cash flows associated with these borrowings with forward foreign currency derivative contracts.
In regard to our non-dollar-denominated equity, we measure our total exposure 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 1.5 billion GBP and 1.4 billion GBP as of December 31, 2016
and 2015, respectively, and 863 million CAD and 686 million CAD as of December 31, 2016 and 2015, 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 our customers within
our Commercial Banking business and offset the majority of these 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.
93
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 1 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 10—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 through interest rate derivatives and mitigating the
foreign exchange exposure of certain non-dollar-denominated equity or transactions through derivatives. Our current market risk
management policies include the use of derivatives, which are one of the primary tools we use in managing interest rate and foreign
exchange risk. We execute our derivative contracts in both over-the-counter (“OTC”) 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 $142.9
billion as of December 31, 2016 from $105.9 billion as of December 31, 2015 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. Because the federal funds target range is currently 0.50% to 0.75%, we use a 50 basis points decrease as our declining interest
rate scenario, since a scenario where interest rates would decline by 200 basis points is unlikely. In scenarios where a 50 basis
points decline would result in a rate less than 0%, we assume a rate of 0%. Below we discuss the assumptions used in calculating
each of these measures.
Net Interest Income Sensitivity
This sensitivity measure estimates the impact on our projected 12-month base-line interest rate-sensitive revenue resulting from
movements in interest rates. Interest rate-sensitive revenue consists of net interest income and certain components of other non-
interest income significantly impacted by movements in interest rates, including changes in the fair value of mortgage servicing
rights and free-standing interest rate swaps. Adjusted net interest income consists of net interest income and changes in the fair
value of mortgage servicing rights, including related derivative hedging activity, and 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 and -50 basis
points to spot rates, with the lower rate scenario limited to zero as described above. At the current level of interest rates, we are
asset sensitive in the +50 and +100 basis points scenarios and liability sensitive in the +200 basis points scenario. The switch to
liability sensitivity in the +200 basis points scenario compared with the +100 basis points scenario is mainly driven by the assumption
that deposit repricing increases with higher interest rates.
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
94
Capital One Financial Corporation (COF)
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,
+50 basis points and -50 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.
During the second quarter of 2016, we updated our projected deposit re-pricing assumptions as part of our regular evaluation and
assessment of the assumptions and models used to measure our interest rate risk sensitivity. This update reduced our estimated
asset sensitivity as shown in our projected base-line net interest income measure and had a minor impact to our economic value
of equity measures.
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 35 shows the estimated percentage impact on our projected base-line net interest income and economic value of equity
calculated under our revised methodology described above as of December 31, 2016 and 2015, as well as under our previous
methodology as of December 31, 2015. Our base-line net interest income sensitivity decreased as compared to December 31, 2015
as a result of higher market interest rates as well as the enhancements to our deposit re-pricing assumptions noted above. Our
economic value of equity sensitivity increased as compared to December 31, 2015 primarily due to higher market interest rates,
updates to long-term cash flow estimates and discount spreads for certain credit card balances and the treatment of intangible assets
in this calculation.
Table 35: Interest Rate Sensitivity Analysis
Estimated impact on projected base-line net interest income:
+200 basis points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
+100 basis points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
+50 basis points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
–50 basis points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Estimated impact on economic value of equity:
+200 basis points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
+100 basis points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
+50 basis points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
–50 basis points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Revised Methodology
Previous
Methodology
December 31,
2016
December 31,
2015
December 31,
2015
(0.1)%
0.5
0.4
(1.0)
(9.6)
(3.8)
(1.5)
0.5
0.3%
0.8
0.6
(1.4)
(4.8)
(1.3)
(0.3)
(0.6)
2.6%
1.6
0.9
(1.6)
(5.2)
(1.5)
(0.4)
(0.6)
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.
95
Capital One Financial Corporation (COF)
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.
96
Capital One Financial Corporation (COF)
SUPPLEMENTAL TABLES
Table A—Loans Held for Investment Portfolio Composition
(Dollars in millions)
Credit Card:
December 31,
2016
2015
2014
2013
2012
Domestic credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 97,120
$ 87,939
$ 77,704
$ 73,255
$ 83,141
International credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total credit card. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,432
105,552
8,186
96,125
8,172
85,876
8,050
81,305
8,614
91,755
Consumer Banking:
Auto . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retail banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total consumer banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial Banking:
Commercial and multifamily real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total commercial lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Small-ticket commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
47,916
21,584
3,554
73,054
26,609
39,824
66,433
483
41,549
25,227
3,596
70,372
25,518
37,135
62,653
613
37,824
30,035
3,580
71,439
23,137
26,972
50,109
781
31,857
35,282
3,623
70,762
20,750
23,309
44,059
952
Total commercial banking. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
66,916
63,266
50,890
45,011
Other loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
64
88
111
121
27,123
44,100
3,904
75,127
17,732
19,892
37,624
1,196
38,820
187
Total loans
$245,586
$229,851
$208,316
$197,199
$205,889
97
Capital One Financial Corporation (COF)
Table B—Performing Delinquencies(1)
2016
2015
December 31,
2014
2013
2012
Loans(2)(3)
% of
Total
Loans(4)
Loans(2)(3)
% of
Total
Loans(4)
Loans(2)(3)
% of
Total
Loans(4)
Loans(2)(3)
% of
Total
Loans(4)
Loans(2)(3)
% of
Total
Loans(4)
(Dollars in millions)
Delinquent loans:
30 – 59 days . . . . . . . . . . . . . . . .
$
3,416
1.39% $
3,042
1.33% $
2,803
1.34% $
2,584
1.31% $
2,629
1.28%
60 – 89 days . . . . . . . . . . . . . . . .
1,833
90 – 119 days . . . . . . . . . . . . . . .
120 – 149 days . . . . . . . . . . . . . .
150 or more days . . . . . . . . . . . .
771
628
537
0.75
0.31
0.26
0.22
1,636
603
493
409
0.71
0.26
0.21
0.18
1,394
508
409
346
0.67
0.24
0.20
0.17
1,313
512
418
361
0.67
0.26
0.21
0.18
1,399
628
485
414
0.68
0.30
0.24
0.20
Total . . . . . . . . . . . . . . . . . . . . . . . . .
$
7,185
2.93% $
6,183
2.69% $
5,460
2.62% $
5,188
2.63% $
5,555
2.70%
By geographic area:
Domestic. . . . . . . . . . . . . . . . . . .
$
6,902
2.81% $
5,939
2.58% $
5,220
2.50% $
4,889
2.48% $
5,247
International . . . . . . . . . . . . . . . .
283
0.12
244
0.11
240
0.12
299
0.15
308
Total . . . . . . . . . . . . . . . . . . . . . . . . .
$
7,185
2.93% $
6,183
2.69% $
5,460
2.62% $
5,188
2.63% $
5,555
2.55%
0.15
2.70%
Total loans held for investment . . . .
$245,586
100.00% $229,851
100.00% $208,316
100.00% $197,199
100.00% $205,889
100.00%
__________
(1)
PCI loans are included in loans held for investment but are excluded from delinquent loans, as these loans are considered performing in accordance with our
expectations as of the purchase date, as we recorded these loans at estimated fair value when we acquired them. As of December 31, 2016, 2015, 2014, 2013
and 2012 the PCI loan portfolio’s contractual 30 to 89 day delinquencies total $94 million, $99 million, $152 million, $223 million and $369 million,
respectively. For loans 90+ days past due, see “MD&A—Table C—Nonperforming Loans and Other Nonperforming Assets.”
(2) Credit card loan balances are reported net of the finance charge and fee reserve, which totaled $402 million, $262 million, $216 million, $190 million and
$307 million as of December 31, 2016, 2015, 2014, 2013 and 2012, respectively.
(3)
Performing loan modifications and restructuring totaled $1.6 billion, $1.4 billion, $1.2 billion, $1.3 billion and $1.4 billion as of December 31, 2016, 2015,
2014, 2013 and 2012, respectively.
(4) Delinquency rates are calculated by dividing loans in each delinquency status category and geographic region as of the end of the period by the total loan
portfolio.
98
Capital One Financial Corporation (COF)
Table C—Nonperforming Loans and Other Nonperforming Assets
(Dollars in millions)
Nonperforming loans held for investment:(1)
Credit Card:
December 31,
2016
2015
2014
2013
2012
International credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Total credit card. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer Banking:
Auto . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retail banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total consumer banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial Banking:
Commercial and multifamily real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
42
42
223
273
31
527
30
988
Total commercial lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,018
Small-ticket commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4
Total commercial banking. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,022
Other loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8
53
53
219
311
28
558
7
538
545
5
550
9
Total nonperforming loans held for investment . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,599
$ 1,170
Other nonperforming assets:
Foreclosed property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other nonperforming assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
75
205
$
126
198
$
$
$
70
70
197
330
22
549
62
106
168
7
175
15
809
139
183
$
$
$
88
88
194
376
41
611
52
93
145
4
149
19
867
113
160
$
100
100
149
422
71
642
137
133
270
12
282
30
$ 1,054
$
204
109
$ 1,879
$ 1,494
$ 1,131
$ 1,140
$ 1,367
Nonperforming loans as a percentage of loans held for investment . . . . . . . . . . .
0.65%
0.51%
0.39%
0.44%
0.51%
Nonperforming assets as a percentage of loans held for investment plus total
other nonperforming assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.76
0.65
0.54
0.58
0.66
__________
(1)
The ratio of nonperforming loans as a percentage of total loans held for investment is calculated based on the nonperforming loans divided by the total
outstanding unpaid principal balance of loans held for investment. The denominator used in calculating the nonperforming asset ratios consists of total loans
held for investment and other nonperforming assets.
(2)
In 2013, we began including the net realizable value of auto loans that have been charged off as a result of bankruptcy and repossessed assets obtained in
satisfaction of auto loans. Both of these amounts are included in other assets. Prior period amounts have been adjusted to conform to current period presentation.
99
Capital One Financial Corporation (COF)
Table D—Net Charge-Offs
(Dollars in millions)
Average loans held for investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net charge-off rate(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2016
2015
2014
2013
2012
$233,272
$ 210,745
$ 197,925
$ 192,614
$ 187,915
5,062
3,695
3,414
2.17%
1.75%
1.72%
3,934
2.04%
3,555
1.89%
__________
(1) Net charge-off rate is calculated by dividing net charge-offs by average loans held for investment for the period.
100
Capital One Financial Corporation (COF)
Table E—Summary of Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments
(Dollars in millions)
Allowance for loan and lease losses:
Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charge-offs:
Credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial banking. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recoveries:
Credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial banking. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net charge-offs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other changes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reserve for unfunded lending commitments:
December 31,
2016
2015
2014
2013
2012
$ 5,130
6,491
$ 4,383
4,490
$ 4,315
3,515
$ 5,156
3,401
$ 4,250
4,446
(5,019)
(1,226)
(307)
(3)
(6,555)
1,066
406
15
6
1,493
(5,062)
(56)
$ 6,503
(4,028)
(1,082)
(76)
(7)
(5,193)
1,110
351
29
8
1,498
(3,695)
(48)
$ 5,130
(3,963)
(989)
(34)
(10)
(4,996)
1,235
314
24
9
1,582
(3,414)
(33)
$ 4,383
(4,542)
(888)
(49)
(26)
(5,505)
1,257
272
35
7
1,571
(3,934)
(308)
$ 4,315
$
35
52
—
87
(4,159)
(797)
(94)
(43)
(5,093)
1,215
266
52
5
1,538
(3,555)
15
$ 5,156
$
66
(31)
—
35
Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 168
$
113
$
Provision (benefit) for losses on unfunded lending commitments . . . . . . . . . . . . . .
Other changes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(32)
—
136
46
9
168
87
26
—
113
Combined allowance and reserve at end of period . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan and lease losses as a percentage of loans held for investment . .
$ 6,639
$ 5,298
$ 4,496
$ 4,402
$ 5,191
2.65%
2.23%
2.10%
2.19%
2.50%
Combined allowance and reserve by geographic distribution:
Domestic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Combined allowance and reserve by loan category:
Credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial banking. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 6,262
377
$ 6,639
$ 4,606
1,109
922
2
$ 6,639
$ 4,999
299
$ 5,298
$ 3,654
875
765
4
$ 5,298
$ 4,170
326
$ 4,496
$ 3,204
786
501
5
$ 4,496
$ 4,024
378
$ 4,402
$ 3,214
759
418
11
$ 4,402
$ 4,738
453
$ 5,191
$ 3,979
719
460
33
$ 5,191
101
Capital One Financial Corporation (COF)
We report certain non-GAAP measures that management uses in assessing its capital adequacy and the level of return generated.
These non-GAAP measures are individually identified and calculations are explained in footnotes below the table. These metrics
are considered key financial performance measures for the Company. We believe they provide useful insight to investors and users
of our financial information in assessing the results of the Company.
The table below provides the details of the calculation of our non-GAAP and regulatory capital measures. While some of our non-
GAAP measures are widely used by investors, analysts and bank regulatory agencies to assess the capital position of financial
services companies, they may not be comparable to similarly titled measures reported by other companies.
Table F—Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures
2016
2015
2014
2013
2012
December 31,
$
47,514
$
47,284
$
45,053
$
41,632
$
40,425
(Dollars in millions)
Tangible Common Equity (Period End)
Stockholders’ equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill and intangible assets(1) . . . . . . . . . . . . . . . . . . . . . .
Noncumulative perpetual preferred stock(2) . . . . . . . . . . . . . .
Tangible common equity . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tangible Common Equity (Average)
Stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill and intangible assets(1) . . . . . . . . . . . . . . . . . . . . . .
Noncumulative perpetual preferred stock(2) . . . . . . . . . . . . . .
Tangible common equity . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tangible Assets (Period End)
$
$
(15,420)
(4,360)
27,734
48,753
(15,550)
(3,591)
$
29,612
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill and intangible assets(1) . . . . . . . . . . . . . . . . . . . . . .
Tangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 357,033
(15,420)
$ 341,613
Tangible Assets (Average)
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill and intangible assets(1) . . . . . . . . . . . . . . . . . . . . . .
Tangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 339,974
(15,550)
$ 324,424
(15,701)
(3,294)
28,289
47,713
(15,273)
(2,641)
29,799
334,048
(15,701)
318,347
313,474
(15,273)
298,201
$
$
$
$
$
$
$
(15,383)
(1,822)
27,848
44,268
(15,575)
(1,213)
27,480
308,167
(15,383)
292,784
297,659
(15,575)
282,084
$
$
$
$
$
$
$
(15,784)
(853)
24,995
41,482
(15,938)
(853)
24,691
296,064
(15,784)
280,280
296,200
(15,938)
280,262
$
$
$
$
$
$
$
(16,224)
(853)
23,348
37,265
(15,604)
(331)
21,330
311,682
(16,224)
295,458
285,142
(15,604)
269,538
$
$
$
$
$
$
$
Non-GAAP Ratio
TCE(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital Ratios(4)
Common equity Tier 1 capital(5) . . . . . . . . . . . . . . . . . . . . . . .
Tier 1 common(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier 1 capital(7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total capital(8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier 1 leverage(9). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supplementary leverage(10). . . . . . . . . . . . . . . . . . . . . . . . . . .
Regulatory Capital Metrics
Risk-weighted assets(11) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted average assets(9). . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total leverage exposure for supplementary leverage ratio. . .
8.1%
8.9%
9.5%
8.9%
7.9%
10.1%
11.1%
12.5%
N/A
11.6
14.3
9.9
8.6
N/A
12.4
14.6
10.6
9.2
N/A
13.2
15.1
10.8
N/A
N/A
12.2%
12.6
14.7
10.1
N/A
N/A
10.9%
11.3
13.5
8.6
N/A
$ 285,756
$
265,739
$
236,944
$
224,556
$
223,499
335,835
387,921
309,037
357,794
291,243
280,574
292,790
N/A
N/A
N/A
102
Capital One Financial Corporation (COF)
(Dollars in millions)
Regulatory Capital Under Basel III Standardized Approach(4)
Common equity excluding AOCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments:
AOCI(12)(13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets(1)(13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common equity Tier 1 capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier 1 capital instruments(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional Tier 1 capital adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier 1 capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier 2 capital instruments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Qualifying allowance for loan and lease losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional Tier 2 capital adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier 2 capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total capital(14) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2016
2015
2014
$
44,103
$
44,606
$
43,661
(674)
(254)
(69)
(14,307)
(14,296)
(13,805)
(384)
65
28,803
4,359
—
33,162
4,047
3,608
—
7,655
(393)
(119)
29,544
3,294
—
32,838
2,654
3,346
—
6,000
(243)
(10)
29,534
1,822
(1)
31,355
1,542
2,981
1
4,524
$
40,817
$
38,838
$
35,879
(Dollars in millions)
Regulatory Capital Under Basel I(4)
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments:
Net unrealized losses (gains) on investment securities available for sale recorded in AOCI(13) . . . . . . . . . .
Net losses on cash flow hedges recorded in AOCI(13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Disallowed goodwill and intangible assets(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncumulative perpetual preferred stock(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier 1 common capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncumulative perpetual preferred stock(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier 1 restricted core capital items. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier 1 capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt qualifying as Tier 2 capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Qualifying allowance for loan and lease losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Tier 2 components . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier 2 capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total capital(14) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
__________
(1) Goodwill and intangible assets includes the impact of related deferred taxes.
(2) Noncumulative perpetual preferred stock and Tier 1 capital instruments include related surplus.
(3)
TCE ratio is a non-GAAP measure calculated based on TCE divided by tangible assets.
December 31,
2013
2012
$
41,632
$
40,425
791
136
(14,326)
(853)
(5)
27,375
853
2
28,230
1,914
2,833
10
4,757
32,987
$
(712)
2
(14,428)
(853)
(12)
24,422
853
2
25,277
2,119
2,831
13
4,963
30,240
$
(4) Beginning on January 1, 2014, we calculate our regulatory capital under the Basel III Standardized Approach subject to transition provisions. Prior to January
1, 2014, we calculated regulatory capital under Basel I.
(5) Common equity Tier 1 capital ratio is a regulatory capital measure calculated based on common equity Tier 1 capital divided by risk-weighted assets.
(6)
Tier 1 common capital ratio is a regulatory capital measure under Basel I calculated based on Tier 1 common capital divided by Basel I risk-weighted assets.
(7)
(8)
Tier 1 capital ratio is a regulatory capital measure calculated based on Tier 1 capital divided by risk-weighted assets.
Total capital ratio is a regulatory capital measure calculated based on total capital divided by risk-weighted assets.
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Capital One Financial Corporation (COF)
(9) 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.
(10) 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.
(11) As of January 1, 2015, risk-weighted assets are calculated under the Basel III Standardized Approach, subject to transition provisions. Prior to January 1,
2015 risk-weighted assets were calculated under Basel I. Includes both credit and market risk-weighted assets starting in 2016.
(12) Amounts presented are net of tax.
(13) Amounts based on transition provisions for regulatory capital deductions and adjustments of 20% for 2014, 40% for 2015 and 60% for 2016.
(14) Total capital equals the sum of Tier 1 capital and Tier 2 capital.
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Capital One Financial Corporation (COF)
Glossary and Acronyms
2012 U.S. card acquisition: On May 1, 2012, pursuant to the agreement with HSBC Finance Corporation, HSBC USA Inc. and
HSBC Technology and Services (USA) Inc. (collectively, “HSBC”), we closed the acquisition of substantially all of the assets and
assumed liabilities of HSBC’s credit card and private label credit card business in the United States (other than the HSBC Bank
USA, consumer credit card program and certain other retained assets and liabilities).
2016 Stock Repurchase Program: On June 29, 2016, we announced that our Board of Directors had authorized the repurchase
of up to $2.5 billion of shares of our common stock from the third quarter of 2016 through the end of the second quarter of 2017.
Annual Report: References to our “2016 Form 10-K” or “2016 Annual Report” are to our Annual Report on Form 10-K for the
fiscal year ended December 31, 2016.
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 Baking 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.
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.
CCB: Chevy Chase Bank, F.S.B., which was acquired by the Company in 2009.
CECL: In June 2016, the FASB issued revised guidance for impairments on financial instruments. The guidance, which becomes
effective on January 1, 2020 with early adoption permitted no earlier than January 1, 2019, requires use of a current expected credit
loss (“CECL”) model that is based on expected rather than incurred losses, with an anticipated result of more timely loss recognition.
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: Common equity, related surplus and retained earnings less accumulated other comprehensive
income net of applicable phase-ins, less goodwill and intangibles net of associated deferred tax liabilities and applicable phase-
ins, less other deductions, as defined by regulators.
Company: Capital One Financial Corporation and its subsidiaries.
CONA: Capital One, National Association, one of our fully owned subsidiaries, which offers a broad spectrum of banking products
and financial services to consumers, small businesses and commercial clients.
Credit 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.
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Capital One Financial Corporation (COF)
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.
Final LCR Rule: In September 2014, the Federal Banking Agencies issued final rules implementing the Basel III Liquidity
Coverage Ratio in the United States. The Final LCR Rule applies to institutions with $250 billion or more in total consolidated
assets or $10 billion or more in total consolidated on-balance sheet foreign exposure, and their respective consolidated subsidiary
depository institutions with $10 billion or more in total consolidated assets. The LCR is calculated by dividing the amount of an
institution’s high quality, unencumbered liquid assets by its estimated net cash outflow, as defined and calculated in accordance
with Final LCR Rule.
Foreign currency derivative contracts: An agreement 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”).
HFS acquisition: On December 1, 2015, we acquired the Healthcare Financial Services business of General Electric Capital
Corporation, which provides financing to companies in various healthcare sectors, including hospitals, senior housing, medical
offices, pharmaceuticals, medical devices and healthcare technology.
Impaired loans: A loan is considered impaired when, based on current information and events, it is probable that we will not be
able to collect all amounts due from the borrower in accordance with the original contractual terms of the loan.
Inactive Insured Securitizations: Securitizations as to which the monoline bond insurers have not made repurchase-related
requests or loan file requests to one of our subsidiaries.
ING Direct acquisition: On February 17, 2012, we completed the acquisition of substantially all of the ING Direct business in
the United States (“ING Direct”) from ING Groep N.V., ING Bank N.V., ING Direct N.V. and ING Direct Bancorp.
Insured securitizations: Securitizations supported by bond insurance.
Interest rate sensitivity: The exposure to interest rate movements.
Interest rate swaps: Contracts in which a series of interest rate flows in a single currency are exchanged over a prescribed period.
Interest rate swaps are the most common type of derivative contract that we use in our asset/liability management activities.
Investment grade: Represents Moody’s long-term rating of Baa3 or better; and/or a Standard & Poor’s, Fitch or DBRS long-term
rating of BBB- or better; or if unrated, an equivalent rating using our internal risk ratings. Instruments that fall below these levels
are considered to be non-investment grade.
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Capital One Financial Corporation (COF)
Investments in qualified affordable housing projects: Capital One invests in private investment funds that make equity
investments in multifamily affordable housing properties that provide affordable housing tax credits for these investments. The
activities of these entities are financed with a combination of invested equity capital and debt.
Investor entities: Entities that invest in community development entities (“CDE”) that provide debt financing to businesses and
non-profit entities in low-income and rural communities.
Leverage ratio: 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 (i.e., residential real estate, autos, etc.) 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 and leases: Loans and leases that have been placed on non-accrual status.
North Fork: North Fork Bancorporation, Inc., which was acquired by the Company in 2006.
Operational risk: The risk of loss, capital impairment, adverse customer experience or reputational impact resulting from failure
to comply with policies and procedures, failed internal processes or systems, or from external events.
Option-ARM loans: The option-ARM real estate loan product is an adjustable-rate mortgage loan that 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.
PCI loans: Refers to the 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 (formerly known as “Statement of Position 03-3, Accounting for Certain Loans or Debt Securities
Acquired in a Transfer,” commonly referred to as “SOP 03-3”). Acquired loans are considered PCI loans if they have a discount
attributable, at least in part, to credit deterioration and they are not specifically scoped out of this guidance. Our PCI loans include
a limited portion of commercial loans acquired in the fourth quarter of 2015 in the HFS acquisition and the substantial majority
of consumer and commercial loans acquired in the ING Direct and Chevy Chase acquisitions.
The excess of cash flows expected to be collected over the estimated fair value of purchased loans represents the accretable yield,
which is recognized into interest income over the life of the loans. The difference between total contractual payments on the loans
and all expected cash flows represents the nonaccretable difference or the amount of principal and interest not considered collectible,
which incorporates future expected credit losses over the life of the loans. Decreases in expected cash flows from credit deterioration
subsequent to acquisition will generally result in an impairment charge recognized in our provision for credit losses and an increase
in the allowance for loan and lease losses. Charge-offs are not recorded until the expected credit losses within the nonaccretable
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Capital One Financial Corporation (COF)
difference are depleted. PCI loans are not classified as delinquent or nonperforming as we expect to collect our net investment in
these loans and the nonaccretable difference will absorb the majority of the losses associated with these loans. In addition, PCI
loans are excluded from impaired loans because the applicable accounting methodology takes into consideration expected future
credit losses.
Public Fund deposits: Deposits that are derived from a variety of political subdivisions such as school districts and municipalities.
Purchase volume: Dollar amount of customer purchases, net of returns.
Rating agency: An independent agency that assesses the credit quality and likelihood of default of an issue or issuer and assigns
a rating to that issue or issuer.
Recorded investment: The amount of the investment in a loan which includes any direct write-down of the investment.
Repurchase agreement: An instrument used to raise short-term funds whereby securities are sold with an agreement for the seller
to buy back the securities at a later date.
Restructuring charges: Charges typically from the consolidation or relocation of operations, and reductions in work force.
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.
Small-ticket commercial real estate: Our small-ticket commercial real estate portfolio is predominantly low- or no-documentation
loans with balances generally less than $2 million. This portfolio was originated on a national basis through a broker network and
is in a run-off mode.
Subprime: For purposes of lending in our Credit Card business we generally consider FICO scores of 660 or below, or other
equivalent risk scores, to be subprime. For purposes of auto lending in our Consumer Banking business we generally consider
FICO scores of 620 or below to be subprime.
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.
108
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
ASC: Accounting Standards Codification
AWS: Amazon Web Services
BHC: Bank holding company
BMA: Bank Merger Act
bps: Basis points
CAD: Canadian dollar
CAP: Compliance Assurance Process
CCAR: Comprehensive Capital Analysis and Review
CCP: Central Counterparty Clearinghouse, or Central Clearinghouse
CDE: Community development entities
CECL: Current expected credit loss
CEO: Chief Executive Officer
CFPB: Consumer Financial Protection Bureau
CFTC: Commodity Futures Trading Commission
CIFG: CIFG Assurance North America, Inc. (“U.S. Bank Litigation”)
CMBS: Commercial mortgage-backed securities
CODM: Chief Operating Decision Maker
COEP: Capital One (Europe) plc
COF: Capital One Financial Corporation
COSO: Committee of Sponsoring Organizations of the Treadway Commission
CRA: Community Reinvestment Act
DCF: Discounted cash flow
DCM: Designated contract market
DDOS: Distributed denial of service
DIF: Deposit insurance fund
DRR: Designated reserve ratio
DUS: Delegated Underwriting and Servicing
Fannie Mae: Federal National Mortgage Association
FASB: Financial Accounting Standards Board
FCA: Financial Conduct Authority
FCM: Future Commission Merchant
FDIC: Federal Deposit Insurance Corporation
FDICIA: The Federal Deposit Insurance Corporation Improvement Act of 1991
FFIEC: Federal Financial Institutions Examination Council
FHFA: Federal Housing Finance Agency
FHLB: Federal Home Loan Banks
FIS: Fidelity Information Services
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Capital One Financial Corporation (COF)
FIRREA: Financial Institutions Reform, Recovery and Enforcement Act
Fitch: Fitch Ratings
FOS: Financial Ombudsman Service
Freddie Mac: Federal Home Loan Mortgage Corporation
FVC: Fair Value Committee
GBP: Great British pound
GDP: Gross domestic product
Ginnie Mae: Government National Mortgage Association
GSE or Agency: Government-sponsored enterprise
GSIB: Globally systemically important bank
HELOCs: Home equity lines of credit
HFI: Held for investment
HFS: Healthcare Financial Services
IRS: Internal Revenue Service
LCR: Liquidity coverage ratio
LIBOR: London Interbank Offered Rate
MMDA: Money market deposit accounts
Moody’s: Moody’s Investors Service
MSR: Mortgage servicing rights
NOW: Negotiable order of withdrawal
NSFR: Net stable funding ratio
NYSE: New York Stock Exchange
OCC: Office of the Comptroller of the Currency
OCI: Other comprehensive income
OTC: Over-the-counter
PCA: Prompt corrective action
PCI: Purchased credit-impaired
PCCR: Purchased credit card relationship
PPI: Payment protection insurance
PRA: Prudential Regulatory Authority
PSA: Performance share award
PSU: Performance share unit
REO: Real estate owned
RMBS: Residential mortgage-backed securities
RSA: Restricted stock award
RSU: Restricted stock unit
S&P: Standard & Poor’s
SCP: Sentinel card protection
SEC: U.S. Securities and Exchange Commission
SEF: Swap execution facility
SLR: Supplementary leverage ratio
TARP: Troubled Asset Relief Program
TCE: Tangible common equity
TDR: Troubled debt restructuring
110
Capital One Financial Corporation (COF)
TILA: Truth in Lending Act
TSYS: Total Systems Services, Inc.
U.K.: United Kingdom
U.S.: United States of America
VAC: Valuations Advisory Committee
111
Capital One Financial Corporation (COF)
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
For a discussion of the quantitative and qualitative disclosures about market risk, see “MD&A—Risk Management—Market Risk
Management” and “MD&A—Market Risk Profile”
Item 8. Financial Statements and Supplementary Data
Management’s Report on Internal Control Over Financial Reporting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting . . . . . . . . . . .
Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements. . . . . . . . . . . . . . .
Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Changes in Stockholders' Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 1—Summary of Significant Accounting Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 2—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 — Premises, Equipment and Lease Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 9—Deposits and Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 10—Derivative Instruments and Hedging Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 11—Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 12 — Regulatory and Capital Adequacy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 13—Earnings Per Common Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 14—Stock-Based Compensation Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 15—Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 16—Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 17—Fair Value Measurement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 18—Business Segments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 19—Commitments, Contingencies, Guarantees and Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 20—Capital One Financial Corporation (Parent Company Only) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 21—Related Party Transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
113
114
115
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116
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119
120
122
122
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161
164
169
172
173
176
181
184
186
187
191
196
199
210
213
221
223
112
Capital One Financial Corporation (COF)
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Capital One Financial Corporation (the “Company” or “Capital One”) is responsible for establishing and
maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over
financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, the Company’s
principal executive and principal financial officers, or persons performing similar functions, and effected by the Company’s Board
of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external reporting purposes in accordance with U.S. generally accepted accounting
principles.
Capital One’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that the Company’s receipts and expenditures are being made only
in accordance with authorizations of the Company’s management and directors; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material
effect on its financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of
December 31, 2016, based on the framework in “2013 Internal Control—Integrated Framework” issued by the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”), commonly referred to as the “2013 Framework.”
Based on this assessment, management concluded that, as of December 31, 2016, the Company’s internal control over financial
reporting was effective based on the criteria established by COSO in the 2013 Framework. Additionally, based upon management’s
assessment, the Company determined that there were no material weaknesses in its internal control over financial reporting as of
December 31, 2016.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2016, has been audited by Ernst &
Young LLP, an independent registered public accounting firm, as stated in their accompanying report, which expresses an
unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016.
/s/ RICHARD D. FAIRBANK
Richard D. Fairbank
Chair, Chief Executive Officer and President
/s/ R. SCOTT BLACKLEY
R. Scott Blackley
Chief Financial Officer
February 23, 2017
113
Capital One Financial Corporation (COF)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Board of Directors and Shareholders of Capital One Financial Corporation:
We have audited Capital One Financial Corporation’s (the “Company” or “Capital One”) internal control over financial reporting
as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Capital One Financial
Corporation’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment
of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal
Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Capital One Financial Corporation maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2016, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Capital One Financial Corporation as of December 31, 2016 and 2015, and the related consolidated
statements of income, comprehensive income, changes in stockholders’ equity and cash flows for each of the three years in the
period ended December 31, 2016, and our report dated February 23, 2017 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
McLean, Virginia
February 23, 2017
114
Capital One Financial Corporation (COF)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON THE CONSOLIDATED FINANCIAL STATEMENTS
The Board of Directors and Shareholders of Capital One Financial Corporation:
We have audited the accompanying consolidated balance sheets of Capital One Financial Corporation (the “Company” or “Capital
One”) as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, changes in
stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2016. These financial statements
are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position
of Capital One Financial Corporation at December 31, 2016 and 2015, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
Capital One Financial Corporation’s internal control over financial reporting as of December 31, 2016, based on criteria established
in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(2013 framework) and our report dated February 23, 2017 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
McLean, Virginia
February 23, 2017
115
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in millions, except per share-related data)
Interest income:
Year Ended December 31,
2016
2015
2014
Loans, including loans held for sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
21,203
$
18,785
$ 17,662
Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense:
1,599
89
22,891
1,575
99
1,628
107
20,459
19,397
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,213
1,091
1,088
Securitized debt obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Senior and subordinated notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income after provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest income:
Service charges and other customer-related fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interchange fees, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net securities gains (losses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
216
476
113
2,018
20,873
6,459
14,414
1,646
2,452
(11)
541
151
330
53
1,625
18,834
4,536
14,298
1,856
2,264
(32)
491
Total non-interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest expense:
4,628
4,579
Salaries and associate benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Occupancy and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Professional services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Communications and data processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from discontinued operations, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends and undistributed earnings allocated to participating securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income available to common stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic earnings per common share:
Net income from continuing operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income per basic common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings per common share:
Net income from continuing operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income per diluted common share. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,202
1,944
1,811
1,075
1,169
386
1,971
13,558
5,484
1,714
3,770
(19)
3,751
(24)
(214)
3,513
7.00
(0.04)
6.96
6.93
(0.04)
6.89
1.60
$
$
$
$
$
$
4,975
1,829
1,744
1,120
1,055
430
1,843
12,996
5,881
1,869
4,012
38
4,050
(20)
(158)
3,872
7.08
0.07
7.15
7.00
0.07
7.07
1.50
$
$
$
$
$
$
$
$
$
$
$
$
145
299
47
1,579
17,818
3,541
14,277
2,008
2,046
(3)
421
4,472
4,593
1,745
1,561
1,053
961
532
1,735
12,180
6,569
2,146
4,423
5
4,428
(18)
(67)
4,343
7.70
0.01
7.71
7.58
0.01
7.59
1.20
See Notes to Consolidated Financial Statements.
116
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in millions)
Year Ended December 31,
2016
2015
2014
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
3,751
$
4,050
$
4,428
Other comprehensive income (loss), net of tax:
Net unrealized gains (losses) on securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net changes in securities held to maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net unrealized gains (losses) on cash flow hedges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss), net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(166)
104
(198)
(79)
6
(333)
(248)
96
110
(135)
(9)
(186)
304
76
120
(48)
(10)
442
Comprehensive income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
3,418
$
3,864
$
4,870
See Notes to Consolidated Financial Statements.
117
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31,
2016
December 31,
2015
(Dollars in millions, except per share data)
Assets:
Cash and cash equivalents:
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
4,185
$
Interest-bearing deposits and other short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted cash for securitization investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities available for sale, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities held to maturity, at carrying value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for investment:
Unsecuritized loans held for investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held in consolidated trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans held for investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan and lease losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loans held for investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for sale, at lower of cost or fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,791
9,976
2,517
40,737
25,712
213,824
31,762
245,586
(6,503)
239,083
1,043
3,675
1,351
14,519
18,420
3,407
4,616
8,023
1,017
39,061
24,619
196,068
33,783
229,851
(5,130)
224,721
904
3,584
1,189
14,480
16,450
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
357,033
$
334,048
Liabilities:
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
327
$
299
Deposits:
Non-interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securitized debt obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other debt:
Federal funds purchased and securities loaned or sold under agreements to repurchase . . . . . . . . . . . . . . . . . . . . . . . . .
Senior and subordinated notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25,502
211,266
236,768
18,826
992
23,431
17,211
41,634
11,964
25,847
191,874
217,721
16,166
981
21,837
20,131
42,949
9,629
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
309,519
286,764
Commitments, contingencies and guarantees (see Note 19)
Stockholders’ equity:
Preferred stock (par value $.01 per share; 50,000,000 shares authorized; 4,475,000 and 3,375,000 shares issued and
outstanding as of December 31, 2016 and 2015, respectively). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock (par value $.01 per share; 1,000,000,000 shares authorized; 653,736,607 and 648,317,395 shares issued
as of December 31, 2016 and 2015, respectively, 480,218,547 and 527,259,920 shares outstanding as of December 31,
2016 and 2015, respectively). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock, at cost (par value $.01 per share; 173,518,060 and 121,057,475 shares as of December 31, 2016 and
2015, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0
7
31,157
29,766
(949)
(12,467)
47,514
0
6
29,655
27,045
(616)
(8,806)
47,284
Total liabilities and stockholders’ equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
357,033
$
334,048
See Notes to Consolidated Financial Statements.
118
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars in millions)
Shares
Amount
Shares
Amount
Preferred Stock
Common Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Treasury
Stock
Total
Stockholders’
Equity
Balance as of December 31, 2013
875,000
$
0
637,151,800
$
6
$ 26,526
$ 20,292
$
(872) $ (4,320) $
41,632
Comprehensive income (loss) . . . .
Dividends—common stock . . . . . .
Dividends—preferred stock . . . . . .
Purchases of treasury stock . . . . . .
Issuances of common stock and
restricted stock, net of forfeitures .
Exercise of stock options and
warrants, tax effects of exercises
and restricted stock vesting . . . . . .
Issuances of preferred stock
(Series C and Series D) . . . . . . . . .
Compensation expense for
restricted stock awards, restricted
stock units and stock options . . . . .
1,373,725
5,031,523
0
0
1,000,000
0
100
146
969
128
442
4,428
(680)
(67)
(2,045)
4,870
(680)
(67)
(2,045)
100
146
969
128
Balance as of December 31, 2014
1,875,000
$
0
643,557,048
$
6
$ 27,869
$ 23,973
$
(430) $ (6,365) $
45,053
Comprehensive income (loss) . . . .
Dividends—common stock . . . . . .
Dividends—preferred stock . . . . . .
Purchases of treasury stock . . . . . .
Issuances of common stock and
restricted stock, net of forfeitures .
Exercise of stock options and
warrants, tax effects of exercises
and restricted stock vesting . . . . . .
Issuances of preferred stock
(Series E and Series F). . . . . . . . . .
Compensation expense for
restricted stock awards, restricted
stock units and stock options . . . . .
46,846
2,603,953
2,109,548
0
0
0
4
111
71
1,472
128
1,500,000
0
(186)
4,050
(820)
(158)
(2,441)
3,864
(816)
(158)
(2,441)
111
71
1,472
128
Balance as of December 31, 2015
3,375,000
$
0
648,317,395
$
6
$ 29,655
$ 27,045
$
(616) $ (8,806) $
47,284
Comprehensive income (loss) . . . .
Dividends—common stock . . . . . .
Dividends—preferred stock . . . . . .
Purchases of treasury stock . . . . . .
Issuances of common stock and
restricted stock, net of forfeitures .
Exercise of stock options, tax
effects of exercises and restricted
stock vesting. . . . . . . . . . . . . . . . . .
