Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File No. 1-13300

 

 

CAPITAL ONE FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   54-1719854

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

1680 Capital One Drive,

McLean, Virginia

  22102
(Address of Principal Executive Offices)   (Zip Code)

Registrant’s telephone number, including area code: (703) 720-1000

(Former name, former address and former fiscal year, if changed since last report)

(Not applicable)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a Shell Company (as defined in Rule 12b-2 of the Exchange Act)    Yes  ¨    No  x

As of October 31, 2013, there were 576,554,996 shares of the registrant’s Common Stock, par value $.01 per share, outstanding.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          Page  

PART I—FINANCIAL INFORMATION

     1   

Item 1.

  

Financial Statements

     68   
  

Condensed Consolidated Statements of Income

     69   
  

Condensed Consolidated Statements of Comprehensive Income

     70   
  

Condensed Consolidated Balance Sheets

     71   
  

Condensed Consolidated Statements of Changes in Stockholders’ Equity

     72   
  

Condensed Consolidated Statements of Cash Flows

     73   
  

Notes to Condensed Consolidated Financial Statements

     74   
  

    Note   1 —  Summary of Significant Accounting Policies

     74   
  

    Note   2 — Discontinued Operations

     76   
  

    Note   3 — Investment Securities

     77   
  

    Note   4 — Loans

     88   
  

    Note   5 — Allowance for Loan and Lease Losses

     112   
  

    Note   6 —  Variable Interest Entities and Securitizations

     116   
  

    Note   7 — Goodwill and Other Intangible Assets

     121   
  

    Note   8 — Deposits and Borrowings

     122   
  

    Note   9 —  Derivative Instruments and Hedging Activities

     125   
  

    Note 10 — Stockholders’ Equity

     132   
  

    Note 11 — Earnings Per Common Share

     135   
  

    Note 12 — Fair Value of Financial Instruments

     136   
  

    Note 13 — Business Segments

     152   
  

    Note 14 — Commitments, Contingencies and Guarantees

     155   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)      1   
  

    Summary of Selected Financial Data

     1   
  

    Introduction

     6   
  

    Executive Summary and Business Outlook

     7   
  

    Critical Accounting Policies and Estimates

     11   
  

    Accounting Changes and Developments

     12   
  

    Consolidated Results of Operations

     13   
  

    Business Segment Financial Performance

     20   
  

    Consolidated Balance Sheet Analysis

     34   
  

    Off-Balance Sheet Arrangements and Variable Interest Entities

     40   
  

    Capital Management

     40   
  

    Risk Management

     44   
  

    Credit Risk Profile

     45   
  

    Liquidity Risk Profile

     58   
  

    Market Risk Profile

     62   
  

    Supervision and Regulation

     64   
  

    Forward-Looking Statements

     65   
  

    Supplemental Tables

     67   

Item 3.

  

Quantitative and Qualitative Disclosures about Market Risk

     167   

Item 4.

  

Controls and Procedures

     167   

PART II—OTHER INFORMATION

     168   

Item 1.

  

Legal Proceedings

     168   

Item 1A.

  

Risk Factors

     168   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     168   

 

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          Page  

Item 3.

  

Defaults upon Senior Securities

     168   

Item 5.

  

Other Information

     168   

Item 6.

  

Exhibits

     169   

SIGNATURES

     170   

EXHIBIT INDEX

     171   

 

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INDEX OF MD&A TABLES AND SUPPLEMENTAL TABLES

 

Table   

Description

   Page  
   MD&A Tables:   
1    Consolidated Financial Highlights (Unaudited)      3   
2    Business Segment Results      7   
3    Average Balances, Net Interest Income and Net Interest Yield      14   
4    Rate/Volume Analysis of Net Interest Income      16   
5    Non-Interest Income      17   
6    Non-Interest Expense      19   
7    Credit Card Business Results      22   
7.1    Domestic Card Business Results      25   
7.2    International Card Business Results      27   
8    Consumer Banking Business Results      29   
9    Commercial Banking Business Results      32   
10    “Other” Results      34   
11    Investment Securities      36   
12    Non-Agency Investment Securities Credit Ratings      37   
13    Net Loans Held for Investment      37   
14    Changes in Representation and Warranty Reserve      39   
15    Capital Ratios Under Basel I      41   
16    Estimated Common Equity Tier 1 Ratio Under Basel III Standardized      42   
17    Loan Portfolio Composition      46   
18    30+ Day Delinquencies      48   
19    Aging and Geography of 30+ Days Delinquent Loans      49   
20    90+ Day Delinquent Loans Accruing Interest      49   
21    Nonperforming Loans and Other Nonperforming Assets      50   
22    Net Charge-Offs      52   
23    Loan Modifications and Restructurings      54   
24    Allowance for Loan and Lease Losses Activity      56   
25    Allocation of the Allowance for Loan and Lease Losses      57   
26    Liquidity Reserves      58   
27    Deposit Composition and Average Deposit Rates      59   
28    Short-term Borrowings      60   
29    Contractual Maturity Profile of Outstanding Debt      61   
30    Senior Unsecured Debt Credit Ratings      62   
31    Interest Rate Sensitivity Analysis      64   
   Supplemental Tables:   
A    Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures Under Basel I      67   

 

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PART I—FINANCIAL INFORMATION

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

 

 

This discussion contains forward-looking statements that are based upon management’s current expectations and are subject to significant uncertainties and changes in circumstances. Please review “Forward-Looking Statements” for more information on the forward-looking statements in this Quarterly Report on Form 10-Q (“this Report”). Our actual results may differ materially from those included in these forward-looking statements due to a variety of factors including, but not limited to, those described in “Part II—Item 1A. Risk Factors” in this Report and in “Part I—Item 1A. Risk Factors” in our 2012 Annual Report on Form 10-K (“2012 Form 10-K”). Unless otherwise specified, references to notes to our consolidated financial statements are to the notes to our unaudited condensed consolidated financial statements as of September 30, 2013 included in this Report.

 

 

Management monitors a variety of key indicators to evaluate our business results and financial condition. The following MD&A is intended to provide the reader with an understanding of our results of operations, financial condition and liquidity by focusing on changes from year to year in certain key measures used by management to evaluate performance, such as profitability, growth and credit quality metrics. MD&A is provided as a supplement to, and should be read in conjunction with, our unaudited condensed consolidated financial statements and related notes in this Report and the more detailed information contained in our 2012 Form 10-K.

 

 

SUMMARY OF SELECTED FINANCIAL DATA

 

The following table presents selected consolidated financial data from our results of operations for the third quarter and first nine months of 2013 and 2012, and selected comparative consolidated balance sheet data as of September 30, 2013, and December 31, 2012. We also provide selected key metrics we use in evaluating our performance. Certain prior period amounts have been reclassified to conform to the current period presentation. The comparability of our results of operations between reported periods is impacted by the following transactions completed in 2012 and 2013:

 

 

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 (the “ING Direct acquisition”). The acquisition resulted in the addition of loans of $40.4 billion, other assets of $53.9 billion and deposits of $84.4 billion as of the acquisition date.

 

 

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, National Association consumer credit card program and certain other retained assets and liabilities) (the “2012 U.S. card acquisition”). The 2012 U.S. card acquisition included (i) the acquisition of HSBC’s U.S. credit card portfolio, (ii) its on-going private label and co-branded partnerships, and (iii) other assets, including infrastructure and capabilities. At closing, we acquired approximately 27 million new active accounts, $27.8 billion in outstanding credit card receivables designated as held for investment and $327 million in other net assets.

 

 

On September 6, 2013, we completed the sale of the Best Buy private label and co-branded credit card portfolio to Citibank, N.A (“Portfolio Sale”). Pursuant to the agreement with Citibank, N.A., we received $6.4 billion for the net portfolio assets.

We use the term “acquired loans” to refer to a limited portion of the credit card loans acquired in the 2012 U.S. card acquisition and the substantial majority of consumer and commercial loans acquired in the ING Direct and Chevy Chase Bank (“CCB”) acquisitions, which were recorded at fair value at acquisition and subsequently

 

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accounted for based on expected cash flows to be collected (under the accounting standard formerly known as “Statement of Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer,” commonly referred to as “SOP 03-3”). The period-end carrying value of acquired loans accounted for subsequent to acquisition based on expected cash flows to be collected was $30.1 billion and $37.1 billion as of September 30, 2013 and December 31, 2012, respectively. The difference between the fair value at acquisition and initial expected cash flows represents the accretable yield, which is recognized into interest income over the life of the loans. The difference between the contractual payments on the loans and the expected cash flows represents the nonaccretable difference or the amount not considered collectible, which approximates what we refer to as the “credit mark.” The credit mark established under the accounting for these loans takes into consideration future expected credit losses over the life of the loans. Accordingly, there are no charge-offs and no allowance associated with these loans unless the estimated cash flows expected to be collected decrease subsequent to acquisition. In addition, these loans are not classified as delinquent or nonperforming even though the customer may be contractually past due because we expect that we will fully collect the carrying value of these loans. The accounting and classification of these loans may significantly alter some of our reported credit quality metrics. We therefore supplement certain reported credit quality metrics with metrics adjusted to exclude the impact of these acquired loans. For additional information, see “Credit Risk Profile” and “Note 4 — Loans—Acquired Loans.”

 

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Table 1: Consolidated Financial Highlights (Unaudited)

 

    Three Months Ended September 30,     Nine Months Ended September 30,  

(Dollars in millions, except per share data as noted)

     2013           2012           Change        2013     2012     Change  

Income statement

                                   

Net interest income

  $ 4,560      $ 4,646        (2 )%    $ 13,683      $ 12,061        13

Non-interest income(1)

    1,091        1,136        (4     3,157        3,711        (15
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenue(2)

    5,651        5,782        (2     16,840        15,772        7   

Provision for credit losses

    849        1,014        (16     2,496        3,264        (24

Non-interest expense(3)

    3,147        3,045        3        9,234        8,691        6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

    1,655        1,723        (4     5,110        3,817        34   

Income tax provision

    525        535        (2     1,600        931        72   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations, net of tax

    1,130        1,188        (5     3,510        2,886        22   

Loss from discontinued operations, net of tax(4)

    (13     (10     30        (210     (212     (1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    1,117        1,178        (5     3,300        2,674        23   

Dividends and undistributed earnings allocated to participating securities

    (5     (5            (14     (12     17   

Preferred stock dividends

    (13            **        (39            **   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common shareholders

  $ 1,099      $ 1,173        (6 )%    $ 3,247      $ 2,662        22
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Common share statistics

                                   

Earnings per common share:

           

Basic earnings per common share

  $ 1.89      $ 2.03        (7 )%    $ 5.58      $ 4.80        16

Diluted earnings per common share

    1.86        2.01        (7     5.51        4.75        16   

Weighted average common shares outstanding:

           

Basic earnings per common share

    582.3        578.3        1        581.4        555.0        5   

Diluted earnings per common share

    591.1        584.1        1        589.0        560.1        5   

Dividends per common share

    0.30        0.05        500        0.65        0.15        333   

Average balances

                                   

Loans held for investment(5)

  $ 191,135      $ 202,856        (6 )%    $ 192,547      $ 182,870        5

Interest-earning assets

    264,796        266,803        (1     267,590        247,462        8   

Total assets

    294,939        297,154        (1     298,356        279,527        7   

Interest-bearing deposits

    186,752        193,700        (4     188,877        180,372        5   

Total deposits

    208,340        213,323        (2     210,170        199,565        5   

Borrowings

    36,355        36,451        **        38,261        35,956        6   

Common equity

    40,431        38,079        6        40,423        36,202        12   

Total stockholders’ equity

    41,284        38,535        7        41,276        36,358        14   

Selected performance metrics

                                   

Purchase volume(6)

  $ 50,943      $ 48,020        6   $ 146,829      $ 127,746        15

Total net revenue margin(7)

    8.54     8.67     (13 )bps      8.39     8.50     (11 )bps 

Net interest margin(8)

    6.89        6.97        (8     6.82        6.50        32   

Net charge-offs

  $ 917      $ 887        3   $ 2,965      $ 2,405        23

Net charge-off rate(9)

    1.92     1.75     17 bps      2.05     1.75     30 bps 

Net charge-off rate (excluding acquired loans)(10)

    2.29        2.18        11        2.48        2.17        31   

 

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    Three Months Ended September 30,     Nine Months Ended September 30,  

(Dollars in millions, except per share data as noted)

      2013             2012             Change             2013             2012             Change      

Return on average assets(11)

    1.53        1.60        (7     1.57        1.38        19   

Return on average tangible assets(12)

    1.62        1.69        (7     1.66        1.46        20   

Return on average common equity(13)

    11.00        12.43        (143     11.40        10.59        81   

Return on average tangible common equity(14)

    18.08        21.84        (376     18.85        18.39        46   

Equity-to-assets ratio(15)

    14.00        12.97        103        13.83        13.01        82   

Non-interest expense as a % of average loans held for investment(16)

    6.59        6.00        59        6.39        6.34        5   

Efficiency ratio(17)

    55.69        52.66        303        54.83        55.10        (27

Effective income tax rate from continuing operations

    31.7        31.1        60        31.3        24.4        690   

 

(Dollars in millions except per share data as noted)

   September 30,
2013
    December 31,
2012
    Change  

Balance sheet (period end)

                  

Loans held for investment(5)

   $ 191,814      $ 205,889        (7 )% 

Interest-earning assets

     259,152        280,096        (7

Total assets

     289,888        312,918        (7

Interest-bearing deposits

     184,553        190,018        (3

Total deposits

     206,834        212,485        (3

Borrowings

     31,845        49,910        (36

Common equity

     40,897        39,646        3   

Total stockholders’ equity

     41,750        40,499        3   

Credit quality metrics (period end)

                  

Allowance for loan and lease losses

   $ 4,333      $ 5,156        (16 )% 

Allowance as a % of loans held of investment (“allowance coverage ratio”)

     2.26     2.50     (24 )bps 

Allowance as a % of loans held of investment (excluding acquired loans)(10)

     2.66        3.02        (36

30+ days performing delinquency rate

     2.54        2.70        (16

30+ days performing delinquency rate (excluding acquired loans)(10)

     3.01        3.29        (28

30+ days delinquency rate

     2.88        3.09        (21

30+ days delinquency rate (excluding acquired loans)(10)

     3.41        3.77        (36

Capital ratios

                  

Tier 1 common ratio(18)

     12.74     10.96     178 bps 

Tier 1 risk-based capital ratio(19)

     13.13     11.34     179   

Total risk-based capital ratio(20)

     15.28     13.56     172   

Tangible common equity (“TCE”) ratio(21)

     9.17     7.89     128   

Associates

                  

Full-time equivalent employees (in thousands)

     39.6        39.6       

 

** Change is less than one percent or not meaningful.
(1)

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.

(2)

Total net revenue was reduced by $154 million and $185 million in the third quarter of 2013 and 2012, respectively, and by $611 million and $619 million in the first nine months of 2013 and 2012, respectively, for the estimated uncollectible amount of billed finance charges and fees. The reserve for estimated uncollectible billed finance charges and fees, which we refer to as the finance charge and fee reserve, totaled $183 million and $307 million as of September 30, 2013 and December 31, 2012, respectively.

 

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(3)

Includes purchased credit card relationship (“PCCR”) intangible amortization of $106 million and $131 million in the third quarter of 2013 and 2012, respectively, and $332 million and $223 million in the first nine months of 2013 and 2012, respectively, the substantial majority of which is attributable to the 2012 U.S. card acquisition. Also includes core deposit intangible amortization of $40 million and $49 million in the third quarter of 2013 and 2012, respectively, and $127 million and $146 million in the first nine months of 2013 and 2012, respectively.