Issuances of preferred stock
(Series G and Series H) . . . . . . . . .
Compensation expense for
restricted stock awards, restricted
stock units and stock options . . . . .
52,338
3,272,745
2,094,129
0
1
0
4
130
102
1,066
200
1,100,000
0
(333)
3,751
(816)
(214)
(3,661)
3,418
(812)
(214)
(3,661)
131
102
1,066
200
Balance as of December 31, 2016
4,475,000
$
0
653,736,607
$
7
$ 31,157
$ 29,766
$
(949) $(12,467) $
47,514
See Notes to Consolidated Financial Statements.
119
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
Operating activities:
Year Ended December 31,
2016
2015
2014
Income from continuing operations, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
3,770
$
4,012
$
4,423
Income (loss) from discontinued operations, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax benefit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (gain) loss on sales of securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment losses on securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sales of loans held for sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock plan compensation expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for sale:
Originations and purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales and paydowns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities:
Changes in interest receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in interest payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(19)
3,751
6,459
2,428
(686)
(6)
17
(80)
239
(11)
(8,645)
8,390
(159)
(1,907)
28
2,013
25
38
4,050
4,536
2,100
(402)
2
30
(86)
161
0
5
4,428
3,541
2,002
(76)
(21)
24
(48)
205
0
(6,942)
6,805
(5,619)
5,365
(72)
(596)
45
575
(79)
(29)
(402)
22
99
(187)
9,304
Net cash from operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,856
10,127
Investing activities:
Securities available for sale:
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(14,154)
(12,200)
(12,650)
Proceeds from paydowns and maturities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities held to maturity:
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from paydowns and maturities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,867
4,146
(3,787)
2,681
7,742
4,379
(4,277)
2,163
7,968
7,417
(4,827)
1,471
Loans:
Net changes in loans held for investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(22,036)
(18,575)
(16,563)
Principal recoveries of loans previously charged off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of premises and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash paid for acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash from other investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,493
(779)
(629)
(432)
1,498
(532)
(9,314)
(610)
1,582
(502)
(24)
137
Net cash from investing activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(25,630)
(29,726)
(15,991)
See Notes to Consolidated Financial Statements.
120
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
Financing activities:
Deposits and borrowings:
Year Ended December 31,
2016
2015
2014
Changes in restricted cash for securitization investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(1,500) $
(783) $
Changes in deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of securitized debt obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturities and paydowns of securitized debt obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of senior and subordinated notes and long-term FHLB advances . . . . . . . . . . . . . . . . . . . . . . . . . .
19,031
6,259
(3,540)
22,984
Maturities and paydowns of senior and subordinated notes and long-term FHLB advances . . . . . . . . . . . . .
(24,170)
12,163
5,062
(500)
31,830
(9,579)
Changes in other short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11
(16,066)
Common stock:
Net proceeds from issuances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred stock:
Net proceeds from issuances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from share-based payment activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash from financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of the period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
131
(812)
1,066
(214)
(3,661)
142
15,727
1,953
8,023
111
(816)
1,472
(158)
(2,441)
85
20,380
781
7,242
Cash and cash equivalents at end of the period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
9,976
$
8,023
$
Supplemental cash flow information:
Non-cash item:
Net transfers from loans held for investment to loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
552
$
268
$
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,250
2,121
1,643
1,732
640
1,017
4,291
(2,992)
7,714
(2,375)
919
100
(679)
969
(67)
(2,045)
146
7,638
951
6,291
7,242
182
1,569
1,603
See Notes to Consolidated Financial Statements.
121
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 December 31, 2016, our principal
subsidiaries included:
• Capital One Bank (USA), National Association (“COBNA”), which offers credit and debit card products, other lending
products and deposit products; and
• Capital One, National Association (“CONA”), which offers a broad spectrum of banking products and financial services
to consumers, small businesses and commercial clients.
The Company is hereafter collectively referred to as “we,” “us” or “our.” COBNA and CONA are collectively referred to as the
“Banks.”
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 currently organized for management reporting purposes into three major business segments, which
are defined based on the products and services provided or the type of customer served: Credit Card, Consumer Banking and
Commercial Banking. We provide details on our business segments, the integration of recent acquisitions into our business segments
and the allocation methodologies and accounting policies used to derive our business segment results in “Note 18—Business
Segments.”
On December 1, 2015, we completed the acquisition of the Healthcare Financial Services business of General Electric Capital
Corporation (“HFS acquisition”). During the second quarter of 2016, we finalized purchase accounting. Including post-closing
purchase price adjustments during the first six months of 2016, total cash consideration for the acquisition was $9.0 billion, net
of $180 million of cash acquired, and we recognized approximately $9.2 billion in assets, primarily consisting of $8.2 billion in
loans, $134 million in intangible assets and $518 million in goodwill.
Basis of Presentation and Use of Estimates
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting
principles in the U.S. (“U.S. GAAP”). The preparation of financial statements in conformity with U.S. GAAP requires management
to make estimates and assumptions that affect the amounts reported 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 judgment, actual amounts or results could differ from these estimates.
Certain prior period amounts have been reclassified to conform to the current period presentation. The reclassifications were
primarily related to income from certain consumer and commercial banking activity from Other to Service charges and other
customer-related fees within Non-interest income, and a reclassification of certain system processing costs from Professional
services to Communications and data processing within Non-interest expense. These reclassifications were made to better reflect
the nature of income earned and expenses incurred. We have also consolidated the Non-interest income presentation of Other-
than-temporary impairment (“OTTI”) with net realized gains or losses from investment securities into a new Net securities gains
(losses) line. These reclassifications were only made to the consolidated statements of income and did not have an impact on total
Non-interest income, total Non-interest expense or Net income previously reported on SEC Forms 10-K for the impacted periods.
122
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Principles of Consolidation
The consolidated financial statements include the accounts of Capital One Financial Corporation and all other entities in which
we have a controlling financial interest. We determine whether we have a controlling financial interest in an entity by first evaluating
whether the entity is a voting interest entity or a variable interest entity (“VIE”). All significant intercompany account balances
and transactions have been eliminated.
Voting Interest Entities
Voting interest entities are entities that have sufficient equity and provide the equity investors voting rights that give them the
power to make significant decisions relating to the entity’s operations. Since a controlling financial interest in an entity is typically
obtained through ownership of a majority voting interest, we consolidate our majority-owned subsidiaries and other voting interest
entities in which we hold, directly or indirectly, more than 50% of the voting rights or where we exercise control through other
contractual rights.
Investments in entities where we do not have a controlling financial interest but we have significant influence over the entity’s
financial and operating decisions (generally defined as owning a voting interest of 20% to 50%) are accounted for under the equity
method. If we own less than 20% of a voting interest entity, we generally carry the investment at cost, except marketable equity
securities, which we carry at fair value with changes in fair value included in accumulated other comprehensive income (“AOCI”).
We report investments accounted for under the equity or cost method in other assets on our consolidated balance sheets, and include
our share of income or loss on equity method investments and dividends on cost method investments in other non-interest income
in our consolidated statements of income.
Variable Interest Entities
VIEs are entities that, by design, either (i) lack sufficient equity to permit the entity to finance its activities without additional
subordinated financial support from other parties; or (ii) have equity investors that do not have the ability to make significant
decisions relating to the entity’s operations through voting rights, or do not have the obligation to absorb the expected losses, or
do not have the right to receive the residual returns of the entity. 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. An entity is deemed to be the primary beneficiary of
a VIE if that entity has both (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic
performance; and (ii) the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE.
In determining whether we are the primary beneficiary of a VIE, we consider both qualitative and quantitative factors regarding
the nature, size and form of our involvement with the VIE, such as our role in establishing the VIE and our ongoing rights and
responsibilities; our economic interests, including debt and equity investments, servicing fees and other arrangements deemed to
be variable interests in the VIE; the design of the VIE, including the capitalization structure, subordination of interests, payment
priority, relative share of interests held across various classes within the VIE’s capital structure and the reasons why the interests
are held by us.
We perform on-going reassessments to evaluate whether changes in an entity’s capital structure or changes in the nature of our
involvement with the entity result in a change to the VIE designation or a change to our consolidation conclusion. See “Note 6—
Variable Interest Entities and Securitizations” for further details.
Cash and Cash Equivalents
Cash and cash equivalents include cash and due from banks, and interest bearing deposits and other-short term investments, all of
which, if applicable, have stated maturities of three months or less when acquired.
Securities Resale and Repurchase Agreements
Securities purchased under resale agreements and securities loaned or sold under agreements to repurchase, principally U.S.
government and agency obligations, are not accounted for as sales but as collateralized financing transactions and recorded at the
amounts at which the securities were acquired or sold, plus accrued interest. We continually monitor the market value of these
securities and deliver additional collateral to or obtain additional collateral from counterparties, as appropriate.
123
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Investment Securities
Our investment 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 and non-agency commercial
mortgage-backed securities (“CMBS”); other asset-backed securities (“ABS”); and other securities. The accounting and
measurement framework for our investment securities differs depending on the security classification. We classify securities as
available for sale or held to maturity based on our investment strategy and management’s assessment of our intent and ability to
hold the securities until maturity. Securities that we may sell prior to maturity in response to changes in our investment strategy,
liquidity needs, interest rate risk profile or for other reasons are classified as available for sale. Securities that we have the intent
and ability to hold until maturity are classified as held to maturity.
We report securities available for sale on our consolidated balance sheets at fair value with unrealized gains or losses recorded,
net of tax, as a component of AOCI. We report securities held to maturity on our consolidated balance sheets at carrying
value. Carrying value generally is equal to amortized cost. Investment securities transferred into the held to maturity category from
the available for sale category are recorded at fair value at the date of transfer. Any unrealized gains or losses at the transfer date
are thereafter included in AOCI. Such unrealized gains or losses are accreted over the remaining life of the security and are expected
to offset the amortization of the related premium or discount created upon the investment securities transfer into the held to maturity
category, with no expected impact on future net income.
Unamortized premiums, discounts and other basis adjustments are recognized in interest income over the contractual lives of the
securities using the effective interest method. We record purchases and sales of investment securities on a trade date basis. Realized
gains or losses from the sale of debt securities are computed using the first in first out method of identification, and are included
in non-interest income in our consolidated statements of income. If we intend to sell an available for sale 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 our consolidated statements
of income.
We regularly evaluate our securities whose values have declined below amortized cost to assess whether the decline in fair value
represents an OTTI. Amortized cost reflects historical cost adjusted for amortization of premiums, accretion of discounts and any
previously recorded impairments. We discuss our assessment of and accounting for OTTI in “Note 3—Investment Securities.” We
discuss the techniques we use in determining the fair value of our investment securities in “Note 17—Fair Value Measurement.”
Our investment portfolio also includes certain acquired debt securities that were deemed to be credit impaired at the acquisition
date, and therefore are accounted for in accordance with accounting guidance for purchased credit-impaired (“PCI”) loans and
debt securities. These securities are recorded at fair value at the acquisition date using the estimated cash flows we expect to collect
discounted by the prevailing market interest rate. The difference between the contractually required payments due and the
undiscounted cash flows we expect to collect at acquisition, considering the impact of prepayments, is referred to as the
nonaccretable difference. The nonaccretable difference reflects estimated future credit losses expected to be incurred over the life
of the security, and is neither accreted into income nor recorded on our consolidated balance sheet. The excess of the undiscounted
cash flows expected to be collected over the estimated fair value of credit-impaired debt securities at acquisition is referred to as
the accretable yield, which is accreted into interest income using an effective yield method over the remaining life of the security.
Decreases in expected cash flows attributable to credit result in the recognition of OTTI. Significant increases in expected cash
flows are recognized prospectively over the remaining life of the security as an adjustment to the accretable yield. See “Loans
Acquired” section of this Note for further discussion of accounting guidance for purchased credit-impaired loans and debt securities.
Loans
Our loan portfolio consists of loans held for investment, including loans underlying our consolidated securitization trusts, and
loans held for sale, and is divided into three portfolio segments: credit card, consumer banking and commercial banking loans.
Credit card loans consist of domestic and international credit card loans. Consumer banking loans consist of auto, home and retail
banking loans. Commercial banking loans consist of commercial and multifamily real estate, commercial and industrial, and small-
ticket commercial real estate loans.
Loan Classification
Upon origination or purchase, we classify loans as held for investment or held for sale based on our investment strategy and
management’s intent and ability with regard to the loans which may change over time. The accounting and measurement framework
124
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for loans differs depending on the loan classification, whether the loans are originated or purchased and whether purchased loans
are considered credit-impaired at the date of acquisition. The presentation within the consolidated statements of cash flows is based
on management’s intent at acquisition or origination. Cash flows related to non-securitized loans held for investment are included
in cash flows from investing activities on our consolidated statements of cash flows while cash flows from loans for securitization
investors are included in cash flows from financing activities. The difference is due to the treatment of securitization transactions
as secured borrowings. Cash flows related to loans held for sale are included in cash flows from operating activities on our
consolidated statements of cash flows.
Loans Held for Investment
Loans that we have the ability and intent to hold for the foreseeable future and loans associated with securitization transactions
accounted for as secured borrowings are classified as held for investment. Loans classified as held for investment, except PCI
loans accounted for based upon expected cash flows described below, are reported at their amortized cost, which is the outstanding
principal balance, net of any unearned income, unamortized deferred fees and costs, unamortized premiums and discounts and
charge-offs. Credit card loans also include billed finance charges and fees, net of the estimated uncollectible amount.
Interest income is recognized on loans held for investment on an accrual basis. We generally defer certain loan origination fees
and direct loan origination costs on originated loans, premiums and discounts on purchased loans and loan commitment fees. We
recognize these amounts in interest income as yield adjustments over the life of the loan and/or commitment period using the
effective interest method. Where appropriate, prepayment estimates are factored into the calculation of the constant effective yield
necessary to apply the interest method. Prepayment estimates are based on historical prepayment data and existing and forecasted
interest rates and economic data. For credit card loans, loan origination fees and direct loan origination costs are amortized on a
straight-line basis over a 12-month period. We establish an allowance for loan losses for probable losses inherent in our held for
investment loan portfolio as of each balance sheet date. Loans held for investment are subject to our allowance for loan and lease
losses methodology described below under “Allowance for Loan and Lease Losses.”
Loans Held for Sale
Loans purchased or originated with the intent to sell or for which we do not have the ability and intent to hold for the foreseeable
future are classified as held for sale. Interest on these loans is recognized on an accrual basis. These loans are recorded at the lower
of amortized cost or fair value. Loan origination fees and direct loan origination costs are deferred until the loan is sold and are
then recognized as part of the total gain or loss on sale.
If a loan is transferred from held for investment to held for sale, declines in fair value related to credit are recorded as a charge-
off and amortization of deferred loan origination fees and costs ceases. Subsequent to transfer, we report write-downs or recoveries
in fair value up to the carrying value at the date of transfer and realized gains or losses on loans held for sale in our consolidated
statements of income as a component of other non-interest income. We calculate the gain or loss on loan sales as the difference
between the proceeds received and the carrying value of the loans sold, net of the fair value of any retained servicing rights.
Loans Acquired
All purchased loans, including loans transferred in a business combination, acquired on or after January 1, 2009, are initially
recorded at fair value, which includes consideration of expected future losses, as of the date of the acquisition. We account for
purchased loans using the guidance for accounting for purchased credit-impaired loans and debt securities, which is based upon
expected cash flows, if the purchased loans have a discount attributable, at least in part, to credit deterioration and they are not
specifically scoped out of the guidance. We refer to these purchased loans that are subsequently accounted for based on expected
cash flows to be collected as “PCI loans” in accordance with Accounting Standard Codification (“ASC”) 310-30, Loans and Debt
Securities Acquired with Deteriorated Credit Quality (formerly known as “Statement of Position 03-3, Accounting for Certain
Loans or Debt Securities Acquired in a Transfer,” commonly referred to as “SOP 03-3”). Other purchased loans that don’t meet
our criteria described above are accounted for based on contractual cash flows.
125
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loans Acquired and Accounted for Based on Expected Cash Flows
In accounting for purchased loans based on expected cash flows, we first determine the contractually required payments due, which
represent the total undiscounted amount of all uncollected principal and interest payments, adjusted for the effect of estimated
prepayments. We then estimate the undiscounted cash flows we expect to collect, incorporating several key assumptions including
expected default rates, loss severities and the amount and timing of prepayments. We estimate the fair value by discounting the
estimated cash flows we expect to collect using an observable market rate of interest, when available, adjusted for factors that a
market participant would consider in determining fair value. We may aggregate loans acquired in the same fiscal quarter into one
or more pools if the loans have common risk characteristics. A pool is then accounted for as a single asset, with a single composite
interest rate and an aggregate fair value and expected cash flows.
The excess of cash flows expected to be collected over the estimated fair value of purchased loans is referred to as the accretable
yield. This amount is not recorded on our consolidated balance sheets, but is accreted into interest income over the life of the loan,
or pool of loans, using the effective interest method. The difference between total contractual payments on the loans and all expected
cash flows represents the nonaccretable difference or the amount of principal and interest not considered collectible.
Subsequent to acquisition, we evaluate our estimate of cash flows expected to be collected on a quarterly basis. These evaluations
require the use of key assumptions and estimates similar to those used in estimating the initial fair value at acquisition. Subsequent
changes in the estimated cash flows expected to be collected may result in changes in the accretable yield and nonaccretable
difference or reclassifications from the nonaccretable difference to the accretable yield. Decreases in expected cash flows resulting
from credit deterioration subsequent to acquisition will generally result in an impairment charge recognized in our provision for
credit losses and an increase in the allowance for loan and lease losses. Charge-offs are not recorded until the expected credit losses
within the nonaccretable difference are depleted. In addition, PCI loans are not classified as delinquent or nonperforming, as we
expect to collect our net investment in these loans. Increases in the cash flows expected to be collected would first reduce any
previously recorded allowance for loan and lease losses established subsequent to acquisition. The excess over the recorded
allowance for loan and lease losses would result in a reclassification to the accretable yield from the nonaccretable difference and
an increase in interest income recognized over the remaining life of the loan or pool of loans. Disposals of loans in the form of
sales to third parties, receipt of payment in full or in part by the borrower, and foreclosure of the collateral, result in removal of
the loan from the PCI loans portfolio. See “Note 4—Loans” for additional information.
Loans Acquired and Accounted for Based on Contractual Cash Flows
To determine the fair value of loans at acquisition in a business combination, we estimate discounted contractual cash flows due
using an observable market rate of interest, when available, adjusted for factors that a market participant would consider in
determining fair value. In determining fair value, contractual cash flows are adjusted to include prepayment estimates based upon
trends in default rates and loss severities. The difference between the fair value and the contractual cash flows is recorded as a
loan discount or premium at acquisition. Subsequent to acquisition, the loans are classified and accounted for as either held for
investment or held for sale based on management’s ability and intent. Loans held for investment are subject to our allowance for
loan and lease losses methodology described below under “Allowance for Loan and Lease Losses.”
We are permitted to aggregate loans acquired in the same fiscal quarter into one or more pools if the loans have common risk
characteristics. If we elect to pool loans, a pool is then accounted for as a single asset with a single composite interest rate and an
aggregate fair value and expected cash flows.
Loan Modifications and Restructurings
As part of our loss mitigation efforts, we may provide 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. A loan modification in which
a concession is granted to a borrower experiencing financial difficulty is accounted for and reported as a troubled debt restructuring
(“TDR”). Our loan modifications typically include an extension of the loan term, a reduction in the interest rate, or a combination
of both. We describe our accounting for and measurement of impairment on restructured loans below under “Impaired Loans.”
See “Note 4—Loans” for additional information on our loan modifications and restructurings.
126
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Delinquent and Nonperforming Loans
The entire balance of a loan is considered contractually delinquent if the minimum required payment is not received by the first
statement cycle date equal to or following the due date specified on the customer’s billing statement. Delinquency is reported on
loans that are 30 or more days past due. Interest and fees continue to accrue on past due loans until the date the loan is placed on
nonaccrual status, if applicable. We generally place loans on nonaccrual status when we believe the collectability of interest and
principal is not reasonably assured.
Nonperforming loans generally include loans that have been placed on nonaccrual status, but we do not report loans classified as
held for sale as nonperforming.
Our policies for classifying loans as nonperforming, by loan category, are as follows:
• Credit card loans: As permitted by regulatory guidance issued by the Federal Financial Institutions Examination Council
(“FFIEC”), our policy is generally to exempt credit card loans from being classified as nonperforming as these loans are
generally charged off in the period the account becomes 180 days past due. Consistent with industry conventions, we
generally continue to accrue interest and fees on delinquent credit card loans until the loans are charged-off. We classify
certain credit card loans issued in the U.K. as nonperforming when the account becomes 120 days past due depending on
the specific facts and circumstances.
• Consumer banking loans: We classify consumer banking loans as nonperforming when we determine that the collectability
of all interest and principal on the loan is not reasonably assured, generally when the loan becomes 90 days past due.
• Commercial banking loans: We classify commercial banking loans as nonperforming as of the date we determine that the
collectability of all interest and principal on the loan is not reasonably assured.
• Modified loans and troubled debt restructurings: Modified loans, including TDRs, that are current at the time of the
restructuring remain on accrual status if there is demonstrated performance prior to the restructuring and continued
performance under the modified terms is expected. Otherwise, the modified loan is classified as nonperforming and placed
on nonaccrual status until the borrower demonstrates a sustained period of performance over several payment cycles,
generally six months of consecutive payments, under the modified terms of the loan.
• PCI loans: PCI loans are not classified as delinquent or nonperforming.
Interest and fees accrued but not collected at the date a loan is placed on nonaccrual status are reversed against earnings. In addition,
the amortization of net deferred loan fees is suspended. Interest and fee income is subsequently recognized only upon the receipt
of cash payments. However, if there is doubt regarding the ultimate collectability of loan principal, all cash received is generally
applied against the principal balance of the loan. Nonaccrual loans are generally returned to accrual status when all principal and
interest is current and repayment of the remaining contractual principal and interest is reasonably assured, or when the loan is both
well-secured and in the process of collection and collectability is no longer doubtful.
Impaired Loans
A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect all
amounts due from the borrower in accordance with the original contractual terms of the loan. Generally, we report loans as impaired
based on the method for measuring impairment in accordance with applicable accounting guidance. Loans 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 accounted
for based on expected cash flows at acquisition because this accounting methodology takes into consideration future credit losses.
Loans defined as individually impaired, based on applicable accounting guidance, include larger balance nonperforming loans and
TDR loans. Our policies for identifying loans as individually impaired, by loan category, are as follows:
• Credit card loans: Credit card loans that have been modified in a troubled debt restructuring are identified and accounted
for as individually impaired.
• Consumer banking loans: Consumer loans that have been modified in a troubled debt restructuring are identified and
accounted for as individually impaired.
• Commercial banking loans: Commercial loans classified as nonperforming and commercial loans that have been modified
in a troubled debt restructuring are reported as individually impaired.
127
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
• PCI loans: PCI loans are tracked and reported separately from other impaired loans.
The majority of individually impaired loans are evaluated for an asset-specific allowance. Although a loan modified in a TDR may
be returned to accrual status if the criteria above under “Delinquent and Nonperforming Loans” are met, we continue to report the
loan as impaired until maturity.
We generally measure impairment and the related asset-specific allowance for individually impaired loans based on the difference
between the recorded investment of the loan and the present value of the expected future cash flows, discounted at the original
effective interest rate of the loan at the time of modification. If the loan is collateral dependent, we measure impairment based
upon the fair value of the underlying collateral, which we determine based on the current fair value of the collateral less estimated
selling costs, instead of discounted cash flows. Loans are identified as collateral dependent if we believe that collateral is the sole
source of repayment.
Charge-Offs
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 an increase to the allowance for loan and lease losses. We
exclude accrued and unpaid finance charges and fees and certain fraud losses from charge-offs. Costs to recover charged-off loans
are recorded as collection expense and included in our consolidated statements of income as a component of other non-interest
expense as incurred. Our charge-off time frames for loans by loan type are presented below.
• Credit card loans: We generally charge-off credit card loans in the period the account becomes 180 days past due. We charge
off delinquent credit card loans for which revolving privileges have been revoked as part of loan workout when the account
becomes 120 days past due. Credit card loans in bankruptcy are generally charged-off by the end of the month following
30 days after the receipt of a complete bankruptcy notification from the bankruptcy court. Credit card loans of deceased
account holders are charged-off by the end of the month following 60 days of receipt of notification.
• Consumer banking loans: We generally charge-off consumer banking loans at the earlier of the date when the account is a
specified number of days past due or upon repossession of the underlying collateral. Our charge-off time frame is 180 days
for home loans and 120 days for auto loans. Small business banking loans generally charge off at 90 or 120 days past due
based on when unpaid principal loan amounts are deemed uncollectible. We calculate the initial charge-off amount for home
loans based on the excess of our recorded investment in the loan over the fair value of the underlying property less estimated
selling costs as of the date of the charge-off. We update our home value estimates on a regular basis and may recognize
additional charge-offs for subsequent declines in home values. Consumer loans in bankruptcy, except for auto and home
loans, generally are charged-off within 40 days of receipt of notification from the bankruptcy court. Auto and home loans
where the borrower has filed for bankruptcy are generally charged-off in the period that the loan is both 60 days or more
past due and 60 days or more past the bankruptcy notification date. Auto and home loans where the borrower has filed for
Chapter 7 bankruptcy, where the debt has been discharged and the borrower did not reaffirm the debt are charged off by the
end of the month in which the bankruptcy notification is received. Consumer loans of deceased account holders are charged-
off by the end of the month following 60 days of receipt of notification.
• Commercial banking loans: We charge-off commercial loans in the period we determine that the unpaid principal loan
amounts are uncollectible.
• PCI loans: We do not record charge-offs on PCI loans that are performing in accordance with or better than our expectations
as of the date of acquisition, as the fair values of these loans already reflect a discount for expected future credit losses. We
record charge-offs on PCI loans only if actual losses exceed estimated credit losses incorporated into the fair value recorded
at acquisition.
Allowance for Loan and Lease Losses
We maintain an allowance for loan and lease losses (“allowance”) that represents management’s best estimate of incurred loan
and lease losses inherent in our held-for-investment portfolio as of each balance sheet date. The provision for credit losses, which
is charged to income, reflects credit losses we believe have been incurred and will eventually be reflected over time in our charge-
offs. Charge-offs of uncollectible amounts are deducted from the allowance and subsequent recoveries are added back.
Management performs a quarterly analysis of our loan portfolio to determine if impairment has occurred and to assess the adequacy
of the allowance based on historical and current trends as well as other factors affecting credit losses. We apply documented
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systematic methodologies to separately calculate the allowance for our consumer loan and commercial loan portfolios and for
loans within each of these portfolios that we identify as individually impaired. Our allowance for loan and lease losses consists of
three components that are allocated to cover the estimated probable losses in each loan portfolio based on the results of our detailed
review and loan impairment assessment process: (i) a component for loans collectively evaluated for impairment; (ii) an asset-
specific component for individually impaired loans; and (iii) a component related to PCI loans that have experienced significant
decreases in expected cash flows subsequent to acquisition. Each of our allowance components is supplemented by an amount
that represents management’s qualitative judgment of the imprecision and risks inherent in the processes and assumptions used in
establishing the allowance. Management’s judgment involves an assessment of subjective factors, such as process risk, modeling
assumption and adjustment risks and probable internal and external events that will likely impact losses.
Our consumer loan portfolio consists of smaller-balance, homogeneous loans, divided into four primary portfolio segments: credit
card loans, auto loans, residential home loans and retail banking loans. Each of these portfolios is further divided by our business
units into pools based on common risk characteristics, such as origination year, contract type, interest rate and geography, which
are collectively evaluated for impairment. The commercial loan portfolio is primarily composed of larger-balance, non-
homogeneous loans. These loans are subject to individual reviews that result in internal risk ratings. In assessing the risk rating
of a particular loan, among the factors we consider are the financial condition of the borrower, geography, collateral performance,
historical loss experience, and industry-specific information that management believes is relevant in determining the occurrence
of a loss event and measuring impairment. These factors are based on an evaluation of historical and current information, and
involve subjective assessment and interpretation. Emphasizing one factor over another or considering additional factors could
impact the risk rating assigned to that loan.
The component of the allowance related to credit card and other consumer loans that we collectively evaluate for impairment is
based on a statistical calculation, which is supplemented by management judgment as described above. Because of the homogeneous
nature of our consumer loan portfolios, the allowance is based on the aggregated portfolio segment evaluations. The allowance is
established through a process that begins with estimates of incurred losses in each pool based upon various statistical analyses.
Loss forecast models are utilized to estimate probable losses incurred and consider several portfolio indicators including, but not
limited to, historical loss experience, account seasoning, the value of collateral underlying secured loans, estimated foreclosures
or defaults based on observable trends, delinquencies, bankruptcy filings, unemployment, credit bureau scores and general economic
and business trends. Management believes these factors are relevant in estimating probable losses incurred and also considers an
evaluation of overall portfolio credit quality based on indicators such as changes in our credit evaluation, underwriting and collection
management policies, the effect of other external factors such as competition and legal and regulatory requirements, general
economic conditions and business trends, and uncertainties in forecasting and modeling techniques used in estimating our allowance.
We update our consumer loss forecast models and portfolio indicators on a quarterly basis to incorporate information reflective
of the current economic environment.
The component of the allowance for commercial loans that we collectively evaluate for impairment is based on our historical loss
experience for loans with similar risk characteristics and consideration of the current credit quality of the portfolio, which is
supplemented by management judgment as described above. We apply internal risk ratings to commercial loans, which we use to
assess credit quality and derive a total loss estimate based on an estimated probability of default (default rate) and loss given default
(loss severity). Management may also apply judgment to adjust the loss factors derived, taking into consideration both quantitative
and qualitative factors, including general economic conditions, specific industry and geographic trends, portfolio concentrations,
trends in internal credit quality indicators, and current and past underwriting standards that have occurred but are not yet reflected
in the historical data underlying our loss estimates.
The asset-specific component of the allowance covers smaller-balance homogeneous consumer loans whose terms have been
modified in a TDR and larger balance nonperforming, non-homogeneous commercial loans. As discussed above under “Impaired
Loans,” we generally measure the asset-specific component of the allowance based on the difference between the recorded
investment of individually impaired loans and the present value of expected future cash flows. When the present value of expected
future cash flows is lower than the carrying value of the loan, impairment is recognized through the provision for credit losses. If
the loan is collateral dependent, we measure impairment based on the current fair value of the collateral less estimated selling
costs, instead of discounted cash flows. The asset-specific component of the allowance for smaller-balance impaired loans is
calculated on a pool basis using historical loss experience for the respective class of assets. The asset-specific component of the
allowance for larger-balance commercial loans is individually calculated for each loan. Key considerations in determining the
allowance include the borrower’s overall financial condition, resources and payment history, prospects for support from financially
responsible guarantors, and when applicable, the estimated realizable value of any collateral.
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We record all purchased loans at fair value at acquisition. Applicable accounting guidance prohibits the carry over or creation of
valuation allowances in the initial accounting for impaired loans acquired in a transfer. Subsequent to acquisition, decreases in
expected principal cash flows of PCI loans would trigger the recognition of impairment through our provision for credit losses.
Subsequent increases in expected cash flows would first result in a recovery of any previously recorded allowance, to the extent
applicable, and then increase the accretable yield. Write-downs on purchased impaired loans in excess of the nonaccretable
difference are charged against the allowance for loan and lease losses. See “Note 4—Loans” for information on loan portfolios
associated with acquisitions.
In addition to the allowance, we also estimate probable losses related to contractually binding unfunded lending commitments,
such as letters of credit and financial guarantees, and binding unfunded loan commitments. The provision for 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. Unfunded lending commitments
are subject to individual reviews and are analyzed and segregated by risk according to our internal risk rating scale, which we use
to assess credit quality and derive a total loss estimate. We assess these risk classifications, taking into consideration both quantitative
and qualitative factors, including historical loss experience, utilization assumptions, current economic conditions, performance
trends within specific portfolio segments and other pertinent information to estimate the reserve for unfunded lending commitments.
Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters
that are inherently uncertain. Subsequent evaluations of the loan portfolio, in light of the factors then prevailing, may result in
significant changes in the allowance and the reserve for unfunded lending commitments in future periods.
Securitization of Loans
Our loan securitization activities primarily involve the securitization of credit card loans, which have provided a source of funding
for us. See “Note 6—Variable Interest Entities and Securitizations” for additional details. Loan securitization involves the transfer
of a pool of loan receivables from our portfolio to a trust. The trust then sells an undivided interest in the pool of loan receivables
to third-party investors through the issuance of debt securities and transfers the proceeds from the debt issuance to us as consideration
for the loan receivables transferred. The debt securities are collateralized by the transferred receivables from our portfolio. We
remove loans from our consolidated balance sheets when securitizations qualify as sales to non-consolidated VIEs, recognize
assets retained and liabilities assumed at fair value and record a gain or loss on the transferred loans. Alternatively, when the
transfer does not qualify as a sale but instead is considered a secured borrowing or when the sale is to a consolidated VIE, the asset
will remain on our consolidated balance sheets with an offsetting liability recognized for the amount of proceeds received.
Premises and Equipment
Premises and equipment, including leasehold improvements, are carried at cost less accumulated depreciation and amortization.
Land is carried at cost. We capitalize direct costs incurred during the application development stage of internally developed software
projects. Depreciation and amortization expenses are generally calculated using the straight-line method over the estimated useful
lives of the assets. Useful lives for premises and equipment are estimated as follows:
Premises & Equipment
Buildings and improvement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Computer software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Useful Lives
5-39 years
3-10 years
3-5 years
Lesser of useful life or the remaining
fixed non-cancelable lease term
Expenditures for maintenance and repairs are expensed to earnings as incurred. Gains or losses upon disposition are reflected in
earnings as realized.
Goodwill and Intangible Assets
Goodwill represents the excess of acquisition cost of an acquired business over the fair value of assets acquired and liabilities
assumed and is assigned to one or more reporting units at the date of acquisition. A reporting unit is defined as an operating segment,
or a business that is one level below an operating segment. Goodwill is not amortized but is tested for impairment at the reporting
unit level annually or more frequently if adverse circumstances indicate that it is more likely than not that the carrying amount of
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a reporting unit exceeds its fair value. These indicators include a sustained, significant decline in the Company’s stock price, a
decline in its expected future cash flows, significant disposition activity, a significant adverse change in the economic or business
environment, and the testing for recoverability of a significant asset group, among others. The annual goodwill impairment test,
performed as of October 1 of each year, is a two-step test. The first step identifies whether there is potential impairment by comparing
the fair value of a reporting unit to its carrying amount, including goodwill. If fair value is less than the carrying amount, the second
step of the impairment test is required to measure the amount of any potential impairment loss. For purposes of our annual goodwill
impairment test in 2016, our reporting units were Domestic Card, International Card, Auto, Other Consumer Banking and
Commercial Banking. Subsequent to the completion of this impairment test, we determined that the Domestic Card and International
Card components should be combined into one reporting unit. Therefore, as of December 31, 2016, our reporting units are Credit
Card, Auto, Other Consumer Banking and Commercial Banking. Intangible assets with finite useful lives are amortized on either
an accelerated or straight-line basis over their estimated useful lives and are evaluated for impairment whenever events or changes
in circumstances indicate the carrying amount of the assets may not be recoverable. See “Note 7—Goodwill and Intangible Assets”
for additional detail.
Mortgage Servicing Rights
Mortgage servicing rights (“MSRs”) are initially recorded at fair value when mortgage loans are sold or securitized in the secondary
market and the right to service these loans is retained for a fee. Subsequently, our consumer MSRs are carried at fair value on our
consolidated balance sheets with changes in fair value recognized in non-interest income. Our commercial MSRs are subsequently
accounted for under the amortization method and are periodically evaluated for impairment, which is recognized as a reduction
in non-interest income. See “Note 7—Goodwill and Intangible Assets” and “Note 17—Fair Value Measurement” for additional
information.
Foreclosed Property and Repossessed Assets
Foreclosed property and repossessed assets obtained through our lending activities typically include commercial and residential
real estate or personal property, such as automobiles, and are recorded at net realizable value. For home loans collateralized by
residential real estate, we reclassify loans to foreclosed property at the earlier of when we obtain legal title to the residential real
estate property or when the borrower conveys all interest in the property to us. For all other foreclosed property and repossessed
assets, we reclassify the loan to repossessed assets upon repossession of the property in satisfaction of the loan. Net realizable
value is the estimated fair value of the underlying collateral less estimated selling costs and is based on appraisals, when available.
We routinely monitor and update the net realizable value of the foreclosed property or repossessed asset, adjusting our accounting
to be equal to the lower of cost or net realizable value. Any changes in net realizable value and gains or losses realized from
disposition of the property are recorded in non-interest expense. See “Note 17—Fair Value Measurement” for details.
Restricted Equity Investments
We have investments in Federal Home Loan Banks (“FHLB”) stock and in the Board of Governors of the Federal Reserve System
(“Federal Reserve”) stock. These investments, which are included in other assets on our consolidated balance sheets, are not
marketable and are carried at cost. We assess these investments for OTTI in accordance with applicable accounting guidance for
evaluating impairment. See “Note 9—Deposits and Borrowings” for details.
Representation and Warranty Reserve
In connection with the sales of mortgage loans, certain of our subsidiaries entered into agreements containing varying representations
and warranties about, among other things, the ownership of the loan, the validity of the lien securing the loan, the loan’s compliance
with any applicable loan criteria established by the purchaser, including underwriting guidelines and the ongoing existence of
mortgage insurance, and the loan’s compliance with applicable federal, state and local laws. We may be required to repurchase
the mortgage loan, indemnify the investor or insurer, or reimburse the investor for loan losses incurred on the loan in the event of
a material breach of contractual representations or warranties.
We have established representation and warranty reserves for losses that we consider to be both probable and reasonably estimable
associated with the mortgage loans sold by each subsidiary, including both litigation and non-litigation liabilities. The reserve-
setting process relies heavily on estimates, which are inherently uncertain, and requires the application of judgment. We evaluate
these estimates on a quarterly basis.
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Losses incurred on loans that we are required to either repurchase or make payments to the investor under indemnification provisions
are charged against the representation and warranty reserve. The representation and warranty reserve is included in other liabilities
on our consolidated balance sheets. Changes to the representation and warranty reserve related to GreenPoint Mortgage Funding,
Inc. (“GreenPoint”) are reported as discontinued operations for all periods presented. See “Note 19—Commitments, Contingencies,
Guarantees and Others” for additional information related to our representation and warranty reserve.
Customer Rewards Reserve
We offer products, primarily credit cards, which include programs that allow members to earn rewards, in the form of points, that
can be redeemed for cash (primarily in the form of statement credits), gift cards, airline tickets or merchandise, based on account
activity. The amount of reward that a customer earns varies based on the terms and conditions of the rewards program and product.
Customer rewards costs are generally recorded as an offset to interchange income, with a corresponding increase to the customer
rewards reserve, when the rewards are earned by the customer. The customer rewards reserve is computed based on the estimated
future cost of earned points that are expected to be redeemed and the average cost per point redeemed. The customer rewards
reserve is reduced as points are redeemed. In estimating the customer rewards reserve, we consider historical rewards redemption
behavior, the terms and conditions of the current rewards programs and card purchase activity. The customer rewards reserve is
sensitive to changes in the reward redemption type and redemption rate, which is based on the expectation that the vast majority
of all points earned will eventually be redeemed. The customer rewards reserve, which is included in other liabilities on our
consolidated balance sheets, totaled $3.6 billion and $3.2 billion as of December 31, 2016 and 2015, respectively.
Revenue Recognition
Interest Income and Fees
We recognize interest income, including finance charges, and fees on loans in interest and non-interest income in our consolidated
statements of income in accordance with the contractual provisions of the credit arrangements. Loan origination fees and costs
and premiums and discounts are generally deferred and amortized over the average life of the related loans using the effective
interest method, except for those related to originated credit cards, which are amortized over 12 months on a straight-line basis.
Direct loan origination costs consist of both internal and external costs associated with the origination of a loan.
Finance charges and fees on credit card loans, net of amounts that we consider uncollectible, are included in loan receivables and
revenue when the fees are earned. Annual membership fees are deferred and amortized into income over one year on a straight-
line basis. We continue to accrue finance charges and fees on credit card loans until the account is charged-off. Our methodology
for estimating the uncollectible portion of billed finance charges and fees is consistent with the methodology we use to estimate
the allowance for incurred principal losses on our credit card loan receivables.
Interchange Income
Interchange income represents merchant fees for credit card transactions processed through the MasterCard® (“MasterCard”) and
Visa® (“Visa”) interchange networks, net of the fee retained by the merchant’s processing bank. The levels and structure of
interchange rates are set by MasterCard and Visa and are based on cardholder purchase volumes. We recognize interchange income
as earned at the time of purchase.
Card Partnership Agreements
Our partnership agreements relate to alliances with retailers and other partners to provide lending and other services to mutual
customers. We primarily issue private-label and co-branded credit card loans to these customers over the term of the partnership
agreements, which typically range from two to ten years.
Certain partners assist in or perform marketing activities on our behalf and promote our products and services to their customers.
As compensation for providing these services, we often pay royalties, bounties or other special bonuses to these partners. Depending
upon the nature of the payments, they are recorded as a reduction of revenue, marketing expenses or other operating expenses. We
have certain credit card partnership arrangements in which our partner agrees to share in a portion of the credit losses associated
with the partnership.
If a partnership agreement provides for profit, revenue or loss sharing payments, we must determine whether to report those
payments on a gross or net basis in our consolidated financial statements. We evaluate the contractual provisions of each transaction
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and applicable accounting guidance to determine the manner in which to report the impact of sharing arrangements in our
consolidated financial statements. Our consolidated net income is the same regardless of whether revenue and loss sharing
arrangements are reported on a gross or net basis.
When presented on a net basis, the loss sharing amounts due from partners are recorded as a reduction to our provision for credit
losses in our consolidated statements of income and reduce the charge-off amounts that we report. The allowance for loan and
lease losses attributable to these portfolios is also reduced by the expected reimbursements from these partners for loss sharing
amounts. See “Note 5—Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments” for additional
information related to our loss sharing arrangements.
Collaborative Arrangements
A collaborative arrangement is a contractual arrangement that involves a joint operating activity between two or more parties that
are active participants in the activity. These parties are exposed to significant risks and rewards based upon the economic success
of the joint operating activity. We assess each of our partnership agreements with profit, revenue or loss sharing payments to
determine if a collaborative arrangement exists and, if so, how revenue generated from third parties, costs incurred and transactions
between participants in the collaborative arrangement should be accounted for and reported on our consolidated financial statements.
We currently have one partnership agreement that meets the definition of a collaborative agreement.
We share a fixed percentage of revenues, consisting of finance charges and late fees, with the partner, and the partner is required
to reimburse us for a fixed percentage of credit losses incurred. Revenues and losses related to the partner’s credit card program
and partnership agreement are reported on a net basis in our consolidated financial statements. Revenue sharing amounts attributable
to the partner are recorded as an offset against total net revenue in our consolidated statements of income. Interest income was
reduced by $1.2 billion, $1.1 billion and $1.0 billion in 2016, 2015, and 2014, respectively, for amounts earned by the partner, as
part of the revenue sharing agreement. The financial statement impact of all of our loss sharing arrangements that qualify for net
accounting treatment is disclosed in “Note 5—Allowance for Loan and Lease Losses and Reserve for Unfunded Lending
Commitments.”
Stock-Based Compensation
We reserve common shares for issuance to employees, directors and third-party service providers, in various forms, including
stock options, stock appreciation rights, restricted stock awards and units and performance share awards and units. In addition,
we also issue cash equity units and cash-settled restricted stock units which are not counted against the common shares reserved
for issuance or available for issuance because they are settled in cash. For awards settled in shares, we generally recognize
compensation expense on a straight-line basis over the award’s requisite service period. If an award settled in shares contains a
performance condition with graded vesting, we recognize compensation expense using the accelerated attribution method. Equity
units and restricted stock units that are cash-settled are accounted for as liability awards which results in quarterly expense
fluctuations based on changes in our stock price through the date that the awards are settled. Awards that continue to vest after
retirement are expensed over the shorter of the period of time between the grant date and the final vesting period or between the
grant date and when the participant becomes retirement eligible; awards to participants who are retirement eligible at the grant
date are subject to immediate expense recognition upon grant. Stock-based compensation expense is included in salaries and
associate benefits in the consolidated statements of income.
Stock-based compensation expense for equity classified stock options is based on the grant date fair value, which is estimated
using a Black-Scholes option pricing model. Significant judgment is required when determining the inputs into the fair value
model. For awards other than stock options, the fair value of stock-based compensation used in determining compensation expense
will generally equal the fair market value of our common stock on the date of grant. Certain share-settled awards have discretionary
vesting conditions which result in a requirement to remeasure at fair value each reporting period and potential for compensation
expense to fluctuate with changes in our stock price.
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Marketing Expenses
We expense marketing costs as incurred. Television advertising costs are expensed during the period in which the advertisements
are aired.
Income Taxes
We recognize the current and deferred tax consequences of all transactions that have been recognized in the financial statements
using the provisions of the enacted tax laws. Current income tax expense represents our estimated taxes to be paid or refunded for
the current period and includes income tax expense related to our uncertain tax positions, as well as tax-related interest and penalties.
Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and
liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
We record valuation allowances to reduce deferred tax assets to the amount that is more likely than not to be realized. See “Note 16
—Income Taxes” for additional detail.
Earnings Per Share
Earnings per share is calculated and reported under the “two-class” method. The “two-class” method is an earnings allocation
method under which earnings per share is calculated for each class of common stock and participating security considering both
dividends declared or accumulated and participation rights in undistributed earnings as if all such earnings had been distributed
during the period. We have unvested share-based payment awards which have a right to receive nonforfeitable dividends. These
share-based payment awards are deemed to be participating securities.
Earnings per common share is calculated by dividing net income, after deducting dividends on preferred stock and undistributed
earnings allocated to participating securities, by the average number of common shares outstanding during the period, net of any
treasury shares. We calculate diluted earnings per share by dividing net income, after deducting dividends on preferred stock and
undistributed earnings allocated to participating securities, by the average number of common shares outstanding during the period,
net of any treasury shares, after consideration of the potential dilutive effect of common stock equivalents. Common stock
equivalents include warrants, stock options, restricted stock awards and units and performance share awards and units. Common
stock equivalents are calculated based upon the treasury stock method using an average market price of common shares sold during
the period. Dilution is not considered when the Company is in a net loss position. Common stock equivalents that have an antidilutive
effect are excluded from the computation of diluted earnings per share.
Derivative Instruments and Hedging Activities
All derivative financial instruments, whether designated for hedge accounting or not, are reported at their fair value on our
consolidated balance sheets as either assets or liabilities, with consideration of legally enforceable master netting arrangements
that allow us to net settle positive and negative positions and offset cash collateral with the same counterparty. We report net
derivatives in a gain position, or derivative assets, on our consolidated balance sheets as a component of other assets. We report
net derivatives in a loss position, or derivative liabilities, on our consolidated balance sheets as a component of other liabilities.
See “Note 10—Derivative Instruments and Hedging Activities” for additional detail on the accounting for derivative instruments,
including those designated as qualifying for hedge accounting.
Fair Value
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 whether the inputs to the valuation
techniques used to measure fair value are observable or unobservable. Fair value measurement of a financial asset or liability is
assigned to a level based on the lowest level of any input that is significant to the fair value measurement in its entirety. The three
levels of the fair value hierarchy are described below:
Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities
Level 2: Observable market-based inputs, other than quoted prices in active markets for identical assets or liabilities
Level 3: Unobservable inputs
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The accounting guidance for fair value requires that we maximize the use of observable inputs and minimize the use of unobservable
inputs in determining fair value. The accounting guidance also 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 into income. We have not made any material fair value option elections as of and for the years ended December 31,
2016, 2015 and 2014. See “Note 17—Fair Value Measurement” for additional information.
Accounting for Acquisitions
We account for business combinations under the acquisition method of accounting. Under the acquisition method, tangible and
intangible identifiable assets acquired, liabilities assumed and any noncontrolling interest in the acquiree are recorded at fair value
as of the acquisition date, with limited exceptions. Transaction costs and costs to restructure the acquired company are expensed
as incurred. Goodwill is recognized as the excess of the acquisition price over the estimated fair value of the net assets acquired.
Likewise, if the fair value of the net assets acquired is greater than the acquisition price, a bargain purchase gain is recognized and
recorded in non-interest income.
If the acquired set of activities and assets does not meet the accounting definition of a business, the transaction is accounted for
as an asset acquisition. In an asset acquisition, the assets acquired are recorded at the purchase price plus any transaction costs
incurred and no goodwill is recognized.
Newly Adopted Accounting Standards
Consolidation: Amendments to the Consolidation Analysis
In February 2015, the Financial Accounting Standards Board (“FASB”) issued revised guidance for evaluating whether
organizations should consolidate certain legal entities such as limited partnerships, limited liability corporations and securitization
structures. The guidance also removed the indefinite deferral of specialized guidance for certain investment funds. We adopted
the guidance effective in the first quarter of 2016 on a modified retrospective basis. Our adoption of this guidance did not have an
impact on our financial condition, results of operations or liquidity. See “Note 6—Variable Interest Entities and Securitizations”
for information regarding our involvement with VIEs.
Recently Issued but Not Yet Adopted Accounting Standards
Clarifying the Definition of a Business
In January 2017, the FASB issued revised guidance for determining whether a purchased set of assets and liabilities constitutes a
purchase of a business. The guidance is intended to reduce the number of acquisitions that qualify as a purchase of a business by
requiring an entity to determine whether substantially all of the gross assets acquired are concentrated in a single identifiable asset,
or group of similar assets, and if so, the acquired set is not considered a business. In addition to this initial test, for the acquired
set of assets to be considered a business, the set must include an input and process that contribute to the ability to create an output,
and removes a previous requirement to evaluate whether a market participant could replace any of the elements, if missing. The
guidance is effective for us on January 1, 2018, with early adoption permitted using the prospective transition method. Upon
adoption, the guidance can be applied retroactively to transactions, provided the transactions have not been previously reported
in our financial statements. We believe the new guidance will result in more acquisitions being accounted for as asset acquisitions
than business combinations. We are currently assessing the potential impact to other applications of the definition of a business
within our accounting policies and whether we may early adopt the standard.
Restricted Cash
In November 2016, the FASB issued revised guidance to require our consolidated statements of cash flows to include restricted
cash. Therefore, amounts generally described as restricted cash or restricted cash equivalents will be included within our beginning-
of-period and end-of-period total cash amounts reported on the consolidated statements of cash flows. Disclosure of the nature of
the restrictions on cash balances is required under the guidance. The guidance is effective for us on January 1, 2018, with early
adoption permitted using the retrospective transition method. Our restricted cash is primarily related to our securitization activities
and is classified as Restricted cash for securitization investors on our consolidated balance sheets. The changes in restricted cash
balance are currently presented as a financing activity in our consolidated statements of cash flows. Upon adoption, the presentation
of restricted cash amounts will change as noted above.
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Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued revised guidance for impairments on financial instruments. The guidance 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 loans held for investment, securities held to
maturity, lease receivables, financial guarantee contracts and certain unconditional loan commitments. The CECL model will
replace our current accounting for PCI and impaired loans. The guidance 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 will be effective for us on January 1, 2020, with
early adoption permitted no earlier than January 1, 2019. We are currently assessing the potential impact on our consolidated
financial statements; however, due to the significant differences in the revised guidance from existing GAAP, the implementation
of this guidance may result in material changes in our accounting for credit losses on financial instruments.
Improvements to Employee Share-Based Accounting
In March 2016, the FASB issued revised guidance for accounting for employee share-based payments, including the accounting
for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the consolidated statements
of cash flows. The guidance was effective beginning on January 1, 2017, with early adoption permitted. The impact of this guidance
will not be material to our consolidated financial statements and we adopted this guidance on the effective date.
Leases
In February 2016, the FASB issued revised guidance for leases. The guidance requires lessees to recognize right of use assets and
lease liabilities on the balance sheet and disclose key information about leasing arrangements for all leases, with certain practical
expedients. This will be effective for us on January 1, 2019, with early adoption permitted. We plan to adopt the standard on the
effective date. We are currently assessing the potential impact on our consolidated financial statements; however, we expect our
total assets and liabilities on our consolidated balance sheet to increase.
Recognition and Measurement of Financial Assets and Financial Liabilities
In January 2016, the FASB issued revised guidance for the recognition, measurement, presentation, and disclosure of financial
instruments. The main provisions of the guidance include, (i) most equity investments are to be measured at fair value and 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 practical expedient can be elected); (ii) the use of the exit price notion is required when valuing
financial instruments for disclosure purposes; (iii) an entity shall present separately in other comprehensive income the portion of
the total change in the fair value of a liability under fair value option resulting from a change in the instrument-specific credit risk;
(iv) the determination of the need for a valuation allowance on a deferred tax asset related to an available-for-sale securities must
be made in combination with other deferred tax assets. The guidance eliminates the current classifications of equity securities as
trading or available-for-sale and will require separate presentation of financial assets and liabilities by category and form of the
financial assets on the face of the consolidated balance sheets or within the accompanying notes. The guidance also eliminates the
requirement to disclose the methods and significant assumptions used to estimate fair value of financial instruments measured at
amortized cost on the balance sheet. The guidance will be effective January 1, 2018. Early adoption is only permitted for the
requirement to present the portion of the total change in fair value attributable to a change in the instrument-specific credit risk in
other comprehensive income. We are currently assessing the potential impact of this new guidance on our consolidated financial
statements.
Revenue from Contracts with Customers
In May 2014, the FASB issued revised guidance for the recognition, measurement and disclosure of revenue from contracts with
customers. The original guidance has been 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. The guidance, as amended, is applicable
to all entities and, once effective, will replace significant portions of existing industry and transaction-specific revenue recognition
rules with a more principles-based recognition model. Most revenue associated with financial instruments, including interest
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. Entities can elect to adopt the guidance either
136
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
on a full or modified retrospective basis. Full retrospective adoption will require a cumulative effect adjustment to retained earnings
as of the beginning of the earliest comparative period presented. Modified retrospective adoption will require a cumulative effect
adjustment to retained earnings as of the beginning of the reporting period in which the entity first applies the new guidance. We
plan to adopt this guidance on the effective date, January 1, 2018. We do not expect the guidance to have a material impact on our
consolidated balance sheets, results of operations or cash flows. However, we are still assessing whether our current income
statement presentation of certain credit card-related activities will be impacted by this new guidance.
137
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2—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. We have no significant
continuing involvement in these operations.
The following table summarizes the results from discontinued operations for the years ended December 31, 2016, 2015 and 2014.
Table 2.1: Results of Discontinued Operations
(Dollars in millions)
Income (loss) from discontinued operations before income taxes . . . . . . . . . . . . . . . . . . . . .
Income tax provision (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from discontinued operations, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2016
2015
2014
$
$
(30) $
(11)
(19) $
60
22
38
$
$
8
3
5
The discontinued mortgage origination operations of our wholesale mortgage banking unit had remaining assets which primarily
consisted of a deferred tax asset related to the reserve for representations and warranties on loans previously sold to third parties.
We also have contingent obligations to exercise certain mandatory clean-up calls associated with securitization transactions
undertaken by the discontinued GreenPoint Credit, LLC manufactured housing operations in the event the third party servicer
does not fulfill its obligation to exercise these clean-up calls. See “Note 6—Variable Interest Entities and Securitizations” for
information related to our retained interests and obligations associated with GreenPoint Credit, LLC manufactured housing
operations, and see “Note 19—Commitments, Contingencies, Guarantees and Others” for information related to reserves we have
established for our mortgage representation and warranty exposure.
138
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3—INVESTMENT SECURITIES
Our investment 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 and non-agency commercial
mortgage-backed securities (“CMBS”); other asset-backed securities (“ABS”); and other securities. The carrying value of our
investments in U.S. Treasury and Agency securities represented 91% and 90% of our total investment securities as of December
31, 2016 and 2015, respectively.
The table below presents the overview of our investment securities portfolio as of December 31, 2016 and 2015.
Table 3.1: Overview of Investment Securities Portfolio
(Dollars in millions)
Securities available for sale, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities held to maturity, at carrying value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total investment securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2016
December 31, 2015
$
$
40,737
25,712
66,449
$
$
39,061
24,619
63,680
The table below presents the amortized cost, gross unrealized gains and losses, and fair value of securities available for sale as of
December 31, 2016 and 2015.
Table 3.2: Investment Securities Available for Sale
(Dollars in millions)
December 31, 2016
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses(1)
Fair
Value
Investment securities available for sale:
U.S. Treasury securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
5,103
$
11
$
(49) $
5,065
RMBS:
Agency(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total RMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CMBS:
Agency(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total CMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other ABS(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other securities(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total investment securities available for sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
26,830
2,349
29,179
3,335
1,676
5,011
714
726
109
382
491
14
21
35
1
1
(412)
(9)
(421)
(45)
(13)
(58)
(1)
(6)
26,527
2,722
29,249
3,304
1,684
4,988
714
721
$
40,733
$
539
$
(535) $
40,737
139
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
Investment securities available for sale:
December 31, 2015
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses(1)
Fair
Value
U.S. Treasury securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
4,664
$
5
$
(9) $
4,660
RMBS:
Agency(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total RMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CMBS:
Agency(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total CMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other ABS(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other securities(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total investment securities available for sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24,332
2,680
27,012
3,690
1,723
5,413
1,345
370
165
368
533
21
16
37
1
2
(212)
(22)
(234)
(47)
(24)
(71)
(6)
(1)
24,285
3,026
27,311
3,664
1,715
5,379
1,340
371
$
38,804
$
578
$
(321) $
39,061
__________
(1)
Includes non-credit-related OTTI that is recorded in AOCI of $9 million and $22 million as of December 31, 2016 and 2015, respectively. All of this amount
is related to non-agency RMBS.
(2)
Includes Government National Mortgage Association (“Ginnie Mae”) guaranteed securities, Federal National Mortgage Association (“Fannie Mae”) and
Federal Home Loan Mortgage Corporation (“Freddie Mac”) issued securities.
(3) ABS collateralized by credit card loans constituted approximately 57% and 71% of the other ABS portfolio as of December 31, 2016 and 2015, respectively,
and ABS collateralized by auto dealer floor plan inventory loans and leases constituted approximately 23% and 11% of the other ABS portfolio as of
December 31, 2016 and 2015, respectively.
(4)
Includes supranational bonds, foreign government bonds and equity investments.
The table below presents the amortized cost, carrying value, gross unrealized gains and losses, and fair value of securities held to
maturity as of December 31, 2016 and 2015.
Table 3.3: Investment Securities Held to Maturity
(Dollars in millions)
U.S. Treasury securities . . . . . . . . . . . . . . . . . . .
Agency RMBS . . . . . . . . . . . . . . . . . . . . . . . . . .
Agency CMBS . . . . . . . . . . . . . . . . . . . . . . . . . .
Total investment securities held to maturity . . .
Amortized
Cost
Unrealized
Losses Recorded
in AOCI(1)
Carrying
Value
Gross
Unrealized
Gains
Gross
Unrealized
Losses
$
199
$
0
$
199
$
0
$
0
$
23,022
3,480
(897)
(92)
22,125
3,388
606
77
(158)
(41)
Fair
Value
199
22,573
3,424
$
26,701
$
(989) $
25,712
$
683
$
(199) $
26,196
December 31, 2016
December 31, 2015
(Dollars in millions)
U.S. Treasury securities . . . . . . . . . . . . . . . . . .
Agency RMBS . . . . . . . . . . . . . . . . . . . . . . . . .
Agency CMBS . . . . . . . . . . . . . . . . . . . . . . . . .
Total investment securities held to maturity . . .
Amortized
Cost
Unrealized
Losses Recorded
in AOCI(1)
Carrying
Value
Gross
Unrealized
Gains
Gross
Unrealized
Losses
$
199
$
0
$
199
$
0
$
(1) $
22,561
3,012
(1,048)
(105)
21,513
2,907
692
87
(72)
(8)
Fair
Value
198
22,133
2,986
$
25,772
$
(1,153) $
24,619
$
779
$
(81) $
25,317
__________
(1) Certain investment securities were transferred from the available for sale category to the held to maturity category in 2013. This amount represents the
unrealized holding gain or loss at the date of transfer, net of any subsequent accretion. Any bonds purchased into the securities held to maturity portfolio
rather than transferred, will not have unrealized losses recognized in AOCI.
140
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 December 31,
2016 and 2015.
Table 3.4: Securities in a Gross Unrealized Loss Position
(Dollars in millions)
Investment securities available for sale:
December 31, 2016
Less than 12 Months
12 Months or Longer
Total
Fair Value
Gross
Unrealized
Losses
Fair Value
Gross
Unrealized
Losses
Fair Value
Gross
Unrealized
Losses
U.S. Treasury securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,060
$
(49) $
0
$
0
$
1,060
$
(49)
RMBS:
Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total RMBS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CMBS:
Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total CMBS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other ABS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total investment securities available for sale in a gross
unrealized loss position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Dollars in millions)
Investment securities available for sale:
U.S. Treasury securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
RMBS:
Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total RMBS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CMBS:
Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total CMBS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other ABS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total investment securities available for sale in a gross
unrealized loss position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16,899
128
17,027
1,624
826
2,450
187
417
(329)
(2)
(331)
(21)
(11)
(32)
(1)
(6)
4,865
145
5,010
745
129
874
21
0
(83)
(7)
(90)
(24)
(2)
(26)
0
0
21,764
273
22,037
2,369
955
3,324
208
417
(412)
(9)
(421)
(45)
(13)
(58)
(1)
(6)
$ 21,141
$
(419) $
5,905
$
(116) $ 27,046
$
(535)
December 31, 2015
Less than 12 Months
12 Months or Longer
Total
Fair Value
Gross
Unrealized
Losses
Fair Value
Gross
Unrealized
Losses
Fair Value
Gross
Unrealized
Losses
$
3,096
$
(9) $
1
$
0
$
3,097
$
(9)
12,025
355
12,380
1,352
739
2,091
825
250
(110)
(10)
(120)
(9)
(13)
(22)
(5)
0
4,420
155
4,575
1,148
330
1,478
255
19
(102)
(12)
(114)
(38)
(11)
(49)
(1)
(1)
16,445
510
16,955
2,500
1,069
3,569
1,080
269
(212)
(22)
(234)
(47)
(24)
(71)
(6)
(1)
$ 18,642
$
(156) $
6,328
$
(165) $ 24,970
$
(321)
141
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2016, the amortized cost of approximately 860 securities available for sale exceeded their fair value by $535
million, of which $116 million related to securities that had been in a loss position for 12 months or longer. As of December 31,
2016, our investments in non-agency RMBS and CMBS, other ABS and other securities accounted for $29 million, or 5%, of total
gross unrealized losses on securities available for sale. As of December 31, 2016, the carrying value of approximately 170 securities
classified as held to maturity exceeded their fair value by $199 million.
Gross unrealized losses on our investment securities have increased since December 31, 2015. The unrealized losses related to
investment securities for which we have not recognized credit impairment were primarily attributable to changes in market interest
rates. As discussed in more detail below, we conduct periodic reviews of all investment securities with unrealized losses to assess
whether impairment is other-than-temporary.
Maturities and Yields of Investment Securities
The following tables summarize the remaining scheduled contractual maturities, assuming no prepayments, of our investment
securities as of December 31, 2016.
Table 3.5: Contractual Maturities of Securities Available for Sale
(Dollars in millions)
Due in 1 year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after 1 year through 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after 5 years through 10 years. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after 10 years(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2016
Amortized Cost
Fair Value
$
$
1,025
$
4,100
3,382
32,226
40,733
$
1,027
4,106
3,350
32,254
40,737
__________
(1)
Investments with no stated maturities, which consist of equity securities, are included with contractual maturities due after 10 years.
Table 3.6: Contractual Maturities of Securities Held to Maturity
(Dollars in millions)
Due after 1 year through 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after 5 years through 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2016
Carrying Value
Fair Value
$
$
199
$
1,363
24,150
25,712
$
199
1,422
24,575
26,196
Because borrowers may have the right to call or prepay certain obligations, the expected maturities of our securities are likely to
differ from the scheduled contractual maturities presented above.
142
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The table below summarizes, by major security type, the expected maturities and weighted-average yields of our investment
securities as of December 31, 2016.
Table 3.7: Expected Maturities and Weighted-Average Yields of Securities
(Dollars in millions)
Fair value of securities available for sale:
December 31, 2016
Due in
1 Year or
Less
Due > 1 Year
through
5 Years
Due > 5 Years
through
10 Years
Due > 10
Years
Total
U.S. Treasury securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
652
$
2,854
$
1,559
$
RMBS:
Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total RMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CMBS:
Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total CMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other ABS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total securities available for sale . . . . . . . . . . . . . . . . . . . . . .
Amortized cost of securities available for sale. . . . . . . . . .
Weighted-average yield for securities available for sale(1)
Carrying value of securities held to maturity:
U.S. Treasury securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Agency RMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Agency CMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total securities held to maturity. . . . . . . . . . . . . . . . . . . . . . .
Fair value of securities held to maturity . . . . . . . . . . . . . .
Weighted-average yield for securities held to maturity(1) .
$
$
$
$
$
94
29
123
144
146
290
247
207
1,519
1,521
1.26%
0
0
0
0
0
$
$
$
$
$
9,755
941
10,696
1,544
780
2,324
460
344
16,678
1,436
18,114
1,616
758
2,374
7
77
16,678
16,548
$
$
22,131
22,286
$
$
0
0
316
316
0
0
0
0
93
409
378
$
5,065
26,527
2,722
29,249
3,304
1,684
4,988
714
721
$
$
40,737
40,733
2.17%
2.51%
6.55%
2.36%
199
$
0
$
0
$
199
1,363
130
1,692
1,714
16,418
2,456
18,874
19,314
$
$
$
$
4,344
802
5,146
5,168
22,125
3,388
25,712
26,196
$
$
0.00%
2.71%
2.54%
3.33%
2.70%
__________
(1)
The weighted-average yield represents the effective yield for the investment securities and is calculated based on the amortized cost of each security.
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 December 31, 2016, 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.
143
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.
The table below presents a rollforward of the credit-related OTTI recognized in earnings for the years ended December 31, 2016,
2015 and 2014 on investment securities for which we had no intent to sell.
Table 3.8: Credit Impairment Rollforward
(Dollars in millions)
Credit loss component, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions:
Year Ended December 31,
2016
2015
2014
$
199
$
175
$
160
Initial credit impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subsequent credit impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total additions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reductions due to payoffs, disposals, transfers and other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit loss component, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3
8
11
(3)
7
18
25
(1)
$
207
$
199
$
5
12
17
(2)
175
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, and the
OTTI losses recognized in earnings for the years ended December 31, 2016, 2015 and 2014. 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 3.9: Realized Gains and Losses and OTTI Recognized in Earnings
(Dollars in millions)
Realized gains (losses):
Gross realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross realized losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized gains (losses) gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OTTI recognized in earnings:
Credit-related OTTI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intent-to-sell OTTI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total OTTI recognized in earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net securities gains (losses). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total proceeds from sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
Year Ended December 31,
2016
2015
2014
$
12
$
23
$
(6)
6
(11)
(6)
(17)
(25)
(2)
(25)
(5)
(30)
(11) $
(32) $
55
(34)
21
(17)
(7)
(24)
(3)
4,146
$
4,379
$
7,417
144
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Securities Pledged and Received
As part of our liquidity management strategy, we pledge securities to secure borrowings from counterparties including the 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 $1.9 billion and $1.7 billion as of December 31, 2016 and 2015, respectively. We
also pledged securities held to maturity with a carrying value of $8.1 billion and $8.7 billion as of December 31, 2016 and 2015,
respectively. Of the total securities pledged as collateral, we have encumbered a fair value of $9.3 billion and $10.6 billion as of
December 31, 2016 and 2015, respectively, primarily related to Public Fund deposits. We accepted pledges of securities with a
fair value of $16 million and $172 million as of December 31, 2016 and 2015, respectively, 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
December 31, 2016 and 2015.
Table 3.10: Outstanding Balance and Carrying Value of Acquired Credit-Impaired Debt Securities
(Dollars in millions)
Outstanding balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Carrying value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2016
December 31, 2015
$
2,899
$
2,277
3,285
2,480
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 years
ended December 31, 2016, 2015 and 2014.
Table 3.11: Changes in the Accretable Yield of Purchased Credit-Impaired Debt Securities
(Dollars in millions)
Accretable yield, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions from new acquisitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion recognized in earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reduction due to payoffs, disposals, transfers and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net reclassifications from nonaccretable difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretable yield, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2016
2015
2014
$
1,237
$
1,250
$
1,423
0
(206)
(2)
144
0
(240)
(1)
228
34
(243)
(3)
39
$
1,173
$
1,237
$
1,250
145
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, home and retail banking loans. Commercial
banking loans consist of commercial and multifamily real estate, commercial and industrial, and small-ticket commercial real
estate loans.
Our portfolio of loans held for investment also includes certain consumer and commercial loans acquired through business
combinations that were recorded at fair value at acquisition and subsequently accounted for based on cash flows expected to be
collected, which are referred to as PCI loans. See “Note 1—Summary of Significant Accounting Policies” for additional information
on the accounting guidance for these loans.
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 table below presents the composition and an aging analysis of our loans held for investment portfolio as of December 31,
2016 and 2015. The delinquency aging includes all past due loans, both performing and nonperforming.
Table 4.1: Loan Portfolio Composition and Aging Analysis
(Dollars in millions)
Credit Card:
Domestic credit card(1). . . . . . . . . . . . . . . .
International credit card. . . . . . . . . . . . . . .
Total credit card . . . . . . . . . . . . . . . . . . . . . . .
Consumer Banking:
Auto . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home loan . . . . . . . . . . . . . . . . . . . . . . . . .
Retail banking . . . . . . . . . . . . . . . . . . . . . .
Total consumer banking . . . . . . . . . . . . . . . . .
Commercial Banking:
Commercial and multifamily real estate . .
Commercial and industrial . . . . . . . . . . . .
Total commercial lending . . . . . . . . . . . .
Small-ticket commercial real estate. . . . . .
Total commercial banking . . . . . . . . . . . . . . .
Other loans . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans(2) . . . . . . . . . . . . . . . . . . . . . . . . . .
% of Total loans . . . . . . . . . . . . . . . . . . . . . . .
Current
30-59
Days
60-89
Days
> 90
Days
Total
Delinquent
Loans
PCI
Loans
Total
Loans
December 31, 2016
$ 93,279
$ 1,153
$
8,115
101,394
44,762
6,951
3,477
55,190
26,536
38,831
65,367
473
65,840
56
124
1,277
2,041
44
22
2,107
45
27
72
7
79
3
846
72
918
890
20
7
917
0
84
84
1
85
0
$ 1,840
$ 3,839
$
121
1,961
223
141
20
384
0
297
297
2
299
5
317
4,156
3,154
205
49
2
0
2
0
14,428
28
3,408
14,456
45
408
453
10
463
8
28
585
613
0
613
0
$ 97,120
8,432
105,552
47,916
21,584
3,554
73,054
26,609
39,824
66,433
483
66,916
64
$222,480
$ 3,466
$ 1,920
$ 2,649
$ 8,035
$ 15,071
$245,586
90.59%
1.41%
0.78%
1.08%
3.27%
6.14% 100.00%
146
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
Credit Card:
Domestic credit card . . . . . . . . . . . . . . . . .
International credit card. . . . . . . . . . . . . . .
Total credit card . . . . . . . . . . . . . . . . . . . . . . .
Consumer Banking:
Auto . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home loan . . . . . . . . . . . . . . . . . . . . . . . . .
Retail banking . . . . . . . . . . . . . . . . . . . . . .
Total consumer banking . . . . . . . . . . . . . . . . .
Commercial Banking:
Commercial and multifamily real estate . .
Commercial and industrial . . . . . . . . . . . .
Total commercial lending . . . . . . . . . . . .
Small-ticket commercial real estate. . . . . .
Total commercial banking . . . . . . . . . . . . . . .
Other loans . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans(1) . . . . . . . . . . . . . . . . . . . . . . . . . .
% of Total loans . . . . . . . . . . . . . . . . . . . . . . .
Current
30-59
Days
60-89
Days
> 90
Days
Total
Delinquent
Loans
PCI Loans
Total
Loans
December 31, 2015
$ 84,954
$
7,903
92,857
38,549
6,465
3,514
48,528
25,449
35,920
61,369
607
61,976
77
$
906
110
1,016
1,901
41
21
1,963
34
51
85
3
88
2
658
67
725
880
18
8
906
0
34
34
1
35
2
$
1,421
$
2,985
$
106
1,527
219
176
20
415
4
203
207
2
209
7
283
3,268
3,000
235
49
0
0
0
0
18,527
33
3,284
18,560
38
288
326
6
332
11
31
927
958
0
958
0
$ 87,939
8,186
96,125
41,549
25,227
3,596
70,372
25,518
37,135
62,653
613
63,266
88
$203,438
$
3,069
$
1,668
$
2,158
$
6,895
$ 19,518
$229,851
88.51%
1.33%
0.73%
0.94%
3.00%
8.49%
100.00%
__________
(1)
Loans (other than PCI loans) include unearned income, unamortized premiums and discounts, and unamortized deferred fees and costs totaling
$558 million and $499 million as of December 31, 2016 and 2015, respectively.
We pledge loan collateral at the FHLB to secure borrowing capacity. The outstanding balance of the pledged loans totaled $29.3
billion and $36.9 billion as of December 31, 2016 and 2015, 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 December 31, 2016 and 2015.
Table 4.2: 90+ Day Delinquent Loans Accruing Interest and Nonperforming Loans(1)
(Dollars in millions)
Credit Card:
December 31, 2016
December 31, 2015
> 90 Days and
Accruing
Nonperforming
Loans
> 90 Days and
Accruing
Nonperforming
Loans
Domestic credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total credit card. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,840
96
$
1,936
Consumer Banking:
Auto . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retail banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total consumer banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0
0
0
0
N/A $
42
42
223
273
31
527
1,421
79
$
1,500
0
0
0
0
N/A
53
53
219
311
28
558
147
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
Commercial Banking:
December 31, 2016
December 31, 2015
> 90 Days and
Accruing
Nonperforming
Loans
> 90 Days and
Accruing
Nonperforming
Loans
Commercial and multifamily real estate . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total commercial lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Small-ticket commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . .
Total commercial banking. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
% of Total loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
0
0
0
0
0
0
$
30
988
1,018
4
1,022
8
$
0
5
5
0
5
0
7
538
545
5
550
9
$
1,936
$
1,599
$
1,505
$
1,170
0.79%
0.65%
0.65%
0.51%
__________
(1) Nonperforming loans generally include loans that have been placed on nonaccrual status. PCI loans are excluded from loans reported as 90 days or more
past due and accruing interest as well as nonperforming loans. See “Note 1—Summary of Significant Accounting Policies” for additional information on
our policies for nonperforming loans.
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 on a portfolio basis. The risk in our credit card loan portfolio
correlates to broad economic trends, such as unemployment rates and home values, as well as customer liquidity, 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 December 31, 2016 and 2015. We also
present net charge-offs for the years ended December 31, 2016 and 2015.
Table 4.3: Credit Card Risk Profile by Geographic Region
(Dollars in millions)
Domestic credit card:
December 31, 2016
% of
Total(1)
Amount
December 31, 2015
% of
Total(1)
Amount
$
California. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New York. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Illinois . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pennsylvania . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ohio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Jersey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Michigan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total domestic credit card. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International credit card:
11,068
7,227
7,090
6,540
4,492
4,048
3,654
3,488
3,164
46,349
97,120
Canada. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total international credit card. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,594
2,838
8,432
105,552
$
__________
(1)
Percentages by geographic region are calculated based on period-end amounts.
10.5% $
6.8
6.7
6.2
4.3
3.8
3.5
3.3
3.0
43.9
92.0
5.3
2.7
8.0
100.0% $
10,029
6,344
6,446
5,712
4,121
3,764
3,371
3,210
2,922
42,020
87,939
4,889
3,297
8,186
96,125
10.5%
6.6
6.7
5.9
4.3
3.9
3.5
3.3
3.0
43.8
91.5
5.1
3.4
8.5
100.0%
148
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Table 4.4: Credit Card Net Charge-Offs
(Dollars in millions)
Net charge-offs:(1)
Year Ended December 31,
2016
2015
Amount
Rate(1)
Amount
Rate
Domestic credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3,681
272
4.16% $ 2,718
3.33
200
$ 3,953
4.09
$ 2,918
3.45%
2.50
3.36
__________
(1) Net charge-offs consist of the unpaid principal balance that we determine to be uncollectible, net of recovered amounts. The net charge-off rate is calculated
for each loan category by dividing net charge-offs by average balance of loans held for investment for the period. Net charge-offs and the net charge-off rate
are impacted periodically by fluctuations in recoveries, including loan sales.
Consumer Banking
Our consumer banking loan portfolio consists of auto, home and retail banking 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 (“GDP”) and home values, as well as customer liquidity, all of which can have a material effect on credit performance.
Delinquency, nonperforming loans and charge-off trends are key indicators we assess in monitoring the credit quality and risk of
our consumer banking loan portfolio.
The table below displays the geographic profile of our consumer banking loan portfolio, including PCI loans. We also present the
delinquency and nonperforming loan rates of our consumer banking loan portfolio as of December 31, 2016 and 2015, as well as
net charge-offs for the years ended December 31, 2016 and 2015.
Table 4.5: Consumer Banking Risk Profile by Geographic Region
(Dollars in millions)
Auto:
December 31, 2016
December 31, 2015
Amount
% of
Total(1)
Amount
% of
Total(1)
8.6% $ 5,463
7.5
4,611
Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Georgia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Louisiana. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Illinois . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ohio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total auto . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home loan:
California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New York . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maryland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Illinois . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Virginia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Jersey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Louisiana. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total home loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 6,304
5,448
3,985
2,506
2,159
2,065
2,017
23,432
47,916
4,993
2,036
1,409
1,218
1,204
1,112
985
8,627
21,584
5.5
3.4
3.0
2.8
2.8
32.0
65.6
6.8
2.8
1.9
1.7
1.7
1.5
1.3
11.8
29.5
7.8%
6.5
4.7
3.2
2.7
2.6
2.5
29.0
59.0
8.4
3.1
2.2
2.1
1.9
1.8
1.6
3,315
2,245
1,882
1,859
1,738
20,436
41,549
5,884
2,171
1,539
1,490
1,354
1,293
1,146
10,350
25,227
14.8
35.9
149
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
Retail banking:
December 31, 2016
December 31, 2015
Amount
% of
Total(1)
Amount
% of
Total(1)
Louisiana. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New York . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Jersey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maryland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Virginia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total retail banking. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total consumer banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,010
941
756
238
190
156
263
1.4% $ 1,071
1.3
921
1.0
0.3
0.3
0.2
0.4
757
259
180
151
257
3,554
$ 73,054
4.9
3,596
100.0% $ 70,372
1.5%
1.3
1.1
0.4
0.3
0.2
0.3
5.1
100.0%
__________
(1)
Percentages by geographic region are calculated based on period-end amounts.