(4)

Discontinued operations reflect ongoing costs related to the mortgage origination operations of GreenPoint’s wholesale mortgage banking unit, GreenPoint Mortgage Funding, Inc. (“Greenpoint”), which we closed in 2007.

(5)

Loans held for investment includes loans acquired in the CCB, ING Direct and 2012 U.S. card acquisitions. See “Note 4 —Loans” for additional information on acquired loans.

(6)

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

(7)

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

(8)

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

(9)

Calculated based on annualized net charge-offs for the period divided by average loans held for investment for the period.

(10) 

Calculation of ratio adjusted to exclude from the denominator acquired loans accounted for subsequent to acquisition based on expected cash flows to be collected. See “Business Segment Financial Performance,” “Credit Risk Profile” and “Note 4—Loans—Credit Quality” for additional information on the impact of acquired loans on our credit quality metrics.

(11) 

Calculated based on annualized income from continuing operations, net of tax, for the period divided by average total assets for the period.

(12) 

Calculated based on annualized income from continuing operations, net of tax, for the period divided by average tangible assets for the period. See “MD&A—Supplemental Tables—Table A: Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures Under Basel I” for additional information.

(13) 

Calculated based on the annualized sum of (i) income from continuing operations, net of tax; (ii) less dividends and undistributed earnings allocated to participating securities; (iii) less preferred stock dividends, for the period, divided by average common equity. Our calculation of return on average common equity may not be comparable to similarly titled measures reported by other companies.

(14) 

Calculated as the annualized sum of (i) income from continuing operations, net of tax; (ii) less dividends and undistributed earnings allocated to participating securities; (iii) less preferred stock dividends, for the period, divided by average tangible common equity. Our calculation of return on average tangible common equity may not be comparable to similarly titled measures reported by other companies. See “MD&A—Supplemental Tables—Table A: Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures Under Basel I” for additional information.

(15) 

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

(16) 

Calculated based on annualized non-interest expense, excluding goodwill impairment charges, for the period divided by average loans held for investment for the period.

(17) 

Calculated based on non-interest expense, excluding goodwill impairment charges, for the period divided by total net revenue for the period.

(18) 

Tier 1 common ratio is a regulatory capital measure calculated based on Tier 1 common equity divided by risk-weighted assets. See “MD&A—Capital Management” and “MD&A—Supplemental Tables—Table A: Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures Under Basel I” for additional information, including the calculation of this ratio.

(19) 

Tier 1 risk-based capital ratio is a regulatory measure calculated based on Tier 1 capital divided by risk-weighted assets. See “MD&A—Capital Management” and “MD&A—Supplemental Tables—Table A: Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures Under Basel I” for additional information, including the calculation of this ratio.

(20) 

Total risk-based capital ratio is a regulatory measure calculated based on total risk-based capital divided by risk-weighted assets. See “MD&A—Capital Management” and “MD&A—Supplemental Tables—Table A: Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures Under Basel I” for additional information, including the calculation of this ratio.

(21) 

TCE ratio is a non-GAAP measure calculated based on tangible common equity divided by tangible assets. See “MD&A—Supplemental Tables—Table A: Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures Under Basel I” for the calculation of this measure and reconciliation to the comparative GAAP measure.

 

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INTRODUCTION

 

We are a diversified financial services holding company with banking and non-banking subsidiaries. Capital One Financial Corporation and its subsidiaries (the “Company”) offer a broad array of financial products and services to consumers, small businesses and commercial clients through branches, the internet and other distribution channels. As of September 30, 2013, 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 and its subsidiaries are hereafter collectively referred to as “we”, “us” or “our.” CONA and COBNA are collectively referred to as the “Banks.”

We had total loans held for investment of $191.8 billion, deposits of $206.8 billion and stockholders’ equity of $41.8 billion as of September 30, 2013, compared with total loans held for investment of $205.9 billion, deposits of $212.5 billion and stockholders’ equity of $40.5 billion as of December 31, 2012.

Our consolidated total net revenues are derived primarily from lending to consumer and commercial customers and by deposit gathering activities net of the costs associated with funding our assets, which generate net interest income, and by activities that generate non-interest income, such as fee-based services provided to consumer and commercial customers and merchant interchange fees with respect to certain credit card transactions. Our expenses primarily consist of the provision for credit losses, operating expenses (including associate salaries and benefits, occupancy and equipment costs, professional services, infrastructure enhancements, branch operations and expansion costs), marketing expenses and income taxes.

Our principal operations are currently organized for management reporting purposes into three main 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. The acquired ING Direct business is primarily reflected in our Consumer Banking business, while the business acquired in the 2012 U.S. card acquisition is reflected in our Credit Card business. Certain activities that are not part of a segment are included in our “Other” category.

 

   

Credit Card: Consists of our domestic consumer and small business card lending, national closed-end installment lending and the international card lending businesses in Canada and the United Kingdom.

 

   

Consumer Banking: Consists of our branch-based lending and deposit gathering activities for consumers and small businesses, national deposit gathering, national auto lending and consumer home 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.

Table 2 summarizes our business segment results, which we report based on income from continuing operations, net of tax, for the third quarter and first nine months of 2013 and 2012. We provide information on the allocation methodologies used to derive our business segment results in “Note 20—Business Segments” in our 2012 Form 10-K. We also provide additional information on the allocation methodologies used to derive our business segment results and a reconciliation of our total business segment results to our consolidated generally accepted accounting principles in the U.S. (“U.S. GAAP”) results in “Note 13—Business Segments” of this Report.

 

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Table 2: Business Segment Results

 

    Three Months Ended September 30,  
    2013     2012  
    Total Net  Revenue(1)     Net Income  (Loss)(2)     Total Net  Revenue(1)     Net Income  (Loss)(2)  

(Dollars in millions)

  Amount     % of
Total
    Amount     % of
Total
    Amount     % of
Total
    Amount     % of
Total
 

Credit Card

  $ 3,591        64   $ 694        61   $ 3,817        66   $ 741        62

Consumer Banking

    1,665        29        345        31        1,761        30        376        32   

Commercial Banking

    567        10        174        15        519        9        228        19   

Other(3)

    (172     (3     (83     (7     (315     (5     (157     (13
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total from continuing operations

  $ 5,651        100   $ 1,130        100   $ 5,782        100   $ 1,188        100
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    Nine Months Ended September 30,  
    2013     2012  
    Total Net  Revenue(1)     Net Income  (Loss)(2)     Total Net  Revenue(1)     Net Income  (Loss)(2)  

(Dollars in millions)

    Amount       % of
Total
    Amount     % of
Total
      Amount       % of
Total
    Amount     % of
Total
 

Credit Card

  $ 10,878        64   $ 2,099        60   $ 9,528        60   $ 1,010        35

Consumer Banking

    4,991        30        1,172        33        4,906        31        1,038        36   

Commercial Banking

    1,655        10        567        16        1,544        10        666        23   

Other(3)

    (684     (4     (328     (9     (206     (1     172        6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total from continuing operations

  $ 16,840        100   $ 3,510        100   $ 15,772        100   $ 2,886        100
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Total net revenue consists of net interest income and non-interest income.

(2)

Net income for our business segments is reported based on income from continuing operations, net of tax.

(3)

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 as well as other items as described in “Note 20—Business Segments” in our 2012 Form 10-K.

 

 

EXECUTIVE SUMMARY AND BUSINESS OUTLOOK

 

In the third quarter of 2013, we delivered strong earnings performance across all three business segments. Our business continued to deliver growth in our total net revenues for the first nine months of 2013, putting us in what we believe is a strong position to continue to generate and distribute capital, and to deliver sustained shareholder value.

On July 2, 2013, our Board of Directors authorized the repurchase of up to $1 billion of shares of our common stock upon the closing of the Portfolio Sale. During the third quarter of 2013, we repurchased $256 million of shares of our common stock and expect to complete the share repurchase of the remaining stock authorized to be repurchased by the end of the year.

On August 16, 2013, we signed an agreement to acquire Beech Street Capital, a privately-held, national originator and servicer of Fannie Mae, Freddie Mac and Federal Housing Authority (FHA) multifamily commercial real estate loans. The acquisition expands and enhances our existing multifamily capabilities and product offerings. The acquisition closed on November 1, 2013.

Financial Highlights

We reported net income of $1.1 billion ($1.86 per diluted share) on total net revenue of $5.7 billion for the third quarter of 2013, with each of our three business segments contributing to our earnings. In comparison, we

 

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reported net income of $1.2 billion ($2.01 per diluted share) on total net revenue of $5.8 billion for the third quarter of 2012. Net income totaled $3.3 billion ($5.51 per diluted share) on total net revenue of $16.8 billion for the first nine months of 2013, compared with net income of $2.7 billion ($4.75 per diluted share) on total net revenue of $15.8 billion for the first nine months of 2012.

Our Tier 1 common ratio, as calculated under Basel I, increased to 12.7% as of September 30, 2013, up 60 basis points from 12.1% as of June 30, 2013, and up 170 basis points from 11.0% as of December 31, 2012. The increase in our Tier I common ratio reflects strong internal capital generation from earnings. It was also temporarily impacted by the full benefit of the decline in risk weighted assets from the Portfolio Sale while we have only completed $256 million of the associated and previously announced $1 billion common stock repurchase program. See “Capital Management” below for additional information.

Below are additional highlights of our performance in the third quarter and first nine months of 2013. These highlights generally are based on a comparison between the third quarter of 2013 and 2012 results and the first nine months of 2013 and 2012 results, except as otherwise noted. The discussion of our financial condition and credit performance is generally based on changes between September 30, 2013 and December 31, 2012. We provide a more detailed discussion of our financial performance in the sections following this “Executive Summary and Business Outlook.”

Total Company

 

   

Earnings: Our net income of $1.1 billion for the third quarter of 2013 decreased $61 million from the third quarter of 2012, while our net income of $3.3 billion for the first nine months of 2013 increased by $626 million as compared to the first nine months of 2012. A significant driver of the increase in earnings in the first nine months of 2013 versus the first nine months of 2012 was the absence of the provision for credit losses of $1.2 billion related to the credit card receivables acquired in the 2012 U.S. card acquisition recorded in the second quarter of 2012. This was partially offset by the absence of the bargain purchase gain of $594 million recorded at acquisition of ING Direct in the first quarter of 2012. Other factors contributing to the increase in earnings included growth in total net revenues attributable to the substantial increase in average interest-earning assets as a result of the ING Direct and 2012 U.S. card acquisitions, which was partially offset by higher ongoing operating expenses associated with these acquisitions and an increase in intangible amortization expense.

 

   

Loans Held for Investment: Period-end loans held for investment decreased by $14.1 billion, or 7%, in the first nine months of 2013, to $191.8 billion as of September 30, 2013, from $205.9 billion as of December 31, 2012. The decrease was due in part to the transfer of the Best Buy loan portfolio of approximately $7 billion to loans held for sale in the first quarter of 2013. The Portfolio Sale was completed on September 6, 2013. In addition to the transfer of the Best Buy loan portfolio, period-end loans held for investment also decreased due to the expected run-off of certain credit card loans acquired in the 2012 U.S. card acquisition, installment loans in our Credit Card business and home loans in our Consumer Banking business. This run-off was partially offset by increased purchase volume in our Credit Card business, continued high volume of auto loan originations and strong loan originations in our commercial and industrial and commercial real estate loan portfolios.

 

   

Charge-off and Delinquency Statistics: Our reported net charge-off rate was 1.92% for the third quarter of 2013, compared with 1.75% for the third quarter of 2012. The net-charge off rate was 2.05% for the first nine months of 2013, compared with 1.75% for the first nine months of 2012. The increases in our reported net charge-offs and net charge-off rates were largely due to the lag in the inclusion of the impact of charge-offs from the 2012 U.S. card acquisition in the numerator in calculating our net charge-off rates, which was recorded at fair value at acquisition. Our reported 30+ day delinquency rate declined to 2.88% as of September 30, 2013, from 3.09% as of December 31, 2012. The improvement in our card delinquency rates in the third quarter of 2013 was better than normal seasonal patterns. We provide information on our credit quality metrics, below under “Business Segments” and “Credit Risk Profile.”

 

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Allowance for Loan and Lease Losses: We reduced our allowance by $823 million to $4.3 billion as of September 30, 2013, from $5.2 billion as of December 31, 2012. The reduction in the allowance was mainly due to a reduction in loans balances and improved credit outlook and an allowance release of $289 million related to the Portfolio Sale. The allowance coverage ratio declined to 2.26% as of September 30, 2013, from 2.50% as of December 31, 2012.

 

   

Representation and Warranty Reserve: We recorded a mortgage representation and warranty benefit of $4 million and provision of $276 million in the third quarter and first nine months of 2013, respectively, compared with a mortgage representation and warranty provision of zero and $349 million in the third quarter and first nine months of 2012, respectively. Our mortgage representation and warranty reserve increased to $1.1 billion as of September 30, 2013, from $899 million as of December 31, 2012.

Business Segments

 

   

Credit Card: Our Credit Card business generated net income from continuing operations of $694 million and $2.1 billion in the third quarter and first nine months of 2013, respectively, compared with a net income from continuing operations of $741 million and $1.0 billion in the third quarter and first nine months of 2012, respectively. The net income for the third quarter of 2013 decreased by $47 million compared to net income for the third quarter of 2012 mainly due to the run-off of certain credit card loans acquired in the 2012 U.S. card acquisition, an increase to net litigation reserves of $101 million and the Portfolio Sale, partially offset by a lower provision for credit losses. The increase in net income from continuing operations of $1.1 billion in the first nine months of 2013 compared to the first nine months of 2012 was driven by the absence of the provision for credit losses of $1.2 billion to establish an allowance for the credit card receivables acquired in the 2012 U.S. card acquisition and the absence of the charge of $174 million to establish a reserve for estimated uncollectible billed finance charges and fees related to those loans, both of which were recorded in the first nine months of 2012. The improvement also reflects higher revenue attributable to the 2012 U.S. card acquisition coupled with increased purchase volume in our Credit Card business. The increase in total net revenue was partially offset by higher operating expenses resulting from the 2012 U.S. card acquisition. Period-end loans held for investment in our Credit Card business decreased by $13.8 billion, in the first nine months of 2013 to $78.0 billion as of September 30, 2013, from $91.8 billion as of December 31, 2012. The decrease was due to the Portfolio Sale, typical seasonal paydown patterns and continued run-off of our installment loan portfolio and certain other credit card loans acquired in the 2012 U.S. card acquisition.

 

   

Consumer Banking: Our Consumer Banking business generated net income from continuing operations of $345 million and $1.2 billion in the third quarter and first nine months of 2013, respectively, compared with net income from continuing operations of $376 million and $1.0 billion in the third quarter and first nine months of 2012, respectively. Net income for the third quarter of 2013 decreased by $31 million compared to net income for the third quarter of 2012, attributable to lower home loans and deposit volumes, partially offset by growth in auto. Net income increased by $134 million in the first nine months of 2013 compared to the first nine months of 2012 due to increased net interest income attributable to higher loan balances and consumer deposits from the ING Direct acquisition. Period-end loans held for investment in our Consumer Banking business declined by $3.8 billion, or 5%, in the first nine months of 2013 to $71.3 billion as of September 30, 2013, from $75.1 billion as of December 31, 2012, due to the continued run-off of acquired home loans, which was partially offset by higher period-end auto loan balances.