Table 4.6: Consumer Banking Net Charge-Offs and Nonperforming Loans
(Dollars in millions)
Net charge-offs:
Year Ended December 31,
2016
2015
Amount
Rate(1)
Amount
Rate(1)
Auto . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home loan(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retail banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total consumer banking(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
752
14
54
820
1.69% $
0.06
1.53
1.15
674
9
48
$
731
1.69%
0.03
1.33
1.03
(Dollars in millions)
Nonperforming loans:
December 31, 2016
Rate(3)
Amount
December 31, 2015
Rate(3)
Amount
Auto . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home loan(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retail banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total consumer banking(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
223
273
31
527
0.47% $
1.26
0.86
0.72
$
219
0.53%
311
28
558
1.23
0.77
0.79
__________
(1)
The net charge-off rate is calculated for each loan category by dividing net charge-offs by average balance of loans held for investment for the period.
(2)
Excluding the impact of PCI loans, the net charge-off rates for our home loan and total consumer banking portfolios were 0.20% and 1.49%, respectively,
for the years ended December 31, 2016, compared to 0.13% and 1.45%, respectively, for the year ended December 31, 2015.
(3) 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.
(4)
Excluding the impact of PCI loans, the nonperforming loan rates for our home loan and total consumer banking portfolios were 3.81% and 0.90%, respectively,
as of December 31, 2016, compared to 4.68% and 1.08%, respectively, as of December 31, 2015.
150
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Home Loan
Our home loan portfolio consists of both first-lien and second-lien residential mortgage loans. In evaluating the credit quality and
risk of our home loan portfolio, we continually monitor a variety of mortgage loan characteristics that may affect the default
experience on this loan portfolio, such as vintage, geographic concentrations, lien priority and product type. Certain loan
concentrations have experienced higher delinquency rates as a result of the significant decline in home prices after the peak in
2006 and subsequent rise in unemployment. These loan concentrations include loans originated between 2006 and 2008 in an
environment of decreasing home sales, broadly declining home prices and more relaxed underwriting standards.
The following table presents the distribution of our home loan portfolio as of December 31, 2016 and 2015, based on selected key
risk characteristics.
Table 4.7: Home Loan Risk Profile by Vintage, Geography, Lien Priority and Interest Rate Type
(Dollars in millions)
Origination year:(3)
December 31, 2016
Loans
PCI Loans(1)
Total Home Loans
Amount
% of
Total(2)
Amount
% of
Total(2)
Amount
% of
Total(2)
< = 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Geographic concentration:(4)
California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New York. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maryland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Illinois . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Virginia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Jersey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Louisiana . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Arizona. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lien type:
1st lien. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2nd lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest rate type:
$ 2,038
128
80
82
139
969
465
557
1,024
1,674
$ 7,156
$
976
1,343
585
108
490
379
962
159
89
725
1,340
$ 7,156
$ 6,182
974
$ 7,156
9.4% $ 7,424
2,260
0.6
1,088
0.4
1,562
0.4
1,683
0.6
268
4.5
59
2.2
31
2.6
30
4.7
23
7.8
33.2% $ 14,428
4.5% $ 4,017
693
6.2
824
2.7
1,110
0.5
714
2.3
733
1.8
23
4.5
772
0.7
799
0.4
98
3.4
4,645
6.2
33.2% $ 14,428
34.4% $ 9,462
2,388
10.5
1,168
5.0
1,644
7.2
1,822
7.8
1,237
1.2
524
0.2
0.2
588
1,054
0.2
1,697
0.1
66.8% $ 21,584
18.6% $ 4,993
2,036
3.2
1,409
3.9
1,218
5.1
1,204
3.3
1,112
3.4
985
0.1
931
3.6
888
3.7
823
0.4
21.5
5,985
66.8% $ 21,584
28.7% $ 14,159
269
4.5
33.2% $ 14,428
65.5% $ 20,341
1,243
1.3
66.8% $ 21,584
Fixed rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustable rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3,394
3,762
$ 7,156
15.8% $ 1,822
17.4
12,606
33.2% $ 14,428
8.4% $ 5,216
58.4
16,368
66.8% $ 21,584
43.8%
11.1
5.4
7.6
8.4
5.7
2.4
2.8
4.9
7.9
100.0%
23.1%
9.4
6.6
5.6
5.6
5.2
4.6
4.3
4.1
3.8
27.7
100.0%
94.2%
5.8
100.0%
24.2%
75.8
100.0%
151
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
Origination year:(3)
< = 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Geographic concentration:(4)
California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New York. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maryland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Illinois . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Virginia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Jersey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Louisiana . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Arizona. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Washington . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lien type:
December 31, 2015
Loans
PCI Loans(1)
Total Home Loans
Amount
% of
Total(2)
Amount
% of
Total(2)
Amount
% of
Total(2)
$ 2,559
10.1% $ 8,956
35.5% $ 11,515
45.6%
157
97
97
176
1,276
557
680
1,101
0.6
0.4
0.4
0.7
5.1
2.2
2.7
4.4
2,866
1,498
2,208
2,476
389
71
31
32
11.4
5.9
8.8
9.8
1.5
0.3
0.1
0.1
3,023
1,595
2,305
2,652
1,665
628
711
1,133
12.0
6.3
9.2
10.5
6.6
2.5
2.8
4.5
$ 6,700
26.6% $ 18,527
73.4% $ 25,227
100.0%
$
871
3.5% $ 5,013
19.9% $ 5,884
23.4%
1,295
511
89
428
353
1,069
157
81
113
1,733
5.1
2.0
0.4
1.7
1.4
4.2
0.6
0.4
0.4
6.9
876
1,028
1,401
926
940
27
989
995
806
3.5
4.1
5.5
3.7
3.7
0.1
3.9
3.9
3.2
5,526
21.9
2,171
1,539
1,490
1,354
1,293
1,096
1,146
1,076
919
7,259
8.6
6.1
5.9
5.4
5.1
4.3
4.5
4.3
3.6
28.8
$ 6,700
26.6% $ 18,527
73.4% $ 25,227
100.0%
1st lien. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2nd lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 5,705
22.6% $ 18,207
72.2% $ 23,912
94.8%
995
4.0
320
1.2
1,315
5.2
$ 6,700
26.6% $ 18,527
73.4% $ 25,227
100.0%
Interest rate type:
Fixed rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustable rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,751
10.9% $ 2,264
9.0% $ 5,015
3,949
15.7
16,263
64.4
20,212
19.9%
80.1
$ 6,700
26.6% $ 18,527
73.4% $ 25,227
100.0%
__________
(1)
The PCI loan balances with an origination date in the years subsequent to 2012 represent refinancing of previously acquired home loans.
(2)
Percentages within each risk category are calculated based on period-end amounts.
(3) Modified loans are reported in the origination year of the initial borrowing.
(4)
States listed represent those that have the highest individual concentration of home loans.
Our recorded investment in home loans that are in process of foreclosure was $382 million and $474 million as of December 31,
2016 and 2015, respectively. We commence the foreclosure process on home loans when a borrower becomes at least 120 days
delinquent in accordance with Consumer Financial Protection Bureau regulations. Foreclosure procedures and timelines vary
according to state laws. As of December 31, 2016 and 2015, the carrying value of the foreclosed residential real estate properties
we hold and report as other assets on our consolidated balance sheets totaled $69 million and $123 million, respectively.
152
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Commercial Banking
We evaluate the credit risk of commercial loans using a dual 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. Loans of $1 million or more 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 greater than $1 million are specifically 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.
The following table presents the geographic distribution and internal risk ratings of our commercial loan portfolio as of December 31,
2016 and 2015.
Table 4.8: Commercial Banking Risk Profile by Geographic Region and Internal Risk Rating
Commercial
and
Multifamily
Real Estate
% of
Total(1)
Commercial
and
Industrial
% of
Total(1)
Small-ticket
Commercial
Real Estate
% of
Total(1)
Total
Commercial
Banking
% of
Total(1)
December 31, 2016
(Dollars in millions)
Geographic concentration:(2)
Northeast. . . . . . . . . . . . . . . . . . .
$ 15,714
59.0% $
Mid-Atlantic . . . . . . . . . . . . . . . .
South . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . .
3,024
4,032
3,839
11.4
15.2
14.4
9,628
3,450
15,193
11,553
8.7
38.1
29.0
Total . . . . . . . . . . . . . . . . . . . . . . . . .
Internal risk rating:(3)
$ 26,609
100.0% $ 39,824
100.0% $
24.2% $
298
61.7% $ 25,640
38.3%
16
34
135
483
3.3
7.0
28.0
6,490
19,259
15,527
9.7
28.8
23.2
100.0% $ 66,916
100.0%
Noncriticized. . . . . . . . . . . . . . . .
$ 26,309
98.9% $ 36,046
90.5% $
473
97.9% $ 62,828
93.9%
Criticized performing . . . . . . . . .
Criticized nonperforming . . . . . .
PCI loans(4) . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . .
242
30
28
0.9
0.1
0.1
2,205
988
585
5.5
2.5
1.5
6
4
0
1.3
0.8
0.0
2,453
1,022
613
3.7
1.5
0.9
$ 26,609
100.0% $ 39,824
100.0% $
483
100.0% $ 66,916
100.0%
153
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
Geographic concentration:(2)
Northeast. . . . . . . . . . . . . . . . . . .
Mid-Atlantic . . . . . . . . . . . . . . . .
South . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . .
Internal risk rating:(3)
Noncriticized. . . . . . . . . . . . . . . .
Criticized performing . . . . . . . . .
Criticized nonperforming . . . . . .
PCI loans(4) . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial
and
Multifamily
Real Estate
$ 15,949
2,797
4,070
2,702
$ 25,518
$ 25,130
350
7
31
$ 25,518
December 31, 2015
% of
Total(1)
Commercial
and
Industrial
% of
Total(1)
Small-ticket
Commercial
Real Estate
% of
Total(1)
Total
Commercial
Banking
% of
Total(1)
62.5% $
11.0
15.9
10.6
8,074
3,010
15,240
10,811
100.0% $ 37,135
98.5% $ 34,008
1,662
1.4
538
0.0
927
0.1
100.0% $ 37,135
21.8% $
8.1
41.0
29.1
100.0% $
91.6% $
4.5
1.4
2.5
100.0% $
376
25
40
172
613
605
3
5
0
613
61.3% $ 24,399
5,832
4.1
19,350
6.5
13,685
28.1
100.0% $ 63,266
98.7% $ 59,743
2,015
0.5
550
0.8
958
0.0
100.0% $ 63,266
38.6%
9.2
30.6
21.6
100.0%
94.4%
3.2
0.9
1.5
100.0%
__________
(1)
Percentages calculated based on total loans held for investment in each respective loan category using period-end amounts.
(2) 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.
(3) Criticized exposures correspond to the “Special Mention,” “Substandard” and “Doubtful” asset categories defined by banking regulatory authorities.
(4) We evaluate PCI loans based on their actual risk ratings. Were these PCI loans classified based on their risk ratings, $346 million and $128 million would
have been classified as Noncriticized, $247 million and $793 million as Criticized performing, and $20 million and $37 million as Criticized nonperforming
as of December 31, 2016 and 2015, respectively.
Impaired Loans
The following table presents information about our impaired loans, excluding PCI loans, which are reported separately as of
December 31, 2016, and 2015, and for the years ended December 31, 2016, 2015 and 2014:
Table 4.9: Impaired Loans(1)
(Dollars in millions)
Credit Card:
With an
Allowance
Without
an
Allowance
December 31, 2016
Total
Recorded
Investment
Related
Allowance
Net
Recorded
Investment
Unpaid
Principal
Balance
Domestic credit card . . . . . . . . . . . . . . . . . . . . . . . . .
$
International credit card . . . . . . . . . . . . . . . . . . . . . . .
Total credit card(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer Banking:
Auto(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retail banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total consumer banking . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial Banking:
Commercial and multifamily real estate . . . . . . . . . .
Commercial and industrial. . . . . . . . . . . . . . . . . . . . .
Total commercial lending . . . . . . . . . . . . . . . . . . . .
Small-ticket commercial real estate . . . . . . . . . . . . . .
Total commercial banking. . . . . . . . . . . . . . . . . . . . . . . .
581
134
715
316
241
52
609
83
1,249
1,332
4
1,336
$
$
0
0
0
581
134
715
523
358
62
943
112
1,393
1,505
4
1,509
$
174
$
407
$
65
239
24
19
14
57
7
162
169
0
169
465
69
476
499
339
48
886
105
1,231
1,336
4
1,340
$
2,702
$
566
129
695
807
464
65
1,336
112
1,444
1,556
4
1,560
3,591
207
117
10
334
29
144
173
0
173
507
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2,660
$
$
3,167
$
154
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
Credit Card:
December 31, 2015
With an
Allowance
Without
an
Allowance
Total
Recorded
Investment
Related
Allowance
Net
Recorded
Investment
Unpaid
Principal
Balance
$
Domestic credit card . . . . . . . . . . . . . . . . . . . . . . . . .
International credit card . . . . . . . . . . . . . . . . . . . . . . .
Total credit card(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer Banking:
Auto(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retail banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total consumer banking . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial Banking:
Commercial and multifamily real estate . . . . . . . . . .
Commercial and industrial. . . . . . . . . . . . . . . . . . . . .
Total commercial lending . . . . . . . . . . . . . . . . . . . .
Small-ticket commercial real estate . . . . . . . . . . . . . .
Total commercial banking. . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Dollars in millions)
Credit Card:
541
125
666
273
229
51
553
82
515
597
6
603
$
$
0
0
0
215
136
10
361
3
278
281
0
281
642
541
125
666
488
365
61
914
85
793
878
6
884
$
150
$
391
$
59
209
22
18
14
54
11
75
86
0
86
66
457
466
347
47
860
74
718
792
6
798
526
121
647
772
456
62
1,290
88
862
950
7
957
$
1,822
$
$
2,464
$
349
$
2,115
$
2,894
2016
Year Ended December 31,
2015
2014
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Domestic credit card. . . . . . . . . . . . . . . . . . . . . . . . . . .
$
International credit card . . . . . . . . . . . . . . . . . . . . . . . .
Total credit card(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer Banking:
Auto(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home loan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retail banking. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total consumer banking. . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial Banking:
Commercial and multifamily real estate. . . . . . . . . . . .
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . .
Total commercial lending . . . . . . . . . . . . . . . . . . . . .
Small-ticket commercial real estate . . . . . . . . . . . . . . .
Total commercial banking . . . . . . . . . . . . . . . . . . . . . . . . .
$
540
133
673
501
361
62
924
111
1,215
1,326
7
1,333
$
58
10
68
86
5
2
93
3
13
16
0
16
$
539
135
674
462
364
56
882
109
466
575
7
582
$
57
10
67
82
4
2
88
3
5
8
0
8
$
571
160
731
387
388
69
844
175
185
360
8
368
58
11
69
72
5
2
79
6
4
10
0
10
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2,930
$
177
$
2,138
$
163
$
1,943
$
158
__________
(1)
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 additional losses have been incurred, or where the fair value of the underlying collateral meets or exceeds the loan’s amortized cost.
(2)
The period-end and average recorded investments of credit card loans include finance charges and fees.
(3) Although assets from loan recovery inventory are not reported in our loans held for investment, they are included as impaired loans above since they are
reported as TDRs.
155
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The total recorded investment of loans modified in TDRs represents $2.5 billion and $1.8 billion of the impaired loans presented
above as of December 31, 2016 and 2015, respectively. Consumer TDRs classified as performing totaled $1.1 billion and $1.0
billion as of December 31, 2016 and 2015, respectively. Commercial TDRs classified as performing totaled $487 million and $334
million as of December 31, 2016 and 2015, respectively. Commitments to lend additional funds on loans modified in TDRs totaled
$208 million and $34 million at December 31, 2016 and 2015, 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 years ended December
31, 2016, 2015 and 2014:
Table 4.10: Troubled Debt Restructurings
Year Ended December 31, 2016
Reduced Interest Rate
Term Extension
Balance Reduction
Total Loans
Modified(1)(2)
% of
TDR
Activity(3)(4)
Average
Rate
Reduction(5)
% of
TDR
Activity(4)(6)
Average
Term
Extension
(Months)(7)
% of
TDR
Activity(4)(8)
Gross
Balance
Reduction(9)
(Dollars in millions)
Credit Card:
Domestic credit card . . . . . . . . .
International credit card . . . . . . .
Total credit card. . . . . . . . . . . . . . . .
$
Consumer Banking:
Auto . . . . . . . . . . . . . . . . . . . . . .
Home loan . . . . . . . . . . . . . . . . .
Retail banking . . . . . . . . . . . . . .
Total consumer banking . . . . . . . . .
Commercial Banking:
Commercial and multifamily
real estate . . . . . . . . . . . . . . . . . .
Commercial and industrial. . . . .
Total commercial lending . . . .
Small-ticket commercial real
estate . . . . . . . . . . . . . . . . . . . . .
Total commercial banking. . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . .
312
138
450
356
48
18
422
38
743
781
1
782
1,654
$
100%
13.19%
100
100
25.87
17.09
0%
0
0
44
64
23
46
0
5
4
0
4
41
3.91
2.25
7.89
3.73
0.00
0.09
0.09
0.00
0.09
12.42
74
87
68
75
67
57
57
0
57
46
0
0
0
7
243
10
38
6
20
19
0
19
27
0% $
0
0
25
2
9
22
32
7
8
0
8
9
0
0
0
78
0
1
79
3
26
29
0
29
108
$
156
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended December 31, 2015
Reduced Interest Rate
Term Extension
Balance Reduction
Total Loans
Modified(1)(2)
% of
TDR
Activity(3)(4)
Average
Rate
Reduction(5)
% of
TDR
Activity(4)(6)
Average
Term
Extension
(Months)(7)
% of
TDR
Activity(4)(8)
Gross
Balance
Reduction(9)
(Dollars in millions)
Credit Card:
100%
12.28%
100
100
41
61
18
42
0
0
0
0
0
25.88
16.26
3.49
2.70
6.88
3.44
0.00
0.67
0.67
0.00
0.67
54
12.42
0%
0
0
69
79
87
71
86
34
36
0
36
36
0
0
0
8
231
6
36
14
7
8
0
8
29
0% $
0
0
30
7
0
26
18
0
1
0
1
0
0
0
93
0
0
93
1
0
1
0
1
10
$
94
293
121
414
347
48
24
419
12
249
261
1
262
1,095
$
Domestic credit card . . . . . . . . .
International credit card . . . . . . .
Total credit card. . . . . . . . . . . . . . . .
$
Consumer Banking:
Auto . . . . . . . . . . . . . . . . . . . . . .
Home loan . . . . . . . . . . . . . . . . .
Retail banking . . . . . . . . . . . . . .
Total consumer banking . . . . . . . . .
Commercial Banking:
Commercial and multifamily
real estate . . . . . . . . . . . . . . . . . .
Commercial and industrial. . . . .
Total commercial lending . . . .
Small-ticket commercial real
estate . . . . . . . . . . . . . . . . . . . . .
Total commercial banking. . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . .
(Dollars in millions)
Credit Card:
Year Ended December 31, 2014
Reduced Interest Rate
Term Extension
Balance Reduction
Total Loans
Modified(1)(2)
% of
TDR
Activity(3)(4)
Average
Rate
Reduction(5)
% of
TDR
Activity(4)(6)
Average
Term
Extension
(Months)(7)
% of
TDR
Activity(4)(8)
Gross
Balance
Reduction(9)
Domestic credit card . . . . . . . . .
$
International credit card . . . . . . .
Total credit card. . . . . . . . . . . . . . . .
Consumer Banking:
Auto . . . . . . . . . . . . . . . . . . . . . .
Home loan . . . . . . . . . . . . . . . . .
Retail banking . . . . . . . . . . . . . .
Total consumer banking . . . . . . . . .
Commercial Banking:
Commercial and multifamily
real estate . . . . . . . . . . . . . . . . . .
Commercial and industrial. . . . .
Total commercial lending . . . .
Small-ticket commercial real
estate . . . . . . . . . . . . . . . . . . . . .
Total commercial banking. . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . .
$
269
149
418
334
35
11
380
72
101
173
2
175
973
100%
11.59%
100
100
25.39
16.51
0%
0
0
39
31
10
37
35
3
17
0
17
60
1.38
2.60
4.21
1.50
1.31
1.66
1.35
0.00
1.35
12.17
65
38
67
63
93
62
75
0
74
38
0
0
0
9
152
9
17
8
9
9
0
9
0% $
0
0
34
5
0
30
6
1
3
0
3
0
0
0
102
1
0
103
2
1
3
0
3
14
12
$
106
157
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
(1) Represents the recorded investment of total loans modified in TDRs at the end of the quarter in which they were modified, excluding an immaterial amount
of accrued interest receivable.
(2) We present the modification types utilized most prevalently across our loan portfolios. As not every modification type is included in the table above, the total
% of TDR activity may not add up to 100%. Some loans may receive more than one type of concession as part of the modification.
(3) Represents percentage of loans modified in TDRs during the period that were granted a reduced interest rate.
(4) Due to multiple concessions granted to some troubled borrowers, percentages may total more than 100% for certain loan types.
(5) Represents weighted average interest rate reduction for those loans that received an interest rate concession.
(6) Represents percentage of loans modified in TDRs during the period that were granted a maturity date extension.
(7) Represents weighted average change in maturity date for those loans that received a maturity date extension.
(8) Represents percentage of loans modified in TDRs during the period that were granted forgiveness or forbearance of a portion of their balance.
(9) Represents the gross balance forgiven. For loans modified in bankruptcy, the gross balance reduction represents collateral value write-downs associated with
the discharge of the borrower’s obligations.
TDR—Subsequent Defaults of Completed TDR Modifications
The following table presents the type, number and recorded investment amount 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.
Table 4.11: TDR—Subsequent Defaults
(Dollars in millions)
Credit Card:
Domestic credit card . . . . . . . . . . . . . . . . . . . . . . . . . . .
International credit card(1) . . . . . . . . . . . . . . . . . . . . . . .
Total credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer Banking:
Auto . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retail banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total consumer banking . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial Banking:
Commercial and multifamily real estate . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . .
Total commercial lending . . . . . . . . . . . . . . . . . . . . . .
Small-ticket commercial real estate. . . . . . . . . . . . . . . .
Total commercial banking . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016
Year Ended December 31,
2015
2014
Number of
Contracts
Amount
Number of
Contracts
Amount
Number of
Contracts
Amount
42,250
$
40,498
82,748
8,587
56
48
8,691
1
150
151
7
158
91,597
$
73
82
155
96
7
9
112
1
281
282
1
283
550
42,808
$
33,888
76,696
8,647
14
26
8,687
0
7
7
3
10
71
81
152
99
2
2
103
0
19
19
0
19
40,814
$
38,195
79,009
63
106
169
6,651
24
75
6,750
5
2
7
33
40
72
5
10
87
11
1
12
3
15
85,393
$
274
85,799
$
271
__________
(1)
In the U.K., regulators require the acceptance of payment plan proposals in which the modified payments may be less than the contractual minimum amount.
As a result, loans entering long-term TDR payment programs in the U.K. typically continue to age and ultimately charge off even when fully in compliance
with the TDR program terms.
158
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PCI Loans
Outstanding Balance and Carrying Value of PCI Loans
The table below presents the outstanding balance and the carrying value of PCI loans as of December 31, 2016 and 2015. The
table also displays loans which would have otherwise been considered impaired at acquisition based on our applicable accounting
policies. See “Note 1—Summary of Significant Accounting Policies” for information related to our accounting policies for impaired
loans.
Table 4.12: PCI Loans
(Dollars in millions)
Outstanding balance . . . . . . . . . . . . . . . . . . . . . . . . . .
Carrying value(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
Impaired
Loans
Non-Impaired
Loans
Total
Impaired
Loans
Non-Impaired
Loans
$
16,506
$
3,272
$
13,234
$
21,151
$
3,840
$
15,074
2,263
12,811
19,516
2,629
17,311
16,887
December 31, 2016
December 31, 2015
__________
(1)
Includes $31 million and $37 million of allowance for loan and lease losses for these loans as of December 31, 2016 and 2015, respectively. We recorded a
$6 million release and a $10 million provision for credit losses for the years ended December 31, 2016 and 2015, respectively, for PCI loans.
Changes in Accretable Yield
The following table presents changes in the accretable yield on the PCI loans:
Table 4.13: Changes in Accretable Yield on PCI Loans
(Dollars in millions)
Total
PCI Loans
Impaired
Loans
Non-Impaired
Loans
Accretable yield as of December 31, 2013. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
6,420
$
2,114
$
4,306
Accretion recognized in earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassifications from nonaccretable differences(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in accretable yield for non-credit related changes in expected cash flows(2). . . . . . . . . . .
Accretable yield as of December 31, 2014. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,042)
214
(939)
(379)
94
(344)
(663)
120
(595)
$
4,653
$
1,485
$
3,168
Addition due to acquisition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion recognized in earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassifications from (to) nonaccretable differences(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in accretable yield for non-credit related changes in expected cash flows(2). . . . . . . . . . .
Accretable yield as of December 31, 2015. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion recognized in earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassifications from nonaccretable differences(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in accretable yield for non-credit related changes in expected cash flows(2). . . . . . . . . . .
Accretable yield as of December 31, 2016. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
123
(817)
26
(502)
7
(284)
43
(7)
$
3,483
$
1,244
$
(711)
138
267
3,177
$
(235)
49
6
116
(533)
(17)
(495)
2,239
(476)
89
261
$
1,064
$
2,113
__________
(1) Represents changes in accretable yield for those loans in pools that are driven primarily by credit performance.
(2) Represents changes in accretable yield for those loans in pools that are driven primarily by actual prepayments and changes in estimated prepayments.
Finance Charge and Fee Reserves
We continue to accrue finance charges and fees on credit card loans until the account is charged off. Our methodology for estimating
the uncollectible portion of billed finance charges and fees is consistent with the methodology we use to estimate the allowance
for incurred principal losses on our credit card loan receivables. Revenue was reduced by $1.1 billion, $732 million and $645
million in 2016, 2015 and 2014, respectively, for the estimated uncollectible portion of billed finance charges and fees. The finance
charge and fee reserve, which is recorded as a contra asset on our consolidated balance sheets, totaled $402 million as of
December 31, 2016, compared to $262 million as of December 31, 2015.
159
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loans Held for Sale
We had total loans held for sale of $1.0 billion and $904 million as of December 31, 2016 and 2015, respectively. We also originated
for sale $7.6 billion, $6.4 billion and $5.4 billion of conforming residential mortgage loans and commercial multifamily real estate
loans in 2016, 2015 and 2014, respectively. We retained servicing on approximately 100% of these loans sold in both 2016 and
2015, and we retained servicing on 96% of these loans sold in 2014.
160
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” for further discussion
on 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 years ended December 31, 2016, 2015 and 2014.
Table 5.1: Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments Activity
(Dollars in millions)
Allowance for loan and lease losses:
Credit
Card
Consumer
Banking
Commercial
Banking
Other(1)
Total
$
338
$
Balance as of December 31, 2013. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3,214
$
Provision (benefit) for loan and lease losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recoveries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other changes(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of December 31, 2014. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reserve for unfunded lending commitments:
2,750
(3,963)
1,235
(2,728)
(32)
3,204
Balance as of December 31, 2013. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for losses on unfunded lending commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of December 31, 2014. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Combined allowance and reserve as of December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan and lease losses:
0
0
0
$ 3,204
Balance as of December 31, 2014. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3,204
$
$
Provision (benefit) for loan and lease losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recoveries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other changes(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of December 31, 2015. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reserve for unfunded lending commitments:
Balance as of December 31, 2014. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for losses on unfunded lending commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other changes(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of December 31, 2015. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Combined allowance and reserve as of December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . .
3,417
(4,028)
1,110
(2,918)
(49)
3,654
0
0
0
752
703
(989)
314
(675)
(1)
779
7
0
7
786
779
819
(1,082)
351
(731)
1
868
7
0
0
$
$
0
$ 3,654
$
7
875
$
67
(34)
24
(10)
0
395
80
26
106
501
395
256
(76)
29
(47)
0
604
106
46
9
161
765
$
$
$
11
(5)
(10)
9
(1)
0
5
0
0
0
5
5
(2)
(7)
8
1
0
4
0
0
0
0
4
$ 4,315
3,515
(4,996)
1,582
(3,414)
(33)
4,383
87
26
113
$ 4,496
$ 4,383
4,490
(5,193)
1,498
(3,695)
(48)
5,130
113
46
9
168
$ 5,298
161
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
Allowance for loan and lease losses:
Credit
Card
Consumer
Banking
Commercial
Banking
Other(1)
Total
Balance as of December 31, 2015. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision (benefit) for loan and lease losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recoveries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other changes(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of December 31, 2016. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reserve for unfunded lending commitments:
Balance as of December 31, 2015. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision (benefit) for losses on unfunded lending commitments . . . . . . . . . . . . . . . . . . . . . .
Other changes(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of December 31, 2016. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Combined allowance and reserve as of December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . .
$ 3,654
4,926
$
(5,019)
1,066
(3,953)
(21)
4,606
0
0
0
0
$
868
1,055
(1,226)
406
(820)
(1)
1,102
7
0
0
7
$ 4,606
$
1,109
$
604
515
(307)
15
(292)
(34)
793
161
(32)
0
129
922
$
$
4
(5)
(3)
6
3
0
2
0
0
0
0
2
$ 5,130
6,491
(6,555)
1,493
(5,062)
(56)
6,503
168
(32)
0
136
$ 6,639
__________
(1) Primarily consists of the legacy loan portfolio of our discontinued GreenPoint mortgage operations.
(2) Represents foreign currency translation adjustments and the net impact of loan transfers and sales.
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 with the recorded investment of the related loans as of December 31, 2016 and 2015.
Table 5.2: Components of Allowance for Loan and Lease Losses by Impairment Methodology
(Dollars in millions)
Allowance for loan and lease losses:
Collectively evaluated(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset-specific(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PCI loans(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total allowance for loan and lease losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for investment:
Collectively evaluated(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset-specific(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PCI loans(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans held for investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance coverage ratio(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2016
Credit
Card
Consumer
Banking
Commercial
Banking
Other
Total
$
4,367
$
1,016
$
239
0
57
29
$
4,606
$
1,102
$ 104,835
$ 57,862
715
2
736
14,456
$
$
622
169
2
793
64,794
1,509
613
$
$
$
2
0
0
2
$
6,007
465
31
$
6,503
64
$ 227,555
0
0
2,960
15,071
$ 105,552
$ 73,054
$
66,916
$
64
$ 245,586
4.36%
1.51%
1.19%
3.13%
2.65%
162
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
Allowance for loan and lease losses:
Collectively evaluated(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset-specific(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PCI loans(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total allowance for loan and lease losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for investment:
Collectively evaluated(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset-specific(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PCI loans(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans held for investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance coverage ratio(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2015
Credit
Card
Consumer
Banking
Commercial
Banking
Other
Total
$
3,445
$
778
$
517
$
209
0
54
36
$
3,654
$
868
$ 95,459
$ 51,113
666
0
699
18,560
$
$
86
1
604
61,424
884
958
$
$
4
0
0
4
$
4,744
349
37
$
5,130
88
$ 208,084
0
0
2,249
19,518
$ 96,125
$ 70,372
$
63,266
$
88
$ 229,851
3.80%
1.23%
0.95%
4.94%
2.23%
__________
(1)
The component of the allowance for loan and lease losses for credit card and other consumer loans that we collectively evaluate for impairment is based on
a statistical calculation supplemented by management judgment and interpretation. The component of the allowance for loan and lease losses for commercial
loans that we collectively evaluate for impairment is based on historical loss experience for loans with similar characteristics and consideration of credit
quality supplemented by management judgment and interpretation.
(2)
(3)
The asset-specific component of the allowance for loan and lease losses for smaller-balance impaired loans is calculated on a pool basis using historical loss
experience for the respective class of assets. The asset-specific component of the allowance for loan and lease losses for larger-balance commercial loans is
individually calculated for each loan.
The PCI loans component of the allowance for loan and lease losses is accounted for based on expected cash flows. See “Note 1—Summary of Significant
Accounting Policies” for details on these loans.
(4) 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 in which our partner agrees to share a portion of the credit losses associated
with the partnership that qualify for net accounting treatment. The expected reimbursements from these partners, which are netted
against our allowance for loan and lease losses, result in reductions to reported net charge-offs and provision for credit losses. See
“Note 1—Summary of Significant Accounting Policies” for further discussion on our card partnership agreements.
The table below summarizes the changes in the expected reimbursements from these partners for the years ended December 31,
2016, 2015 and 2014.
Table 5.3: Summary of Loss Sharing Arrangements Impacts
(Dollars in millions)
Expected reimbursements from loss sharing partners:
Year Ended December 31,
2016
2015
2014
Balance as of beginning of the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
194
$
143
$
Impact to net charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impact to provision for credit losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of end of the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(229)
263
228
$
(189)
240
194
$
140
(164)
167
143
163
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 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 and home loans, which have provided a source of funding
for us and enabled us to transfer a certain portion of the economic risk of the loans or 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, loans held in consolidated trusts, and
allowance for loan and lease losses, respectively. The assets of a particular VIE are the primary source of fundings to settle its
obligations. The creditors of the VIEs typically do not have recourse to the general credit of the Company. The liabilities primarily
consist of debt securities issued by the VIEs, which we report under securitized debt obligations. For unconsolidated VIEs, we
present the carrying amount of assets and liabilities reflected on our consolidated balance sheets and our 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 table below presents 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 December 31, 2016 and 2015. We separately present information for consolidated
and unconsolidated VIEs.
Table 6.1: Carrying Amount of Consolidated and Unconsolidated VIEs
(Dollars in millions)
Securitization-Related VIEs:
Credit card loan securitizations(1) . . . . . . . . . . . . . . . . . . . . . . . . . .
Home loan securitizations(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total securitization-related VIEs. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other VIEs:(3)
Affordable housing entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Entities that provide capital to low-income and rural
communities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other VIEs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total VIEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2016
Consolidated
Unconsolidated
Carrying
Amount
of Assets
Carrying
Amount of
Liabilities
Carrying
Amount
of Assets
Carrying
Amount of
Liabilities
Maximum
Exposure to
Loss
$
33,550
$
19,662
$
0
$
0
0
33,550
19,662
201
201
$
0
27
27
0
1,276
1,276
174
927
0
1,101
9
127
0
136
3,862
1,093
3,862
0
187
4,049
0
0
1,093
0
187
4,049
5,325
$
34,651
$
19,798
$
4,250
$
1,120
$
164
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
Securitization-Related VIEs:
December 31, 2015
Consolidated
Unconsolidated
Carrying
Amount
of Assets
Carrying
Amount of
Liabilities
Carrying
Amount
of Assets
Carrying
Amount of
Liabilities
Maximum
Exposure to
Loss
Credit card loan securitizations(1) . . . . . . . . . . . . . . . . . . . . . . . . . .
Home loan securitizations(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total securitization-related VIEs. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
34,800
$
16,925
$
0
$
0
0
34,800
16,925
211
211
$
0
27
27
0
873
873
Other VIEs:
Affordable housing entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Entities that provide capital to low-income and rural
communities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other VIEs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total VIEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,852
555
3,852
0
352
0
352
0
101
0
101
0
57
3,909
$
35,152
$
17,026
$
4,120
$
0
0
0
57
555
582
$
3,909
4,782
__________
(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)
(3)
The carrying amount of assets of unconsolidated securitization-related VIEs consists of retained interests associated with the securitization of option-adjustable
rate mortgage (“option-ARM”) loans and letters of credit related to manufactured housing securitizations. These are reported on our consolidated balance
sheets within other assets. The carrying amount of liabilities of unconsolidated securitization-related VIEs is comprised of obligations on certain swap
agreements associated with the securitizations of manufactured housing loans and other obligations. These are reported on our consolidated balance sheets
within other liabilities.
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 $1.9 billion of assets and $618 million of liabilities as of December 31, 2016.
Securitization-Related VIEs
In a securitization transaction, assets from our balance sheet 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 residential home loans and 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 RMBS or 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. Our maximum
exposure to loss as a result of our involvement with these VIEs is the carrying value of the 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 residential home loan and 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.
We also may have exposure associated with contractual obligations to repurchase previously transferred loans due to breaches of
representations and warranties. See “Note 19—Commitments, Contingencies, Guarantees and Others” for information related to
reserves we have established for our mortgage representation and warranty exposure.
165
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 December 31, 2016 and 2015.
Table 6.2: Continuing Involvement in Securitization-Related VIEs
(Dollars in millions)
December 31, 2016:
Securities held by third-party investors . . . . . . . . . . . . . . . . . . . . . .
Receivables in the trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash balance of spread or reserve accounts . . . . . . . . . . . . . . . . . .
Retained interests. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Servicing retained . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization event(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2015:
Securities held by third-party investors . . . . . . . . . . . . . . . . . . . . . .
Receivables in the trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash balance of spread or reserve accounts . . . . . . . . . . . . . . . . . .
Retained interests. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Servicing retained . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization event(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage
Credit
Card
Option-
ARM
GreenPoint
HELOCs
GreenPoint
Manufactured
Housing
$
$
$
$
18,826
31,762
0
Yes
Yes
No
16,166
33,783
0
Yes
Yes
No
$
$
1,499
1,549
8
Yes
Yes (1)
No
1,754
1,814
8
Yes
Yes (1)
No
$
$
56
50
N/A
Yes
No
No
74
68
N/A
Yes
No
No
697
702
130
Yes
No (2)
No
789
794
134
Yes
No (2)
No
__________
(1) We continue to service only certain option-ARM securitizations.
(2)
The core servicing activities for the manufactured housing securitizations are completed by a third party.
(3) Amortization events vary according to each specific trust agreement but generally are triggered by declines in performance or credit metrics of the underlying
assets, such as net charge-off rates or delinquency rates, beyond certain predetermined thresholds. Generally, the occurrence of an amortization event changes
the sequencing and amount of trust-related cash flows to the benefit of more senior interest holders.
Credit Card Securitizations
We hold certain retained interests in our credit card securitizations and continue to service the receivables in these trusts. As of
December 31, 2016 and 2015, 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-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 $1.5 billion and $1.8 billion as of December 31, 2016 and 2015, 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, the most significant being certificated interest-only bonds issued by the trusts. We generally
estimate the fair value of these retained interests based on the estimated present value of expected future cash flows, 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.
166
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.
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 10
—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 December 31, 2016 and 2015. We also have unfunded commitments
of $5 million and $6 million related to those interests for our non-consolidated VIEs as of December 31, 2016 and 2015, respectively.
GreenPoint Credit Manufactured Housing
We have retained certain 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 mandatory clean-up calls in certain securitization transactions were sold to a third party in
2004. We do not consolidate these securitization trusts because we do not have the power to direct the activities that most significantly
impact the economic performance of the trusts as we no longer service the loans.