 

   

Commercial Banking: Our Commercial Banking business generated net income from continuing operations of $174 million and $567 million in the third quarter and first nine months of 2013, respectively, compared with net income from continuing operations of $228 million and $666 million in the third quarter and first nine months of 2012, respectively. Growth in commercial real estate and commercial and industrial loans and higher deposit balances contributed to an increase in revenue. The favorable impact from a higher revenue was offset by a higher provision for credit losses in the third quarter and first nine months of 2013. The higher provision for credit losses was driven by lower allowance releases in both the third quarter and first nine months of 2013 compared to the same prior year periods. Period-end loans held for investment in

 

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our Commercial Banking business increased by $3.6 billion, or 9%, in the first nine months of 2013 to $42.4 billion as of September 30, 2013, from $38.8 billion as of December 31, 2012. The increase was driven by strong loan originations in the commercial and industrial and commercial real estate businesses, which were partially offset by the continued run-off of the small-ticket commercial real estate loan portfolio.

Business Outlook

We discuss below our current expectations regarding our total company performance and the performance of each of our business segments over the near-term based on market conditions, the regulatory environment and our business strategies as of the time we filed this Report. The statements contained in this section are based on our current expectations regarding our outlook for our financial results and business strategies. Our expectations take into account, and should be read in conjunction with, our expectations regarding economic trends and analysis of our business as discussed in “Part I—Item 1. Business” and “Part I—Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2012 Form 10-K. Certain statements are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those in our forward-looking statements. Except as otherwise disclosed, forward-looking statements do not reflect: (i) any change in current dividend or repurchase strategies, (ii) the effect of any acquisitions, divestitures or similar transactions that have not been previously disclosed, or (iii) any changes in laws, regulations or regulatory interpretations, in each case after the date as of which such statements are made. See “Forward-Looking Statements” in this Report for more information on forward-looking statements included in this report and “Item 1A. Risk Factors” in our 2012 Form 10-K for factors that could materially influence our results.

Total Company Expectations

Our strategies and actions are designed to deliver and sustain strong returns and capital generation through the acquisition and retention of franchise-enhancing customer relationships across our businesses. We believe that franchise-enhancing customer relationships create and sustain significant long-term value through low credit costs, long and loyal customer relationships and a gradual build in loan balances and revenues over time. Examples of franchise-enhancing customer relationships include rewards customers and partnerships in our Credit Card business, retail deposit customers in our Consumer Banking business and primary banking relationships with commercial customers in our Commercial Banking business. We intend to grow these customer relationships by continuing to invest in scalable infrastructure and operating platforms, so that we can meet the rising regulatory and compliance expectations facing all banks and deliver a “brand-defining” customer experience that builds and sustains a valuable, long-term customer franchise.

We continue to expect average interest-earning assets to decline in 2013. We also continue to expect average loan balances for full-year 2013 to decline from average loan balances for full-year 2012, as significant run-off of certain home and card loans, principally those we acquired, coupled with the Portfolio Sale, is partially offset by growth in certain of our businesses, including auto and Commercial Banking. We expect intensifying competition in several businesses, particularly auto and commercial and industrial lending, to put pressure on pricing and drive declining margins in those businesses.

In 2013, we expect operating expenses of approximately $11 billion and pre-provision net revenue of approximately $10 billion. These estimates are expected to vary within reasonable margins and do not contemplate non-recurring items including $101 million of litigation related expenses incurred in the quarter ended September 30, 2013, expected cost of certain restructurings in the fourth quarter of 2013 or the impact of the acquisition of Beech Street Capital on November 1, 2013.

In 2014, we expect approximately $5 billion in total portfolio run-off, comprised of $1 billion in card loans and $4 billion in home loans, primarily driven by mortgage prepayments. We expect operating expenses for 2014 to be approximately $10.5 billion, excluding the potential impact of non-recurring items.

 

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We believe our actions have created a well-positioned balance sheet with strong capital and liquidity levels and a strong capital generation trajectory. In the third quarter, we began executing our previously announced $1 billion share repurchase program. We expect to complete the share repurchase program in the fourth quarter. The timing and exact amount of any common stock repurchases will depend on various factors, including market conditions, our capital position, and internal capital generation. Our share 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. We expect to request capital distribution in the 2014 Comprehensive Capital Analysis and Review (“CCAR”) cycle that, if approved, would result in a total payout ratio well above the industry norm of 50%. See “Capital Management—Capital Planning and Regulatory Stress Testing” for more information.

Business Segment Expectations

Credit Card Business

We expect Domestic Card loan growth in the coming quarters to be muted as planned run-off and other strategic choices we have made continue to mask strong underlying growth in areas we are emphasizing. We expect loan growth in Domestic Card to resume sometime around the second half of 2014, when underlying loan growth will begin to more than offset shrinkage in other parts of our business.

Consumer Banking Business

In our Consumer Banking business, we anticipate that run-off in the acquired home loan portfolios will more than offset growth in auto loans. We expect auto finance losses will continue to increase gradually from their recent historic lows as industry wide underwriting normalizes following significant tightening during the recession and as used car values decline from historic high levels. We also expect that auto finance yields will continue to decline from recent exceptionally high levels but will continue to support an attractive and resilient business.

Commercial Banking Business

Our Commercial Banking business continues to grow loans, deposits, and revenues as we attract new customers and deepen relationships with existing customers. We expect our focused and specialized approach to the Commercial Banking business to deliver strong results.

 

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

The preparation of financial statements in accordance with U.S. GAAP requires management to make a number of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expenses in the consolidated financial statements. Understanding our accounting policies and the extent to which we use management judgment and estimates in applying these policies is integral to understanding our financial statements. We provide a summary of our significant accounting policies under “Note 1—Summary of Significant Accounting Policies” in our 2012 Form 10-K.

We have identified the following accounting policies as critical because they require significant judgments and assumptions about highly complex and inherently uncertain matters and the use of reasonably different estimates and assumptions could have a material impact on our reported results of operations or financial condition. These critical accounting policies govern:

 

   

Loan loss reserves

   

Asset impairment

   

Fair value of financial instruments

 

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Representation and warranty reserve

   

Customer rewards reserve

   

Income taxes

We evaluate our critical accounting estimates and judgments on an ongoing basis and update them, as necessary, based on changing conditions. Below we discuss changes that we made in the first nine months of 2013 in estimating the allowance for loan and lease losses and reserve for unfunded lending commitments for our commercial loan portfolio. Management has discussed our critical accounting policies and estimates with the Audit Committee of the Board of Directors.

Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments—Commercial Loans

Our commercial loan portfolio is primarily composed of larger-balance, non-homogeneous loans. We determine the allowance for loan and lease losses (“allowance”) and reserve for unfunded lending commitments for our commercial loan portfolio by evaluating loans with similar risk characteristics and applying internal risk ratings. We use these risk ratings to assess credit quality and derive a total loss estimate based on an estimated probability of default and loss given default. Factors we consider in determining risk ratings and deriving loss estimates include historical loss experience for loans with similar risk characteristics, the financial condition of the borrower, geography, collateral performance and industry-specific information that management believes is relevant in determining the occurrence of a loss event and measuring impairment. Management may also apply judgment to adjust the derived loss factors, 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.

In the first quarter of 2013, we changed our process for estimating the allowance and reserve for unfunded lending commitments for our commercial loan portfolio. These changes resulted in a net increase in the combined allowance and reserve for unfunded lending commitments of $37 million as of March 31, 2013 and a corresponding increase in the provision for credit losses of $37 million in the first quarter of 2013. The gross impact of these changes resulted in a decrease in the allowance of $2 million and an increase in the reserve for unfunded lending commitments of $39 million as of March 31, 2013. These changes did not have a material impact on the allowance and reserve for unfunded lending commitments for our commercial loan portfolio in subsequent quarters. See “Note 5—Allowance for Loan and Lease Losses” in this Report for additional information.

We provide additional information on our critical accounting policies and estimates under “MD&A—Critical Accounting Policies and Estimates” in our 2012 Form 10-K.

 

 

ACCOUNTING CHANGES AND DEVELOPMENTS

 

See “Note 1—Summary of Significant Accounting Policies” for information on accounting standards adopted in 2013, as well as recently issued accounting standards not yet required to be adopted and the expected impact of these changes in accounting standards. To the extent we believe the adoption of new accounting standards has had or will have a material impact on our results of operations, financial condition or liquidity, we discuss the impacts in the applicable section(s) of MD&A.

 

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CONSOLIDATED RESULTS OF OPERATIONS

 

The section below provides a comparative discussion of our consolidated financial performance for the third quarter and first nine months of 2013 and 2012. Following this section, we provide a discussion of our business segment results. You should read this section together with our “Executive Summary and Business Outlook,” where we discuss trends and other factors that we expect will affect our future results of operations.

Net Interest Income

Net interest income represents the difference between the interest income and applicable fees earned on our interest-earning assets, which include loans held for investment and investment securities, and the interest expense on our interest-bearing liabilities, which include interest-bearing deposits, senior and subordinated notes, securitized debt and other borrowings. 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 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.

Table 3 below presents, for each major category of our interest-earning assets and interest-bearing liabilities, the average outstanding balances, interest income earned, interest expense incurred, average yield and rate for the third quarter and first nine months of 2013 and 2012.

 

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Table 3: Average Balances, Net Interest Income and Net Interest Yield(1)

 

     Three Months Ended September 30,  
     2013     2012  

(Dollars in millions)

   Average
Balance
    Interest
Income/
Expense(2)(3)
     Yield/
Rate
    Average
Balance
    Interest
Income/
Expense(2)(3)
     Yield/
Rate
 

Assets:

              

Interest-earning assets:

              

Credit card:

              

Domestic

   $ 74,421      $ 2,738         14.72   $ 80,614      $ 2,995         14.86

International

     7,782        318         16.35        8,154        336         16.48   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Credit card

     82,203        3,056         14.87        88,768        3,331         15.01   

Consumer banking

     71,886        1,112         6.19        77,488        1,170         6.04   

Commercial banking

     41,584        402         3.87        37,045        381         4.11   

Other

     166        9         21.69        162        21         51.85   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total loans, including loans held for sale

     195,839        4,579         9.35        203,463        4,903         9.64   

Investment securities(4)

     63,317        396         2.50        57,928        335         2.31   

Cash equivalents and other interest-earning assets

     5,640        23         1.63        5,412        16         1.18   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-earning assets

   $ 264,796      $ 4,998         7.55   $ 266,803      $ 5,254         7.88
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Cash and due from banks

     2,553             2,285        

Allowance for loan and lease losses

     (4,408          (5,003     

Premises and equipment, net

     3,784             3,561        

Other assets

     28,214             29,508        
  

 

 

        

 

 

      

Total assets

   $ 294,939           $ 297,154        
  

 

 

        

 

 

      

Liabilities and stockholders’ equity:

              

Interest-bearing liabilities:

              

Deposits

   $ 186,752      $ 309         0.66   $ 193,700      $ 371         0.77

Securitized debt obligations

     10,243        42         1.64        13,331        64         1.92   

Senior and subordinated notes

     12,314        76         2.47        11,035        85         3.08   

Other borrowings

     13,798        11         0.32        12,085        88         2.91   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

   $ 223,107      $ 438         0.79   $ 230,151      $ 608         1.06
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Non-interest bearing deposits

     21,588             19,623        

Other liabilities

     8,960             8,845        
  

 

 

        

 

 

      

Total liabilities

     253,655             258,619        

Stockholders’ equity

     41,284             38,535        
  

 

 

        

 

 

      

Total liabilities and stockholders’ equity

   $ 294,939           $ 297,154        
  

 

 

        

 

 

      

Net interest income/spread

     $ 4,560         6.76     $ 4,646         6.82
    

 

 

        

 

 

    

Impact of non-interest bearing funding

          0.13             0.15   
       

 

 

        

 

 

 

Net interest margin

          6.89          6.97
       

 

 

        

 

 

 

 

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     Nine Months Ended September 30,  
     2013     2012  

(Dollars in millions)

   Average
Balance
    Interest
Income/
Expense(2)(3)
     Yield/
Rate
    Average
Balance
    Interest
Income/
Expense(2)(3)
     Yield/
Rate
 

Assets:

              

Interest-earning assets:

              

Credit card:

              

Domestic

   $ 76,493      $ 8,336         14.53   $ 68,882      $ 7,286         14.10

International

     7,998        970         16.17        8,216        966         15.68   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Credit card

     84,491        9,306         14.69        77,098        8,252         14.27   

Consumer banking

     73,127        3,309         6.03        70,643        3,385         6.39   

Commercial banking

     39,909        1,158         3.87        35,643        1,137         4.25   

Other

     174        51         39.08        158        43         36.29   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total loans, including loans held for sale

     197,701        13,824         9.32        183,542        12,817         9.31   

Investment securities(4)

     63,725        1,161         2.43        55,158        968         2.34   

Cash equivalents and other interest-earning assets

     6,164        74         1.60        8,762        64         0.97   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-earning assets

   $ 267,590      $ 15,059         7.50   $ 247,462      $ 13,849         7.46
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Cash and due from banks

     2,401             5,413        

Allowance for loan and lease losses

     (4,653          (4,470     

Premises and equipment, net

     3,750             3,259        

Other assets

     29,268             27,863        
  

 

 

        

 

 

      

Total assets

   $ 298,356           $ 279,527        
  

 

 

        

 

 

      

Liabilities and stockholders’ equity:

              

Interest-bearing liabilities:

              

Deposits

   $ 188,877      $ 953         0.67   $ 180,372      $ 1,055         0.78

Securitized debt obligations

     10,975        143         1.74        14,816        213         1.92   

Senior and subordinated notes

     12,331        240         2.60        10,839        260         3.20   

Other borrowings

     14,955        40         0.36        10,301        260         3.37   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

   $ 227,138      $ 1,376         0.81   $ 216,328      $ 1,788         1.10
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Non-interest bearing deposits

     21,293             19,193        

Other liabilities

     8,649             7,648        
  

 

 

        

 

 

      

Total liabilities

     257,080             243,169        

Stockholders’ equity

     41,276             36,358        
  

 

 

        

 

 

      

Total liabilities and stockholders’ equity

   $ 298,356           $ 279,527        
  

 

 

        

 

 

      

Net interest income/spread

     $ 13,683         6.69     $ 12,061         6.36
    

 

 

        

 

 

    

Impact of non-interest bearing funding

          0.13             0.14   
       

 

 

        

 

 

 

Net interest margin

          6.82          6.50
       

 

 

        

 

 

 

 

(1)

Certain prior period amounts have been reclassified to conform to the current period presentation.

(2)

Past due fees included in interest income totaled approximately $440 million and $1.4 billion in the third quarter and first nine months of 2013, respectively, and $530 million and $1.2 billion in the third quarter and first nine months of 2012, respectively.

(3)

Interest income and interest expense and the calculation of average yields on interest-earning assets and average rates on interest-bearing liabilities include the impact of hedge accounting.

(4)

Prior to the second quarter of 2013, average balances for investment securities were calculated based on fair value amounts. Effective in the second quarter of 2013, average balances are calculated based on the amortized cost of investment securities. The impact of this change on prior period yields is not material.

 

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Table 4 displays the change in our net interest income between periods and the extent to which the variance is attributable to: (i) changes in the volume of our interest-earning assets and interest-bearing liabilities or (ii) changes in the interest rates related to these assets and liabilities.

Table 4: Rate/Volume Analysis of Net Interest Income(1)

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2013 vs 2012     2013 vs 2012  

(Dollars in millions)

   Total
  Variance  
      Volume         Rate       Total
  Variance  
      Volume         Rate    

Interest income:

            

Loans:

            

Credit card

   $ (275   $ (244   $ (31   $ 1,054      $ 809      $ 245   

Consumer banking

     (58     (215     157        (76     165        (241

Commercial banking

     21        137        (116     21        168        (147

Other

     (12     3        (15     8        5        3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans, including loans held for sale

     (324     (319     (5     1,007        1,147        (140
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment securities

     61        33        28        193        155        38   

Cash equivalents and other interest-earning assets

     7        1        6        10        (31     41   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     (256     (285     29        1,210        1,271        (61
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

            

Deposits

     (62     (13     (49     (102     73        (175

Securitized debt obligations

     (22     (13     (9     (70     (51     (19

Senior and subordinated notes

     (9     46        (55     (20     47        (67

Other borrowings

     (77     76        (153     (220     134        (354
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     (170     96        (266     (412     203        (615
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

   $ (86   $ (381   $ 295      $ 1,622      $ 1,068      $ 554   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

We calculate the change in interest income and interest expense separately for each item. The change in net interest income attributable to both volume and rates is allocated based on the relative dollar amount of each item.

Net interest income of $4.6 billion in the third quarter of 2013 decreased by $86 million, or 2%, from the third quarter of 2012, driven by a 1% decrease in average interest-earning assets and a 1% (8 basis point) decrease of the net interest margin to 6.89%.

Net interest income of $13.7 billion in the first nine months of 2013 increased by $1.6 billion, or 13%, from the first nine months of 2012, driven by an 8% increase in average interest-earning assets and a 5% (32 basis point) increase of the net interest margin to 6.82%.

 

   

Average Interest-Earning Assets: Average interest-earning assets were relatively flat in the third quarter of 2013 as compared to the third quarter of 2012. The increase in average interest-earning assets in the first nine months of 2013 compared to the first nine months of 2012 reflects the full year impact of loans and investment securities from the ING Direct acquisition and the addition of loans from the 2012 U.S. card acquisition. Growth in average interest-earning assets also was driven by strong commercial loan growth and continued growth in auto loans, which was partially offset by the continued run-off of installment and other loans as well as the Portfolio Sale in the third quarter of 2013.

 

   

Net Interest Margin: Net interest margin also stayed relatively flat in the third quarter of 2013 as compared to the third quarter of 2012. The increase in our net interest margin in the first nine months of 2013 was primarily attributable to a reduction in our cost of funds, which was due in part to the redemption of $3.65 billion of our trust preferred securities on January 2, 2013, which generally carried a higher coupon than

 

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other funding sources available to us. Our lowered cost of funds also reflects the continued benefit from the shift in the mix of our funding to lower cost consumer and commercial banking deposits from higher cost wholesale sources and a decline in deposit interest rates as a result of the continued overall low interest rate environment.

Non-Interest Income

Non-interest income primarily consists of service charges and other customer-related fees, interchange income (net of rewards expense), other non-interest income and, in 2012, the bargain purchase gain attributable to the ING Direct acquisition in the amount of $594 million. Other non-interest income includes the pre-tax provision for home loan representation and warranty losses related to continuing operations. It also includes gains and losses from the sale of investment securities, gains and losses on derivatives not accounted for in hedge accounting relationships and hedge ineffectiveness, which we generally do not allocate to our business segments because they relate to centralized asset/liability and market risk management activities undertaken by our Corporate Treasury group.

Table 5 displays the components of non-interest income for the third quarter and first nine months of 2013 and 2012, respectively.

Table 5: Non-Interest Income

 

     Three Months Ended September 30,     Nine Months Ended September 30,  

(Dollars in millions)

       2013             2012             2013             2012      

Service charges and other customer-related fees

   $ 530      $ 557      $ 1,614      $ 1,511   

Interchange fees, net

     476        452        1,407        1,188   

Bargain purchase gain(1)

                          594   

Net other-than-temporary impairment (“OTTI”)

     (11     (13     (40     (40

Other non-interest income:

        

Provision (benefit) for mortgage representation and warranty losses(2)

     13               27        (42

Net gains from the sale of investment securities

            1        3        42   

Net fair value gains (losses) on free-standing derivatives(3)

     (8     3        (11     (45

Other

     91        136        157        503   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other non-interest income

     96        140        176        458   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

   $ 1,091      $ 1,136      $ 3,157      $ 3,711   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Represents the amount by which the fair value of the net assets acquired in the ING Direct acquisition, as of the acquisition date of February 17, 2012, exceeded the consideration transferred.

(2)

Represents representation and warranty provision related to continuing operations. We recorded a total benefit of $4 million for mortgage representation and warranty losses and a provision of $276 million for the third quarter and first nine months ended September 30, 2013, respectively, and a total provision of $349 million for the first nine months ended September 30, 2012. We did not record any provision for the three months ended September 30, 2012. The remaining portion of the provision for mortgage representation and warranty losses is included, net of tax, in discontinued operations.

(3)

Excludes changes in cumulative credit risk valuation adjustments related to derivatives in a gain position. Credit risk valuation adjustments for derivative assets totaled $9 million as of both September 30, 2013 and December 31, 2012. See “Note 9—Derivative Instruments and Hedging Activities” for additional information.

Non-interest income in the third quarter of 2013 decreased by $45 million from the third quarter of 2012. Non-interest income of $3.2 billion in the first nine months of 2013 decreased by $554 million, or 15%, from non-

 

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interest income of $3.7 billion in the first nine months of 2012. The decrease in non-interest income reflected the combined impact of the absence of the bargain purchase gain of $594 million recognized at acquisition of ING Direct and income of $162 million from the sale of Visa shares, both of which were recorded in the first nine months of 2012. The impact of these items was partially offset by the favorable impact of increased customer related fees and interchange fees from purchase volume growth, a reduction in the provision for mortgage representation and warranty losses and a reduction in fair value losses on free-standing derivatives.

We recorded net OTTI losses of $11 million and $40 million in the third quarter and first nine months of 2013, respectively, compared with $13 million and $40 million in the third quarter and first nine months of 2012, respectively. The OTTI losses for the third quarter of 2013 were mainly attributable to decreasing prices resulting from rising interest rates. The decrease in prices resulted in a considerable population of our impaired securities shifting from an unrealized gain position to an unrealized loss position this quarter. In accordance with the accounting guidance for OTTI, we do not recognize credit losses until securities are in an unrealized loss position. We provide additional information on other-than-temporary impairment recognized on our investment securities in “Note 3—Investment Securities.”

Provision for Credit Losses

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 and the level of allowance for loan and lease losses that we determine is necessary to provide for probable loan and lease losses incurred that are inherent in our loan portfolio as of each balance sheet date.

We recorded a provision for credit losses of $849 million and $2.5 billion in the third quarter and first nine months of 2013, respectively, compared with $1.0 billion and $3.3 billion in the third quarter and first nine months of 2012, respectively. The decrease in the third quarter of 2013 was primarily due to an allowance release of $113 million in our Domestic Card business, compared with an allowance build of $199 million in the third quarter of 2012. This change was partially offset by the activity in our Commercial Banking business, which recorded a provision for credit losses of $31 million in the third quarter of 2013, compared with benefits of $87 million in the third quarter of 2012. The decrease in the first nine months of 2013 was driven by the absence of the provision for credit losses of $1.2 billion recorded in the second quarter of 2012 to establish an allowance for credit card loans acquired in the 2012 U.S. card acquisition, the impact of which was partially offset by (i) a higher provision in the credit card loan portfolio due to higher net charge-offs in the first nine months of 2013, largely attributable to the addition of loans from the 2012 U.S. card acquisition, and (ii) a lower allowance release in our Commercial Banking business due to the stabilization of the credit outlook in the current period when compared to the prior period. The combined allowance in commercial loans and reserve for unfunded lending commitments increased by $23 million in the third quarter of 2013 and decreased by $38 million in the first nine months of 2013, compared with reductions of $87 million and $283 million in the third quarter and first nine months of 2012, respectively.

We provide additional information on the provision for credit losses and changes in the allowance for loan and lease losses under the “Credit Risk Profile—Summary of Allowance for Loan and Lease Losses” and “Note 5—Allowance for Loan and Lease Losses.” For information on the allowance methodology for each of our loan categories, see “Note 1—Summary of Significant Accounting Policies” in our 2012 Form 10-K.

Non-Interest Expense

Non-interest expense consists of ongoing operating costs, such as salaries and associate benefits, occupancy and equipment costs, professional services, communications and data processing technology expenses and other miscellaneous expenses. Non-interest expense also includes marketing costs, merger-related expense and amortization of intangibles. Table 6 displays the components of non-interest expense for the third quarter and first nine months of 2013 and 2012.

 

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Table 6: Non-Interest Expense

 

     Three Months Ended September 30,      Nine Months Ended September 30,  

(Dollars in millions)

       2013              2012              2013              2012      

Salaries and associate benefits

   $ 1,145       $ 1,002       $ 3,329       $ 2,837   

Occupancy and equipment

     369         354         1,075         947   

Marketing

     299         316         946         971   

Professional services

     320         310         956         916   

Communications and data processing

     224         198         667         573   

Amortization of intangibles

     161         199         505         418   

Acquisition-related

     37         48         133         267   

Other non-interest expense:

           

Collections

     114         139         362         417   

Fraud losses

     56         52         161         129   

Bankcard, regulatory and other fee assessments

     151         149         431         396   

Other

     271         278         669         820   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other non-interest expense

     592         618         1,623         1,762   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest expense

   $ 3,147       $ 3,045       $ 9,234       $ 8,691   
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-interest expense of $3.1 billion in the third quarter of 2013 increased by $102 million, or 3%, from the third quarter of 2012. The increase in non-interest expense was primarily attributable to the increased salaries and associate benefits and additional litigation reserves, partially offset by a decline in marketing expense and amortization of intangible assets.

Non-interest expense of $9.2 billion in the first nine months of 2013 increased by $543 million, or 6%, from the first nine months of 2012. The increase reflected higher operating expenses, increased salaries and associate benefits and infrastructure cost attributable to the acquired businesses, amortization of intangible assets resulting from the ING Direct and 2012 U.S. card acquisitions, higher expenses related to the growth in our auto loan portfolio and an increase to net litigation reserves of $101 million recorded in the first nine months of 2013. These increases were partially offset by a reduction in acquisition-related costs and legal costs primarily due to the absence of (i) civil penalties of $60 million attributable to a regulatory settlement associated with cross-selling certain products to credit card customers in our Domestic Card business and (ii) legal costs of $98 million related to interchange and other litigation activity, both of which were recorded in the first nine months of 2012.

Income Taxes

We recorded an income tax provision on income from continuing operations of $525 million (31.7% effective income tax rate) in the third quarter of 2013, compared with an income tax provision of $535 million (31.1% effective income tax rate) in the third quarter of 2012. The increase in our effective tax rate in the third quarter of 2013 from the third quarter of 2012 was primarily due to additional discrete tax expense of $19 million in the third quarter of 2013 for adjustments to acquired tax attributes based upon the final filed tax returns and changes to enacted statutory tax rates, partially offset by the increased relative benefit of tax credits and tax-exempt income.

We recorded an income tax provision of $1.6 billion (31.3% effective income tax rate) in the first nine months of 2013, compared with an income tax provision of $931 million (24.4% effective income tax rate) in the first nine months of 2012. The increase in our effective tax rate in the first nine months of 2013 from the first nine months of 2012 was attributable to the absence of discrete tax benefits of $211 million recorded in the first quarter of 2012 primarily for the non-taxable bargain purchase gain of $594 million related to the acquisition of ING Direct, a deferred tax benefit for changes in our state tax position resulting from the 2012 U.S. card acquisition

 

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and the resolution of certain tax issues and audits. In comparison, we recorded $20 million of discrete tax expense in the first nine months of 2013 primarily related to adjustments to acquired tax attributes based upon the final filed tax returns and changes to enacted statutory tax rates.

Our effective income tax rate, excluding the impact of the discrete tax items discussed above, was 30.6% and 31.1% in the third quarter of 2013 and 2012, respectively. The decrease in the effective tax rate was primarily due to the increased relative benefit of tax credits and tax-exempt income. Our effective income tax rate, excluding the impact of the discrete tax items discussed above, was 30.9% and 30.0% in the first nine months of 2013 and 2012, respectively. The increase in the effective tax rate was primarily due to higher pre-tax earnings recorded in the first nine months of 2013 over the first nine months of 2012, which diluted the relative tax benefit of tax credits and tax-exempt income.

We provide additional information on items affecting our income taxes and effective tax rate in our 2012 Form 10-K under “Note 18—Income Taxes.”

Loss from Discontinued Operations, Net of Tax

Loss from discontinued operations reflects ongoing costs, which primarily consist of mortgage loan repurchase representation and warranty charges related to the mortgage origination operations of GreenPoint’s wholesale mortgage banking unit that we closed in 2007.

We recorded a loss from discontinued operations, net of tax, of $13 million and $210 million in the third quarter and first nine months of 2013, respectively. In comparison, we recorded a loss from discontinued operations, net of tax, of $10 million and $212 million in the third quarter and first nine months of 2012, respectively. The variance in the loss from discontinued operations between the third quarter and first nine months of 2013 and 2012 is attributable to the provision for mortgage representation and warranty losses.

We provide additional information on the provision for mortgage representation and warranty losses and the related reserve for potential representation and warranty claims in “Consolidated Balance Sheet Analysis—Potential Mortgage Representation and Warranty Liabilities” and “Note 14—Commitments, Contingencies and Guarantees.”

 

 

BUSINESS SEGMENT FINANCIAL PERFORMANCE

 

The results of our individual businesses, which we report on a continuing operations basis, reflect the manner in which management evaluates performance and makes decisions about funding our operations and allocating resources. We provide additional information on the allocation methodologies used to derive our business segment results in “Note 20—Business Segments” in our 2012 Form 10-K.

We refer to the business segment results derived from our internal management accounting and reporting process as our “managed” presentation, which differs in some cases from our reported results prepared based on U.S. GAAP. There is no comprehensive, authoritative body of guidance for management accounting equivalent to U.S. GAAP; therefore, the managed presentation of our business segment results may not be comparable to similar information provided by other financial service 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. See “Note 13—Business Segments” of this Report for a reconciliation of our total business segment results to our reported consolidated results.

Below we summarize our business segment results for the third quarter and first nine months of 2013 and 2012 and provide a comparative discussion of these results. We also discuss changes in our financial condition and credit performance statistics as of September 30, 2013, compared with December 31, 2012. Information on the outlook for each of our business segments is presented above under “Executive Summary and Business Outlook.”

 

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Credit Card Business

The primary sources of revenue for our Credit Card business are interest income and non-interest income from customers and interchange fees. Expenses primarily consist of the provision for credit losses, operating costs such as salaries and associate benefits, occupancy and equipment, professional services, communications and data processing technology expenses, as well as marketing expenses. Rewards costs are generally netted against interchange fees.

Our Credit Card business generated net income from continuing operations of $694 million and $2.1 billion in the third quarter and first nine months of 2013, respectively, compared with a net income from continuing operations of $741 million and $1.0 billion in the third quarter and first nine months of 2012, respectively.

On February 1, 2013, we transferred the Best Buy loan portfolio, which had loan balances of approximately $7 billion as of the date of the transfer, to held for sale from held for investment. While the transfer of this portfolio contributed to a reduction in loans held for investment for Domestic Card, the accounting for held for sale loans has had a favorable impact on Domestic Card total net revenue and the provision for credit losses, as charge-offs of finance charges, fees and principal are reflected in the carrying value of loans classified as held for sale. On September 6, 2013, we completed Portfolio Sale. Pursuant to the agreement with Citibank, N.A we received $6.4 billion for the net portfolio assets.