The unpaid principal balance of manufactured housing securitization transactions where we are the residual interest holder was
$702 million and $794 million as of December 31, 2016 and 2015, respectively. In the event the third party servicer does not fulfill
its obligation to exercise the clean-up calls on certain securitizations, the obligation reverts to us and we would be required to
acquire a maximum of approximately $420 million of loan receivables and other assets upon our execution of these clean-up calls
with the requirement to absorb any losses on the loan receivables and other assets. See “Note 19—Commitments, Contingencies,
Guarantees and Others” for information related to these obligations.
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 $85 million and $76 million as of December 31, 2016 and
2015, respectively. We also have credit exposure on agreements 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 maximum credit exposure related to
these agreements totaled $12 million and $13 million as of December 31, 2016 and 2015, respectively. These agreements are
included in other liabilities on our consolidated balance sheets, and our obligation under these agreements was $8 million as of
both December 31, 2016 and 2015.
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.
167
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 years ended December 31, 2016 and 2015, we recognized amortization
of $393 million and $337 million, respectively, and tax credits of $444 million and $382 million, respectively, associated with
these investments within income tax provision. The carrying value of our equity investments in these qualified affordable housing
projects was $3.8 billion and $3.5 billion as of December 31, 2016 and 2015, respectively. We are periodically required to provide
additional financial or other support during the period of the investments. We had recorded liabilities of $1.2 billion and $1.3
billion for these unfunded commitments as of December 31, 2016 and 2015, respectively, which is expected to be paid from 2017
to 2019.
For those investment funds considered to be VIEs, we are not required to consolidate them if we do not have the power to direct
the activities that most significantly impact the economic performance of those entities. We record our interests in these
unconsolidated VIEs in loans held for investment, other assets and other liabilities on our consolidated balance sheets. Our interests
consisted of assets of approximately $3.9 billion as of both December 31, 2016 and 2015. Our maximum exposure to these entities
is limited to our variable interests in the entities of $3.9 billion as of both December 31, 2016 and 2015. 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 $11.5 billion and
$11.4 billion as of December 31, 2016 and 2015, 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 $927 million and $352 million as of December 31, 2016 and 2015, respectively, are reflected on our
consolidated balance sheets in cash, loans held for investment, interest receivable and other assets. The liabilities are reflected in
other liabilities. The creditors of the VIEs have no recourse to our general credit. We have not provided additional financial or
other support other than during the period that we are contractually required to provide 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 $187 million and $57 million as of December 31, 2016 and 2015, 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.
168
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7—GOODWILL AND INTANGIBLE ASSETS
The table below displays the components of goodwill, intangible assets and MSRs as of December 31, 2016 and 2015. Goodwill
is presented separately on our consolidated balance sheets. Intangible assets and MSRs are included in other assets on our
consolidated balance sheets.
Table 7.1: Components of Goodwill, Intangible Assets and MSRs
(Dollars in millions)
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets:
December 31, 2016
Carrying
Amount of
Assets(1)
Accumulated
Amortization(1)
Net
Carrying
Amount
Remaining
Amortization
Period
$
14,519
N/A $
14,519
N/A
Purchased credit card relationship (“PCCR”) intangibles . . . . . . . .
Core deposit intangibles. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total goodwill and intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
MSRs:
Consumer MSRs(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial MSRs(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total MSRs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
2,151
$
1,391
314
3,856
(1,715)
(1,345)
(131)
(3,191)
436
46
183
665
4.4 years
2.0 years
8.7 years
5.4 years
18,375
$
(3,191) $
15,184
80
276
356
$
$
N/A $
(82)
(82) $
80
194
274
(Dollars in millions)
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets:
December 31, 2015
Carrying
Amount of
Assets(1)
Accumulated
Amortization(1)
Net
Carrying
Amount
Remaining
Amortization
Period
$
14,480
N/A $
14,480
N/A
PCCR intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Core deposit intangibles. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total goodwill and intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
MSRs:
Consumer MSRs(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial MSRs(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total MSRs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
2,156
$
1,771
378
4,305
(1,467)
(1,662)
(135)
(3,264)
18,785
$
(3,264) $
68
212
280
$
$
N/A $
(51)
(51) $
689
109
243
1,041
15,521
68
161
229
5.1 years
2.9 years
9.6 years
5.9 years
__________
(1) Certain intangible assets that were fully amortized in prior periods were removed from our consolidated balance sheets.
(2)
Primarily consists of intangibles for sponsorship relationships, brokerage relationship intangibles, partnership and other contract intangibles and trade name
intangibles.
(3) Represents MSRs related to our Consumer Banking business that are carried at fair value on our consolidated balance sheets.
(4) Represents MSRs related to our Commercial Banking business that are subsequently accounted for under the amortization method and periodically assessed
for impairment. We recorded $31 million and $27 million of amortization expense for the years ended December 31, 2016 and 2015, respectively.
169
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Goodwill
The following table presents goodwill attributable to each of our business segments as of December 31, 2016 and 2015.
Table 7.2: Goodwill Attributable to Business Segments
(Dollars in millions)
Credit
Card
Consumer
Banking
Commercial
Banking
Total
Balance as of December 31, 2014. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of December 31, 2015. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of December 31, 2016. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
5,001
$
4,593
$
4,384
$
13,978
1
(5)
7
0
500
(1)
508
(6)
4,997
$
4,600
$
4,883
$
14,480
36
(15)
0
0
18
0
54
(15)
5,018
$
4,600
$
4,901
$
14,519
__________
(1)
In connection with the HFS acquisition, we recorded goodwill of $518 million representing the amount by which the purchase price exceeded the fair
value of the net assets acquired. The goodwill was assigned to the Commercial Banking segment.
We did not recognize any goodwill impairment during 2016, 2015 or 2014. The goodwill impairment test, performed as of October 1
of each year, is a two-step test. The first step identifies whether there is potential impairment by comparing the fair value of a
reporting unit to its carrying amount, including goodwill. If the fair value of a reporting unit is less than its carrying amount, the
second step of the impairment test is required to measure the amount of any potential impairment loss.
The fair value of reporting units is calculated using a discounted cash flow methodology, a form of the income approach. The
calculation uses projected cash flows based on each reporting unit’s internal forecast and uses the perpetuity growth method to
calculate terminal values. These cash flows and terminal values are then discounted using appropriate discount rates, which are
largely based on our external cost of equity with adjustments for risk inherent in each reporting unit. Cash flows are adjusted, as
necessary, in order to maintain each reporting unit’s equity capital requirements. Our discounted cash flow analysis requires
management to make judgments about future loan and deposit growth, revenue growth, credit losses, and capital rates. Discount
rates used in 2016 for the reporting units ranged from 8% to 13%. The key inputs into the discounted cash flow analysis were
consistent with market data, where available, indicating that assumptions used were within a reasonable range of observable market
data. For our 2016 goodwill impairment test for our International Card reporting unit, we engaged an independent valuation
specialist to assist in the determination of the International Card reporting unit fair value. We employed both a discounted cash
flow and market approach to calculate the fair value of our International Card reporting unit. Based on our analysis, fair value
exceeded the carrying amount for all reporting units as of our annual testing date; therefore, the second step of impairment testing
was unnecessary.
Intangible Assets
In connection with our acquisitions, we recorded intangible assets which include purchased credit card relationship (“PCCR”)
intangibles, core deposit intangibles, brokerage relationship intangibles, partnership contract intangibles, other contract intangibles,
trademark intangibles and other intangibles, which are subject to amortization. At acquisition, the PCCR intangibles reflect the
estimated value of existing credit card holder relationships and the core deposit intangibles reflect the estimated value of deposit
relationships. During 2016, we recorded an impairment charge of $17 million related primarily to our brokerage relationship
intangibles. There were no meaningful intangible asset impairments in 2015 or 2014.
170
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Intangible assets are typically amortized over their respective estimated useful lives on either an accelerated or straight-line basis.
The following table summarizes the actual amortization expense recorded for the years ended December 31, 2016, 2015 and 2014
and the estimated future amortization expense for intangible assets as of December 31, 2016:
Table 7.3: Amortization Expense
(Dollars in millions)
Actual for the year ended December 31,
Amortization
Expense
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Estimated future amounts for the year ended December 31,
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total estimated future amounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
532
430
386
245
176
108
57
27
48
661
171
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8—PREMISES, EQUIPMENT AND LEASE COMMITMENTS
Premises and Equipment
Premises and equipment as of December 31, 2016 and 2015 were as follows:
Table 8.1: Components of Premises and Equipment
(Dollars in millions)
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Computer software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
In progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total premises and equipment, gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2016
2015
$
423
$
458
2,958
1,834
1,681
591
7,487
2,674
1,735
1,618
514
6,999
Less: Accumulated depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(3,812)
(3,415)
Total premises and equipment, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
3,675
$
3,584
Depreciation and amortization expense was $710 million, $638 million and $656 million for the years ended December 31, 2016,
2015 and 2014, respectively.
Lease Commitments
Certain premises and equipment are leased under agreements that expire at various dates through 2056, without taking into
consideration available renewal options. Many of these leases provide for payment by us, as the lessee, of property taxes, insurance
premiums, cost of maintenance and other costs. In some cases, rentals are subject to increases in relation to a cost of living index.
Total rent expenses amounted to approximately $330 million, $276 million and $265 million for the years ended December 31,
2016, 2015 and 2014, respectively.
Future minimum rental commitments as of December 31, 2016, for all non-cancellable operating leases with initial or remaining
terms of one year or more are as follows:
Table 8.2: Lease Commitments
(Dollars in millions)
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Estimated Future
Minimum Rental
Commitments
$
$
317
314
284
262
236
1,173
2,586
Minimum sublease rental income of $192 million due in future years under non-cancellable leases has not been included in the
table above as a reduction to minimum lease payments.
172
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9—DEPOSITS AND BORROWINGS
Deposits
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 had $211.3 billion and $191.9 billion in interest-bearing deposits as of December 31, 2016 and 2015, respectively. Time deposits
issued by domestic offices totaled $19.8 billion and $12.2 billion as of December 31, 2016 and 2015, respectively. Of these deposits,
the amount of domestic time deposits with a denomination of $100,000 or more was $2.9 billion and $1.9 billion as of December 31,
2016 and 2015, respectively. Deposits issued by foreign offices totaled $480 million and $843 million as of December 31, 2016
and 2015, respectively.
Securitized and Unsecured Debt Obligations
In addition to our deposits, which serve as our primary funding source, we use a variety of other funding sources including short-
term borrowings, the issuance of senior and subordinated notes and other borrowings, and securitization transactions. In addition,
we utilize FHLB advances, which are secured by certain portions of our loan and investment securities portfolios, for our funding
needs. The securitized debt obligations are separately presented 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.
Securitized Debt Obligations
Our outstanding borrowings due to securitization investors increased to $18.8 billion as of December 31, 2016, from $16.2 billion
as of December 31, 2015. During 2016, approximately $6.3 billion of new debt was issued to third-party investors from our credit
card loan securitization trust offset by $3.5 billion of maturities and paydowns.
Senior and Subordinated Notes
As of December 31, 2016, we had $23.4 billion of senior and subordinated notes outstanding, inclusive of fair value hedging
adjustments of $280 million. As of December 31, 2015, we had $21.8 billion of senior and subordinated notes outstanding, inclusive
of fair value hedging adjustments of $134 million. During 2016, we issued $4.4 billion of long-term senior and subordinated debt
comprised of $655 million of floating-rate notes and $3.8 billion of fixed-rate notes. During 2016, $2.7 billion of senior and
subordinated notes were matured or redeemed. See “Note 10—Derivative Instruments and Hedging Activities” for information
about our fair value hedging activities.
FHLB Advances and Other
We have access to funding through the FHLB system and the Federal Reserve Discount Window. Our FHLB and Federal Reserve
memberships require us to hold FHLB and Federal Reserve stock which totaled $1.9 billion and $2.1 billion as of December 31,
2016 and 2015, respectively, and are included in other assets on our consolidated balance sheets.
Our FHLB advances and lines of credit are secured by our investment securities, residential home loans, multifamily real estate
loans, commercial real estate loans and HELOCs. Outstanding FHLB advances totaled $17.2 billion and $20.1 billion as
of December 31, 2016 and 2015, respectively, substantially all of which represented long-term advances generally callable on
either a one-month or a three-month basis.
We have access to short-term borrowings through the Federal Reserve. Our membership with the Federal Reserve is secured by
our investment in Federal Reserve stock, totaling $1.2 billion as of both December 31, 2016 and 2015. On an annual basis, we
process immaterial overnight test trades to ensure continued system functionality and borrowing capabilities. We did not access
the Federal Reserve Discount Window for funding during 2016 or 2015.
173
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Composition of Deposits, Short-Term Borrowings and Long-Term Debt
The table below summarizes the components of our deposits, short-term borrowings and long-term debt as of December 31, 2016
and 2015. Our total short-term borrowings consist of federal funds purchased and securities loaned or sold under agreements to
repurchase and other short-term borrowings with an original contractual maturity of one year or less. Our long-term debt consists
of borrowings with an original contractual maturity of greater than one year. The amounts presented for outstanding borrowings
include unamortized debt premiums and discounts, net of debt issuance costs and fair value hedge accounting adjustments.
Table 9.1: Components of Deposits, Short-Term Borrowings and Long-Term Debt
(Dollars in millions)
Deposits:
December 31,
2016
December 31,
2015
Non-interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term borrowings:
Federal funds purchased and securities loaned or sold under agreements to repurchase . . . . . . . . . . . . . . .
Total short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
25,502
211,266
236,768
992
992
$
$
$
$
25,847
191,874
217,721
981
981
(Dollars in millions)
Long-term debt:
Securitized debt obligations(1) . . . . . . . . . . . . . . . . . . .
Senior and subordinated notes:(1)
December 31, 2016
Maturity
Dates
Interest Rates
Weighted-
Average
Interest Rate
Outstanding
Amount
December 31,
2015
2017 - 2025
0.74 - 5.75%
1.61% $
18,826
$
16,166
Fixed unsecured senior debt. . . . . . . . . . . . . . . . . .
Floating unsecured senior debt . . . . . . . . . . . . . . .
2017 - 2025
2018 - 2019
1.20 - 6.75
1.56 - 2.06
Total unsecured senior debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed unsecured subordinated debt . . . . . . . . . . . .
2019 - 2026
3.38 - 8.80
2.65
1.73
2.58
4.09
Total senior and subordinated notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term borrowings:
FHLB advances . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital lease obligations . . . . . . . . . . . . . . . . . . . .
2017 - 2025
0.45 - 6.41
2017 - 2035
3.09 - 12.86
0.64
4.17
Total other long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total short-term borrowings and long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
17,546
1,353
18,899
4,532
23,431
17,179
32
17,211
59,468
60,460
$
$
16,559
1,198
17,757
4,080
21,837
20,098
33
20,131
58,134
59,115
__________
(1) Outstanding amount includes any fair value hedge accounting adjustments.
174
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Interest-bearing time deposits, securitized debt obligations and other debt as of December 31, 2016 mature as follows:
Table 9.2: Maturity Profile of Borrowings and Debt
(Dollars in millions)
Interest-bearing time deposits(1) . . . . . . . . . . . . . . . . . . . . . . . . .
Securitized debt obligations. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal funds purchased and securities loaned or sold sold
under agreements to repurchase. . . . . . . . . . . . . . . . . . . . . . . . .
Senior and subordinated notes . . . . . . . . . . . . . . . . . . . . . . . . . .
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017
2018
2019
2020
2021
Thereafter
Total
$ 6,543
$ 5,095
$ 2,740
$ 3,268
$ 1,928
$
7,233
2,366
5,637
1,562
1,698
992
2,814
19
0
4,684
10
0
5,701
1,252
0
0
1,001
0
3,474
5,651
250
330
$19,824
18,826
0
6,758
9,278
992
23,431
17,211
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$17,601
$12,155
$15,330
$ 5,831
$12,751
$ 16,616
$80,284
__________
(1)
Includes only those interest bearing deposits which have a contractual maturity date.
Components of Interest Expense
The following table displays interest expense attributable to short-term borrowings and long-term debt for the years ended December
31, 2016, 2015 and 2014:
Table 9.3: Components of Interest Expense on Short-Term Borrowings and Long-Term Debt
(Dollars in millions)
Short-term borrowings:
Year Ended December 31,
2016
2015
2014
Federal funds purchased and securities loaned or sold under agreements to repurchase . . . . . . .
FHLB advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt:
Securitized debt obligations(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Senior and subordinated notes(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest expense on short-term borrowings and long-term debt. . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2
0
2
216
476
111
803
805
$
$
1
9
10
151
330
43
524
534
$
$
2
19
21
145
299
26
470
491
__________
(1)
Interest expense includes the impact from hedge accounting.
175
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10—DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Use of Derivatives
We manage asset and liability positions and market risk exposure and limits 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 so we may 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, and clear eligible derivative transactions
through Central Counterparty Clearinghouses (“CCPs”) or often referred to as “central clearinghouses” as required under the
Dodd-Frank Act. 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 usually offset our exposure through derivative transactions with other counterparties.
Accounting for Derivatives
Our derivatives are designated as either qualifying accounting hedges or free-standing derivatives. 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 in earnings together with offsetting
changes in the fair value of the hedged item and any resulting ineffectiveness. Our fair value hedges consist of interest rate
swaps that are intended to modify our exposure to interest rate risk on various fixed-rate assets and liabilities.
• Cash Flow Hedges: We designate derivatives as cash flow hedges 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, to the extent that the hedge relationships are effective, and amounts are reclassified from
AOCI to earnings as the forecasted transactions impact earnings. To the extent that any ineffectiveness exists in the hedge
relationships, the amounts are recorded in current period earnings. 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 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.
• Free-Standing Derivatives: We use free-standing derivatives to hedge the risk of changes in the fair value of residential
MSRs, mortgage loan origination and purchase commitments and other interests held. We also categorize our customer
accommodation derivatives and the related offsetting contracts as free-standing derivatives. Changes in the fair value of
free-standing derivatives are recorded in earnings as a component of other non-interest income.
Balance Sheet Presentation
The following table summarizes the notional and fair values of our derivative instruments on a gross basis as of December 31,
2016 and 2015, 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 paid.
176
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Table 10.1: Derivative Assets and Liabilities at Fair Value
(Dollars in millions)
Derivatives designated as accounting hedges:
Interest rate contracts:
Fair value hedges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flow hedges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest rate contracts. . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange contracts:
Cash flow hedges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investment hedges. . . . . . . . . . . . . . . . . . . . . . . . . .
Total foreign exchange contracts . . . . . . . . . . . . . . . . . . . .
Total derivatives designated as accounting hedges. . . . . . .
Derivatives not designated as accounting hedges:
Interest rate contracts covering:
MSRs(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer accommodation . . . . . . . . . . . . . . . . . . . . . . .
Other interest rate exposures(3) . . . . . . . . . . . . . . . . . . .
Total interest rate contracts. . . . . . . . . . . . . . . . . . . . . . . . .
Other contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total derivatives not designated as accounting hedges . . .
Total derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: netting adjustment(4) . . . . . . . . . . . . . . . . . . . . . . . . .
Total derivative assets/liabilities. . . . . . . . . . . . . . . . . . . . .
December 31, 2016
December 31, 2015
Notional or
Contractual
Amount
Derivative(1)
Assets
Liabilities
Notional or
Contractual
Amount
Derivative(1)
Assets
Liabilities
$
40,480
$
50,400
90,880
5,620
2,396
8,016
98,896
1,696
39,474
1,105
42,275
1,767
44,042
295
151
446
108
163
271
717
17
670
33
720
57
777
$
142,938
$
1,494
(539)
$
955
$
$
$
569
287
856
9
0
9
$
34,417
$
30,450
64,867
5,580
2,562
8,142
$
550
167
717
239
87
326
146
61
207
2
0
2
865
73,009
1,043
209
21
530
8
559
14
573
1,665
28,841
1,519
32,025
882
32,907
11
431
33
475
0
475
1,438
$
105,916
$
1,518
(336)
1,102
(532)
$
986
$
$
7
290
10
307
4
311
520
(143)
377
__________
(1) Derivative assets and liabilities include interest accruals and exclude valuation adjustments related to non-performance risk.
(2)
Includes interest rate swaps and to-be-announced contracts.
(3) Other interest rate exposures include mortgage-related derivatives.
(4) Represents balance sheet netting of derivative assets and liabilities, and related payables and receivables for cash collateral held or placed with the same
counterparty. See Table 10.2 for further information.
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.
Derivative contracts that are cleared with central clearinghouses through our Future Commission Merchants (“FCMs”) are not
subject to offsetting due to the uncertainty existing around an end-user’s ability to setoff these derivative contracts. Therefore, as
of December 31, 2016 and 2015, we did not offset our derivative positions cleared through clearinghouses.
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 exchange with the central
clearinghouses. Acceptable types of collateral are typically in the form of cash or high quality liquid securities.
177
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
The following table presents as of December 31, 2016 and 2015 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 10.2: Offsetting of Financial Assets and Financial Liabilities
(Dollars in millions)
As of December 31, 2016
Gross Amounts Offset in the
Balance Sheet
Gross
Amounts
Financial
Instruments
Cash Collateral
Received
Net Amounts
as Recognized
Securities
Collateral Held
Under Master
Netting
Agreements
Net
Exposure
Derivatives assets(1)(2) . . . . . . . . . . . . . . .
$
1,494
$
(152) $
(387) $
955
$
(11) $
944
As of December 31, 2015
Derivatives assets(1)(2) . . . . . . . . . . . . . . .
1,518
(86)
(446)
986
(156)
830
(Dollars in millions)
As of December 31, 2016
Gross Amounts Offset in the
Balance Sheet
Gross
Amounts
Financial
Instruments
Cash Collateral
Pledged
Net Amounts
as Recognized
Securities
Collateral Pledged
Under Master
Netting
Agreements
Net
Exposure
Derivatives liabilities(1)(2) . . . . . . . . . . . .
Repurchase agreements(3)(4) . . . . . . . . . .
$
$
1,438
992
(152) $
0
(184) $
0
$
1,102
992
$
0
(992)
1,102
0
As of December 31, 2015
Derivatives liabilities(1)(2) . . . . . . . . . . . .
Repurchase agreements(3) . . . . . . . . . . . .
520
969
(86)
0
(57)
0
377
969
0
(969)
377
0
__________
(1)
The gross balances include derivative assets and derivative liabilities as of December 31, 2016 that totaled $491 million and $908 million, respectively,
related to the centrally cleared derivative contracts. The comparable amounts as of December 31, 2015 totaled $429 million and $314 million, respectively.
These contracts were not subject to offsetting as of December 31, 2016 and 2015.
(2) We received cash collateral from derivative counterparties totaling $448 million and $544 million as of December 31, 2016 and 2015, respectively. We also
received securities from derivative counterparties with a fair value of $16 million and $172 million as of December 31, 2016 and 2015, respectively, which
we have the ability to re-pledge. We posted $1.5 billion and $304 million of cash collateral as of December 31, 2016 and 2015, respectively.
(3) As of December 31, 2016 and 2015, we only had repurchase obligations outstanding and did not have any reverse repurchase receivables.
(4) Represents customer repurchase agreements that mature the next business day. As of December 31, 2016, we pledged collateral with a fair value of $1.0
billion under these customer repurchase agreements, which were primarily agency RMBS securities.
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 represented by the fair
value of derivatives in a gain position, or derivative asset position, assuming no recoveries of underlying collateral. We also engage
in certain foreign exchange derivatives that may give rise to counterparty settlement risk.
To mitigate the risk of counterparty default, we enter into legally enforceable master netting agreements and collateral agreements,
where possible, with certain derivative counterparties. We generally enter into these agreements on a bilateral basis with our
counterparties.These bilateral agreements typically provide the right to offset exposures and require one counterparty to post
collateral in the event the fair values of derivatives exceed established thresholds to the other counterparty. We also clear eligible
OTC derivatives with central clearinghouses through FCMs as part of the regulatory requirement. The use of the central
clearinghouses and the FCMs reduces our bilateral counterparty credit exposures while it increases our credit exposures to CCPs
and FCMs. Certain of our agreements governing derivative transactions include provisions that may require us to post more
collateral or otherwise change terms in our agreements under certain circumstances.
178
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Certain of our derivative contracts include provisions requiring that our debt maintain a credit rating of investment grade or above
by each of the major credit rating agencies. In the event of a downgrade of our debt credit rating below investment grade, some
of our counterparties would have the right to terminate the derivative contract and close out the existing positions, or demand
immediate and ongoing full overnight collateralization on derivative instruments in a net liability position. Had our debt credit
rating fallen below investment grade, we would have been required to post additional $81 million and $55 million of collateral as
of December 31, 2016 and 2015, respectively. In addition, certain of our derivative contracts may also allow, in the event of a
downgrade of our debt credit rating of any kind, our counterparties to demand additional collateral on such derivative instruments
in a net liability position. The fair value of derivative instruments with credit risk-related contingent features in a net liability
position was less than $1 million as of both December 31, 2016 and 2015.
We record counterparty credit risk valuation adjustments on our OTC 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. The cumulative
counterparty credit risk valuation adjustment recorded on our consolidated balance sheets as a reduction to the derivative asset
balance was $6 million and $4 million as of December 31, 2016 and 2015, respectively. We also 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. The cumulative credit risk valuation adjustment related to our credit quality
recorded on our consolidated balance sheets as a reduction in the derivative liability balance was less than $1 million as of both
December 31, 2016 and 2015.
Income Statement Presentation and AOCI
The following table summarizes the impact of derivatives and the related hedged items in our consolidated statements of income
and AOCI.
Fair Value Hedges and Free-Standing Derivatives
The net gains (losses) recognized in earnings related to derivatives in fair value hedging relationships and free-standing derivatives
are presented below for the years ended December 31, 2016, 2015 and 2014.
Table 10.3: Gains and Losses on Fair Value Hedges and Free-Standing Derivatives
(Dollars in millions)
Derivatives designated as accounting hedges:(1)
Fair value interest rate contracts:
Year Ended December 31,
2016
2015
2014
Gains (losses) recognized in earnings on derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gains (losses) recognized in earnings on hedged items. . . . . . . . . . . . . . . . . . . . . . . . . . .
Net fair value hedge ineffectiveness gains (losses). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivatives not designated as accounting hedges:(1)
Interest rate contracts covering:
MSRs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer accommodation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other interest rate exposures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest rate contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total gains on derivatives not designated as accounting hedges . . . . . . . . . . . . . . . . . . . . . .
Net derivative gains recognized in earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
__________
(1) Amounts are recorded in our consolidated statements of income in other non-interest income.
$
(613) $
603
(10)
(1)
37
68
104
0
(9)
95
85
$
$
(66) $
75
9
200
(157)
43
3
21
44
68
0
(2)
66
75
$
23
18
11
52
1
(1)
52
95
179
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash Flow and Net Investment Hedges
The table below shows the net gains (losses) related to derivatives designated as cash flow hedges and net investment hedges for
the years ended December 31, 2016, 2015 and 2014.
Table 10.4: Gains and Losses on Derivatives Designated as Cash Flow Hedges and Net Investment Hedges
(Dollars in millions)
Gains (losses) recorded in AOCI:
Cash flow hedges:
Year Ended December 31,
2016
2015
2014
Interest rate contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investment hedges:
Foreign exchange contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net derivatives gains (losses) recognized in AOCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gains (losses) recorded in earnings:
Cash flow hedges:
Gains (losses) reclassified from AOCI into earnings:
Interest rate contracts(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange contracts(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gains (losses) recognized in earnings due to ineffectiveness:
Interest rate contracts(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net derivative gains (losses) recognized in earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
(6) $
3
(3)
280
277
$
301
$
(17)
284
83
367
$
192
$
190
$
3
195
(4)
191
$
(16)
174
2
176
$
251
(23)
228
132
360
131
(23)
108
1
109
__________
(1) Amounts reclassified are recorded in our consolidated statements of income in interest income or interest expense.
(2) Amounts are recorded in our consolidated statements of income in other non-interest income or other interest income.
In the next 12 months, we expect to reclassify to earnings net after-tax gains of $112 million currently recorded in AOCI as of
December 31, 2016. 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 December 31, 2016. 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.
180
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11—STOCKHOLDERS’ EQUITY
Preferred Stock
The following table summarizes the Company’s preferred stock issued and outstanding as of December 31, 2016 and 2015.
Table 11.1: Preferred Stock Issued and Outstanding(1)
Series
Description
6.00%
Non-Cumulative
6.25%
Non-Cumulative
6.70%
Non-Cumulative
Issuance
Date
August 20,
2012
June 12,
2014
October 31,
2014
Fixed-to-
Floating Rate
Non-Cumulative
May 14,
2015
Redeemable
by Issuer
Beginning
September 1,
2017
September 1,
2019
December 1,
2019
June 1, 2020
Per Annum
Dividend Rate
Dividend
Frequency
Liquidation
Preference
per Share
Total Shares
Outstanding
December 31,
2016
December 31,
2015
Carrying Value
(in millions)
6.00% Quarterly
$
1,000
875,000
$
853
$
6.25
Quarterly
1,000
500,000
6.70
Quarterly
1,000
500,000
484
485
853
484
485
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
6.20%
Non-Cumulative
August 24,
2015
5.20%
Non-Cumulative
July 29,
2016
6.00%
Non-Cumulative
November
29, 2016
December 1,
2020
December 1,
2021
December 1,
2021
6.20
Quarterly
1,000
500,000
5.20
Quarterly
1,000
600,000
6.00
Quarterly
1,000
500,000
484
583
483
484
N/A
N/A
$
4,360
$
3,294
Series B
Series C
Series D
Series E
Series F
Series G
Series H
Total
__________
(1) With the exception of 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.
181
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accumulated Other Comprehensive Income
The following table presents the changes in AOCI by component for the years ended December 31, 2016, 2015 and 2014.
Table 11.2: Accumulated Other Comprehensive Income
(Dollars in millions)
AOCI as of December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss) before reclassifications . . . . .
Amounts reclassified from AOCI into earnings. . . . . . . . . . . . . . .
Net other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . .
AOCI as of December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss) before reclassifications . . . . .
Amounts reclassified from AOCI into earnings. . . . . . . . . . . . . . .
Net other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . .
AOCI as of December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss) before reclassifications . . . . .
Amounts reclassified from AOCI into earnings. . . . . . . . . . . . . . .
Net other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . .
AOCI as of December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities
Available
for Sale
106
$
302
2
304
410
(268)
20
(248)
162
(172)
6
(166)
$
(4) $
Securities
Held to
Maturity(1)
$
Cash
Flow
Hedges
Foreign
Currency
Translation
Adjustments(2)
40
(48)
0
(48)
(8)
(135)
0
(135)
(143)
(79)
0
(79)
(222) $
(110) $
228
(108)
120
10
284
(174)
110
120
(3)
(195)
(198)
(78) $
Other
$
Total
(11) $ (872)
477
(35)
442
(430)
(124)
(62)
(186)
(616)
(247)
(86)
(333)
(24) $ (949)
(5)
(5)
(10)
(21)
(5)
(4)
(9)
(30)
7
(1)
6
(897) $
0
76
76
(821)
0
96
96
(725)
0
104
104
(621) $
__________
(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.
(2)
Includes the impact from hedging instruments designated as net investment hedges.
The following table presents the impacts on net income of amounts reclassified from each component of AOCI for the years ended
December 31, 2016, 2015 and 2014.
Table 11.3: Reclassifications from AOCI
(Dollars in millions)
AOCI Components
Securities available for sale:
Affected Income Statement Line Item
Amount Reclassified from AOCI
Year Ended December 31,
2016
2015
2014
Non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(10) $
(32) $
Securities held to maturity:(1)
Income tax provision (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax provision (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flow hedges:
Interest rate contracts:
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange
contracts:
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations before income taxes . . . . . .
Income tax provision. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(4)
(6)
(164)
(60)
(104)
306
6
(2)
310
115
195
(12)
(20)
(151)
(55)
(96)
303
(5)
(21)
277
103
174
(3)
(1)
(2)
(131)
(55)
(76)
209
0
(36)
173
65
108
182
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
AOCI Components
Other:
Affected Income Statement Line Item
Amount Reclassified from AOCI
Year Ended December 31,
2016
2015
2014
Various (pension and other). . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax provision. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
1
1
5
1
4
Total reclassifications. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
86
$
62
$
11
6
5
35
__________
(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.
The table below summarizes other comprehensive income activity and the related tax impact for the years ended December 31,
2016, 2015 and 2014.
Table 11.4: Other Comprehensive Income (Loss)
(Dollars in millions)
Other comprehensive income (loss):
Net unrealized gains (losses) on
securities available for sale . . . . . . . . . .
Net changes in securities held to
maturity . . . . . . . . . . . . . . . . . . . . . . . . .
Net unrealized gains (losses) on cash
flow hedges . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation
adjustments(1) . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016
2015
2014
Year Ended December 31,
Before
Tax
Provision
(Benefit)
After
Tax
Before
Tax
Provision
(Benefit)
After
Tax
Before
Tax
Provision
(Benefit)
After
Tax
$ (254) $
(88) $ (166) $ (393) $
(145) $ (248) $
482
$
178
$
304
164
60
104
(315)
(117)
(198)
86
10
(79)
6
165
4
24
151
175
(86)
(14)
55
65
49
(5)
96
110
(135)
(9)
131
192
29
(18)
55
72
77
(8)
76
120
(48)
(10)
Other comprehensive income (loss). . . .
$ (309) $
$ (333) $ (167) $
19
$ (186) $
816
$
374
$
442
__________
(1)
Includes the impact from hedging instruments designated as net investment hedges.
183
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12—REGULATORY AND CAPITAL ADEQUACY
Regulation and Capital Adequacy
Bank holding companies (“BHCs”) and national banks are subject to capital adequacy standards adopted by the Federal Banking
Agencies, including the Basel III Capital Rule. Moreover, the Banks, as insured depository institutions, are subject to PCA capital
regulations,which require the Federal Banking Agencies to take prompt corrective action for banks that do not meet PCA capital
requirements. The Company entered parallel run under Advanced Approaches on January 1, 2015, during which we 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.
As of January 1, 2015, under the Basel III Capital Rule, the regulatory minimum risk-based and leverage capital requirements for
Advanced Approaches banking organizations include a common equity Tier 1 capital ratio of at least 4.5%, a Tier 1 capital ratio
of at least 6.0%, a total capital ratio of at least 8.0% and a Tier 1 leverage capital ratio of at least 4.0%. The Basel III Capital Rule
introduced a supplementary leverage ratio for all Advanced Approaches banking organizations, which 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. Beginning in the first quarter of 2015, as an Advanced Approaches banking organization, we are required
to calculate and publicly disclose our supplementary leverage ratio. The supplementary leverage ratio minimum requirement of
3.0% becomes effective on January 1, 2018.
For additional information about the capital adequacy guidelines we are subject to, see “Part 1—Item 1. Business—Supervision
and Regulation.”
184
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table provides a comparison of our regulatory capital amounts and ratios under the Basel III Standardized Approach
subject to transition provisions, the regulatory minimum capital adequacy ratios and the PCA well-capitalized level for each ratio
(where applicable) as of December 31, 2016 and 2015.
Table 12.1: Capital Ratios Under Basel III(1)
(Dollars in millions)
Capital One Financial Corp:
Common equity Tier 1 capital(2) . . . . . .
Tier 1 capital(3) . . . . . . . . . . . . . . . . . . .
Total capital(4) . . . . . . . . . . . . . . . . . . . .
Tier 1 leverage(5) . . . . . . . . . . . . . . . . . .
Supplementary leverage(6) . . . . . . . . . .
Capital One Bank (USA), N.A.:
Common equity Tier 1 capital(2) . . . . . .
Tier 1 capital(3) . . . . . . . . . . . . . . . . . . .
Total capital(4) . . . . . . . . . . . . . . . . . . . .
Tier 1 leverage(5) . . . . . . . . . . . . . . . . . .
Supplementary leverage(6) . . . . . . . . . .
Capital One, N.A.:
Common equity Tier 1 capital(2) . . . . . .
Tier 1 capital(3) . . . . . . . . . . . . . . . . . . .
Total capital(4) . . . . . . . . . . . . . . . . . . . .
Tier 1 leverage(5) . . . . . . . . . . . . . . . . . .
Supplementary leverage(6) . . . . . . . . . .
December 31, 2016
December 31, 2015
Capital
Amount
Capital
Ratio
Minimum
Capital
Adequacy
Well-
Capitalized
Capital
Amount
Capital
Ratio
Minimum
Capital
Adequacy
Well-
Capitalized
$ 28,803
10.1%
4.5%
N/A
$ 29,544
11.1%
4.5%
N/A
33,162
40,817
33,162
33,162
11.6
14.3
9.9
8.6
6.0
8.0
4.0
N/A
6.0% 32,838
10.0
N/A
N/A
38,838
32,838
32,838
12.4
14.6
10.6
9.2
6.0
8.0
4.0
N/A
6.0%
10.0
N/A
N/A
$ 11,568
12.0%
4.5%
6.5% $ 10,644
12.2%
4.5%
6.5%
11,568
14,230
11,568
11,568
12.0
14.8
10.8
8.9
6.0
8.0
4.0
N/A
8.0
10.0
5.0
N/A
10,644
13,192
10,644
10,644
12.2
15.2
10.8
9.0
6.0
8.0
4.0
N/A
8.0
10.0
5.0
N/A
$ 20,670
10.6%
4.5%
6.5% $ 21,765
11.8%
4.5%
6.5%
20,670
23,117
20,670
20,670
10.6
11.8
7.7
6.9
6.0
8.0
4.0
N/A
8.0
10.0
5.0
N/A
21,765
23,832
21,765
21,765
11.8
12.9
8.8
7.9
6.0
8.0
4.0
N/A
8.0
10.0
5.0
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 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 40% for 2015, 60% for 2016, 80% for 2017 and 100% for 2018. Capital ratios that
are not applicable are denoted by “N/A.”
(2) Common equity Tier 1 capital ratio is a regulatory capital measure calculated based on common equity Tier 1 capital divided by risk-weighted assets.
(3) Tier 1 capital ratio is a regulatory capital measure calculated based on Tier 1 capital divided by risk-weighted assets.
(4) Total capital ratio is a regulatory capital measure calculated based on total capital divided by risk-weighted assets.
(5) Tier 1 leverage ratio is a regulatory capital measure calculated based on Tier 1 capital divided by adjusted average assets.
(6)
Supplementary leverage ratio (“SLR”) 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 December 31, 2016 and 2015.
Regulatory restrictions exist that limit the ability of the Banks to transfer funds to our BHC. As of December 31, 2016, funds
available for dividend payments from COBNA and CONA were $3.9 billion and $1.0 billion, respectively. Applicable provisions
that may be contained in our borrowing agreements or the borrowing agreements of our subsidiaries may limit our subsidiaries’
ability to pay dividends to us or our ability to pay dividends to our stockholders.
185
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13—EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per common share:
Table 13.1: Computation of Basic and Diluted Earnings per Common Share
(Dollars and shares in millions, except per share data)
Income from continuing operations, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from discontinued operations, net of tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends and undistributed earnings allocated to participating securities(1) . . . . . . . . . . . . . . . .