Table 7 summarizes the financial results of our Credit Card business, which is comprised of Domestic Card, including installment loans, and International Card, and displays selected key metrics for the periods indicated.

 

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Table 7: Credit Card Business Results

 

     Three Months Ended September 30,     Nine Months Ended September 30,  

(Dollars in millions)

   2013     2012     Change     2013     2012     Change  

Selected income statement data:

            

Net interest income

   $ 2,757      $ 2,991        (8 )%    $ 8,391      $ 7,333        14

Non-interest income

     834        826        1        2,487        2,195        13   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenue(1)

     3,591        3,817        (6     10,878        9,528        14   

Provision for credit losses

     617        892        (31     2,073        3,061        (32

Non-interest expense

     1,904        1,790        6        5,571        4,921        13   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     1,070        1,135        (6     3,234        1,546        109   

Income tax provision

     376        394        (5     1,135        536        112   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations, net of tax

   $ 694      $ 741        (6 )%    $ 2,099      $ 1,010        108
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Selected performance metrics:

            

Average loans held for investment(2)

   $ 77,729      $ 88,656        (12 )%    $ 79,523      $ 76,960        3

Average yield on loans held for investment(3)

     15.72     15.03     69 bps      15.60     14.30     130 bps 

Total net revenue margin(4)

     18.48        17.22        126        18.24        16.51        173   

Net charge-offs

   $ 734      $ 713        3   $ 2,506      $ 1,981        27

Net charge-off rate(5)

     3.78     3.22     56 bps      4.20     3.43     77 bps 

Card loan premium amortization and other intangible accretion(6)

   $ 45      $ 82        (45 )%    $ 159      $ 141        13

PCCR intangible amortization

     106        131        (19     332        223        49   

Purchase volume(7)

     50,943        48,020        6        146,829        127,746        15   

(Dollars in millions)

   September 30,
2013
    December 31,
2012
    Change        

Selected period-end data:

        

Loans held for investment(2)

   $ 77,967      $ 91,755        (15 )%   

30+ days performing delinquency
rate
(8)

     3.51     3.61     (10 )bps   

30+ days delinquency rate(9)

     3.60        3.69        (9  

Nonperforming loan rate(10)

     0.12        0.11        1     

Allowance for loan and lease losses

   $ 3,245      $ 3,979        (18 )%   

Allowance coverage ratio(11)

     4.16     4.34     (18 )bps   

 

(1)

We recognize billed finance charges and fee income on open-ended loans in accordance with the contractual provisions of the credit arrangements and estimate the uncollectible amount on a quarterly basis. The estimated uncollectible amount of billed finance charges and fees is reflected as a reduction in revenue and is not included in our net charge-offs. Total net revenue was reduced by $154 million and $611 million in the third quarter and first nine months of 2013, respectively, and by $185 million and $619 million in the third quarter and first nine months of 2012, respectively, for the estimated uncollectible amount of billed finance charges and fees. The finance charge and fee reserve totaled $183 million and $307 million as of September 30, 2013 and December 31, 2012, respectively. The decrease was due to the absence of a finance charge and fee reserve recorded in 2012 for the acquired loans from the 2012 U.S. card acquisition.

(2)

Credit card period-end loans held for investment and average loans held for investment include accrued finance charges and fees, net of the estimated uncollectible amount.

(3)

Calculated by dividing annualized interest income for the period by average loans held for investment during the period for the specified loan category. Annualized interest income also includes interest income on loans held for sale. Therefore, the transfer of the Best Buy loan portfolio to held for sale resulted in an increase in the average yield for the Credit Card business of 110 and 119 basis points in the third quarter and first nine months of 2013, respectively.

(4)

Calculated by dividing annualized total net revenue for the period by average loans held for investment during the period for the specified loan category. Annualized interest income also includes interest income on loans held for sale.

 

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  Therefore, the transfer of the Best Buy loan portfolio to held for sale resulted in an increase in the net revenue margin for the Credit Card business of 123 and 134 basis points in the third quarter and first nine months of 2013, respectively.
(5)

Calculated by dividing annualized net charge-offs for the period by average loans held for investment during the period for the specified loan category.

(6)

Represents the net reduction in interest income attributable to the amortization of premiums on purchased loans accounted for based on contractual cash flows and the accretion of other intangibles associated with the 2012 U.S. card acquisition.

(7)

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

(8)

Calculated by loan category by dividing 30+ days performing delinquent loans as of the end of the period by period-end loans held for investment for the specified loan category.

(9)

Calculated by loan category by dividing 30+ days delinquent loans as of the end of the period by period-end loans held for investment for the specified loan category.

(10)

Calculated by loan category by dividing nonperforming loans as of the end of the period by period-end loans held for investment for the specified loan category. Nonperforming credit card loans generally include international card loans that are 90 or 120 days delinquent.

(11)

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

The completion of the 2012 U.S. card acquisition in May 2012 was the most significant driver of changes in the financial performance of our Credit Card business for the first nine months of 2013 compared to the first nine months of 2012. Our Credit Card business results for the first nine months of 2013 reflect the full impact of the addition of loans from the acquisition, while the first nine months of 2012 reflect only a partial period impact of the loans acquired in the 2012 U.S. card acquisition. In addition, our Credit Card business results for the first nine months of 2013 reflects the absence of the provision for credit losses of $1.2 billion to establish an allowance for the credit card receivables acquired in the 2012 U.S. card acquisition and the absence of the charge of $174 million to establish a reserve for estimated uncollectible billed finance charges and fees related to these loans, both of which were recorded in the first half of 2012.

Other key factors affecting the results of our Credit Card business for the third quarter and first nine months of 2013, compared with the third quarter and first nine months of 2012, and changes in financial condition and credit performance between September 30, 2013 and December 31, 2012 include the following:

 

   

Net Interest Income: Net interest income decreased by $234 million, or 8%, in the third quarter of 2013 to $2.8 billion and increased by $1.1 billion, or 14%, in the first nine months of 2013 to $8.4 billion. The decrease in the third quarter of 2013 was mainly due to the Portfolio Sale and expected continued run-off of our installment loan portfolio and other credit card loans acquired in the 2012 U.S. card acquisition. The increase in net interest income for the first nine months of 2013 is primarily driven by the significant increase in average loans held for investment resulting from the 2012 U.S. card acquisition in the second quarter of 2012, as well as the absence of the charge recorded in the second quarter of 2012 to establish the finance charge and fee reserve for the acquired loans. Higher average yield on loans held for investment was driven largely by the transfer of the Best Buy loan portfolio to the held for sale category in the first quarter of 2013.

 

   

Non-Interest Income: Non-interest income increased by $8 million, or 1%, in the third quarter of 2013 to $834 million and by $292 million, or 13% in the first nine months of 2013 to $2.5 billion. The increase in the first nine months of 2013 was primarily driven by higher net interchange fees generated from growth in purchase volume due in part to the 2012 U.S. card acquisition. Purchase volume increased by $19.1 billion, or 15%, in the first nine months of 2013, attributable to higher purchase volume and the addition of customer accounts associated with the 2012 U.S. card acquisition. Non-interest income was also higher due to increased customer-related fees from the addition of acquired credit card accounts and the absence of charges incurred in the first and second quarters of 2012 for expected refunds to customers affected by certain cross-sell sale practices in our Domestic Card business.

 

   

Provision for Credit Losses: The provision for credit losses related to our Credit Card business decreased by $275 million to $617 million in the third quarter of 2013 and by $1.0 billion to $2.1 billion in the first nine

 

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months of 2013, from $892 million and $3.1 billion in the third quarter and first nine months of 2012, respectively. The decrease in the third quarter of 2013 was mainly due to an improved credit outlook of our portfolio in the third quarter of 2013 compared to the third quarter of 2012. The decrease in the first nine months of 2013 was primarily driven by the absence of the provision for credit losses of $1.2 billion recorded in the second quarter of 2012 to establish an allowance for credit card loans acquired in the 2012 U.S. card acquisition. This impact was partially offset by an increase in the provision related to higher net charge-offs in the first nine months of 2013, largely attributable to the addition of loans from the 2012 U.S. card acquisition.

 

   

Non-Interest Expense: Non-interest expense increased by $114 million, or 6%, in the third quarter of 2013 to $1.9 billion and increased by $650 million, or 13%, in the first nine months of 2013 to $5.6 billion. The increase in the third quarter of 2013 was due to recognition of net litigation reserves of $101 million recorded in the quarter. The increase in the first nine months of 2013 was largely due to higher operating expenses resulting from the 2012 U.S. card acquisition, the amortization of intangibles and other assets associated with the acquisition, and net litigation reserves of $101 million recorded in the third quarter of 2013. This includes Purchased Credit Card Relationships (“PCCR”) intangible amortization expense of $332 million in the first nine months of 2013, compared with $223 million in the first nine months of 2012.

 

   

Loans Held for Investment: Period-end loans held for investment in our Credit Card business decreased by $13.8 billion, or 15%, in the first nine months of 2013 to $78.0 billion as of September 30, 2013, from $91.8 billion as of December 31, 2012. The decrease was due in part to the Portfolio Sale in the third quarter of 2013. In addition to the Portfolio Sale, period-end loans held for investment also decreased due to typical seasonal patterns, as well as the expected continued run-off of our installment loan portfolio and the expected run-off of certain other credit card loans acquired in the 2012 U.S. card acquisition.

 

   

Charge-off and Delinquency Statistics: Our reported net charge-off rate increased to 3.78% and 4.20% in the third quarter and first nine months of 2013, respectively, from 3.22% and 3.43% in the third quarter and first nine months of 2012, respectively. The 30+ day delinquency rate decreased to 3.60% as of September 30, 2013, from 3.69% as of December 31, 2012. The increase in reported net charge-off rates in the third quarter and first nine months of 2013 was largely due to the lag in the inclusion of the impact of charge-offs from the 2012 U.S. card acquisition in the numerator in calculating our net charge-off rates, which was recorded at fair value at acquisition.

Domestic Card Business

Domestic Card generated net income from continuing operations of $644 million and $1.9 billion in the third quarter and first nine months of 2013, respectively, compared with net income from continuing operations of $673 million and $924 million in the third quarter and first nine months of 2012, respectively. Domestic Card accounted for 90% of revenues for our Credit Card business in both the third quarter and first nine months of 2013, respectively, compared with 90% and 89% in the third quarter and first nine months of 2012, respectively. Income attributable to Domestic Card represented 93% and 92% of income for our Credit Card business in the third quarter and first nine months of 2013, respectively, compared with 91% in both the third quarter and first nine months of 2012.

Table 7.1 summarizes the financial results for Domestic Card and displays selected key metrics for the periods indicated.

 

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Table 7.1: Domestic Card Business Results

 

     Three Months Ended September 30,     Nine Months Ended September 30,  

(Dollars in millions)

       2013             2012             Change             2013             2012             Change      

Selected income statement data:

            

Net interest income

   $ 2,492      $ 2,715        (8 )%    $ 7,584      $ 6,546        16

Non-interest income

     749        722        4        2,210        1,927        15   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenue

     3,241        3,437        (6     9,794        8,473        16   

Provision for credit losses

     529        811        (35     1,823        2,772        (34

Non-interest expense

     1,713        1,584        8        4,981        4,270        17   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     999        1,042        (4     2,990        1,431        109   

Income tax provision

     355        369        (4     1,064        507        110   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations, net of tax

   $ 644      $ 673        (4 )%    $ 1,926      $ 924        108
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Selected performance metrics:

            

Average loans held for investment(1)

   $ 69,947      $ 80,502        (13 )%    $ 71,525      $ 68,744        4

Average yield on loans held for investment(2)

     15.65     14.88     77 bps      15.54     14.13     141 bps 

Total net revenue margin(3)

     18.53        17.08        145        18.26        16.43        183   

Net charge-offs

   $ 642      $ 612        5   $ 2,218      $ 1,653        34

Net charge-off rate(4)

     3.67     3.04     63 bps      4.14     3.21     93 bps 

Card loan premium amortization and other intangible accretion(5)

   $ 45      $ 82        (45 )%    $ 159      $ 141        13

PCCR intangible amortization

     106        131        (19     332        223        49   

Purchase volume(6)

     47,420        44,552        6        136,524        117,776        16   

(Dollars in millions)

   September 30,
2013
    December 31,
2012
        Change            

Selected period-end data:

        

Loans held for investment(1)

   $ 69,936      $ 83,141        (16 )%   

30+ days delinquency rate(7)

     3.46     3.61     (15 )bps   

Allowance for loan and lease losses

   $ 2,842      $ 3,526        (19 )%   

 

(1)

Credit card period-end loans held for investment and average loans held for investment include accrued finance charges and fees, net of the estimated uncollectible amount.

(2)

Calculated by dividing annualized interest income for the period by average loans held for investment during the period for the specified loan category. Annualized interest income includes interest income on loans held for sale. Therefore, the transfer of the Best Buy loan portfolio to held for sale resulted in an increase in the average yield for Domestic Card of 121 and 131 basis points in the third quarter and first nine months of 2013, respectively.

(3)

Calculated by dividing annualized total net revenue for the period by average loans held for investment during the period for the specified loan category. Annualized interest income includes interest income on loans held for sale. Therefore, the transfer of the Best Buy loan portfolio to held for sale resulted in an increase in the net revenue margin for Domestic Card of 136 and 148 basis points in the third quarter and first nine months of 2013, respectively.

(4)

Calculated by dividing annualized net charge-offs for the period by average loans held for investment during the period for the specified loan category.

(5)

Represents the net reduction in interest income attributable to the amortization of premiums on purchased loans accounted for based on contractual cash flows and the accretion of other intangibles associated with the 2012 U.S. card acquisition.

 

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(6)

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

(7)

Calculated by loan category by dividing 30+ days delinquent loans as of the end of the period by period-end loans held for investment for the specified loan category.

Because our Domestic Card business accounts for the substantial majority of our Credit Card business, the key factors driving the results for this division are similar to the key factors affecting our total Credit Card business. The decrease in Domestic Card net income from continuing operations in the third quarter of 2013 from the third quarter of 2012 reflected the impact of the following items: (i) a decrease in net interest income, primarily attributable to lower average loans held for investment and the portfolio assets; (ii) an increase in non-interest expense due to recognition of net litigation reserves of $101 million recorded in the third quarter of 2013; and (iii) partially offset by an allowance release of $113 million in the third quarter of 2013, compared with an allowance build of $199 million in the third quarter of 2012.

The primary drivers of the improvement in results for our Domestic Card business in the first nine months of 2013, compared with the first nine months of 2012 included: (i) higher interest income primarily driven by the significant increase in average loans held for investment resulting from the 2012 U.S. card acquisition; (ii) the absence of provision for credit losses of $1.2 billion recorded in the second quarter of 2012 to establish an allowance for acquired credit card loans; (iii) higher non-interest income due to increased customer-related fees from the addition of acquired credit card accounts; (iv) absence of charges incurred in 2012 for expected refunds to customers affected by certain cross-sell sale practices; and (v) absence of the charge recorded in the second quarter of 2012 to establish the finance charge and fee reserve for the acquired loans. This impact was partially offset by an increase in the provision related to higher net charge-offs and operation expenses attributable to the addition of loans and increased amortization of intangibles and other assets associated with the 2012 U.S. card acquisition.

International Card Business

International Card generated net income from continuing operations of $50 million and $173 million in the third quarter and first nine months of 2013, respectively, compared with net income from continuing operations of $68 million and $86 million in the third quarter and first nine months of 2012, respectively. International Card accounted for 10% of total net revenues for our Credit Card business in both the third quarter and first nine months of 2013, respectively, compared with 10% and 11% in the third quarter and first nine months of 2012, respectively. Income attributable to International Card represented 7% and 8% of income for our Credit Card business in the third quarter and first nine months of 2013, respectively, compared with 9% of the net income for both the third quarter and first nine months of 2012, respectively.

Table 7.2 summarizes the financial results for International Card and displays selected key metrics for the periods indicated.

 

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Table 7.2: International Card Business Results

 

     Three Months Ended
September 30,
    Nine Months Ended September 30,  

(Dollars in millions)

   2013     2012     Change       2013         2012         Change    

Selected income statement data:

            

Net interest income

   $ 265      $ 276        (4 )%    $ 807      $ 787        3

Non-interest income

     85        104        (18     277        268        3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenue

     350        380        (8     1,084        1,055        3   

Provision for credit losses

     88        81        9        250        289        (13

Non-interest expense

     191        206        (7     590        651        (9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     71        93        (24     244        115        112   

Income tax provision

     21        25        (16     71        29        145   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations, net of tax

   $ 50      $ 68        (26 )%    $ 173      $ 86        101
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Selected performance metrics:

            

Average loans held for investment(1)

   $ 7,782      $ 8,154        (5 )%    $ 7,998      $ 8,216        (3 )% 

Average yield on loans held for investment(2)

     16.35     16.47     (12 )bps      16.17     15.68     49 bps 

Total net revenue margin(3)

     17.99        18.64        (65     18.07        17.12        95   

Net charge-offs

   $ 92      $ 101        (9 )%    $ 288      $ 328        (12 )% 

Net charge-off rate(4)

     4.71     4.95     (24 )bps      4.79     5.32     (53 )bps 

Purchase volume(5)

   $ 3,523      $ 3,468        2   $ 10,305      $ 9,970        3

 

(Dollars in millions)

   September 30,
2013
    December 31,
2012
    Change  

Selected period-end data:

      

Loans held for investment(1)

   $ 8,031      $ 8,614        (7 )% 

30+ days performing delinquency rate(6)

     3.86     3.58     28 bps 

30+ days delinquency rate(7)

     4.78        4.49        29   

Nonperforming loan rate(8)

     1.16        1.16          

Allowance for loan and lease losses

   $ 403      $ 453        (11 )% 

 

(1)

Credit card period-end loans held for investment and average loans held for investment include accrued finance charges and fees, net of the estimated uncollectible amount.

(2)

Calculated by dividing annualized interest income for the period by average loans held for investment during the period for the specified loan category.

(3)

Calculated by dividing annualized total net revenue for the period by average loans held for investment during the period for the specified loan category.

(4)

Calculated by dividing annualized net charge-offs for the period by average loans held for investment during the period for the specified loan category.

(5)

Consists of purchase transactions, net of returns for the period. Excludes cash advance and balance transfer transactions.

(6)

Calculated by loan category by dividing 30+ days performing delinquent loans as of the end of the period by period-end loans held for investment for the specified loan category.

(7)

Calculated by loan category by dividing 30+ days delinquent loans as of the end of the period by period-end loans held for investment for the specified loan category.

(8)

Calculated by loan category by dividing nonperforming loans as of the end of the period by period-end loans held for investment for the specified loan category. Nonperforming credit card loans include international card loans that are generally 90 or 120 days delinquent.

The decrease in International Card net income from continuing operations in the third quarter of 2013 from the third quarter of 2012 was largely driven by lower revenues from a decrease in average loans held for investment, partially offset by lower non-interest expense from a decrease in marketing expense.

 

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The primary drivers of the improvement in results for our International Card business in the first nine months of 2013, compared with the first nine months of 2012 included: (i) the absence of charges recorded in the second quarter of 2012 associated with refunds to U.K. customers due to retrospective regulatory requirements pertaining to Payment Protection Insurance, which had an unfavorable impact on total net revenue and non-interest expense in 2012, and (ii) a reduction in the provision for credit losses attributable to lower net charge-offs, reflecting the improvement in the credit environment in Canada and the U.K.

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 customer fees. Expenses primarily consist of the provision for credit losses, ongoing operating costs, such as salaries and associate benefits, occupancy and equipment, professional services, communications and data processing technology expenses, as well as marketing expenses.

Our Consumer Banking business generated net income from continuing operations of $345 million and $1.2 billion in the third quarter and first nine months of 2013, respectively, compared with net income from continuing operations of $376 million and $1.0 billion in the third quarter and first nine months of 2012, respectively. Our results primarily reflect the impact of the following items: (i) declining average balances in our home loan portfolio partially offset by an increase in yields due to higher than estimated cash flows that we expect to collect on acquired loans and (ii) increasing average balances in our auto finance portfolio offset by lower yields.

On February 17, 2012, we acquired ING Direct, which resulted in the addition of loans with carrying value of $40.4 billion and deposits of $84.4 billion at acquisition. The substantial majority of the lending and retail deposit businesses acquired are reported in our Consumer Banking business; however, the results of our Consumer Banking business for the first quarter of 2012 reflect only a partial-quarter impact from the operations of ING Direct.

Table 8 summarizes the financial results of our Consumer Banking business and displays selected key metrics for the periods indicated.

 

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Table 8: Consumer Banking Business Results

 

     Three Months Ended September 30,     Nine Months Ended September 30,  

(Dollars in millions)

     2013         2012         Change       2013     2012     Change  

Selected income statement data:

            

Net interest income

   $ 1,481      $ 1,501        (1 )%    $ 4,437      $ 4,285        4

Non-interest income

     184        260        (29     554        621        (11
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenue

     1,665        1,761        (5     4,991        4,906        2   

Provision for credit losses

     202        202               444        420        6   

Non-interest expense

     927        977        (5     2,727        2,879        (5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     536        582        (8     1,820        1,607        13   

Income tax provision

     191        206        (7     648        569        14   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations, net of tax

   $ 345      $ 376        (8 )%    $ 1,172      $ 1,038        13
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Selected performance metrics:

            

Average loans held for investment:(1)

            

Auto

   $ 30,157      $ 25,923        16   $ 28,780      $ 24,336        18

Home loan

     37,852        47,262        (20     40,450        41,930        (4

Retail banking

     3,655        4,086        (11     3,721        4,139        (10
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer banking

   $ 71,664      $ 77,271        (7 )%    $ 72,951      $ 70,405        4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average yield on loans held for investment(2)

     6.21     6.05     16 bps      6.04     6.40     (36 )bps 

Average deposits

   $ 169,082      $ 173,334        (2 )%    $ 170,294      $ 159,273        7

Average deposit interest rate

     0.63     0.71     (8 )bps      0.64     0.71     (7 )bps 

Core deposit intangible amortization

   $ 34      $ 41        (17 )%    $ 106      $ 120        (12 )% 

Net charge-offs

     170        161        6        423        362        17   

Net charge-off rate(3)

     0.95     0.83     12 bps      0.77     0.69     8 bps 

Net charge-off rate (excluding acquired loans)(4)

     1.64        1.70        (6     1.40        1.34        6   

Automobile loan originations

   $ 4,752      $ 3,905        22   $ 13,066      $ 12,481        5

(Dollars in millions)

   September 30,
2013
    December 31,
2012
    Change                    

Selected period-end data:

            

Loans held for investment:(1)

            

Auto

   $ 30,803      $ 27,123        14      

Home loan

     36,817        44,100        (17      

Retail banking

     3,665        3,904        (6      
  

 

 

   

 

 

   

 

 

       

Total consumer banking

   $ 71,285      $ 75,127        (5 )%       
  

 

 

   

 

 

   

 

 

       

30+ days performing delinquency rate(5)

     2.82     2.65     17 bps       

30+ days performing delinquency rate (excluding acquired loans)(4)

     4.83        5.14        (31 )       

30+ days delinquency rate(6)

     3.46        3.34        12         

30+ days delinquency rate (excluding acquired loans)(4)

     5.92        6.49        (57      

Nonperforming loans rate(7)

     0.79        0.85        (6      

 

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(Dollars in millions)

   September 30,
2013
    December 31,
2012
    Change                

Nonperforming loans rate (excluding acquired loans)(4)

     1.36        1.66        (30        

Nonperforming asset rate(8)

     1.01        1.02        (1        

Nonperforming asset rate (excluding acquired loans)(4)

     1.73        1.98        (25        

Allowance for loan and lease losses

   $ 733      $ 711        3        

Allowance coverage ratio(9)

     1.03     0.95     8 bps         

Deposits

   $ 168,437      $ 172,396        (2 )%         

Loans serviced for others

     14,043        15,333        (8        

 

(1)

Loans held for investment includes loans acquired in the ING Direct and CCB acquisitions. The carrying value of consumer banking acquired loans accounted for subsequent to acquisition based on expected cash flows to be collected was $29.7 billion and $36.5 billion as of September 30, 2013 and December 31, 2012, respectively. The average balance of consumer banking loans held for investment, excluding the carrying value of acquired loans, was $41.4 billion and $38.0 billion in the third quarter of 2013 and 2012, respectively and $40.3 billion and $36.0 billion in the first nine months of 2013 and 2012, respectively.

(2)

Calculated by dividing interest income for the period by average loans held for investment during the period for the specified loan category.

(3)

Calculated by dividing annualized net charge-offs for the period by average loans held for investment during the period for the specified loan category.

(4)

Calculation of ratio adjusted to exclude from the denominator acquired loans accounted for subsequent to acquisition based on expected cash flows to be collected. See “Credit Risk Profile” and “Note 4—Loans—Credit Quality” for additional information on the impact of acquired loans on our credit quality metrics.

(5)

Calculated by loan category by dividing 30+ days performing delinquent loans as of the end of the period by period-end loans held for investment for the specified loan category.

(6)

Calculated by loan category by dividing 30+ days delinquent loans as of the end of the period by period-end loans held for investment for the specified loan category.

(7)

Calculated by loan category by dividing nonperforming loans as of the end of the period by period-end loans held for investment.

(8)

Calculated by loan category by dividing nonperforming assets as of the end of the period by period-end loans held for investment, real estate owned (“REO”), and other foreclosed assets for the specified loan category.

(9)

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

Key factors affecting the results of our Consumer Banking business for the third quarter and first nine months of 2013, compared with the third quarter and first nine months of 2012, and changes in financial condition and credit performance between September 30, 2013 and December 31, 2012 include the following:

 

   

Net Interest Income: Net interest income decreased slightly by $20 million, or 1%, in the third quarter of 2013 to $1.5 billion and increased by $152 million, or 4%, in the first nine months of 2013 to $4.4 billion. The increase in net interest income in the first nine months of 2013 was primarily attributable to a significant increase in average loans held for investment due to the ING Direct acquisition and higher auto loan originations over the past twelve months.

 

   

Non-Interest Income: Non-interest income decreased by $76 million, or 29%, in the third quarter of 2013 to $184 million and decreased by $67 million, or 11%, in the first nine months of 2013 to $554 million.

 

   

Provision for Credit Losses: The provision for credit losses was flat from the third quarter of 2012 to the third quarter of 2013 and increased slightly by $24 million in the first nine months of 2013, reflecting modestly higher auto loan charge-offs attributable to auto portfolio growth and an increase in the auto charge-off rate from historically low levels. As discussed above under “Summary of Selected Financial Data,” the substantial majority of the ING Direct home loan portfolio is accounted for based on estimated cash flows expected to be collected over the life of the loans. Because the credit mark established at acquisition for these loans takes into consideration future credit losses expected to be incurred, there are no charge-offs or an allowance associated with these loans unless the estimated cash flows expected to be collected decrease subsequent to acquisition.

 

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Non-Interest Expense: Non-interest expense decreased by $50 million, or 5%, in the third quarter of 2013 to $927 million and by $152 million, or 5%, in the first nine months of 2013 to $2.7 billion. The decrease was largely due to the absence of ING Direct acquisition-related costs incurred in the first nine months of 2012, which was partially offset by increased expenses related to the growth in our auto loan portfolio.

 

   

Loans Held for Investment: Period-end loans held for investment in our Consumer Banking business declined by $3.8 billion, or 5%, in the first nine months of 2013, to $71.3 billion as of September 30, 2013, due to the continued expected run-off of acquired home loans and small business banking, which was partially offset by higher period-end auto balances due to the continued high volume of auto loan originations.

 

   

Deposits: Period-end deposits in our Consumer Banking business declined by $4.0 billion, or 2%, in the first nine months of 2013 to $168.4 billion as of September 30, 2013, primarily due to the anticipated run-off of our legacy National Direct Bank deposits.

 

   

Charge-off and Delinquency Statistics: The reported net charge-off rate of 0.95% and 0.77% in the third quarter and first nine months of 2013, respectively, increased from 0.83% and 0.69% in the third quarter and first nine months of 2012, respectively. The 30+ days delinquency rate increased to 3.46% as of September 30, 2013, from 3.34% as of December 31, 2012. The increase in the net charge-off rates reflect moderately higher auto loan charge-offs, partially offset by improved home loan performance. As discussed above under “Summary of Selected Financial Data,” the addition of the ING Direct home loan portfolio affects our reported credit metrics, as the credit mark established at acquisition for these loans takes into consideration future credit losses expected to be incurred. Accordingly, there are no charge-offs or an allowance associated with these loans unless the estimated cash flows expected to be collected decrease subsequent to acquisition. In addition, these loans are not classified as delinquent or nonperforming even though the customer may be contractually past due because we expect that we will fully collect the carrying value of these loans. The overall delinquency rates increased moderately largely due to the run-off of the acquired home loans, which were included in the denominator in calculating the delinquency rates, from $36.4 billion as of December 31, 2012 to $29.6 billion as of September 30, 2013. The credit performance of our consumer loan portfolios continued to improve, resulting in lower delinquency rates, excluding acquired loans, as presented in the Table 8.

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. Because we have some affordable housing tax-related 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, ongoing operating costs, such as salaries and associate benefits, occupancy and equipment, professional services, communications and data processing technology expenses, as well as marketing expenses.

Our Commercial Banking business generated net income from continuing operations of $174 million and $567 million in the third quarter and first nine months of 2013, respectively, compared with net income from continuing operations of $228 million and $666 million in the third quarter and first nine months of 2012, respectively.

On August 16, 2013, we announced the signing of a definitive agreement to acquire Beech Street Capital, a privately-held, national originator and servicer of Fannie Mae, Freddie Mac and FHA multifamily commercial real estate loans. The acquisition closed on November 1, 2013. The Beech Street Capital results will be reported within the Commercial Banking business.

Table 9 summarizes the financial results of our Commercial Banking business and displays selected key metrics for the periods indicated.