Preferred stock dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income available to common stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total weighted-average basic shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of dilutive securities:
Stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other contingently issuable shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warrants(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total effect of dilutive securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total weighted-average diluted shares outstanding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic earnings per common share:
Net income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income per basic common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings per common share:(3)
Net income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income per diluted common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
$
$
Year Ended December 31,
2016
2015
2014
3,770
(19)
3,751
(24)
(214)
3,513
$
$
504.9
2.0
1.3
1.6
4.9
509.8
7.00
(0.04)
6.96
6.93
(0.04)
6.89
$
$
$
$
4,012
38
4,050
(20)
(158)
3,872
$
$
4,423
5
4,428
(18)
(67)
4,343
541.8
563.1
2.6
1.3
2.3
6.2
548.0
7.08
0.07
7.15
7.00
0.07
7.07
$
$
$
$
2.7
1.6
4.5
8.8
571.9
7.70
0.01
7.71
7.58
0.01
7.59
__________
(1) Dividends and undistributed earnings allocated to participating securities includes undistributed earnings allocated to participating securities using the two-
class method under the accounting guidance for computing earnings per share.
(2) Represents warrants issued as part of the U.S. Department of Treasury’s Troubled Assets Relief Program (“TARP”). There were 4.1 million warrants to
purchase common stock outstanding as of both December 31, 2016 and 2015, and 6.4 million as of December 31, 2014.
(3)
Excluded from the computation of diluted earnings per share were 1.7 million shares related to options with exercise prices ranging from $63.73 to $88.81,
1.9 million shares related to options with exercise prices ranging from $70.96 to $88.81 and 2.9 million shares related to options with exercise prices ranging
from $70.96 to $88.81 for the years ended December 31, 2016, 2015 and 2014, respectively, because their inclusion would be anti-dilutive.
186
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14—STOCK-BASED COMPENSATION PLANS
Stock Plans
We have one active stock-based compensation plan available for the issuance of shares to employees, directors and third-party
service providers (if applicable). As of December 31, 2016, under the Amended and Restated 2004 Stock Incentive plan (“2004
Plan”), we are authorized to issue 55 million common shares in various forms, including incentive stock options, nonstatutory
stock options, stock appreciation rights, restricted stock awards (“RSAs”), share-settled restricted stock units (“RSUs”),
performance share awards (“PSAs”) and performance share units (“PSUs”). Of this amount, 17 million shares remain available
for future issuance as of December 31, 2016. The 2004 Plan permits the use of newly issued shares or treasury shares upon the
settlement of options and stock-based incentive awards, and we generally settle by issuing new shares.
We also issue cash-settled restricted stock units (and in the past issued cash equity units). These cash-settled units are not counted
against the common shares authorized for issuance or available for issuance under the 2004 Plan.
Total compensation expense recognized for stock-based compensation for 2016, 2015 and 2014 was $239 million, $161 million
and $205 million, respectively. The total income tax benefit recognized in the consolidated statements of income for stock-based
compensation for 2016, 2015 and 2014 was $89 million, $61 million and $77 million, respectively.
Stock Options
Stock options have a maximum contractual term of ten years. Generally, the exercise price of stock options will equal the fair
market value of our common stock on the date of grant. Option vesting is determined at the time of grant and may be subject to
the achievement of any applicable performance conditions. Options generally become exercisable over three years beginning on
the first anniversary of the date of grant; however, some option grants cliff-vest on or shortly after the first or third anniversary of
the grant date.
The following table presents a summary of 2016 activity for stock options and the balance of stock options exercisable as of
December 31, 2016.
Table 14.1: Summary of Stock Options Activity
(Shares in thousands, and intrinsic value in millions)
Outstanding as of January 1, 2016. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expired. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding as of December 31, 2016. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercisable as of December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares
Subject to
Options
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
9,322
441
(2,091)
(88)
(599)
6,985
5,955
$
$
$
53.98
63.73
64.61
86.29
88.64
48.03
44.34
4.0 years
3.2 years
$
$
274
255
The weighted-average fair value of each option granted for 2016, 2015 and 2014 was $16.36, $15.11 and $16.39, respectively.
The total intrinsic value of stock options exercised during 2016, 2015 and 2014 was $31 million, $23 million and $24 million,
respectively. The unrecognized compensation expense related to stock options as of December 31, 2016 was $4 million, which is
expected to be amortized over a weighted-average period of approximately nine months.
187
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the cash received from the exercise of stock options under all stock-based incentive arrangements,
and the actual income tax benefit realized related to tax deductions from the exercise of the stock options.
Table 14.2: Stock Options Cash Flow Impact
(Dollars in millions)
Year Ended December 31,
2016
2015
2014
Cash received for options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
135
$
Tax benefit realized for options exercised. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12
64
9
$
131
9
Compensation expense for stock options is based on the grant date fair value, which is estimated using the Black-Scholes option-
pricing model. Certain stock options have discretionary vesting conditions and are remeasured at fair value each reporting period.
The option pricing model requires the use of numerous assumptions, many of which are subjective.
The following table presents the weighted-average assumptions used to value stock options granted during 2016, 2015 and 2014.
Table 14.3: Assumptions Used to Value Stock Options Granted
Dividend yield(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Volatility(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected option lives(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2016
2015
2014
2.07%
1.82%
1.74%
30.00
1.64
24.00
1.55
26.00
1.92
6.6 years
6.3 years
6.1 years
__________
(1) Dividend yield represents the expected dividend rate over the life of the option.
(2)
The volatility assumption for 2016 grants was based on the implied volatility of exchange-traded options and the historical volatility of common stock. The
volatility assumption for 2015 and 2014 grants was based on the implied volatility of exchange-traded options and warrants.
(3)
(4)
The risk-free interest rate is based on the U.S. Treasury yield curve.
Expected option lives represents the period of time that options granted are expected to remain outstanding based on historical activities.
Restricted Stock Awards and Units
RSAs and RSUs represent share-settled awards that do not contain performance conditions and are granted to certain employees
at no cost to the recipient. RSAs and RSUs generally vest over three years from the date of grant; however, some RSAs and RSUs
cliff vest on or shortly after the first or third anniversary of the grant date. These awards and units are subject to forfeiture until
certain restrictions have lapsed, including continued employment for a specified period of time. A recipient of a RSA is entitled
to voting rights and is generally entitled to dividends on the common stock. A recipient of a RSU is entitled to receive a share of
common stock after the applicable restrictions lapse. Additionally, a recipient of a RSU is generally entitled to receive cash payments
or additional shares of common stock equivalent to any dividends paid on the underlying common stock during the period the
RSU is outstanding, but is not entitled to voting rights.
Generally, the value of RSAs and RSUs will equal the fair market value of our common stock on the date of grant and the expense
is recognized over the vesting period.
188
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents a summary of 2016 activity for RSAs and RSUs.
Table 14.4: Summary of Restricted Stock Awards and Units
Restricted Stock Awards
Restricted Stock Units
(Shares/units in thousands)
Unvested as of January 1, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unvested as of December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares
387
0
(313)
(7)
67
Weighted-Average
Grant Date
Fair Value
per Share
$
$
61.28
0.00
60.85
61.10
63.34
Units
2,310
1,810
(664)
(198)
3,258
Weighted-Average
Grant Date
Fair Value
per Unit
$
$
70.34
65.19
73.83
71.08
66.72
There were no RSAs granted in 2016, 2015 and 2014, as we shifted to primarily granting RSUs beginning in 2014. The total fair
value of RSAs that vested during 2016, 2015 and 2014 was $21 million, $28 million and $57 million, respectively. The unrecognized
compensation expense related to unvested RSAs as of December 31, 2016 was $1 million, which is expected to be amortized over
a weighted-average period of 1.8 years.
The weighted-average grant date fair value of RSUs in 2016, 2015 and 2014 was $65.19, $76.15 and $72.12, respectively. The
total fair value of RSUs that vested during 2016, 2015 and 2014 was $42 million, $27 million and $5 million, respectively. The
unrecognized compensation expense related to unvested RSUs as of December 31, 2016 was $96 million, which is expected to be
amortized over a weighted-average period of 1.8 years.
Performance Share Awards and Units
PSAs and PSUs represent share-settled awards that contain performance conditions and are granted to certain employees at no
cost to the recipient. PSAs and PSUs generally vest over three years from the date of grant; however, some PSUs cliff vest on or
shortly after the third anniversary of the grant date. Generally, the value of PSAs and PSUs will equal the fair market value of our
common stock on the date of grant and the expense is recognized over the vesting period. Certain PSAs and PSUs have discretionary
vesting conditions and are remeasured at fair value each reporting period. A recipient of a PSA is entitled to voting rights and is
generally entitled to dividends on the common stock. A recipient of a PSU is entitled to receive a share of common stock after the
applicable restrictions lapse. Additionally, a recipient of a PSU is generally entitled to receive cash payments or additional shares
of common stock equivalent to any dividends paid on the underlying common stock during the period the PSU is outstanding, but
is not entitled to voting rights.
The number of PSAs that vest each year, and PSUs that step vest over three years, can be reduced by 50% or 100% depending on
whether specific performance goals are met during the vesting period. The number of three-year cliff vesting PSUs that will
ultimately vest is contingent upon meeting specific performance goals over a three-year period. These PSUs also include an
opportunity to receive from 0% to 150% of the target number of common shares.
The following table presents a summary of 2016 activity for PSAs and PSUs.
Table 14.5: Summary of Performance Share Awards and Units
Performance Share Awards
Performance Share Units
(Shares/units in thousands)
Unvested as of January 1, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unvested as of December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares
183
0
(177)
0
6
Weighted-Average
Grant Date
Fair Value
per Share
$
$
57.30
0.00
56.86
0.00
70.96
Units
1,706
1,213
(823)
(19)
2,077
Weighted-Average
Grant Date
Fair Value
per Unit
$
$
70.95
62.89
63.06
66.75
69.40
__________
(1) Granted and vested include adjustments for achievement of specific performance goals for performance share units granted in prior periods.
189
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
There were no PSAs granted in 2016 and 2015. The weighted-average grant date fair value of PSAs granted during 2014 was
$70.96. The total fair value of PSAs that vested during 2016, 2015 and 2014 was $11 million, $30 million and $33 million,
respectively. There was no unrecognized compensation expense related to unvested PSAs as of December 31, 2016.
The weighted-average grant date fair value of PSUs granted during 2016, 2015 and 2014 was $62.89, $65.98 and $68.66,
respectively. The total fair value of performance share units that vested on the vesting date was $54 million, $74 million and $20
million in 2016, 2015 and 2014, respectively. The unrecognized compensation expense related to unvested performance share
units as of December 31, 2016 was $33 million, which is expected to be amortized over a weighted-average period of 1 year.
Cash-Settled Units
Cash-settled units are recorded as liabilities and marked-to-market on a quarterly basis. Cash-settled units are settled with a cash
payment for each unit vested that is equal to the average fair market value of our common stock for the 15 or 20 trading days
preceding the vesting date. Cash-settled units generally vest over three years beginning on the first anniversary of the date of grant;
however, some cash-settled units cliff vest shortly before the one year anniversary of the grant date or on or shortly after the third
anniversary of the grant date. Cash-settled units vesting during 2016, 2015 and 2014 resulted in cash payments to associates of
$36 million, $70 million and $72 million, respectively. There was no unrecognized compensation cost for unvested cash-settled
units as of December 31, 2016.
Associate Stock Purchase Plan
We maintain an Associate Stock Purchase Plan (“Purchase Plan”) which is a compensatory plan under the accounting guidance
for stock-based compensation. We recognized $18 million, $16 million and $13 million in compensation expense for 2016, 2015
and 2014, respectively, under the Purchase Plan.
Under the Purchase Plan, eligible associates are permitted to contribute between 1% and 15% of their base salary through payroll
deductions and receive a 17.65% Company match on the contributions. Both the associates’ contributions and the Company match
are applied to the purchase of our unissued common or treasury stock at the current market price. Shares may also be acquired on
the open market. Dividends for active participants are automatically reinvested in additional shares of common stock. Of the 18
million total authorized shares as of December 31, 2016, 5 million shares were available for issuance.
Dividend Reinvestment and Stock Purchase Plan
In 2002, we implemented our Dividend Reinvestment and Stock Purchase Plan (“2002 DRP”), which allows participating
stockholders to purchase additional shares of our common stock through automatic reinvestment of dividends or optional cash
investments. Of the 8 million total authorized shares as of December 31, 2016, 7 million shares were available for issuance under
the 2002 DRP.
190
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15—EMPLOYEE BENEFIT PLANS
Defined Contribution Plan
We sponsor a contributory Associate Savings Plan (the “Plan”) in which all full-time and part-time associates over the age of 18
are eligible to participate. We make non-elective contributions to each eligible associates’ account and match a portion of associate
contributions. We also sponsor a voluntary non-qualified deferred compensation plan in which select groups of employees are
eligible to participate. We make contributions to this plan based on participants’ deferral of salary, bonuses and other eligible pay.
In addition, we match participants’ excess compensation (compensation over the Internal Revenue Service compensation limit)
less deferrals. We contributed a total of $252 million, $234 million and $214 million to these plans during the years ended December
31, 2016, 2015 and 2014, respectively.
Defined Benefit Pension and Other Postretirement Benefit Plans
We sponsor a frozen qualified defined benefit pension plan and several non-qualified defined benefit pension plans. We also sponsor
a plan that provides other postretirement benefits, including medical and life insurance coverage.
Our pension plans and the other postretirement benefit plans are valued using December 31, 2016 and 2015 measurement dates.
Our policy is to amortize prior service amounts on a straight-line basis over the average remaining years of service to full eligibility
for benefits of active plan participants.
The following table sets forth, on an aggregated basis, changes in the benefit obligation and plan assets, the funded status and how
the funded status is recognized on our consolidated balance sheets.
Table 15.1: Changes in Benefit Obligation and Plan Assets
(Dollars in millions)
Change in benefit obligation:
Defined Pension
Benefits
Other Postretirement
Benefits
2016
2015
2016
2015
Accumulated benefit obligation as of January 1, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
185
$
204
$
45
$
Service cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net actuarial loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated benefit obligation as of December 31, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in plan assets:
Fair value of plan assets as of January 1, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employer contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of plan assets as of December 31, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over (under) funded status as of December 31, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Dollars in millions)
Balance sheet presentation as of December 31,
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net amount recognized as of December 31,. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
$
$
2
7
(14)
0
180
222
17
1
(14)
226
46
$
$
$
$
1
8
(15)
(13)
185
239
(3)
1
(15)
222
37
$
$
$
$
55
0
2
(3)
(9)
45
7
(1)
2
(3)
5
0
2
(3)
(5)
39
5
1
3
$
$
(3)
6
$
(33) $
(40)
Defined Pension
Benefits
Other Postretirement
Benefits
2016
2015
2016
2015
57
(11)
46
$
$
48
(11)
37
$
$
0
$
(33)
(33) $
0
(40)
(40)
191
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the components of net periodic benefit costs and other amounts recognized in other comprehensive
income.
Table 15.2: Components of Net Periodic Benefit Cost
(Dollars in millions)
Components of net periodic benefit cost:
Year Ended December 31,
2016
2015
2014
2016
2015
2014
Defined Pension
Benefits
Other Postretirement
Benefits
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2
7
$
1
8
$
1
8
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(14)
(15)
(14)
$
0
2
0
$
0
2
0
Amortization of transition obligation, prior service credit and net actuarial loss
(gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net periodic benefit gain. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
1
1
(6)
(4)
$
(4) $
(5) $
(4) $
(4) $
(2) $
Changes recognized in other comprehensive income, pretax:
Net actuarial gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification adjustments for amounts recognized in net periodic benefit cost. .
Total gain (loss) recognized in other comprehensive income. . . . . . . . . . . . . . . . . .
$
$
4
1
5
$
$
(5) $ (16) $
5
$
1
1
(6)
(4) $ (15) $
(1) $
7
(4)
3
$
$
0
2
0
(3)
(1)
(3)
(3)
(6)
Pre-tax amounts recognized in AOCI that have not yet been recognized as a component of net periodic benefit cost consist of the
following:
Table 15.3: Amounts Recognized in AOCI
December 31,
2016
2015
2016
2015
(Dollars in millions)
Prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net actuarial gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
Defined Pension
Benefits
0
$
Other Postretirement
Benefits
0
$
(2) $
(66)
(66) $
(71)
(71) $
12
10
$
(2)
12
10
Pre-tax amounts recorded in AOCI as of December 31, 2016 that are expected to be recognized as a component of our net periodic
benefit cost in 2017 consist of the following:
Table 15.4: Estimated Amortization of Unamortized Actuarial Gains and Losses - 2017
(Dollars in millions)
Prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net actuarial gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 Estimate
Defined
Pension
Benefits
Other
Postretirement
Benefits
$
$
0
$
(1)
(1) $
0
5
5
192
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents weighted-average assumptions used in the accounting for the plans:
Table 15.5: Assumptions Used in the Accounting for the Plans
December 31,
2016
2015
2014
2016
2015
2014
Defined Pension
Benefits
Other Postretirement
Benefits
Assumptions for benefit obligations at measurement date:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.0% 4.2%
3.9%
4.0%
4.2%
3.9%
Assumptions for periodic benefit cost for the year ended:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected long-term rate of return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . .
4.2
6.5
3.9
6.5
4.6
6.5
Assumptions for year-end valuations:
Health care cost trend rate assumed for next year:
Pre-age 65 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Post-age 65 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate).
Year the rate reaches the ultimate trend rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
4.2
6.5
6.7
6.8
4.5
3.9
6.5
7.0
7.1
4.5
4.6
6.5
7.3
7.4
4.5
2037
2037
2028
To develop the expected long-term rate of return on plan assets assumption, consideration was given to the current level of expected
returns on risk-free investments (primarily government bonds), the historical level of the risk premium associated with the other
asset classes in which the portfolio is invested and the expectations for future returns of each asset class. The expected return for
each asset class was then weighted based on the target asset allocation to develop the expected long-term rate of return on the plan
assets assumption for the portfolio.
Assumed health care trend rates have a significant effect on the amounts reported for the other postretirement benefit plans. The
following table presents the effect of a one-percent change in the assumed health care cost trend rate on our accumulated
postretirement benefit obligation. There were insignificant effects on total service and interest cost for the years ended December
31, 2016, 2015 and 2014.
Table 15.6: Sensitivity Analysis
(Dollars in millions)
Effect on year-end postretirement benefit obligation. . . . . . . . . . . . . . . . . . . . . .
1% Increase
1% Decrease
1% Increase
1% Decrease
$
4
$
(4) $
5
$
(4)
Year Ended December 31,
2016
2015
Plan Assets
The asset allocations as of the annual measurement dates are as follows:
193
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Table 15.7: Plan Assets
Common collective trusts(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate bonds (Standard & Poor’s (“S&P”) rating of A or higher) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate bonds (S&P rating of lower than A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Government securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Municipal bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money market fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2016
2015
62%
57%
6
12
13
5
1
1
6
13
18
5
1
0
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100%
100%
__________
(1) Common collective trusts primarily include domestic and international equity securities.
Plan assets are invested using a total return investment approach whereby a mix of equity securities and debt securities are used
to preserve asset values, diversify risk and enhance our ability to achieve our benchmark for long-term investment return.
Investment strategies and asset allocations are based on careful consideration of plan liabilities, the plan’s funded status and our
financial condition. Investment performance and asset allocation are measured and monitored on a quarterly basis.
Plan assets are managed in a balanced portfolio comprised of three major components: a domestic equity portion, an international
equity portion and a domestic fixed income portion. The expected role of plan equity investments is to maximize the long-term
real growth of fund assets, while the role of fixed income investments is to generate current income, provide for more stable
periodic returns and provide some protection against a prolonged decline in the market value of fund equity investments.
The investment guidelines provide the following asset allocation targets and ranges: domestic equity target of 39% and allowable
range of 34% to 44%, international equity target of 16% and allowable range of 11% to 21%, fixed income securities target of
45% and allowable range of 35% to 55%.
Fair Value Measurement
For information on fair value measurements, including descriptions of Level 1, 2 and 3 of the fair value hierarchy and the valuation
methods we utilize, see “Note 1—Summary of Significant Accounting Policies” and “Note 17—Fair Value Measurement.”
Table 15.8: Plan Assets Measured at Fair Value on a Recurring Basis
(Dollars in millions)
Plan assets, at fair value:
December 31, 2016
Fair Value Measurements Using
Level 1
Level 2
Level 3
Assets
at Fair
Value
Corporate bonds (S&P rating of A or higher). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Corporate bonds (S&P rating of lower than A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Government securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Municipal bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money market fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plan assets in fair value hierarchy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plan assets not classified in fair value hierarchy(1):
$
Common collective trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total plan assets, at fair value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0
0
0
0
0
0
0
$
$
15
29
31
11
1
2
$
89
$
0
0
0
0
0
0
0
$
$
$
15
29
31
11
1
2
89
143
232
194
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
Plan assets, at fair value:
Corporate bonds (S&P rating of A or higher). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate bonds (S&P rating of lower than A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Government securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Municipal bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plan assets in fair value hierarchy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plan assets not classified in fair value hierarchy(1):
Common collective trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total plan assets, at fair value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2015
Fair Value Measurements Using
Level 1
Level 2
Level 3
Assets
at Fair
Value
$
$
0
0
0
0
0
0
$
$
15
30
40
12
1
98
$
$
0
0
0
0
0
0
$
$
$
15
30
40
12
1
98
129
227
__________
(1) These plan assets are measured at net asset value per share (or its equivalent) as practical expedient and have not been classified in the fair value hierarchy.
The fair value amounts are presented in this table to reconcile to the line items presented in Table 15.1: Changes in Benefit Obligation and Plan Assets.
Expected Future Benefit Payments
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
Table 15.9: Expected Future Benefits Payments
(Dollars in millions)
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022-2026. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension
Benefits
Postretirement
Benefits
$
12
12
12
11
11
52
3
3
3
3
3
11
In 2017, $1 million in contributions are expected to be made to the pension plans and $2 million in contributions are expected to
be made to other postretirement benefits plans.
195
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16—INCOME TAXES
We recognize the current and deferred tax consequences of all transactions that have been recognized in the consolidated financial
statements using the provisions of enacted tax laws. Deferred tax assets and liabilities are determined based on differences between
the financial reporting and tax basis of assets and liabilities, and are measured using the enacted tax rates and laws that are expected
to apply to taxable income in the years in which the differences are expected to be settled or realized. Valuation allowances are
recorded to reduce deferred tax assets to an amount that is more likely than not to be realized.
The following table presents significant components of the provision for income taxes attributable to continuing operations:
Table 16.1: Significant Components of the Provision for Income Taxes Attributable to Continuing Operations
(Dollars in millions)
Current income tax provision:
Year Ended December 31,
2016
2015
2014
Federal taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,087
$ 1,991
$ 1,934
State taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
209
104
207
73
197
91
Total current provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,400
$ 2,271
$ 2,222
Deferred income tax provision (benefit):
Federal taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(621) $
(368) $
(125)
State taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(63)
(2)
(39)
5
22
27
Total deferred provision (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(686) $
(402) $
(76)
Total income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,714
$ 1,869
$ 2,146
The international income tax provision related to pre-tax earnings from foreign operations totaled approximately $287 million,
$288 million and $466 million in 2016, 2015 and 2014, respectively.
The following table presents the income tax provision (benefit) reported in stockholders’ equity:
Table 16.2: Income Tax Provision (Benefit) Reported in Stockholders’ Equity
(Dollars in millions)
Income tax provision recorded in AOCI(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax provision (benefit) recorded in additional paid in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation (gains) losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total income tax provision recorded in stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
24
33
(5)
52
$
(7)
23
35
16
6
$
396
Year Ended December 31,
2016
2015
2014
$
19
$
374
__________
(1)
Income tax provision (benefit) recorded in AOCI includes the impact from hedging instruments designated as net investment hedges.
The following table presents the reconciliation of the U.S. federal statutory income tax rate to the Company’s effective income
tax rate applicable to income from continuing operations for the years ended December 31, 2016, 2015 and 2014:
196
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Table 16.3: Effective Income Tax Rate
Year Ended December 31,
2016
2015
2014
Income tax at U.S. federal statutory tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
35.0%
35.0%
35.0%
State taxes, net of federal benefit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Low-income housing, new markets and other tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other foreign tax differences, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.9
(4.9)
0.3
(1.0)
1.9
(4.0)
(0.2)
(0.9)
1.8
(3.0)
(0.6)
(0.5)
Effective income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
31.3%
31.8%
32.7%
The following table presents significant components of the Company’s deferred tax assets and liabilities at December 31, 2016
and 2015:
Table 16.4: Significant Components of Deferred Tax Assets and Liabilities
(Dollars in millions)
Deferred tax assets:
December 31,
2016
December 31,
2015
Allowance for loan and lease losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2,350
$
Rewards programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,348
Security and loan valuations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill and intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Representation and warranty reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net operating loss and tax credit carryforwards. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unearned income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net unrealized losses on derivatives. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities:
Original issue discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed assets and leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net unrealized gains on derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
869
294
276
234
188
186
35
270
6,050
(179)
5,871
1,012
221
0
328
1,561
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
4,310
$
1,853
1,192
912
245
303
226
176
143
0
329
5,379
(166)
5,213
940
242
46
323
1,551
3,662
As of December 31, 2016, we have federal net operating loss carryforwards and losses of $19 million attributable to prior acquisitions
that expire from 2018 to 2036. Under IRS rules, the Company’s ability to utilize these losses against future income is limited. We
have state operating loss carryforwards with a net tax value of $182 million that expire from 2017 to 2036.
The valuation allowance increased by $13 million to $179 million as of December 31, 2016 in order to adjust the tax benefit of
certain state deferred tax assets and net operating loss carryforwards to the amount we have determined is more likely than not to
be realized. We recognize accrued interest and penalties related to income taxes as a component of income tax expense. We
recognized a $5 million benefit for net interest and penalties for 2016 and a $3 million benefit for both 2015 and 2014.
197
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the accrued balance of tax, interest and penalties related to unrecognized tax benefits:
Table 16.5: Reconciliation of the Change in Unrecognized Tax Benefits
(Dollars in millions)
Balance as of January 1, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions for tax positions related to prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reductions for tax positions related to prior years due to IRS and other settlements . . . . .
Balance as of December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions for tax positions related to prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reductions for tax positions related to prior years due to IRS and other settlements . . . . .
Balance as of December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions for tax positions related to prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reductions for tax positions related to prior years due to IRS and other settlements . . . . .
Balance as of December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Portion of balance at December 31, 2016 that, if recognized, would impact the effective
income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross
Unrecognized
Tax Benefits
Accrued
Interest and
Penalties
Gross Tax,
Interest and
Penalties
$
$
$
$
$
114
$
9
(16)
107
$
38
(15)
130
$
0
(45)
85
55
$
$
39
2
(5)
36
8
(11)
33
6
(15)
24
16
$
$
$
$
$
153
11
(21)
143
46
(26)
163
6
(60)
109
71
We are subject to examination by the IRS and other tax authorities in certain countries and states in which we operate. The tax
years subject to examination vary by jurisdiction. During 2016, the IRS completed its examination of the Company’s federal
income tax returns for the tax years 2012 and 2013.
The Company entered into the IRS Compliance Assurance Process (“CAP”) for the Company’s 2014 federal income tax return. The
Company’s 2015 and 2016 tax years were under CAP examination in 2016. For the 2015 tax year, the CAP examination process
was substantially completed in 2016 prior to the filing of the Company’s 2015 federal income tax return. A single issue remains
under examination for both 2014 and 2015, which the Company does not anticipate will impact its unrecognized tax benefits. The
Company continued in the CAP examination process for the 2016 tax year during 2016, with a similar expectation that the IRS
examination will be substantially completed prior to the filing of its 2016 federal income tax return in 2017. The Company has
also been accepted into CAP for 2017. It is reasonably possible that further adjustments to the Company’s unrecognized tax benefits
may be made within twelve months of the reporting date as a result of the above-referenced pending matters. At this time, an
estimate of the potential change to the amount of unrecognized tax benefits cannot be made.
As of December 31, 2016, U.S. income taxes and foreign withholding taxes have not been provided on approximately $1.3 billion
of unremitted earnings of subsidiaries operating outside the U.S., in accordance with the guidance for accounting for income taxes
in special areas. These earnings are considered by management to be invested indefinitely. Upon repatriation of these earnings,
we could be subject to both U.S. income taxes (subject to possible adjustment for foreign tax credits) and withholding taxes payable
to various foreign countries. Determination of the amount of unrecognized deferred U.S. income tax liability and foreign withholding
tax on these unremitted earnings is not practicable at this time because such liability is dependent upon circumstances existing if
and when remittance occurs.
As of December 31, 2016, U.S. income taxes of approximately $107 million have not been provided for approximately $287
million of previously acquired thrift bad debt reserves created for tax purposes as of December 31, 1987. These amounts, acquired
as a result of the acquisitions of North Fork Bancorporation, Inc. (“North Fork”) and Chevy Chase Bank, F.S.B. (“CCB”), are
subject to recapture in the unlikely event that CONA, as successor to North Fork and CCB, makes distributions in excess of earnings
and profits, redeems its stock, or liquidates.
198
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17—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 quoted prices in active markets for identical assets
or liabilities, quoted prices in markets that are not active, or models using inputs that are observable or can be
corroborated by observable market data of substantially the full term of the assets or liabilities.
Level 3: Valuation is generated from techniques that use significant assumptions not observable in the market. Valuation
techniques include pricing models, discounted cash flow methodologies or similar techniques.
The accounting guidance for fair value measurements requires that we maximize the use of observable inputs and minimize the
use of unobservable inputs in determining fair value. The accounting guidance provides for the irrevocable option to elect, on a
contract-by-contract basis, to measure certain financial assets and liabilities at fair value at inception of the contract and record
any subsequent changes in fair value in earnings. We have not made any material fair value option elections as of or for the periods
disclosed herein.
Fair Value Governance and Control
We have a governance framework and a number of key controls that are intended to ensure that our fair value measurements are
appropriate and reliable. Our governance framework provides for independent oversight and segregation of duties. Our control
processes include review and approval of new transaction types, price verification and review of valuation judgments, methods,
models, process controls and results.
Groups independent 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 third-party 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 valuation 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.
Financial Assets and Liabilities
The following describes the valuation techniques used in estimating the fair value of our financial assets and liabilities recorded
at fair value on a recurring basis or nonrecurring basis, and for financial instruments not recorded at fair value. We applied the fair
value provisions to the financial instruments not recognized on the consolidated balance sheets at fair value. The provisions
requiring us to maximize the use of observable inputs and to measure fair value using a notion of exit price were factored into our
selection of inputs for our established valuation techniques.
199
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Investment Securities
Quoted prices in active markets are used to measure the fair value of U.S. Treasury securities. For the majority of securities in
other investment categories, we utilize multiple third-party pricing services to obtain fair value measurements. A pricing service
may be considered as the primary pricing provider for certain securities and the designation of the primary pricing provider may
vary depending on how closely aligned its prices are to other vendor prices, and how consistent the prices are with other available
market information. The determination of the primary pricing provider is based on our experience and validation benchmark of
the pricing service’s performance in terms of providing fair value measurements for the various types of securities.
RMBS and CMBS securities are generally classified as Level 2 or 3. When significant assumptions are not consistently observable,
fair values are derived using the best available data. Such data may include quotes provided by dealers, valuation from external
pricing services, independent pricing models, or other model-based valuation techniques, for example, calculation of the present
values of future cash flows incorporating assumptions such as benchmark yields, spreads, prepayment speeds, credit ratings and
losses. Generally, the pricing services utilize observable market data to the extent available. Pricing models may be used, which
can vary by asset class and may also incorporate available trade, bid and other market information. Across asset classes, information
such as trader/dealer inputs, credit spreads, forward curves and prepayment speeds are used to help determine appropriate valuations.
Because many fixed income securities do not trade on a daily basis, the pricing models may apply available information through
processes such as benchmarking curves, grouping securities based on their characteristics and using matrix pricing to prepare
valuations. In addition, model processes are used by the pricing services to develop prepayment assumptions.
We validate the pricing obtained from the primary pricing providers through comparison of pricing to additional sources, including
other pricing services, dealer pricing indications in transaction results and other internal sources. Pricing variances among different
pricing sources are analyzed. Additionally, on an on-going basis, we request more detailed information from the valuation vendors
to understand the pricing methodology and assumptions used to value the securities.
Derivative Assets and Liabilities
We use both exchange-traded and OTC derivatives to manage our interest rate and foreign currency risk exposures. When quoted
market prices are available and used to value our exchange-traded derivatives, we classify them as Level 1. However, predominantly
all of our derivatives do not have readily available quoted market prices. Therefore, we value most of our derivatives using vendor-
based valuation techniques. We primarily rely on market observable inputs for our models, such as interest rate yield curves, credit
curves, option volatility and currency rates. These inputs can vary depending on the type of derivatives and nature of the underlying
rate, price or index upon which the derivative’s value is based. We typically classify derivatives as Level 2 when significant inputs
can be observed in a liquid market and the model itself does not require significant judgment. When instruments are traded in less
liquid markets and significant inputs are unobservable, such as interest rate swaps whose remaining terms do not correlate with
market observable interest rate yield curves, such derivatives are classified as Level 3. The impact of counterparty non-performance
risk is considered when measuring the fair value of derivative assets. Official internal pricing is compared against additional pricing
sources such as external valuation agents and other internal sources. Pricing variances among different pricing sources are analyzed
and validated. These derivatives are included in other assets or other liabilities on the consolidated balance sheets.
Mortgage Servicing Rights
We record consumer MSRs at fair value on a recurring basis.We determine the fair value of MSRs using a valuation model that
calculates the present value of estimated future net servicing income. The model incorporates assumptions that we believe other
market participants use in estimating future net servicing income, including estimates of prepayment speeds, discount rate, option-
adjusted spreads, cost to service, contractual servicing fee income, ancillary income and late fees. Fair value measurements of
MSRs use significant unobservable inputs and, accordingly, are classified as Level 3. In the event we enter into an agreement with
a third party to sell the MSRs, the valuation is based on the agreed upon sale price which is considered to be the exit price and
such MSRs are classified as Level 2.
Retained Interests in Securitizations
We have retained interests in various mortgage securitizations from previous acquisitions. Our retained interests primarily include
amounts previously funded under letters of credit to cover losses on certain manufactured housing securitizations, interest-only
bonds issued by a trust and negative amortization bonds. We record these retained interests at fair value using market indications
and valuation models to calculate the present value of future cash flows. The models incorporate various assumptions that market
200
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
participants use in estimating future cash flows including constant prepayment rate, discount rate, default rate and loss severity.
Due to the use of significant unobservable inputs, retained interests in securitizations are classified as Level 3 under the fair value
hierarchy.
Deferred Compensation Plan Assets
We offer a voluntary non-qualified deferred compensation plan to eligible associates. In addition to participant deferrals, we make
contributions to the plan. Participants invest these contributions in a variety of publicly traded mutual funds. The plan assets, which
consist of publicly traded mutual funds, are classified as Level 1.
Other Assets
Other assets subject to nonrecurring fair value measurements include foreclosed property, other repossessed assets and long-lived
assets held for sale. Foreclosed property, other repossessed assets and long-lived assets held for sale are carried at the lower of the
carrying amount or fair value less costs to sell. The fair value is determined based on the appraisal value, listing price of the property
or collateral provided by independent appraisers, and is adjusted for the estimated costs to sell. Due to the use of significant
unobservable inputs, these assets are classified as Level 3 under the fair value hierarchy. Fair value adjustments for these assets
are recorded in other non-interest expense in the consolidated statements of income.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and due from banks, interest bearing deposits and other short-term investments. Cash
and due from banks are generally classified as Level 1. Interest bearing deposits and other short-term investments are generally
classified as Level 2, as their fair value approximates carrying value.
Restricted Cash for Securitization Investors
Restricted cash for securitization investors are classified as Level 1.
Net Loans Held For Investment
Loans held for investment that are individually impaired are carried at the lower of cost or fair value of the underlying collateral,
less the estimated cost to sell. The fair values of credit card loans, auto loans, home loans and commercial loans are estimated
using a discounted cash flow method, which is a form of the income approach. Discount rates are determined considering rates at
which similar portfolios of loans would be made under current conditions and considering liquidity spreads applicable to each
loan portfolio based on the secondary market. The fair value of credit card loans excludes any value related to customer account
relationships. For loans held for investment that are recorded at fair value on our consolidated balance sheets and measured on a
nonrecurring basis, the fair value is determined using appraisal values that are obtained from independent appraisers, broker pricing
opinions or other available market information, adjusted for the estimated cost to sell.
Due to the use of significant unobservable inputs, loans held for investment are classified as Level 3 under the fair value hierarchy.
Fair value adjustments for individually impaired collateralized loans held for investment are recorded in provision for credit losses
in the consolidated statements of income.
Loans Held For Sale
Loans held for sale are carried at the lower of aggregate cost, net of deferred fees and deferred origination costs, or fair value. We
originate loans with the intent to sell them. Certain commercial mortgage loans are sold to government-sponsored enterprises as
part of a delegated underwriting and servicing (“DUS”) program. For DUS commercial mortgage loans, the fair value is estimated
primarily using contractual prices and other market observable inputs. For residential mortgage loans classified as held for sale,
the fair value is estimated using observable market prices for loans with similar characteristics as the primary component, with
the secondary component derived from typical securitization activities and market conditions. Credit card loans held for sale are
valued based on other market observable inputs. These assets are therefore classified as Level 2. Fair value adjustments to loans
held for sale are recorded in other non-interest income in our consolidated statements of income.
201
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Interest Receivable
Interest receivable is classified as Level 2, as its fair value estimate uses only observable market inputs.
Other Investments
Other investments include FHLB and Federal Reserve stock and cost method investments. These investments are classified as
Level 2 when their fair value estimates use observable market inputs and as Level 3 if any significant unobservable inputs are
employed in determining the fair value.
Deposits
Non-interest bearing deposits are classified as Level 1. Interest-bearing deposits with no stated maturities are classified as Level
2, as the fair value is equal to the amount payable on demand at the reporting date. Interest-bearing deposits with stated maturities
are also classified as Level 2, as the fair value is estimated utilizing a discounted cash flow analysis using market observable inputs
such as current interest rates.
Securitized Debt Obligations
We utilize multiple third-party pricing services to obtain fair value measurements for the majority of our securitized debt
obligations. The pricing services use pricing models that incorporate market observable data to the extent available, such as trade,
bid and other market information. We use internal pricing models such as discounted cash flow models or similar techniques to
estimate the fair value of certain securitization trusts where third-party pricing is not available. Securitized debt obligations are
generally classified as Level 2.
Senior and Subordinated Notes
We also engage multiple third-party pricing services to estimate the fair value of senior and subordinated notes. The pricing services
utilize pricing models that incorporate available trade, bid and other market information. The spread assumptions and relevant
credit information are also incorporated into the pricing models. Senior and subordinated notes are generally classified as Level
2.
Federal Funds Purchased and Securities Loaned or Sold under Agreements to Repurchase
The federal funds purchased and securities loaned or sold under agreements to repurchase are mainly overnight secured lending
transactions. They are classified as Level 2 since their fair value estimates use observable market inputs.
Other Borrowings
Other borrowings primarily consist of FHLB advances. The fair value of FHLB advances is determined based on discounted
expected cash flows using discount rates consistent with current market rates for FHLB advances with similar remaining terms.
They are classified as Level 2.
Interest Payable
Interest payable is classified as Level 2, as its fair value estimate is based on observable market inputs.
The determination of the leveling of financial instruments in the fair value hierarchy is performed at the end of each reporting
period. We consider all available information, including observable market data, indications of market liquidity and orderliness,
and our understanding of the valuation techniques and significant inputs. Based upon the specific facts and circumstances of each
instrument or instrument category, judgments are made regarding the significance of the observable or unobservable inputs to the
instruments’ fair value measurement in its entirety. If unobservable inputs are considered significant, the instrument is classified
as Level 3. The process for determining fair value using unobservable inputs is generally more subjective and involves a high
degree of management judgment and assumptions. During 2016, we had minimal movements between Levels 1 and 2.