 

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Table 9: Commercial Banking Business Results

 

     Three Months Ended September 30,     Nine Months Ended September 30,  

(Dollars in millions)

     2013         2012           Change             2013             2012             Change      

Selected income statement data:

            

Net interest income

   $ 480      $ 432        11   $ 1,391      $ 1,290        8

Non-interest income

     87        87               264        254        4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenue

     567        519        9        1,655        1,544        7   

Provision (benefit) for credit losses

     31        (87     136        (18     (250     93   

Non-interest expense

     266        253        5        793        765        4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     270        353        (24     880        1,029        (14

Income tax provision

     96        125        (23     313        363        (14
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations, net of tax

   $ 174      $ 228        (24 )%    $ 567      $ 666        (15 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Selected performance metrics:

            

Average loans held for investment:(1)

            

Commercial and multifamily real estate

   $ 19,047      $ 16,654        14   $ 18,201      $ 16,004        14

Commercial and industrial

     21,491        18,817        14        20,596        17,955        15   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial lending

     40,538        35,471        14        38,797        33,959        14   

Small-ticket commercial real estate

     1,038        1,296        (20     1,102        1,388        (21
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial banking

   $ 41,576      $ 36,767        13   $ 39,899      $ 35,347        13
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average yield on loans held for investment(2)

     3.87     4.14     (27 )bps      3.87     4.29     (42 )bps 

Average deposits

   $ 30,685      $ 28,063        9   $ 30,590      $ 27,859        10

Average deposit interest rate

     0.27     0.31     (4 )bps      0.27     0.34     (7 )bps 

Core deposit intangible amortization

   $ 6      $ 8        (25 )%    $ 21      $ 26        (19 )% 

Net charge-offs

     8        1        700        19        34        (44

Net charge-off rate(3)

     0.07         7 bps      0.06     0.13     (7 )bps 

(Dollars in millions)

   September 30,
2013
    December 31,
2012
    Change                    

Selected period-end data:

            

Loans held for investment:

            

Commercial and multifamily real estate

   $ 19,523      $ 17,732        10      

Commercial and industrial

     21,848        19,892        10         
  

 

 

   

 

 

   

 

 

       

Total commercial lending

     41,371        37,624        10         

Small-ticket commercial real estate

     1,028        1,196        (14      
  

 

 

   

 

 

   

 

 

       

Total commercial banking

   $ 42,399      $ 38,820        9      
  

 

 

   

 

 

   

 

 

       

Nonperforming loans rate(4)

     0.47     0.73     (26 )bps       

Nonperforming asset rate(5)

     0.56        0.77        (21      

Allowance for loan and lease losses

   $ 341      $ 433        (21 )%       

Allowance coverage ratio(6)

     0.80     1.12     (32 )bps       

Deposits

   $ 30,592      $ 29,866        2      

 

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(1) 

Loans held for investment includes loans acquired in the ING Direct and CCB acquisitions. The carrying value of commercial banking acquired loans accounted for subsequent to acquisition based on expected cash flows to be collected was $290 million and $359 million as of September 30, 2013 and December 31, 2012, respectively. The average balance of commercial banking loans held for investment, excluding the carrying value of acquired loans, was $41.3 billion and $36.4 billion in the third quarter of 2013 and 2012, respectively, and $39.6 billion and $34.9 billion in the first nine months of 2013 and 2012, respectively.

(2) 

Calculated by dividing annualized interest income for the period by average loans held for investment during the period for the specified loan category.

(3) 

Calculated by dividing annualized net charge-offs for the period by average loans held for investment during the period for the specified loan category.

(4) 

Calculated by loan category by dividing nonperforming loans as of the end of the period by period-end loans held for investment for the specified loan category. Nonperforming loans generally include loans that have been placed on non-accrual status and certain restructured loans whose contractual terms have been restructured in a manner that grants a concession to a borrower experiencing financial difficulty.

(5) 

Calculated by loan category by dividing nonperforming assets as of the end of the period by period-end loans held for investment, REO, and other foreclosed assets for the specified loan category.

(6) 

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

Key factors affecting the results of our Commercial Banking business for the third quarter and first nine months of 2013, compared with the third quarter and first nine months of 2012, and changes in financial condition and credit performance between September 30, 2013 and December 31, 2012 include the following:

 

   

Net Interest Income: Net interest income increased by $48 million, or 11%, in the third quarter of 2013 to $480 million and by $101 million, or 8%, in the first nine months of 2013 to $1.4 billion. The increase was primarily driven by higher deposit balances and growth in commercial real estate and commercial and industrial loans.

 

   

Non-Interest Income: Non-interest income of $87 million in the third quarter of 2013 was flat compared with non-interest income of $87 million in the third quarter of 2012 and increased by $10 million, or 4%, in the first nine months of 2013 to $264 million, driven by increased fee-based products and services.

 

   

Provision for Credit Losses: The Commercial Banking business recorded a provision for credit losses of $31 million in the third quarter and and a benefit of $18 million in the first nine months of 2013, respectively, compared with benefits of $87 million and $250 million in the third quarter and first nine months of 2012, respectively. The stabilization of the credit outlook has resulted in less allowance release in the current period when compared to the prior year period. The combined allowance and reserve for unfunded lending commitments increased by $23 million in the third quarter of 2013 and decreased by $38 million in the first nine months of 2013, compared with reductions of $87 million and $283 million in the third quarter and first nine months of 2012, respectively.

 

   

Non-Interest Expense: Non-interest expense increased by $13 million, or 5%, in the third quarter of 2013 to $266 million and by $28 million, or 4%, in the first nine months of 2013 to $793 million, driven by investments in business growth and infrastructure enhancements.

 

   

Loans Held for Investment: Period-end loans held for investment in our Commercial Banking business increased by $3.6 billion, or 9%, in the first nine months of 2013, to $42.4 billion as of September 30, 2013. The increase was driven by strong loan originations in the commercial and industrial and commercial real estate businesses, which was partially offset by the continued run-off of the small-ticket commercial real estate loan portfolio.

 

   

Deposits: Period-end deposits in the Commercial Banking business increased by $726 million, or 2%, to $30.6 billion as of September 30, 2013, from $29.9 billion as of December 31, 2012, driven by our strategy to strengthen existing relationships and increase liquidity from commercial customers.

 

   

Charge-off Statistics: The net charge-off rate was 0.07% and 0.06% in the third quarter and first nine months of 2013, respectively, compared to 0.00% and 0.13% in the third quarter and first nine months of 2012, respectively. The nonperforming loan rate decreased to 0.47% as of September 30, 2013, from 0.73% as of December 31, 2012. The continued strength in the credit metrics in our Commercial Banking business reflects stable credit trends and underlying collateral values.

 

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“Other” Category

Other includes unallocated amounts related to our centralized Corporate Treasury group activities, such as management of our corporate investment portfolio and asset/liability management. Gains and losses on our investment securities portfolio and certain trading activities are included in the Other category. The Other category also includes foreign exchange-rate fluctuations related to the revaluation of foreign currency-denominated investments; certain gains and losses on the sale and securitization of loans; 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 provision 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.

Net loss from continuing operations recorded in Other was $83 million and $328 million in the third quarter and first nine months of 2013, respectively, compared with a net loss from continuing operations of $157 million in the third quarter of 2012 and net income from continuing operations of $172 million in the first nine months of 2012.

Table 10 summarizes the financial results of our Other category for the periods indicated.

Table 10: Other Results

 

     Three Months Ended September 30,     Nine Months Ended September 30,  

(Dollars in millions)

       2013             2012             Change             2013             2012             Change      

Selected income statement data:

            

Net interest income (expense)

   $ (158   $ (278     43   $ (536   $ (847     37

Non-interest income

     (14     (37     62        (148     641        (123
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenue

     (172     (315     45        (684     (206     (232

Provision for credit losses

     (1     7        (114     (3     33        (109

Non-interest expense

     50        25        100        143        126        13   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     (221     (347     36        (824     (365     (126

Income tax benefit

     (138     (190     27        (496     (537     8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations, net of tax

   $ (83   $ (157     47   $ (328   $ 172        (291 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The shift in the Other category to a net loss from continuing operations of $328 million in the first nine months of 2013 from net income from continuing operations of $172 million in the first nine months of 2012 was primarily due to the recognition of the bargain purchase gain of $594 million related to the ING Direct acquisition in the first quarter of 2012, which was partially offset by a derivative loss of $78 million recognized in the first quarter of 2012 related to the interest rate swaps we entered into in 2011 to partially hedge the interest rate risk of the net assets associated with the expected ING Direct acquisition.

 

 

CONSOLIDATED BALANCE SHEET ANALYSIS

 

Total assets of $289.9 billion as of September 30, 2013 decreased by $23.0 billion, or 7%, from $312.9 billion as of December 31, 2012. Total liabilities of $248.1 billion as of September 30, 2013, decreased by $24.3 billion, or 9%, from $272.4 billion as of December 31, 2012. Stockholders’ equity increased by $1.3 billion to $41.8 billion as of September 30, 2013. The increase in stockholders’ equity was primarily attributable to our net income of

 

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$3.3 billion for the first nine months of 2013, which was partially offset by an other comprehensive loss of $1.6 billion, largely attributable to an increase in interest rates in the second quarter and third quarter of 2013 that reduced the fair value of our investment securities available for sale and resulted in net unrealized losses.

Following is a discussion of material changes in the major components of our assets and liabilities during the first nine months of 2013. 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 our ability to manage liquidity requirements for the company and our customers and our market risk exposure in accordance with our risk appetite.

Investment Securities

Our investment portfolio consisted primarily of the following: U.S. Treasury debt, U.S. agency debt and corporate debt securities guaranteed by U.S. government agencies; agency and non-agency mortgage-backed securities (“MBS”); other asset-backed securities and other investments. The carrying value of our investments in U.S. Treasury, agency securities and other securities guaranteed by the U.S. government or agencies of the U.S. government represented 76% and 77% of our total investment securities portfolio as of September 30, 2013, and December 31, 2012, respectively.

Our investment portfolio includes securities available for sale as well as securities held to maturity. We reported securities available for sale in our condensed consolidated balance sheets at fair value with unrealized gains and losses recorded, net of tax, as a component of accumulated other comprehensive income (“AOCI”). We report securities held to maturity on our consolidated balance sheets at carrying value. Carrying value is amortized cost, and includes any unamortized unrealized gains and losses recognized in AOCI prior to reclassifying the securities from securities available for sale to securities held to maturity. 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. The unrealized holding gain or loss at the date of transfer is retained in AOCI and in the carrying value of the securities held to maturity. Such amounts are amortized over the remaining life of the security with no impact on future net income.

The fair value of our securities available for sale portfolio was $43.1 billion as of September 30, 2013, a $20.9 billion decrease from $64.0 billion as a December 31, 2012. This decrease was primarily driven by the transfer of securities available for sale to securities held to maturity with a fair value of $18.3 billion as of the date of the transfer. We transferred these securities to held to maturity to reduce the impact of price volatility on AOCI and in consideration of potential changes to regulatory capital requirements under the final Basel III capital standards. The transferred securities included net pre-tax unrealized losses of $1.5 billion at the date of transfer. Excluding the transferred securities, the fair value of our securities available for sale decreased $849 million in the first nine months of 2013 driven by the sharp rise in interest rates.

Table 11 presents the amortized cost, carrying value and fair value for the major categories of our portfolio of investment securities as of September 30, 2013 and December 31, 2012.

 

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Table 11: Investment Securities

 

     September 30, 2013      December 31, 2012  

(Dollars in millions)

   Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 

Investment securities available for sale

           

U.S. Treasury debt obligations

   $ 834       $ 837       $ 1,548       $ 1,552   

U.S. agency debt obligations(1)

     1         1         301         302   

Corporate debt securities guaranteed by U.S. government agencies(2)

     1,311         1,272         1,003         1,012   

Residential mortgage-backed securities (“RMBS”):

           

Agency(3)

     22,009         22,061         39,408         40,002   

Non-agency

     3,277         3,623         3,607         3,871   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total RMBS

     25,286         25,684         43,015         43,873   
  

 

 

    

 

 

    

 

 

    

 

 

 

Commercial mortgage-backed securities (“CMBS”):

           

Agency(3)

     4,130         4,097         6,045         6,144   

Non-agency

     1,697         1,661         1,425         1,485   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total CMBS

     5,827         5,758         7,470         7,629   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other asset-backed securities(4)

     7,642         7,656         8,393         8,458   

Other securities(5)

     1,951         1,924         1,120         1,153   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities available for sale

   $ 42,852       $ 43,132       $ 62,850       $ 63,979   
  

 

 

    

 

 

    

 

 

    

 

 

 

(Dollars in millions)

   Carrying
Value
     Fair
Value
     Carrying
Value
     Fair
Value
 

Investment securities held to maturity

           

Residential mortgage-backed securities (“RMBS”):

           

Agency(3)

   $ 16,722       $ 17,075                   

Commercial mortgage-backed securities (“CMBS”):

           

Agency(3)

     1,554         1,587                   

Other asset-backed securities(4)

                     9         9   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities held to maturity

   $ 18,276       $ 18,662       $ 9       $ 9   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Includes debt securities issued by Fannie Mae, Freddie Mac, and the Department of Housing and Urban Development.

(2) 

Consists of corporate debt securities guaranteed by U.S. government agencies, such as the Export-Import Bank of the United States.

(3) 

Includes MBS issued by Fannie Mae and Freddie Mac and MBS guaranteed by Ginnie Mae.

(4) 

The other asset-backed securities portfolio was collateralized by approximately 66% credit card loans, 15% auto dealer floor plan inventory loans and leases, 6% auto loans, 4% equipment loans, 1% student loans and 8% of other assets as of September 30, 2013. In comparison, the distribution was approximately 64% credit card loans, 18% auto dealer floor plan inventory loans and leases, 6% auto loans, 5% equipment loans, 1% student loans, 2% commercial paper and 4% of other assets as of December 31, 2012. Approximately 87% of the securities in our other asset-backed security portfolio were rated AAA or its equivalent as of September 30, 2013, compared with 82% as of December 31, 2012.

(5) 

Includes foreign government/agency bonds, covered bonds, corporate securities, municipal securities and equity investments primarily related to activities under the Community Reinvestment Act (“CRA”).

We provide information on OTTI losses recognized in earnings on our investment securities above under “Consolidated Results of Operations—Non-Interest Income.”

Credit Ratings

Our portfolio of investment securities continues to be concentrated in securities that generally have low credit risk and high credit ratings, such as securities issued and guaranteed by the U.S. Treasury and other government

 

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sponsored enterprises or agencies. Approximately 91% and 92% of our total investment securities portfolio was rated AA+ or its equivalent, or better as of September 30, 2013 and December 31, 2012, respectively, while approximately 6% was below investment grade as of September 30, 2013 and December 31, 2012. We categorize the credit ratings of our investment securities based on the lowest credit rating as issued by the rating agencies Standard & Poor’s Ratings Services (“S&P”), Moody’s Investors Service (“Moody’s”) and Fitch Ratings (“Fitch”).

Table 12 provides information on the credit ratings of our non-agency RMBS, non-agency CMBS, other asset-backed securities and other securities in our portfolio as of September 30, 2013 and December 31, 2012.

Table 12: Non-Agency Investment Securities Credit Ratings

 

     September 30, 2013     December 31, 2012  

(Dollars in millions)

   Amortized
Cost
     AAA     Other
Investment
Grade
    Below
Investment
Grade or Not
Rated
    Amortized
Cost
     AAA     Other
Investment
Grade
    Below
Investment
Grade or Not
Rated
 

Non-agency RMBS

   $ 3,277             4     96   $ 3,607             5     95

Non-agency CMBS

     1,697         99        1               1,425         97        3          

Other asset-backed securities

     7,642         87        12        1        8,393         82        17        1   

Other securities(1)

     1,951         25        65        10        1,120         67        24        9   

 

(1) 

Includes foreign government/agency bonds, covered bonds, corporate securities, municipal securities and equity investments primarily related to activities under the CRA.

For additional information on our investment securities, see “Note 3—Investment Securities.”

Loans Held for Investment

Total loans that we manage consist of held for investment loans recorded on our consolidated balance sheets and loans held in our securitization trusts. Loans underlying our securitization trusts are reported on our consolidated balance sheets in restricted loans for securitization investors. Table 13 summarizes our portfolio of loans held for investment by business segment, net of the allowance for loan and lease losses, as of September 30, 2013 and December 31, 2012.