202
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 December 31, 2016 and 2015:
Table 17.1: Assets and Liabilities Measured at Fair Value on a Recurring Basis
(Dollars in millions)
Assets:
Securities available for sale:
U.S. Treasury securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
RMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other ABS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total securities available for sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets:
Derivative assets(1)(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities:
Other liabilities:
December 31, 2016
Fair Value Measurements Using
Level 1
Level 2
Level 3
Total
$
5,065
$
0
$
0
$
5,065
28,731
4,937
714
417
518
51
0
9
29,249
4,988
714
721
34,799
578
40,737
1,440
0
47
281
906
1,494
500
$ 42,731
$
5,586
$ 36,239
$
0
0
0
295
5,360
7
219
Derivative liabilities(1)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
12
12
$
$
1,397
1,397
$
$
29
29
$
$
1,438
1,438
(Dollars in millions)
Assets:
Securities available for sale:
December 31, 2015
Fair Value Measurements Using
Level 1
Level 2
Level 3
Total
U.S. Treasury securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
RMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other ABS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total securities available for sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets:
Derivative assets(1)(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
4,660
$
0
$
0
$
4,660
0
0
0
355
5,015
2
183
26,807
5,282
1,340
2
33,431
1,459
0
$
5,200
$ 34,890
$
504
27,311
97
0
14
5,379
1,340
371
615
39,061
57
279
951
1,518
462
$ 41,041
Liabilities:
Other liabilities:
Derivative liabilities(1)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2
2
$
$
491
491
$
$
27
27
$
$
520
520
__________
(1)
The balances represent gross derivative amounts and are not reduced by the impact of legally enforceable master netting agreements that allow us to net
positive and negative positions and the related payables and receivables for cash collateral held or placed with the same counterparty. The net derivative
203
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
assets were $955 million and $986 million, and the net derivative liabilities were $1.1 billion and $377 million as of December 31, 2016 and 2015, respectively.
See “Note 10—Derivative Instruments and Hedging Activities” for further information, including further disaggregation of the balance composition.
(2) Does not reflect $5 million and $4 million recognized as a net valuation allowance on derivative assets and liabilities for non-performance risk as of
December 31, 2016 and 2015, respectively. 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) Other includes consumer MSRs of $80 million and $68 million, retained interests in securitizations of $201 million and $211 million and deferred compensation
plan assets of $219 million and $183 million as of December 31, 2016 and 2015, respectively.
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 years ended December 31, 2016 and 2015. When assets and liabilities are
transferred between levels, we recognize the transfer as of the end of the period.
Table 17.2: Level 3 Recurring Fair Value Rollforward
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Year Ended December 31, 2016
Total Gains (Losses)
(Realized/Unrealized)
Balance,
January 1,
2016
Included
in Net
Income(1)
Included
in
OCI
Purchases
Sales
Issuances
Settlements
Transfers
Into
Level 3(2)
Transfers
Out of
Level 3(2)
Balance,
December
31, 2016
Net Unrealized
Gains (Losses)
Included in Net
Income Related to
Assets and
Liabilities
Still Held as of
December 31, 2016(3)
(Dollars in millions)
Assets:
Securities available for sale:
RMBS . . . . . . . . . . . . . . .
$
504
$
31
$
97
0
14
615
57
68
0
0
(9)
22
12
(5)
211
(10)
$
$
9
0
0
0
9
0
0
0
110
266
30
14
420
0
0
0
$
0
0
0
0
0
0
0
0
0
0
0
0
0
69
23
0
$
(98) $
380
$ (418) $
518
$
(14)
0
(10)
64
0
0
(362)
(30)
0
51
0
9
(122)
444
(810)
578
(73)
(6)
0
0
0
0
(18)
0
0
47
80
201
32
0
0
0
32
12
(5)
(10)
CMBS . . . . . . . . . . . . . . .
Other ABS . . . . . . . . . . . .
Other securities . . . . . . . .
Total securities available
for sale . . . . . . . . . . . . . . .
Other assets:
Derivative assets(4) . . . . . .
Consumer MSRs . . . . . . .
Retained interest in
securitizations . . . . . . . . .
Liabilities:
Other liabilities:
Derivative liabilities(4) . . .
$
(27) $
(17) $
0
$
0
$
0
$
(33) $
40
$
0
$
8
$
(29) $
(17)
204
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Year Ended December 31, 2015
Total Gains (Losses)
(Realized/Unrealized)
Balance,
January 1,
2015
Included
in Net
Income(1)
Included
in
OCI
Purchases
Sales
Issuances
Settlements
Transfers
Into
Level 3(2)
Transfers
Out of
Level 3(2)
Balance,
December
31, 2015
Net Unrealized
Gains (Losses)
Included in Net
Income Related to
Assets and
Liabilities
Still Held as of
December 31, 2015(3)
$
(1) $
6
$
$
333
561
228
65
18
1,205
66
53
35
0
1
0
35
14
(1)
221
(10)
0
0
138
0
4
$(226) $
0
0
(20)
0
142
(246)
0
0
0
0
0
0
0
0
0
0
0
0
49
22
0
$
(12) $
0
$ (100) $
0
$
(63)
(52)
0
(8)
343
0
0
0
(369)
(216)
(44)
0
504
97
0
14
(135)
343
(729)
615
(59)
(6)
0
0
0
0
(13)
0
0
57
68
211
0
36
0
0
0
36
14
(1)
(10)
(3)
(1)
(2)
0
0
0
0
0
$
(43) $
(9) $
0
$
0
$
0
$
(20) $
36
$
0
$
9
$
(27) $
(9)
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Year Ended December 31, 2014
Total Gains (Losses)
(Realized/Unrealized)
Balance,
January 1,
2014
Included
in Net
Income(1)
Included
in
OCI
Purchases
Sales
Issuances
Settlements
Transfers
Into
Level 3(2)
Transfers
Out of
Level 3(2)
Balance,
December
31, 2014
Net Unrealized
Gains (Losses)
Included in Net
Income Related to
Assets and Liabilities
Still Held as of
December 31, 2014(3)
$
927
$
(5) $
20
$
0
$(248) $
0
$
(63) $
64
$ (362) $
333
$
0
(Dollars in millions)
Assets:
Securities available for sale:
Corporate debt securities
guaranteed by U.S.
government agencies . . . .
RMBS . . . . . . . . . . . . . . .
CMBS . . . . . . . . . . . . . . .
Other ABS . . . . . . . . . . . .
Other securities . . . . . . . .
Total securities available
for sale . . . . . . . . . . . . . . .
Other assets:
Derivative assets(4). . . . . .
Consumer MSRs . . . . . . .
Retained interest in
securitizations . . . . . . . . .
Liabilities:
Other liabilities:
Derivative liabilities(4) . . .
(Dollars in millions)
Assets:
Securities available for sale:
Corporate debt securities
guaranteed by U.S.
government agencies . . . .
64
3,330
0
0
0
0
0
0
0
0
39
3
12
0
65
0
5
(1)
259
66
75
10
(171)
(75)
(3)
(8)
1,022
192
0
0
1,304
739
343
17
(1,957)
(697)
(367)
0
RMBS . . . . . . . . . . . . . . .
CMBS . . . . . . . . . . . . . . .
Other ABS . . . . . . . . . . . .
Other securities . . . . . . . .
Total securities available
for sale . . . . . . . . . . . . . . .
Other assets:
Derivative assets(4). . . . . .
Consumer MSRs . . . . . . .
Retained interest in
securitization . . . . . . . . . .
Liabilities:
Other liabilities:
Derivative liabilities(4) . . .
__________
(1) Gains (losses) related to Level 3 Consumer MSRs, derivative assets and derivative liabilities, and retained interests in securitizations are reported in other
561
228
65
18
64
0
5
0
19
(27)
20
(27)
(21)
(4)
(15) $
(20) $
(38) $
(43) $
(3,383)
(3)
0
20
15
50
69
66
53
1,214
1,205
(320)
(248)
(20)
474
221
199
0
0
0
0
0
0
0
0
29
22
69
22
74
$
$
$
$
$
0
0
0
$
$
0
1
0
0
0
0
0
0
0
0
non-interest income, which is a component of non-interest income, in our consolidated statements of income.
(2)
For the years ended December 31, 2016, 2015 and 2014, the transfers into Level 3 were primarily driven by less consistency among vendor pricing on
individual securities, while the transfers out of Level 3 were primarily driven by greater consistency among multiple pricing sources.
205
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3)
The amount presented for unrealized gains (losses) for assets still held as of the reporting date primarily represents impairments of securities available for
sale, accretion on certain fixed maturity securities, changes in fair value of derivative instruments and mortgage servicing rights transactions.
(4) All Level 3 derivative assets and liabilities are presented on a gross basis and are not reduced by the impact of legally enforceable master netting agreements
that allow us to net positive and negative positions and the related payables and receivables for cash collateral held or placed with the same counterparty.
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 third-party pricing services to obtain fair value for our securities. Several of our third-
party pricing services are only able to provide unobservable input information for a limited number of securities due to software
licensing restrictions. Other third-party pricing services are able to provide unobservable input information for all securities for
which they provide a valuation. As a result, the unobservable input information for the securities available for sale presented below
represents a composite summary of all information we are able to obtain. The unobservable input information for all other Level
3 financial instruments is based on the assumptions used in our internal valuation models.
Table 17.3: Quantitative Information about Level 3 Fair Value Measurements
(Dollars in millions)
Assets:
Quantitative Information about Level 3 Fair Value Measurements
Fair Value at
December 31,
2016
Significant
Valuation
Techniques
Significant
Unobservable
Inputs
Range
Weighted
Average
Securities available for sale:
RMBS . . . . . . . . . . . . . . . . . . . .
$
518 Discounted cash flows
(3rd party pricing)
CMBS . . . . . . . . . . . . . . . . . . . .
51 Discounted cash flows
(3rd party pricing)
Yield
Constant prepayment rate
Default rate
Loss severity
Yield
Constant prepayment rate
Other securities . . . . . . . . . . . . .
9 Discounted cash flows
Yield
Other assets:
Derivative assets(1) . . . . . . . . . . .
47 Discounted cash flows
Swap rates
0-15%
0-30%
0-16%
9-87%
2%
0%
1-2%
2%
Consumer MSRs . . . . . . . . . . . .
80 Discounted cash flows
Retained interests in
securitization(2) . . . . . . . . . . . . . .
201 Discounted cash flows
Total prepayment rate
Discount rate
Option-adjusted spread rate
Servicing cost ($ per loan)
Life of receivables (months)
Constant prepayment rate
Discount rate
Default rate
Loss severity
8-20%
15%
580-1,500 bps
$75-$100
6-87
2-11%
4-11%
1-6%
7-102%
5%
4%
4%
57%
2%
0%
1%
2%
15%
15%
636 bps
$76
N/A
Liabilities:
Derivative liabilities(1) . . . . . . . .
$
29 Discounted cash flows
Swap rates
2%
2%
206
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
Assets:
Quantitative Information about Level 3 Fair Value Measurements
Fair Value at
December 31,
2015
Significant
Valuation
Techniques
Significant
Unobservable
Inputs
Range
Weighted
Average
Securities available for sale:
RMBS . . . . . . . . . . . . . . . . . . . .
$
504 Discounted cash flows
(3rd party pricing)
Yield
Constant prepayment rate
Default rate
Loss severity
CMBS . . . . . . . . . . . . . . . . . . . .
97 Discounted cash flows
(3rd party pricing)
Yield
Constant prepayment rate
Other securities . . . . . . . . . . . . .
14 Discounted cash flows
Yield
Other assets:
Derivative assets(1) . . . . . . . . . . .
57 Discounted cash flows
Swap rates
Consumer MSRs . . . . . . . . . . . .
68 Discounted cash flows
Retained interests in
securitization(2) . . . . . . . . . . . . . .
211 Discounted cash flows
Total prepayment rate
Discount rate
Option-adjusted spread rate
Servicing cost ($ per loan)
Life of receivables (months)
Constant prepayment rate
Discount rate
Default rate
Loss severity
0-12%
0-28%
0-8%
16-85%
2-3%
0-15%
1%
2%
11-18%
12%
435-1,500 bps
$93-$201
16-75
1-13%
4-9%
2-6%
15-94%
6%
4%
4%
55%
3%
9%
1%
2%
16%
12%
474 bps
$98
N/A
Liabilities:
Derivative liabilities(1) . . . . . . . .
$
27 Discounted cash flows
Swap rates
2%
2%
__________
(1) All Level 3 derivative assets and liabilities are presented on a gross basis and are not reduced by the impact of legally enforceable master netting agreements
that allow us to net positive and negative positions and the related payables and receivables for cash collateral held or placed with the same counterparty.
(2) 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).
The following table presents the carrying amount of the assets measured at fair value on a nonrecurring basis and still held as of
December 31, 2016 and 2015, and for which a nonrecurring fair value measurement was recorded during the years then ended:
Table 17.4: Nonrecurring Fair Value Measurements Related to Assets Still Held at Period End
(Dollars in millions)
Loans held for investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2016
Estimated
Fair Value Hierarchy
Level 3
Level 2
$
0
$
587
$
157
0
0
83
$
157
$
670
$
Total
587
157
83
827
207
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
Loans held for investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2015
Estimated
Fair Value Hierarchy
Level 3
Level 2
$
0
$
362
$
149
0
0
92
$
149
$
454
$
Total
362
149
92
603
__________
(1) Other assets includes foreclosed property and repossessed assets of $43 million and long-lived assets held for sale of $40 million as of December 31, 2016,
compared to foreclosed property and repossessed assets of $54 million and long-lived assets held for sale of $38 million as of December 31, 2015.
In the above table, loans held for investment primarily include nonperforming loans for which specific reserves or charge-offs
have been recognized. These loans are classified as Level 3, as they are valued based in part on the estimated fair value of the
underlying collateral and the non-recoverable rate, which is considered to be a significant unobservable input. Collateral fair value
sources include the appraisal value obtained from independent appraisers, broker pricing opinions or other available market
information. The non-recoverable rate ranged from 0% to 73%, with a weighted average of 16%, and from 9% to 73%, with a
weighted average of 20%, as of December 31, 2016 and 2015, respectively. The fair value of the other assets classified as Level
3 is determined based on appraisal value or listing price which involves significant judgment; the significant unobservable inputs
and related quantitative information are not meaningful to disclose as they vary significantly across properties and collateral.
The following table presents total nonrecurring fair value measurements for the period, included in earnings, attributable to the
change in fair value relating to assets that are still held at December 31, 2016, 2015 and 2014:
Table 17.5: Nonrecurring Fair Value Measurements Included in Earnings Related to Assets Still Held at Period End
(Dollars in millions)
Total Gains (Losses)
Year Ended December 31,
2016
2015
2014
Loans held for investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(230) $
(80) $
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2)
(19)
(1)
(45)
$
(251) $
(126) $
(24)
0
(12)
(36)
__________
(1) Other assets includes losses related to foreclosed property, repossessed assets and long-lived assets held for sale.
Fair Value of Financial Instruments
The following table presents the carrying amounts and estimated fair value, including the level within the fair value hierarchy, of
our financial instruments that are not measured on our consolidated balance sheets at fair value as of December 31, 2016 and
December 31, 2015.
208
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Table 17.6: Fair Value of Financial Instruments
(Dollars in millions)
Financial assets:
December 31, 2016
Carrying
Amount
Estimated
Fair
Value
Estimated Fair Value Hierarchy
Level 1
Level 2
Level 3
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
9,976
$
9,976
$
4,185
$
5,791
$
Restricted cash for securitization investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities held to maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,517
25,712
2,517
26,196
2,517
199
0
25,962
0
0
35
Net loans held for investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
239,083
242,935
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investments(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,043
1,351
2,029
1,038
1,351
2,029
0
0
0
0
Financial liabilities:
0
242,935
1,038
1,351
2,020
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 236,768
$ 237,082
$ 25,502
$ 211,580
$
Securitized debt obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Senior and subordinated notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal funds purchased and securities loaned or sold under agreements to repurchase. . . .
18,826
23,431
992
18,920
23,774
992
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17,211
17,180
Interest payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
327
327
0
0
0
0
0
18,920
23,774
992
17,180
327
0
0
9
0
0
0
0
0
0
(Dollars in millions)
Financial assets:
December 31, 2015
Carrying
Amount
Estimated
Fair
Value
Estimated Fair Value Hierarchy
Level 1
Level 2
Level 3
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
8,023
$
8,023
$
8,023
$
Restricted cash for securitization investors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities held to maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,017
24,619
1,017
25,317
1,017
198
Net loans held for investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
224,721
222,007
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investments(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
904
1,189
2,060
933
1,189
2,060
0
0
0
0
$
0
0
25,068
0
0
51
0
222,007
860
1,189
2,060
73
0
0
Financial liabilities:
Deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 217,721
$ 210,922
$ 25,847
$ 15,848
$ 169,227
Securitized debt obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Senior and subordinated notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal funds purchased and securities loaned or sold under agreements to repurchase . . . .
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16,166
21,837
981
16,225
22,062
981
20,131
20,134
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
299
299
0
0
981
0
0
16,225
22,062
0
20,134
299
0
0
0
0
0
__________
(1) Other investments includes FHLB, Federal Reserve stock and cost method investments. These investments are included in other assets on our consolidated
balance sheets.
209
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18—BUSINESS SEGMENTS
Our principal operations are currently organized into three major business segments, which are defined based on the products and
services provided or the type of customer served: Credit Card, Consumer Banking and Commercial Banking. The operations of
acquired businesses have been integrated into our existing business segments. Certain activities that are not part of a segment,
such as management of our corporate investment portfolio and asset/liability management by our centralized Corporate Treasury
group, are included in the Other category.
• Credit Card: Consists of our domestic consumer and small business card lending, and the international card lending
businesses in Canada and the United Kingdom.
• Consumer Banking: Consists of our branch-based lending and deposit gathering activities for consumers and small
businesses, national deposit gathering, national auto lending and consumer home loan lending and servicing activities.
• Commercial Banking: Consists of our lending, deposit gathering and treasury management services to commercial real
estate and commercial and industrial customers. Our commercial and industrial customers typically include companies with
annual revenues between $10 million to $1 billion.
• Other category: Includes the residual impact of the allocation of our centralized Corporate Treasury group activities, such
as management of our corporate investment portfolio and asset/liability management, to our business segments. Accordingly,
net gains and losses on our investment securities portfolio and certain trading activities are included in the Other category.
Other category also includes foreign exchange-rate fluctuations on foreign currency-denominated transactions; unallocated
corporate expenses that do not directly support the operations of the business segments or for which the business segments
are not considered financially accountable in evaluating their performance, such as acquisition and restructuring charges;
certain provisions for representation and warranty reserves related to continuing operations; certain material items that are
non-recurring in nature; and offsets related to certain line-item reclassifications.
Basis of Presentation
We report the results of each of our business segments on a continuing operations basis. See “Note 2—Discontinued Operations”
for a discussion of 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.
The following is additional information on the principles and methodologies used in preparing our business segment results.
• Net interest income: Interest income from loans held for investment and interest expense from deposits and other interest-
bearing liabilities are reflected within each applicable business segment. Because funding and asset/liability management
are managed centrally by our Corporate Treasury Group, net interest income for our business segments also includes the
results of a funds transfer pricing process that is intended to allocate a cost of funds used or credit for funds provided to all
business segment assets and liabilities, respectively, using a matched funding concept. The taxable-equivalent benefit of
tax-exempt products is also allocated to each business unit with a corresponding increase in income tax expense.
• Non-interest income: Non-interest fees and other revenue associated with loans or customers managed by each business
segment and other direct revenues are accounted for within each business segment.
210
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
• Provision for credit losses: The provision for credit losses is directly attributable to the business segment in which the loans
are managed.
• Non-interest expense: Non-interest expenses directly managed and incurred by a business segment are accounted for within
each business segment. We allocate certain non-interest expenses indirectly incurred by business segments, such as corporate
support functions, to each business segment based on various factors, including the actual cost of the services from the
service providers, the utilization of the services, the number of employees or other relevant factors.
• Goodwill and intangible assets: Goodwill and intangible assets that are not directly attributable to business segments are
assigned to business segments based on the relative fair value of each segment. Intangible amortization is included in the
results of the applicable segment.
•
•
Income taxes: Income taxes are assessed for each business segment based on a standard tax rate with the residual tax expense
or benefit to arrive at the consolidated effective tax rate included in the Other category.
Loans held for investment: Loans are reported within each business segment based on product or customer type.
• Deposits: Deposits are reported within each business segment based on product or customer type.
Segment Results and Reconciliation
We may periodically change our business segments or reclassify business segment results based on modifications to our management
reporting methodologies and changes in organizational alignment. The following tables present our business segment results for
the years ended December 31, 2016, 2015 and 2014, selected balance sheet data as of December 31, 2016, 2015 and 2014, and a
reconciliation of our total business segment results to our reported consolidated income from continuing operations, loans held
for investment and deposits.
211
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Table 18.1: Segment Results and Reconciliation
(Dollars in millions)
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total net revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision (benefit) for credit losses . . . . . . . . . . . . . . . . . . . . . . .
Non-interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from continuing operations before income taxes . .
Income tax provision (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations, net of tax . . . . . . . . . . . . . . .
Loans held for investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Dollars in millions)
Year Ended December 31, 2016
Credit
Card
Consumer
Banking
Commercial
Banking(1)
Other(1)
Consolidated
Total
$
$
$
12,635
3,380
16,015
4,926
7,703
3,386
1,226
2,160
105,552
0
$
$
$
5,829
733
6,562
1,055
4,139
1,368
498
870
73,054
181,917
$
$
$
$
$
$
2,216
578
2,794
483
1,407
904
329
575
66,916
33,866
$
$
$
193
(63)
130
(5)
309
(174)
(339)
165
64
20,985
20,873
4,628
25,501
6,459
13,558
5,484
1,714
3,770
245,586
236,768
Year Ended December 31, 2015
Credit
Card
Consumer
Banking
Commercial
Banking(1)
Other(1)
Consolidated
Total
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
11,161
$
5,755
$
1,865
$
53
$
18,834
Non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total net revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision (benefit) for credit losses . . . . . . . . . . . . . . . . . . . . . . .
Non-interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from continuing operations before income taxes . .
Income tax provision (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations, net of tax . . . . . . . . . . . . . . .
Loans held for investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
3,421
14,582
3,417
7,502
3,663
1,309
2,354
96,125
0
$
$
710
6,465
819
4,026
1,620
586
1,034
70,372
172,702
$
$
487
2,352
302
1,156
894
324
570
63,266
34,257
(39)
14
(2)
312
(296)
(350)
$
$
54
88
$
$
10,762
4,579
23,413
4,536
12,996
5,881
1,869
4,012
229,851
217,721
(Dollars in millions)
Year Ended December 31, 2014
Credit
Card
Consumer
Banking
Commercial
Banking(1)
Other(1)
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
10,310
$
5,748
$
1,751
$
Non-interest income
Total net revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision (benefit) for credit losses
Non-interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from continuing operations before income taxes
Income tax provision (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations, net of tax
Loans held for investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
Deposits
3,311
13,621
2,750
7,063
3,808
1,329
2,479
85,876
0
$
$
684
6,432
703
3,869
1,860
665
1,195
71,439
168,078
$
$
450
2,201
93
1,083
1,025
366
659
50,890
31,954
9
27
36
(5)
165
(124)
(214)
Consolidated
Total
$
17,818
4,472
22,290
3,541
12,180
6,569
2,146
4,423
208,316
205,548
$
$
90
111
$
$
5,516
__________
(1)
Some of our tax-related commercial investments generate tax-exempt income or tax credits. Accordingly, we make certain reclassifications within our
Commercial Banking business results to present revenues and yields on a taxable-equivalent basis, calculated assuming an effective tax rate approximately
equal to our federal statutory tax rate of 35% with offsetting reclassifications to the Other category.
212
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19—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 our allowance for loan and lease losses.
The following table presents contractual amount and carrying value of our unfunded lending commitments as of December 31,
2016 and 2015. The carrying value represents our reserve and deferred revenue on legally binding commitments.
Table 19.1: Unfunded Lending Commitments: Contractual Amount and Carrying Value
Contractual Amount
Carrying Value
(Dollars in millions)
Standby letter of credit and commercial letter of credit(1) . .
Credit card lines. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other loan commitments(2) . . . . . . . . . . . . . . . . . . . . . . . . .
Total unfunded lending commitments . . . . . . . . . . . . . . . . .
$
$
December 31,
2016
December 31,
2015
December 31,
2016
December 31,
2015
1,936
$
1,874
$
42
$
312,864
28,402
308,257
27,883
N/A
98
343,202
$
338,014
$
140
$
37
N/A
134
171
__________
(1)
(2)
These financial guarantees had expiration dates ranging from 2017 to 2025 as of December 31, 2016.
Includes $699 million and $1.0 billion of advised lines of credit as of December 31, 2016 and December 31, 2015, respectively.
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 amount of liability recognized on our consolidated balance sheets for our loss sharing agreements was $48 million
and $40 million as of December 31, 2016 and December 31, 2015, respectively.
In certain securitizations in connection with the discontinued manufactured housing operations of GreenPoint Credit, LLC, the
third party servicer has an obligation to exercise mandatory clean-up calls. In the event the third party servicer does not fulfill its
213
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
obligation to exercise these clean-up calls, the obligation reverts to us. The amount of loan receivables and other assets subject to
these clean-up calls is approximately $420 million. Based on our current projections, we expect these securitizations to reach their
individual clean-up call thresholds beginning in 2017 and continuing through 2019. According to current information and estimates,
we also expect the fair value of the loan receivables and other assets to be less than the contractual amount required to exercise
the clean-up calls. We monitor the underlying assets for trends in delinquencies and related losses and review the third party
servicer’s financial strength. As of December 31, 2016, our best estimate is that any reasonably possible future losses associated
with these clean-up call obligations are not significant to the Company’s financial position.
U.K. Cross Sell
In the U.K., we previously sold payment protection insurance (“PPI”) and other ancillary cross sell products. In response to an
elevated level of customer complaints across the industry, heightened media coverage and pressure from consumer advocacy
groups, the U.K. Financial Conduct Authority (“FCA”), 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 October 2, 2015, the FCA issued a Statement on PPI (“FCA Proposal”) announcing it has decided to consult
on the introduction of a time bar for PPI complaints and on new rules and guidance about how banks should handle unfair relationship
PPI complaints covered by s.140A of the Consumer Credit Act of 1974 (“Consumer Credit Act”). Following feedback on the FCA
Proposal, the FCA issued a further Consultation Paper on August 2, 2016, suggesting some amendments to its proposed rules on
how banks should handle unfair relationship PPI complaints and indicating an expectation that the complaint deadline will fall by
the end of June 2019. This timetable was based on making a decision about whether to proceed, and making rules and guidance,
by the end of December 2016. On December 9, 2016, the FCA issued a statement delaying any further announcement until the
first quarter of 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 the 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. cross sell products, including PPI, totaled $238 million and $176
million as of December 31, 2016 and 2015, respectively. In the year ended December 31, 2016, we added $161 million to our
reserve in response to the above FCA announcements. Other movements to the reserve were 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 December 31, 2016 is approximately $300 million. The increase in this estimate from the prior
quarter reflects the heightened level of uncertainty resulting from the continuing delay to the issuance of new rules.
Mortgage Representation and Warranty Liabilities
We acquired three subsidiaries that originated residential mortgage loans and sold these loans to various purchasers, including
purchasers who created securitization trusts. These subsidiaries are Capital One Home Loans, LLC, which was acquired in February
2005; GreenPoint, which was acquired in December 2006 as part of the North Fork acquisition; and CCB, which was acquired in
February 2009 and subsequently merged into CONA (collectively, the “subsidiaries”).
In connection with their sales of mortgage loans, the subsidiaries entered into agreements containing varying representations and
warranties about, among other things, the ownership of the loan, the validity of the lien securing the loan, the loan’s compliance
with any applicable loan criteria established by the purchaser, including underwriting guidelines and the existence of mortgage
insurance, and the loan’s compliance with applicable federal, state and local laws. The representations and warranties do not address
the credit performance of the mortgage loans, but mortgage loan performance often influences whether a claim for breach of
representation and warranty will be asserted and has an effect on the amount of any loss in the event of a breach of a representation
or warranty.
Each of these subsidiaries may be required to repurchase mortgage loans in the event of certain breaches of these representations
and warranties. In the event of a repurchase, the subsidiary is typically required to pay the unpaid principal balance of the loan
together with interest and certain expenses (including, in certain cases, legal costs incurred by the purchaser and/or others). The
214
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
subsidiary then recovers the loan or, if the loan has been foreclosed, the underlying collateral. The subsidiary is exposed to any
losses on the repurchased loans, taking into account any recoveries on the collateral. In some instances, rather than repurchase the
loans, a subsidiary may agree to make cash payments to make a purchaser whole on losses or to settle repurchase claims, possibly
including claims for attorneys’ fees and interest. In addition, our subsidiaries may be required to indemnify certain purchasers and
others against losses they incur as a result of certain breaches of representations and warranties.
These subsidiaries, in total, originated and sold to non-affiliates approximately $111 billion original principal balance of mortgage
loans between 2005 and 2008, which are the years (or “vintages”) with respect to which our subsidiaries have received the vast
majority of the repurchase-related requests and other related claims.
The following table presents the original principal balance of mortgage loan originations, by vintage for 2005 through 2008, for
the three general categories of purchasers of mortgage loans and the estimated unpaid principal balance as of December 31, 2016
and 2015:
Table 19.2: Unpaid Principal Balance of Mortgage Loans Originated and Sold to Third Parties Based on Category of Purchaser
(Dollars in billions)
GSEs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Insured Securitizations . . . . . . . . . . . . . . . . . . . . . . . . .
Uninsured Securitizations and Other . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Estimated
Unpaid Principal Balance
December 31,
2016
December 31,
2015
Original Principal Balance
Total
2008
2007
2006
2005
$
$
2
3
12
17
$
$
2
4
14
20
$
$
11
20
80
$
111
$
1
0
3
4
$
$
4
2
15
21
$
$
3
8
30
41
$
$
3
10
32
45
Of the $20 billion in original principal balance of mortgage loans sold directly by our subsidiaries to private-label purchasers who
placed the loans into securitizations supported by bond insurance (“Insured Securitizations”), approximately 48% of the original
principal balance was covered by bond insurance. Further, approximately $16 billion original principal balance was placed in
securitizations as to which the monoline bond insurers have made repurchase-related requests or loan file requests to one of our
subsidiaries (“Active Insured Securitizations”) and the remaining approximately $4 billion original principal balance was placed
in securitizations as to which the monoline bond insurers have not made repurchase-related requests or loan file requests to one
of our subsidiaries (“Inactive Insured Securitizations”). Insured Securitizations often allow the monoline bond insurer to act
independently of the investors. Bond insurers typically have indemnity agreements directly with both the mortgage originators
and the securitizers, and they often have super-majority rights within the trust documentation that allow them to direct trustees to
pursue mortgage repurchase-related requests without coordination with other investors.
Because we do not service most of the loans our subsidiaries sold to others, we do not have complete information about the current
ownership of a portion of the $80 billion in original principal balance of mortgage loans not sold directly to GSEs or placed in
Insured Securitizations. We have determined based on information obtained from third-party databases that about $48 billion
original principal balance of these mortgage loans was placed in private-label publicly issued securitizations not supported by
bond insurance (“Uninsured Securitizations”). An additional approximately $22 billion original principal balance of mortgage
loans were initially sold to private investors as whole loans. Various known and unknown investors purchased the remaining $10
billion original principal balance of mortgage loans.
With respect to the $111 billion in original principal balance of mortgage loans originated and sold to others between 2005 and
2008, we estimate that approximately $17 billion in unpaid principal balance remains outstanding as of December 31, 2016, of
which approximately $3 billion in unpaid principal balance is at least 90 days delinquent. Approximately $23 billion in losses have
been realized by third parties. Because we do not service most of the loans we sold to others, we do not have complete information
about the underlying credit performance levels for some of these mortgage loans. These amounts reflect our best estimates, including
extrapolations of underlying credit performance where necessary. These estimates could change as we get additional data or refine
our analysis.
The subsidiaries had open repurchase-related requests with regard to approximately $1.4 billion original principal balance of
mortgage loans as of December 31, 2016, flat from December 31, 2015. Currently, repurchase-related demands predominantly
relate to the 2006 and 2007 vintages. We have received relatively few repurchase-related demands for vintages after 2007, mostly
because GreenPoint ceased originating mortgages in August 2007.
215
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents information on pending repurchase-related requests by counterparty category and timing of initial
request. The amounts presented are based on original loan principal balances.
Table 19.3: Open Pipeline All Vintages (All Entities)(1)
(Dollars in millions)
Open claims as of December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross new demands received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans repurchased/made whole . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Demands rescinded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Open claims as of December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross new demands received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans repurchased/made whole . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Demands rescinded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Open claims as of December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
__________
GSEs
Insured
Securitizations
Uninsured
Securitizations
and Other
Total
$
$
16
23
(17)
(21)
1
14
(4)
(3)
649
$
1,847
$
2,512
0
0
23
(1)
(115)
534
$
(1,054)
815
$
1
0
0
13
0
(2)
46
(18)
(1,190)
1,350
28
(4)
(5)
8
$
535
$
826
$
1,369
(1)
The open pipeline includes all timely repurchase-related requests ever received by our subsidiaries where the requesting party has not formally rescinded
the repurchase-related request or our subsidiary has not agreed to either repurchase the loan at issue or make the requesting party whole with respect to its
losses. The demands rescinded in 2015 reflect the ruling from New York’s highest court in June 2015 that the statute of limitations for repurchase claims
begins when the relevant representations and warranties were made, as opposed to some later date during the life of the loan. Finally, the amounts reflected
in this chart are the original principal balance amounts of the mortgage loans at issue and do not correspond to the losses our subsidiary would incur upon
the repurchase of these loans.
The following table summarizes changes in our representation and warranty reserve for the years ended December 31, 2016, 2015
and 2014:
Table 19.4: Changes in Representation and Warranty Reserve(1)
Year Ended December 31,
(Dollars in millions)
Representation and warranty reserve, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016
2015
2014
$
610
$
731
$
1,172
Provision (benefit) for mortgage representation and warranty losses:
Recorded in continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recorded in discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total provision (benefit) for mortgage representation and warranty losses. . . . . . . . . . . . . . . . . . .
Net realized recoveries (losses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Representation and warranty reserve, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2)
21
19
1
(16)
(64)
(80)
(41)
$
630
$
610
$
(26)
(7)
(33)
(408)
731
__________
(1) Reported on our consolidated balance sheets as a component of other liabilities.
216
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the allocation of our representation and warranty reserve as of December 31, 2016 and 2015:
Table 19.5: Allocation of Representation and Warranty Reserve
(Dollars in millions, except for loans sold)
Selected period-end data:
Reserve Liability
December 31,
2016
2015
Loans Sold
2005 to 2008(1)
Active Insured Securitizations and GSEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inactive Insured Securitizations and Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
499
131
630
$
$
480
130
610
$
$
27
84
111
__________
(1) Reflects, in billions, the total original principal balance of loans originated by our subsidiaries and sold to third-party investors between 2005 and 2008.
We established reserves for the $11 billion original principal balance of GSE loans, based on open claims and historic repurchase
rates. We have entered into and completed repurchase or settlement agreements with respect to the majority of our repurchase
exposure within this category.
Our reserves could also be impacted by any claims which may be brought by governmental agencies under the Financial Institutions
Reform, Recovery and Enforcement Act (“FIRREA”), the False Claims Act or other federal or state statutes. For example,
GreenPoint and Capital One have received requests for information and/or subpoenas from various governmental regulators and
law enforcement authorities, including members of the RMBS Working Group, relating to the origination of loans for sale to the
GSEs and to RMBS participants. We are cooperating with these regulators and other authorities in responding to such requests.
For the $16 billion original principal balance in Active Insured Securitizations, our reserving approach is based upon the expected
resolution of litigation with the monoline bond insurers. Accordingly, our representation and warranty reserves for this category
are litigation reserves. In establishing litigation reserves for this category, we consider the current and future monoline insurer
losses inherent within the securitization and apply legal judgment to the developing factual and legal record to estimate the liability
for each securitization. We consider as factors within the analysis our own past monoline settlements in addition to publicly available
industry monoline settlements. Our reserves with respect to the U.S. Bank Litigation, referenced below, are contained within the
Active Insured Securitization reserve category. Further, to the extent we have litigation reserves with respect to indemnification
risks from certain representation and warranty lawsuits brought by monoline bond insurers against third-party securitizations
sponsors, where one of our subsidiaries provided some or all of the mortgage collateral within the securitization but is not a
defendant in the litigation, such reserves are also contained within this category.
For the $4 billion original principal balance of mortgage loans in the Inactive Insured Securitizations category and the $48 billion
original principal balance of mortgage loans in the Uninsured Securitizations category, we establish reserves based on an assessment
of probable and estimable legal liability, if any, utilizing both our own experience and publicly available industry settlement
information to estimate lifetime liability. In contrast with the bond insurers in the Insured Securitizations, investors in Uninsured
Securitizations often face a number of legal and logistical hurdles before they can force a securitization trustee to pursue mortgage
repurchases, including the need to coordinate with a certain percentage of investors holding the securities and to indemnify the
trustee for any litigation it undertakes. Accordingly, we only reserve for such exposures when a trustee or investor with standing
brings claims and it is probable we have incurred a loss. Some Uninsured Securitization investors from this category are currently
suing investment banks and securitization sponsors under federal and/or state securities laws. Although we face some indirect
indemnity risks from these litigations, we generally have not established reserves with respect to these indemnity risks because
we do not consider them to be both probable and reasonably estimable liabilities. In addition, to the extent we have litigation
reserves with respect to indemnification risks from certain representation and warranty lawsuits brought by parties who purchased
loans from our subsidiaries and subsequently re-sold the loans into securitizations, such reserves are also contained within this
category.
For the $22 billion original principal balance of mortgage loans sold to private investors as whole loans, we establish reserves
based on open claims and historical repurchase rates.
217
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The aggregate reserve for all three subsidiaries totaled $630 million as of December 31, 2016, compared to $610 million as of
December 31, 2015. We recorded a net provision for mortgage representation and warranty losses of $19 million (which includes
a benefit of $2 million before taxes in continuing operations and a provision of $21 million before taxes in discontinued operations)
in 2016.
As part of our business planning processes, we have considered various outcomes relating to the future representation and warranty
liabilities of our subsidiaries that are possible but do not rise to the level of being both probable and reasonably estimable outcomes
justifying an incremental accrual under applicable accounting standards. Our current best estimate of reasonably possible future
losses from representation and warranty claims beyond our reserves as of December 31, 2016 is approximately $1.5 billion, a
decrease from our $1.6 billion estimate at December 31, 2015. The decrease in this estimate was primarily driven by favorable
rulings in representation and warranty-related litigation. The estimate as of December 31, 2016 covers all reasonably possible
losses relating to representation and warranty claim activity, including those relating to the cases more specifically described below
in Mortgage Repurchase Litigation.
In estimating reasonably possible future losses in excess of our current reserves, for Active Insured Securitizations, we assume
loss rates on the high end of those observed in monoline settlements or court rulings. For our remaining GSE exposures, Uninsured
Securitizations and whole loan exposures, our reasonably possible risk estimates assume lifetime loss rates and claims rates at the
highest levels of our past experience and also consider the limited instances of observed settlements. We do not however, based
on industry precedent, assume claim rates or loss rates for these risk categories will be as high as those assumed for the Active
Insured Securitizations. Should the number of claims or the loss rates on these claims increase significantly, our estimate of
reasonably possible risk would increase materially. We also assume that repurchase-related requests will be resolved at discounts
reflecting the nature of the claims, the vintage of the underlying loans and evolving legal precedents.
Notwithstanding our ongoing attempts to estimate a reasonably possible amount of future losses beyond our current accrual levels
based on current information, it is possible that actual future losses will exceed both the current accrual level and our current
estimate of the amount of reasonably possible losses. Our reserve and reasonably possible loss estimates involve considerable
judgment and reflect that there is still significant uncertainty regarding numerous factors that may impact the ultimate loss levels,
including, but not limited to: litigation outcomes; court rulings; governmental enforcement decisions; future repurchase and
indemnification claim levels; securitization trustees pursuing mortgage repurchase litigation unilaterally or in coordination with
investors; investors successfully pursuing repurchase litigation independently and without the involvement of the trustee as a party;
ultimate repurchase and indemnification rates; future mortgage loan performance levels; actual recoveries on the collateral; and
macroeconomic conditions (including unemployment levels and housing prices). In light of the significant uncertainty as to the
ultimate liability our subsidiaries may incur from these matters, an adverse outcome in one or more of these matters could be
material to our consolidated results of operations or cash flows for any particular reporting period.
Litigation
In accordance with the current accounting standards for loss contingencies, we establish reserves for litigation related matters 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 determine estimates of potential future outcomes that are not probable and
reasonably estimable outcomes justifying either the establishment of a reserve or an incremental reserve build, but which are
reasonably possible outcomes. For other disclosed matters, such an estimate is not possible at this time. For those matters below
where an estimate is possible (excluding the reasonably possible future losses relating to the U.S. Bank Litigation and the Federal
Housing Finance Agency (“FHFA”) Litigation because reasonably possible losses with respect to those litigations are included
within the reasonably possible representation and warranty liabilities discussed above), management currently estimates the
reasonably possible future losses beyond our reserves as of December 31, 2016 are approximately $200 million. Notwithstanding
our attempt to estimate a reasonably possible range of loss beyond our current accrual levels for some litigation matters based on
current information, it is possible that actual future losses will exceed both the current accrual level and the range of reasonably
possible losses disclosed here. Given the inherent uncertainties involved in these matters, 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
218
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 consolidated results of operations or cash flows for any particular reporting period.
Interchange Litigation
In 2005, a number of entities, each purporting to represent a class of retail merchants, filed antitrust lawsuits 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 Court of Appeals 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. On November 23, 2016, the class
plaintiffs petitioned the United States Supreme Court to hear plaintiffs’ appeal of the Second Circuit reversal. Several merchant
plaintiffs also opted out of the class settlement before it was overturned, some of which 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 Repurchase Litigation
In February 2009, GreenPoint was named as a defendant in a lawsuit commenced in the New York County Supreme Court, by
U.S. Bank, N. A., Syncora Guarantee Inc. and CIFG Assurance North America, Inc. (“U.S. Bank Litigation”). Plaintiffs allege,
among other things, that GreenPoint breached certain representations and warranties in two contracts pursuant to which GreenPoint
sold approximately 30,000 mortgage loans having an aggregate original principal balance of approximately $1.8 billion to a
purchaser that ultimately transferred most of these mortgage loans to a securitization trust. Some of the securities issued by the
trust were insured by Syncora and CIFG. Plaintiffs seek unspecified damages and an order compelling GreenPoint to repurchase
the entire portfolio of 30,000 mortgage loans based on alleged breaches of representations and warranties relating to a limited
sampling of loans in the portfolio, or, alternatively, the repurchase of specific mortgage loans to which the alleged breaches of
representations and warranties relate. In March 2010, the court granted GreenPoint’s motion to dismiss with respect to plaintiffs
Syncora and CIFG but denied the motion with respect to U.S. Bank. GreenPoint subsequently answered the complaint with respect
to U.S. Bank, denying the allegations, and filed a counterclaim against U.S. Bank alleging breach of covenant of good faith and
fair dealing. In February 2012, the court denied plaintiffs’ motion for leave to file an amended complaint and dismissed Syncora
and CIFG from the case. Syncora and CIFG appealed their dismissal to the New York Supreme Court, Appellate Division, First
Department (“First Department”), which affirmed the dismissal in April 2013. The New York Court of Appeals denied Syncora’s
and CIFG’s motion for leave to appeal the First Department’s decision in February 2014. Therefore, the case is now proceeding
with U.S. Bank as the sole plaintiff. On May 20, 2015, Lehman Brothers Holding, Inc. (“LBHI”) filed an adversary proceeding
in the United States Bankruptcy Court for the Southern District of New York against U.S. Bank, Syncora and GreenPoint regarding
bankruptcy proofs of claims filed by U.S. Bank and Syncora on the same securitization at issue in the U.S. Bank Litigation. The
adversary proceeding filed by LBHI has been resolved and dismissed.
In May, June and July 2012, 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
219
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
As noted above in the section entitled Mortgage Representation and Warranty Liabilities, the Company’s subsidiaries establish
reserves with respect to representation and warranty litigation matters, where appropriate, within the Company’s overall
representation and warranty reserves.
Anti-Money Laundering
Capital One is being investigated by the New York District Attorney’s Office (“NYDA”), the Department of Justice 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 OCC dated July 10, 2015 concerning regulatory deficiencies
in our AML program.
Intellectual Ventures Corp., et al.
In June 2013, Intellectual Ventures I, LLC and Intellectual Ventures II, LLC (collectively “IV”) sued Capital One Financial Corp.,
Capital One Bank (USA), N.A. and Capital One, N.A. (collectively “Capital One”) for patent infringement in the U.S. District
Court for the Eastern District of Virginia. In the Complaint, IV alleged infringement of patents related to various business processes
across the Capital One enterprise. IV simultaneously filed patent infringement actions against numerous other financial institutions
on the same and other patents in several other federal courts. Capital One filed an answer and counterclaim alleging antitrust
violations. In December 2013, the court dismissed Capital One’s counterclaim and decided the parties’ arguments on claim
construction. IV agreed to dismiss two patents in suit, and following claim construction, asked for a stipulation of non-infringement
for one patent with an opportunity to appeal the court’s decision regarding claim construction. In April 2014, the court granted
Capital One’s motion for summary judgment and found that the two remaining patents were either unpatentable or indefinite. In
May 2014, IV appealed to the Federal Circuit, which affirmed the district court’s dismissal of all three remaining patents in July
2015.
In January 2014, IV filed a second suit against Capital One for patent infringement in the U.S. District Court for the District of
Maryland. In the complaint, IV again alleges infringement of patents related to various business practices across the Capital One
enterprise. In March 2015, the court granted Capital One’s motion for leave to add a counterclaim for antitrust violations. IV
voluntarily dismissed one of the patents against Capital One and in September 2015, the court granted summary judgment in favor
of Capital One on the remaining four patents and dismissed IV’s claims. IV appealed the dismissal of three of its claims to the
Federal Circuit and we anticipate a decision from the court in early 2017. The only claims remaining in the trial court are Capital
One’s counterclaims for antitrust violations by IV. The parties are engaged in discovery related to the counterclaims.
Other Pending and Threatened Litigation
In addition, we are commonly subject to various pending and threatened legal actions relating to the conduct of our normal business
activities. In the opinion of management, the ultimate aggregate liability, if any, arising out of all such other pending or threatened
legal actions will not be material to our consolidated financial position or our results of operations.
220
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20—CAPITAL ONE FINANCIAL CORPORATION (PARENT COMPANY ONLY)
Financial Information
The following Parent Company Only financial statements are provided in accordance with Regulation S-X of the SEC.
Table 20.1: Parent Company Statements of Income
(Dollars in millions)
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes and equity in undistributed earnings of subsidiaries. . . . . . . . . . . . . . . . . . . . .
Income tax provision (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in undistributed earnings of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss), net of tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2016
2015
2014
$
120
258
3,936
(13)
48
3,737
(79)
(65)
3,751
(333)
$ 3,418
$
120
185
450
10
178
217
(67)
3,766
4,050
(186)
$ 3,864
$
114
204
3,449
53
85
3,327
11
1,112
4,428
442
$ 4,870
Table 20.2: Parent Company Balance Sheets
(Dollars in millions)
Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans to subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2016
2015
$ 7,296
48,297
592
901
672
$ 57,758
$ 7,245
48,676
521
905
739
$ 58,086
Liabilities:
Senior and subordinated notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Borrowings from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses and other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and stockholders’ equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 8,304
1,610
330
10,244
47,514
$ 57,758
$ 8,657
1,591
554
10,802
47,284
$ 58,086
221
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Table 20.3: Parent Company Statements of Cash Flows
(Dollars in millions)
Operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed earnings of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash from operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investing activities:
Net payments (to) from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from paydowns and maturities of securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in loans to subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash from investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing activities:
Borrowings:
Year Ended December 31,
2016
2015
2014
$ 3,751
$ 4,050
$ 4,428
65
(10)
3,806
(3,766)
(300)
(16)
(1,112)
(83)
3,233
(163)
71
0
(71)
(163)
(172)
65
0
973
866
94
50
(143)
(7)
(6)
Changes in borrowings from subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of senior and subordinated notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from paydowns and maturities of senior and subordinated notes . . . . . . . . . . . . . . . . . . . . . . . . .
19
1,487
(1,750)
18
2,487
(2,625)
28
1,498
(2,100)
Common stock:
Net proceeds from issuances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
131
(812)
111
(816)
100
(679)
Preferred stock:
Net proceeds from issuances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from share-based payment activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash from financing activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,066
(214)
(3,661)
142
(3,592)
51
7,245
$ 7,296
1,472
(158)
(2,441)
85
(1,867)
(1,017)
8,262
$ 7,245
969
(67)
(2,045)
146
(2,150)
1,077
7,185
$ 8,262
222
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21—RELATED PARTY TRANSACTIONS
In the ordinary course of business, we may have loans issued to our executive officers, directors, and principal stockholders.
Pursuant to our policy, such loans are issued on the same terms as those prevailing at the time for comparable loans to unrelated
persons and do not involve more than the normal risk of collectability.
223
Capital One Financial Corporation (COF)
CAPITAL ONE FINANCIAL CORPORATION
SELECTED QUARTERLY FINANCIAL INFORMATION
(Dollars in millions, except per share data and as noted)
(unaudited)
Summarized results of operations:
2016
2015
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
6,009
$
5,794
$
5,571
$
5,517
$
5,384
$
5,164
$
4,937
$
4,974
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income after provision for credit losses . . . . . .
Non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations before income taxes . .
Income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations, net of tax . . . . . . . . . .
Income (loss) from discontinued operations, net of tax
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends and undistributed earnings allocated to
participating securities(1) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . .
562
5,447
1,752
3,695
1,119
3,679
1,135
342
793
(2)
791
(6)
(75)
517
5,277
1,588
3,689
1,184
3,361
1,512
496
1,016
(11)
1,005
(6)
(37)
478
5,093
1,592
3,501
1,161
3,295
1,367
424
943
(1)
942
(6)
(65)
461
5,056
1,527
3,529
1,164
3,223
1,470
452
1,018
(5)
1,013
(6)
(37)
423
4,961
1,380
3,581
1,233
3,480
1,334
426
908
12
920
(4)
(68)
404
4,760
1,092
3,668
1,140
3,160
1,648
530
1,118
(4)
1,114
(6)
(29)
400
4,537
1,129
3,408
1,135
3,307
1,236
384
852
11
863
(4)
(29)
398
4,576
935
3,641
1,071
3,049
1,663
529
1,134
19
1,153
(6)
(32)
Net income available to common stockholders. . . . . . . . . .
$
710
$
962
$
871
$
970
$
848
$
1,079
$
830
$
1,115
Common share statistics:
Basic earnings per common share:(1)
Net income from continuing operations . . . . . . . . . . . .
Income (loss) from discontinued operations . . . . . . . . .
Net income per basic common share. . . . . . . . . . . . . . .
Diluted earnings per common share:(1)
Net income from continuing operations . . . . . . . . . . . .
Income (loss) from discontinued operations . . . . . . . . .
Net income per diluted common share . . . . . . . . . . . . .
$
$
$
$
1.47
0.00
1.47
1.45
0.00
1.45
$
$
$
$
1.94
(0.02)
1.92
1.92
(0.02)
1.90
$
$
$
$
1.70
0.00
1.70
1.69
0.00
1.69
$
$
$
$
1.86
(0.01)
1.85
1.85
(0.01)
1.84
$
$
$
$
1.58
0.02
1.60
1.56
0.02
1.58
$
$
$
$
2.01
(0.01)
2.00
1.99
(0.01)
1.98
$
$
$
$
1.50
0.02
1.52
1.48
0.02
1.50
$
$
$
$
2.00
0.03
2.03
1.97
0.03
2.00
Weighted-average common shares outstanding
(in millions):
Basic common shares . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted common shares . . . . . . . . . . . . . . . . . . . . . . . . .
483.5
489.2
501.1
505.9
511.7
516.5
523.5
528.0
530.8
536.3
540.6
546.3
545.6
552.0
550.2
557.2
Balance sheet (average balances):
Loans held for investment . . . . . . . . . . . . . . . . . . . . . . . . . .
$240,027
$235,843
$230,379
$226,736
$220,052
$211,227
$206,337
$205,194
Interest-earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
317,853
310,987
302,764
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
350,225
343,153
334,479
Interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . .
206,464
196,913
195,641
Total deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
232,204
222,251
221,146
Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . .
58,624
47,972
60,708
49,033
54,359
48,934
299,456
331,919
194,125
219,180
53,761
49,078
292,054
283,082
276,585
278,427
323,354
313,822
307,206
309,401
189,885
185,800
183,946
182,998
215,899
210,974
209,143
207,851
48,850
48,712
45,070
48,456
41,650
47,255
46,082
46,397
__________
(1) Dividends and undistributed earnings allocated to participating securities, earnings per share and preferred stock dividends are computed independently for
each period. Accordingly, the sum of each quarter may not agree to the year-to-date total.
224
Capital One Financial Corporation (COF)
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. 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 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 December 31, 2016, the end of the period
covered by this Annual Report on Form 10-K. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were effective as of December 31, 2016, 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 have been no changes in internal control over financial reporting that occurred during the fourth quarter of 2016
which have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
(c) Management’s Report on Internal Control Over Financial Reporting
Management’s Report on Internal Control Over Financial Reporting is included in “Part II—Item 8. Financial Statements and
Supplementary Data” and is incorporated herein by reference. The Report of Independent Registered Public Accounting Firm on
Internal Control Over Financial Reporting also is included in “Part II—Item 8. Financial Statements and Supplementary Data”
and incorporated herein by reference.
Item 9B. Other Information
None.
225
Capital One Financial Corporation (COF)
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information required by Item 10 will be included in our Proxy Statement for the 2017 Annual Stockholder Meeting (“Proxy
Statement”) under the headings “Corporate Governance at Capital One” and “Section 16(a) Beneficial Ownership Reporting
Compliance,” and is incorporated herein by reference. The Proxy Statement will be filed with the Securities and Exchange
Commission pursuant to Regulation 14A within 120 days of the end of our 2016 fiscal year.
Item 11. Executive Compensation
The information required by Item 11 will be included in the Proxy Statement under the headings “Director Compensation,”
“Compensation Discussion and Analysis,” “Named Executive Officer Compensation,” “Compensation Committee Interlocks and
Insider Participation” and “Compensation Committee Report,” and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by Item 12 will be included in the Proxy Statement under the headings “Security Ownership” and “Equity
Compensation Plans,” and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions and Director Independence
The information required by Item 13 will be included in the Proxy Statement under the headings “Related Person Transactions”
and “Director Independence,” and is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The information required by Item 14 will be included in the Proxy Statement under the heading “Ratification of Selection of
Independent Auditors,” and is incorporated herein by reference.
226
Capital One Financial Corporation (COF)
Item 15. Exhibits, Financial Statements Schedules
(a) Financial Statement Schedules
PART IV
The following documents are filed as part of this Annual Report in Part II, Item 8 and are incorporated herein by reference.
(1) Management’s Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements
Consolidated Financial Statements:
Consolidated Statements of Income for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Comprehensive Income for the years ended December 31, 2016, 2015 and 2014
Consolidated Balance Sheets as of December 31, 2016 and 2015
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014
Notes to Consolidated Financial Statements
Selected Quarterly Financial Information
(2) Schedules
None.
(b) Exhibits
An index to exhibits has been filed as part of this Report and is incorporated herein by reference.
227
Capital One Financial Corporation (COF)
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.
SIGNATURES
Date: February 23, 2017
CAPITAL ONE FINANCIAL CORPORATION
By:
/s/ RICHARD D. FAIRBANK
Richard D. Fairbank
Chair, Chief Executive Officer and President
Signature
Title
Date
/s/ RICHARD D. FAIRBANK
Richard D. Fairbank
/s/ R. SCOTT BLACKLEY
R. Scott Blackley
/s/ PATRICK W. GROSS
Patrick W. Gross
/s/ ANN FRITZ HACKETT
Ann Fritz Hackett
/s/ LEWIS HAY, III
Lewis Hay, III
/s/ BENJAMIN P. JENKINS, III
Benjamin P. Jenkins, III
/s/ PETER THOMAS KILLALEA
Peter Thomas Killalea
/s/ PIERRE E. LEROY
Pierre E. Leroy
/s/ PETER E. RASKIND
Peter E. Raskind
/s/ MAYO A. SHATTUCK III
Mayo A. Shattuck III
/s/ BRADFORD H. WARNER
Bradford H. Warner
/s/CATHERINE G. WEST
Catherine G. West
Chair, Chief Executive Officer and President
February 23, 2017
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer)
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
February 23, 2017
February 23, 2017
February 23, 2017
February 23, 2017
February 23, 2017
February 23, 2017
February 23, 2017
February 23, 2017
February 23, 2017
February 23, 2017
February 23, 2017
228
Capital One Financial Corporation (COF)
EXHIBIT INDEX
CAPITAL ONE FINANCIAL CORPORATION
ANNUAL REPORT ON FORM 10-K
DATED DECEMBER 31, 2016
Commission File No. 1-13300
The following exhibits are incorporated by reference or filed herewith. References to (i) the “2002 Form 10-K” are to the Company’s
Annual Report on Form 10-K for the year ended December 31, 2002, filed on March 17, 2003; (ii) 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; (iii) the “2004 Form
10-K” are to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, filed on March 9, 2005; (iv)
the “2010 Form 10-K” are to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, filed on March
1, 2011, as amended on March 7, 2011; (v) the “2011 Form 10-K” are to the Company’s Annual Report on Form 10-K for the year
ended December 31, 2011, filed on February 28, 2012; (vi) the “2012 Form 10-K” are to the Company’s Annual Report on Form
10-K for the year ended December 31, 2012, filed on February 28, 2013; (vii) the “2013 Form 10-K” are to the Company’s Annual
Report on Form 10-K for the year ended December 31, 2013, filed on February 27, 2014; (viii) the “2014 Form 10-K” are to the
Company’s Annual Report on Form 10-K for the year ended December 31, 2014, filed on February 24, 2015; and (ix) the “2015
Form 10-K” are to the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, filed on February 25,
2016.
Exhibit No.
3.1
Description
Restated Certificate of Incorporation of Capital One Financial Corporation, (as restated April 30, 2015) (incorporated by
reference to Exhibit 3.1 of the Current Report on Form 8-K, filed on May 4, 2015).
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
10.1.1
10.1.2
10.1.3
10.2.1
Amended and Restated Bylaws of Capital One Financial Corporation, dated October 5, 2015 (incorporated by reference to
Exhibit 3.1 of the Current Report on Form 8-K, filed on October 5, 2015).
Certificate of Designations of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series B, dated August 16, 2012
(incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K, filed on August 20, 2012).
Certificate of Designations of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series C, dated June 11, 2014
(incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K, filed June 12, 2014).
Certificate of Designations of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series D, dated October 29, 2014
(incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K, filed October 31, 2014).
Certificate of Designations of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series E, dated May 12,
2015 (incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K, filed May 14, 2015).
Certificate of Designations of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series F, dated August 20, 2015
(incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K, filed August 24, 2015).
Certificate of Designations of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series G, dated July 28, 2016
(incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K, filed July 29, 2016).
Certificate of Designations of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series H, dated November 28, 2016
(incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K, filed on November 29, 2016).
Specimen certificate representing the common stock of Capital One Financial Corporation (incorporated by reference to
Exhibit 4.1 of the 2003 Form 10-K).
Warrant Agreement, dated December 3, 2009, between Capital One Financial Corporation and Computershare Trust Company,
N.A. (incorporated by reference to the Exhibit 4.1 of the Form 8-A, filed on December 4, 2009).
Deposit Agreement, dated August 20, 2012 (incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K, filed
on August 20, 2012).
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.
Amended and Restated 2004 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 of the Current Report on Form
8-K, filed on May 3, 2006).
Second Amended and Restated 2004 Stock Incentive Plan (incorporated by reference to the Proxy Statement on Definitive
Schedule 14A, filed on March 13, 2009).
Third Amended and Restated 2004 Stock Incentive Plan (incorporated by reference to the Proxy Statement on Definitive
Schedule 14A, filed on March 18, 2014).
Form of Nonstatutory Stock Option Agreement granted to certain of our executives under the 2004 Stock Incentive Plan
(incorporated by reference to Exhibit 10.20.3 of the 2004 Form 10-K).
229
Capital One Financial Corporation (COF)
Exhibit No.
10.2.2
10.2.3
10.2.4
10.2.5
10.2.6
10.2.7
10.2.8
10.2.9
10.2.10
10.2.11
10.2.12
10.2.13
10.2.14
10.2.15
10.2.16
10.2.17
10.2.18
10.2.19*
10.2.20*
10.2.21*
10.3.1
Description
Form of Nonstatutory Stock Option Award Agreement granted to our executive officers, including the Chief Executive Officer,
under the Second Amended and Restated 2004 Stock Incentive Plan on January 26, 2011 (incorporated by reference to Exhibit
10.18 of the 2010 Form 10-K).
Form of Nonstatutory Stock Option Award Agreements granted to our executive officers, including the Chief Executive Officer,
under the Second Amended and Restated 2004 Stock Incentive Plan on January 31, 2012 (incorporated by reference to Exhibit
10.2.10 of the 2011 Form 10-K).
Form of Performance Unit Award Agreements granted to executive officers, including the Chief Executive Officer, under the
Second Amended and Restated 2004 Stock Incentive Plan on January 31, 2012 (incorporated by reference to Exhibit 10.2.11
of the 2011 Form 10-K).
Form of Nonstatutory Stock Option Award Agreements granted to our executive officers, including the Chief Executive Officer,
under the Second Amended and Restated 2004 Stock Incentive Plan on January 31, 2013 (incorporated by reference to Exhibit
10.2.14 of the 2012 Form 10-K).
Form of Performance Unit Award Agreements granted to executive officers, including the Chief Executive Officer, under the
Second Amended and Restated 2004 Stock Incentive Plan on January 31, 2013 (incorporated by reference to Exhibit 10.2.15
of the 2012 Form 10-K).
Restricted Stock Award Agreement granted to Stephen S. Crawford under the Second Amended and Restated 2004 Stock
Incentive Plan on February 2, 2013 (incorporated by reference to Exhibit 10.2.18 of the 2012 Form 10-K).
Form of Nonstatutory Stock Option Award Agreements granted to our executive officers, including the Chief Executive Officer,
under the Second Amended and Restated 2004 Stock Incentive Plan on January 30, 2014 (incorporated by reference to Exhibit
10.2.15 of the 2013 Form 10-K).
Form of Performance Unit Award Agreements granted to executive officers, including the Chief Executive Officer, under the
Second Amended and Restated 2004 Stock Incentive Plan on January 30, 2014 (incorporated by reference to Exhibit 10.2.16
of the 2013 Form 10-K).
Form of Restricted Stock Unit Award Agreements granted to our executive officers, including the Chief Executive Officer,
under the Second Amended and Restated 2004 Stock Incentive Plan on January 30, 2014 (incorporated by reference to Exhibit
10.2.17 of the 2013 Form 10-K).
Form of Nonstatutory Stock Option Award Agreements granted to our executive officers, including the Chief Executive Officer,
under the Second Amended and Restated 2004 Stock Incentive Plan on January 29, 2015 (incorporated by reference to Exhibit
10.2.14 of the 2014 Form 10-K).
Form of Performance Unit Award Agreements granted to executive officers, including the Chief Executive Officer, under the
Second Amended and Restated 2004 Stock Incentive Plan on January 29, 2015 (incorporated by reference to Exhibit 10.2.15
of the 2014 Form 10-K).
Form of Restricted Stock Unit Award Agreements granted to our executive officers, including the Chief Executive Officer,
under the Second Amended and Restated 2004 Stock Incentive Plan on January 29, 2015 (incorporated by reference to Exhibit
10.2.16 of the 2014 Form 10-K).
Form of Nonstatutory Stock Option Award Agreements granted to our executive officers, including the Chief Executive Officer,
under the Second Amended and Restated 2004 Stock Incentive Plan on February 4, 2016 (incorporated by reference to Exhibit
10.2.17 of the 2015 Form 10-K).
Form of Performance Unit Award Agreements granted to executive officers, including the Chief Executive Officer, under the
Second Amended and Restated 2004 Stock Incentive Plan on February 4, 2016 (incorporated by reference to Exhibit 10.2.18
of the 2015 Form 10-K).
Form of Restricted Stock Unit Award Agreements granted to our executive officers, including the Chief Executive Officer,
under the Second Amended and Restated 2004 Stock Incentive Plan on February 4, 2016 (incorporated by reference to Exhibit
10.2.19 of the 2015 Form 10-K).
Restricted Stock Award Agreement granted to Richard Scott Blackley under the Second Amended and Restated 2004 Stock
Incentive Plan, dated May 9, 2016 (incorporated by reference to Exhibit 10.2 of the Quarterly Report on Form 10-Q for the
period ended June 30, 2016).
Amendment 1 to Restricted Stock Award Agreement granted to Stephen S. Crawford under the Second Amended and Restated
2004 Stock Incentive Plan (incorporated by reference to Exhibit 10.3 of the Quarterly Report on Form 10-Q for the period
ended June 30, 2016).
Form of Nonstatutory Stock Option Award Agreements granted to our executive officers, including the Chief Executive Officer,
under the Second Amended and Restated 2004 Stock Incentive Plan on February 2, 2017.
Form of Performance Unit Award Agreements granted to executive officers, including the Chief Executive Officer, under the
Second Amended and Restated 2004 Stock Incentive Plan on February 2, 2017.
Form of Restricted Stock Unit Award Agreements granted to our executive officers, including the Chief Executive Officer,
under the Second Amended and Restated 2004 Stock Incentive Plan on February 2, 2017.
Capital One Financial Corporation 1999 Non-Employee Directors Stock Incentive Plan, as amended (incorporated by reference
to Exhibit 10.4 of the 2002 Form 10-K).
230
Capital One Financial Corporation (COF)
Exhibit No.
10.3.2
10.3.3
10.3.4
10.3.5
10.3.6
10.4.1
10.4.2
10.5
10.6.1
10.6.2
10.7.1
10.7.2
10.7.3
10.8.1
10.8.2
10.9
12.1*
21*
23*
31.1*
31.2*
32.1*
32.2*
Description
Form of 1999 Non-Employee Directors Stock Incentive Plan Nonstatutory Stock Option Agreement between Capital One
Financial Corporation and certain of its Directors (incorporated by reference to Exhibit 10.2 of the Quarterly Report on Form
10-Q for the period ended September 30, 2004).
Form of 1999 Non-Employee Directors Stock Incentive Plan Deferred Share Units Award Agreement between Capital One
Financial Corporation and certain of its Directors (incorporated by reference to Exhibit 10.3 of the Quarterly Report on Form
10-Q for the period ended September 30, 2004).
Form of Restricted Stock Unit Award Agreement granted to our directors under the Second Amended and Restated 2004
Stock Incentive Plan (incorporated by reference to Exhibit 10.3.4 of the 2011 Form 10-K).
Form of Stock Option Award Agreement granted to our directors under the Second Amended and Restated 2004 Stock Incentive
Plan (incorporated by reference to Exhibit 10.3.5 of the 2011 Form 10-K).
Form of Restricted Stock Unit Award Agreement granted to our directors under the Second Amended and Restated 2004 Stock
Incentive Plan, for awards granted on or after May 5, 2016 (incorporated by reference to Exhibit 10.1 of the Quarterly Report
on Form 10-Q for the period ended June 30, 2016).
Amended and Restated Capital One Financial Corporation Executive Severance Plan (incorporated by reference to Exhibit
10.4 of the 2011 Form 10-K).
Amended and Restated Capital One Financial Corporation Executive Severance Plan (incorporated by reference to Exhibit
10.1 of the Quarterly Report on Form 10-Q for the period ended September 30, 2015).
Capital One Financial Corporation Non-Employee Directors Deferred Compensation Plan (incorporated by reference to
Exhibit 10.5 of the 2011 Form 10-K).
Amended and Restated Capital One Financial Corporation Voluntary Non-Qualified Deferred Compensation Plan
(incorporated by reference to Exhibit 10.6 of the 2011 Form 10-K).
First Amendment to the Amended and Restated Capital One Financial Corporation Voluntary Non-Qualified Deferred
Compensation Plan (incorporated by reference to Exhibit 10.6.2 of the 2012 Form 10-K).
Form of Change of Control Employment Agreement between Capital One Financial Corporation and each of its named
executive officers, other than the Chief Executive Officer (incorporated by reference to Exhibit 10.8.2 of the 2011 Form 10-
K).
Form of 2011 Change of Control Employment Agreement between Capital One Financial Corporation and certain executive
officers (incorporated by reference to Exhibit 10.8.3 of the 2012 Form 10-K).
Change of Control Employment Agreement between Capital One Financial Corporation and Richard D. Fairbank (incorporated
by reference to Exhibit 10.7.3 of the 2013 Form 10-K).
Form of Non-Competition Agreement between Capital One Financial Corporation and certain named executive officers
(incorporated by reference to Exhibit 10.9 of the 2012 Form 10-K).
Non-Competition and Non-Solicitation of Customer Agreement between Capital One Financial Corporation and Jonathan W.
Witter (incorporated by reference to Exhibit 10.8.2 of the 2013 Form 10-K).
Offer Letter to Stephen S. Crawford dated January 31, 2013 (incorporated by reference to Exhibit 10.10.2 of the 2012 Form
10-K).
Computation of Ratio of Earnings to Fixed Charges and Earnings to Combined Fixed Charges and Preferred Stock Dividends.
Subsidiaries of the Company.
Consent of Ernst & Young LLP.
Certification of Richard D. Fairbank.
Certification of R. Scott Blackley.
Certification** of Richard D. Fairbank.
Certification** of R. Scott Blackley.
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-K.
**
Information in this Form 10-K 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.
231
Capital One Financial Corporation (COF)
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND
EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS(1)
Exhibit 12.1
(Dollars in millions)
Ratios (including interest expense on deposits):
Earnings:
Year Ended December 31,
2016
2015
2014
2013
2012
Income from continuing operations before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
5,484
$
5,881
$
6,569
$
6,578 $
5,184
Adjustments:
Fixed charges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,025
1,632
1,586
1,796
2,377
Equity in undistributed (gain) loss of unconsolidated subsidiaries. . . . . . . . . . . . . . . . . . . . .
(7)
(19)
(1)
(16)
(22)
Earnings available for fixed charges, as adjusted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
7,502
$
7,494
$
8,154
$
8,358 $
7,539
Fixed charges:
Interest expense on deposits and borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2,018
$
1,625
$
1,579
$
1,792 $
2,375
Interest factor in rent expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total fixed charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred stock dividend requirements(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total combined fixed charges and preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ratio of earnings to fixed charges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ratio of earnings to combined fixed charges and preferred stock dividends . . . . . . . . . . . . . . . .
7
2,025
311
7
1,632
232
7
1,586
100
4
2
1,796
2,377
77
20
$
2,336
$
1,864
$
1,686
$
1,873
$
2,397
3.70
3.21
4.59
4.02
5.14
4.84
4.65
4.46
3.17
3.15
Ratios (excluding interest expense on deposits):
Earnings:
Income from continuing operations before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
5,484
$
5,881
$
6,569
$
6,578 $
5,184
Adjustments:
Fixed charges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in undistributed (gain) loss of unconsolidated subsidiaries. . . . . . . . . . . . . . . . . . . . .
812
(7)
541
(19)
498
(1)
555
(16)
974
(22)
Earnings available for fixed charges, as adjusted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
6,289
$
6,403
$
7,066
$
7,117 $
6,136
Fixed charges:
Interest expense on borrowings(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest factor in rent expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total fixed charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred stock dividend requirements(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total combined fixed charges and preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7
812
311
$
1,123
$
Ratio of earnings to fixed charges, excluding interest on deposits . . . . . . . . . . . . . . . . . . . . . . . .
Ratio of earnings to combined fixed charges, excluding interest on deposits and preferred
stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7.75
5.60
7
541
232
773
$
7
498
100
598
4
555
77
$
632
$
11.84
14.19
12.82
2
974
20
994
6.30
8.28
11.82
11.26
6.17
$
805
$
534
$
491
$
551 $
972
__________
(1) We acquired ING Direct on February 17, 2012. On May 1, 2012, we closed the 2012 U.S. card acquisition. Each of these transactions was accounted for
under the acquisition method of accounting.
(2)
(3)
Preferred stock dividends requirements represent pre-tax earnings that would be required to cover any preferred stock dividends, computed using our effective
tax rate, whenever there is an income tax provision, for the relevant periods.
Interest expense on borrowings represents total interest expense reported on our consolidated statements of income, excluding interest on deposits of $1.2
billion for the year ended December 31, 2016, $1.1 billion for the years ended December 31, 2015 and 2014, $1.2 billion for the year ended December 31,
2013 and $1.4 billion for the year ended December 31, 2012.
Corporate Information
Corporate Office
1680 Capital One Drive, McLean, VA 22102
Tel: (703) 720-1000
www.capitalone.com
Annual Meeting
Thursday, May 4, 2017
10:00 a.m. Eastern Time
Capital One Headquarters
1680 Capital One Drive, McLean, VA 22102
Principal Investor Contact
Jeff Norris
Senior Vice President,
Global Finance
Capital One Financial Corporation
1680 Capital One Drive, McLean, VA 22102
Tel: (703) 720-2455
Common Stock
Listed on New York Stock Exchange®
Stock Symbol COF
Member of S&P 500®
Corporate Registrar/Transfer Agent
Computershare Investor Services
P.O. Box 43078, Providence, RI 02940-3078
Tel: (888) 985-2057
Outside the U.S., Canada, & Puerto Rico
Tel: (781) 575-2725
Hearing impaired: (800) 952-9245
Email: shareholder@computershare.com
Internet: www.computershare.com
By Overnight Courier to:
Computershare Investor Services
250 Royall Street, Canton, MA 02021
Independent Auditors
Ernst & Young LLP
Copies of Form 10-K filed with the Securities and Exchange Commission are available without charge at www.capitalone.com. The
most recent certifications by our Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 are filed as exhibits to the Form 10-K. We have also filed with the New York Stock Exchange the most recent Annual CEO
Certification as required by Section 303A.12 (a) of the New York Stock Exchange Listed Company Manual.
ABOUT CAPITAL ONE
Capital One Financial Corporation (www.capitalone.com) is a financial holding company whose subsidiaries, which include Capital One, N.A., and Capital One Bank (USA),
N.A., had $236.8 billion in deposits and $357.0 billion in total assets as of December 31, 2016. Headquartered in McLean, Virginia, Capital One offers a broad spectrum of
financial products and services to consumers, small businesses and commercial clients through a variety of channels. Capital One, N.A. has branches located primarily in
New York, Louisiana, Texas, Maryland, Virginia, New Jersey and the District of Columbia. A Fortune 500 company, Capital One trades on the New York Stock Exchange
under the symbol “COF” and is included in the S&P 100 index.
Capital One cautions readers that any forward-looking statement is not a guarantee of future performance and that actual results could differ materially from those
contained in the forward-looking statements as a result of various factors including, but not limited to: general economic and business conditions in the U.S., the U.K.,
Canada or Capital One’s 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; financial, legal,
regulatory, tax or accounting changes or actions, including the impact of the Dodd-Frank Act and the regulations promulgated thereunder, and other regulatory reforms
and regulations governing bank capital and liquidity standards, including Basel-related initiatives and potential changes to financial accounting and reporting standards;
developments, changes or actions relating to any litigation, governmental investigation or regulatory enforcement action or matter involving Capital One; the inability to
sustain revenue and earnings growth; increases or decreases in interest rates; Capital One’s ability to access the capital markets at attractive rates and terms to capitalize
and fund Capital One’s operations and future growth; the success of Capital One’s marketing efforts in attracting and retaining customers; increases or decreases in Capital
One’s 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 Capital One incurs, and attrition of loan balances; the level of future repurchase or indemnification requests
Capital One may receive, the actual future performance of mortgage loans relating to such requests, the success rates of claimants against Capital One, any developments
in litigation and the actual recoveries Capital One may make on any collateral relating to claims against Capital One; the amount and rate of deposit growth; changes
in the reputation of, or expectations regarding, the financial services industry or Capital One with respect to practices, products or financial condition; changes in retail
distribution strategies and channels, including in the behavior and expectations of Capital One’s customers; any significant disruption in Capital One’s operations or in the
technology platforms on which Capital One relies, including security failures or breaches of Capital One’s systems or those of Capital One’s customers, partners, service
providers or other third parties; Capital One’s ability to maintain a compliance and technology infrastructure suitable for the nature of Capital One’s business; Capital One’s
ability to develop digital technology that addresses the needs of Capital One’s customers, including the challenges relating to rapid significant technological changes; the
effectiveness of Capital One’s risk management strategies; Capital One’s ability to control costs, including the amount of, and rate of growth in, Capital One’s expenses as
Capital One’s business develops or changes or as it expands into new market areas; Capital One’s ability to execute on Capital One’s strategic and operational plans; the
extensive use of models in Capital One’s business, including those to aggregate and assess various risk exposures and estimate certain financial values; any significant
disruption of, or loss of public confidence in, the internet affecting the ability of Capital One’s customers to access their accounts and conduct banking transactions; Capital
One’s ability to recruit and retain talented and experienced personnel; changes in the labor and employment markets; fraud or misconduct by Capital One’s customers,
employees, business partners or third parties; competition from providers of products and services that compete with Capital One’s businesses; increased competition for
rewards customers resulting in higher rewards expense, or impairing Capital One’s ability to attract and retain credit card customers; merchants’ increasing focus on the
fees charged by credit card networks; and other risk factors listed from time to time in reports that Capital One files with the SEC, including, but not limited to, the Annual
Report on Form 10-K for the year ended December 31, 2016.
All Capital One service marks are owned by Capital One. All rights reserved. All third-party trademarks used herein are owned by the respective entity. All rights reserved.
© Copyright 2017 Capital One Services, Inc.
Created and produced by Capital One and the following:
Design and Production: Elevation
Photography: Vedros & Associates, Cade Martin
Printing: Allied Printing Services Inc.
1680 Capital One Drive
McLean, VA 22102
(703) 720-1000
www.capitalone.com