Table 13: Net Loans Held for Investment

 

     September 30, 2013      December 31, 2012  

(Dollars in millions)

   Total Loans
Held For
Investment
     Allowance      Net Loans
Held For
Investment
     Total Loans
Held For
Investment
     Allowance      Net Loans
Held For
Investment
 

Credit Card

   $ 77,967       $ 3,245       $ 74,722       $ 91,755       $ 3,979       $ 87,776   

Consumer Banking

     71,285         733         70,552         75,127         711         74,416   

Commercial Banking

     42,399         341         42,058         38,820         433         38,387   

Other

     163         14         149         187         33         154   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 191,814       $ 4,333       $ 187,481       $ 205,889       $ 5,156       $ 200,733   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Period-end loans held for investment decreased by $14.1 billion, or 7%, in the first nine months of 2013, to $191.8 billion as of September 30, 2013, from $205.9 billion as of December 31, 2012. The decrease was due in part to the transfer of the Best Buy loan portfolio of approximately $7 billion at the date of the transfer to held for sale. In addition to the transfer of the Best Buy loan portfolio, period-end loans held for investment also decreased due to higher credit card loan paydowns in the first nine months of the year, the expected run-off of certain other credit card loans acquired in the 2012 U.S. card acquisition and continued expected run-off of

 

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installment loans in our Credit Card business and home loans in our Consumer Banking business. The paydowns and run-off of card balances were partially offset by increased purchase volume in our Credit Card business, higher period-end auto loan balances due to the continued high volume of auto loan originations and strong loan originations in our commercial and industrial and commercial real estate loan portfolios.

We provide additional information on the composition of our loan portfolio and credit quality below in “Credit Risk Profile” and in “Note 4—Loans.”

Loans Held for Sale

Loans held for sale, which are carried at lower of cost or fair value, decreased to $180 million as of September 30, 2013, from $201 million as of December 31, 2012. We reclassified the assets subject to the Best Buy sale agreement, which included loans of approximately $7 billion as of the date of the transfer, to the held for sale category from the held for investment category in the first quarter. On September 6, 2013, we completed the Portfolio Sale resulting in a decrease of $6.1 billion in assets in the held for sale category.

Customer Deposits

Our customer deposits have become our largest source of funding for our operations and asset growth, providing a sizable and consistent source of low-cost funds. Total customer deposits decreased by $5.7 billion to $206.8 billion as of September 30, 2013, from $212.5 billion as of December 31, 2012, reflecting our disciplined pricing and scaling back of deposit growth in the current environment of relatively low overall loan growth. We provide information on the composition of our deposits, average outstanding balances, interest expense and yield below in “Liquidity Risk Profile.”

Securitized Debt Obligations

Borrowings due to securitization investors decreased by $1.9 billion during the first nine months of 2013 to $9.5 billion as of September 30, 2013, from $11.4 billion as of December 31, 2012. The decrease was driven by maturities, paydowns and repurchases of our securitization debt of $3.3 billion during the nine months ended September 30, 2013. These reductions were partially offset by the execution of $1.45 billion of credit card securitization transactions during the nine months ended September 30, 2013.

Other Debt

Other debt, which consists of federal funds purchased and securities loaned or sold under agreements to repurchase, senior and subordinated notes and other borrowings, including junior subordinated debt and Federal Home Loan Bank (“FHLB”) advances, but excluding securitized debt obligations, totaled $22.3 billion as of September 30, 2013, of which $8.9 billion represented short-term borrowings and $13.4 billion represented long-term debt. Other debt decreased by $16.2 billion in the third quarter of 2013 from a total of $38.5 billion as of December 31, 2012, of which $21.1 billion represented short-term borrowings and $17.4 billion represented long-term borrowings.

In the first quarter of 2013, we exchanged $1.2 billion of outstanding 8.80% subordinated notes due 2019. The transaction involved offering then current holders market value plus an exchange premium for these outstanding notes, which consideration was paid through a combination of $1.4 billion of new 3.375% subordinated notes due 2023 and cash of $209 million. In the second quarter, we exchanged $763 million of outstanding 6.75% senior notes due 2017. The transaction involved offering current holders market value plus an exchange premium for these outstanding notes, which consideration was paid through a combination of $839 million of new 3.5% senior notes due 2023 and cash of $88 million. Both exchanges were accounted for as a modification of debt.

 

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In addition, other debt decreased as a result of our redemption of $3.65 billion of our junior subordinated debt on January 2, 2013 in connection with our redemption of our outstanding trust preferred securities. This decrease was partially offset by the issuance of $850 million unsecured senior bank notes in the first quarter of 2013. The remaining decrease was due to the maturities of FHLB advances of $65.1 billion, which was partially offset by $52.4 billion of new FHLB advances during the first nine months of 2013. We provide additional information on our borrowings in “Note 8—Deposits and Borrowings”

Potential Mortgage Representation & Warranty Liabilities

We acquired three subsidiaries that originated residential mortgage loans and sold them to various purchasers, including purchasers who created securitization trusts. These subsidiaries are Capital One Home Loans, which was acquired in February 2005; GreenPoint Mortgage Funding, Inc. (“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 in our condensed consolidated balance sheets as a component of other liabilities. The aggregate reserves for all three subsidiaries totaled $1.1 billion as of September 30, 2013, compared with $899 million as of December 31, 2012, and $919 million as of September 30, 2012.

The table below summarizes changes in our representation and warranty reserves in the third quarter and first nine months of 2013 and 2012.

Table 14: Changes in Representation and Warranty Reserve

 

     Three Months  Ended
September 30,
    Nine Months  Ended
September 30,
 

(Dollars in millions)

       2013             2012             2013             2012      

Representation and warranty repurchase reserve, beginning of period(1)

   $ 1,156      $ 1,002      $ 899      $ 943   

Provision for mortgage representation and warranty losses(2)

     (4            276        349   

Net realized losses

     (7     (83     (30     (373
  

 

 

   

 

 

   

 

 

   

 

 

 

Representation and warranty repurchase reserve, end of period(1)

   $ 1,145      $ 919      $ 1,145      $ 919   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Reported in our consolidated balance sheets as a component of other liabilities.

(2) 

The pre-tax portion of the provision for mortgage representation and warranty losses recognized in our condensed consolidated statements of income as a component of non-interest income was a benefit of $13 million and $27 million in the third quarter and first nine months of 2013, respectively, compared with a loss of $42 million in the first nine months of 2012. The pre-tax portion of the provision for mortgage representation and warranty losses recognized in our consolidated statements of income as a component of discontinued operations totaled $9 million and $303 million in the third quarter and first nine months of 2013, respectively and $307 million in the first nine months of 2012.

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 September 30, 2013, is approximately $2.5 billion, a decline from our estimate of $2.7 billion as of December 31, 2012. The estimate as of September 30, 2013 covers all reasonably possible losses relating to representation and warranty claim activity.

We provide additional information related to the representation and warranty reserve, including factors that may impact the adequacy of the reserves and the ultimate amount of losses incurred by our subsidiaries, in “Note 14—Commitments, Contingencies and Guarantees.”

 

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OFF-BALANCE SHEET ARRANGEMENTS AND VARIABLE INTEREST ENTITIES

 

In the ordinary course of business, we are involved in various types of arrangements with limited liability companies, partnerships or trusts that often involve special purpose entities and variable interest entities (“VIEs”). Some of these arrangements are not recorded on our consolidated balance sheets or may be recorded in amounts different from the full contract or notional amount of the arrangements, depending on the nature or structure of, and accounting required to be applied to, the arrangement. These arrangements may expose us to potential losses in excess of the amounts recorded in the consolidated balance sheets. Our involvement in these arrangements can take many forms, including securitization and servicing activities, the purchase or sale of mortgage-backed or other asset-backed securities in connection with our home loan portfolio and loans to VIEs that hold debt, equity, real estate or other assets.

Our continuing involvement in unconsolidated VIEs primarily consists of certain mortgage loan trusts and community reinvestment and development entities. The carrying amount of assets and liabilities of these unconsolidated VIEs was $3.2 billion and $442 million, respectively, as of September 30, 2013, and our maximum exposure to loss was $3.2 billion as of September 30, 2013. We provide a discussion of our activities related to these VIEs in “Note 6—Variable Interest Entities and Securitizations.”

 

 

CAPITAL MANAGEMENT

 

The level and composition of our equity capital are determined by multiple factors, including our consolidated regulatory capital requirements and an internal risk-based capital assessment, and 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

Bank holding companies and national banks are subject to capital adequacy standards adopted by the Federal Reserve and the Office of the Comptroller of the Currency (“OCC”), respectively. The capital adequacy standards set forth minimum risk-based and leverage capital requirements that are based on quantitative and qualitative measures of assets and off-balance sheet items. Under the capital adequacy standards, bank holding companies and national banks currently are required to maintain 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% in order to be considered adequately capitalized.

National banks also are subject to prompt corrective action (“PCA”) capital regulations. Under PCA regulations, a national bank is considered to be well capitalized if it maintains a total risk-based capital ratio of at least 10% (200 basis points higher than the minimum capital standard above), a Tier 1 risk-based capital ratio of at least 6% (200 basis points higher than the minimum capital standard above), a Tier 1 leverage capital ratio of at least 5% (100 basis points higher than the minimum capital standard above) and is not subject to any supervisory agreement, order or directive to meet and maintain a specific capital level for any capital measure. A bank is considered to be adequately capitalized if it meets the above minimum capital standards and does not otherwise meet the well capitalized definition. Currently, PCA capital requirements do not apply to bank holding companies.

We also disclose a Tier 1 common ratio for our bank holding company, which is a regulatory capital measure widely used by investors, analysts, rating agencies and bank regulatory agencies to assess the capital position of financial services companies. While there is currently no mandated minimum or “well capitalized” standard for the Tier 1 common ratio, the Federal Reserve, the OCC and the FDIC (collectively, the U.S. federal banking agencies) recently finalized a new capital rule (the “Final Rule”) that implements the Basel III capital accord developed by the Basel Committee on Banking Supervision and certain Dodd-Frank Act capital provisions and

 

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updates the PCA capital requirements. The new capital framework establishes a new minimum Common Equity Tier 1 capital ratio that will be phased-in starting in 2014 for bank holding companies subject to the “Advanced” risk-based capital rules adopted by the U.S. federal banking agencies (“Advanced Approaches”). The Final Rule also increases some of the thresholds for the PCA capital categories and adds, effective January 1, 2015, the new Common Equity Tier 1 capital ratio to the PCA regulations. See “Supervision and Regulation” in our Quarterly Report on Form 10-Q for the period ended June 30, 2013, for more information.

We disclose a non-GAAP TCE ratio in “Summary of Selected Financial Data.” While the TCE ratio is a capital measure widely used by investors, analysts and bank regulatory agencies to assess the capital position of financial services companies, it may not be comparable to similarly titled measures reported by other companies. We provide information on the calculation of this ratio in “Supplemental Tables—Table A: Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures Under Basel I.”

Table 15 provides a comparison of our capital ratios under the Federal Reserve’s capital adequacy standards and the capital ratios of the Banks under the OCC’s capital adequacy standards as of September 30, 2013 and December  31, 2012.

Table 15: Capital Ratios Under Basel I(1)

 

     September 30, 2013     December 31, 2012  
     Capital
Ratio
    Minimum
Capital
Adequacy
    Well
Capitalized
    Capital
Ratio
    Minimum
Capital
Adequacy
    Well
Capitalized
 

Capital One Financial Corp (“COF”):

            

Tier 1 common(2)

     12.74     N/A        N/A        10.96     N/A        N/A   

Tier 1 risk-based capital(3)

     13.13        4.00     6.00     11.34        4.00     6.00

Total risk-based capital(4)

     15.28        8.00        10.00        13.56        8.00        10.00   

Tier 1 leverage(5)

     10.05        4.00        N/A        8.66        4.00        N/A   

Capital One Bank (USA) N.A. (“COBNA”):

            

Tier 1 risk-based capital(3)

     12.21     4.00     6.00     11.32     4.00     6.00

Total risk-based capital(4)

     15.72        8.00        10.00        14.74        8.00        10.00   

Tier 1 leverage(5)

     10.57        4.00        5.00        10.43        4.00        5.00   

Capital One, N.A. (“CONA”):

            

Tier 1 risk-based capital(3)

     13.43     4.00     6.00     13.59     4.00     6.00

Total risk-based capital(4)

     14.55        8.00        10.00        14.85        8.00        10.00   

Tier 1 leverage(5)

     9.12        4.00        5.00        9.15        4.00        5.00   

 

(1) 

Calculated under capital standards and regulations based on the international capital framework commonly known as Basel I. Capital ratios that are not applicable are denoted by “N/A.” See “MD&A—Supplemental Tables—Table A: Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures Under Basel I” for additional information.

(2) 

Tier 1 common ratio is a regulatory capital measure calculated based on Tier 1 common capital divided by risk-weighted assets.

(3) 

Tier 1 risk-based capital ratio is a regulatory capital measure calculated based on Tier 1 capital divided by risk-weighted assets.

(4) 

Total risk-based capital ratio is a regulatory capital measure calculated based on total risk-based capital divided by risk-weighted assets.

(5) 

Tier 1 leverage ratio is a regulatory capital measure calculated based on Tier 1 capital divided by quarterly average total assets, after certain adjustments.

Our Tier 1 common ratio, as calculated under capital standards and regulations based on the international capital framework commonly known as Basel I, increased to 12.74% as of September 30, 2013, up from 10.96% as of December 31, 2012. While the increase in our Tier 1 common ratio reflected strong internal capital generation from earnings, it was also driven by a temporary timing impact. We realized the full benefit of the decline in risk weighted assets from the Portfolio Sale, but the offsetting decline in our capital level only included $256 million in common stock repurchases made during the third quarter related to our previously announced $1 billion common stock repurchase program. We exceeded minimum capital requirements and would meet the “well capitalized” ratio levels specified under PCA for Tier 1 risk-based capital and total risk-based capital under Federal Reserve capital standards for bank holding companies as of September 30, 2013 and December 31, 2012. The Banks also exceeded minimum regulatory requirements under the OCC’s applicable capital adequacy guidelines and were “well capitalized” under PCA requirements as of September 30, 2013 and December 31, 2012.

 

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Recent Developments in Capital Requirements

As described above, the U.S. federal banking agencies recently adopted the Final Rule, which increases the minimum capital that we and other institutions are required to hold. Prior to being revised in the Final Rule, the minimum risk-based capital requirements adopted by the U.S. federal banking agencies followed Basel I as noted in Table 15 above and the Advanced Approaches for applicable banks and bank holding companies. Currently, we are subject to Basel I and are in the Advanced Approaches qualification process but are not formally subject to its capital requirements.

The Final Rule modified both Basel I and the Advanced Approaches (as modified, referred to respectively as “Basel III Standardized” and the “Basel III Advanced Approaches”). Under the Final Rule, beginning on January 1, 2014, as an Advanced Approaches banking organization that has yet to enter or exit parallel run, we must use Basel III Standardized for calculating our regulatory capital, including as used in our capital ratios, subject to transition periods. In 2014, however, we will continue to use Basel I for calculating our risk-weighted assets in our regulatory capital ratios. Beginning on January 1, 2015, we must use Basel III Standardized for calculating our risk-weighted assets in our regulatory capital ratios.

Basel III Standardized Common Equity Tier 1 capital under the Final Rule includes additional adjustments and deductions not included in Basel I Tier 1 common capital, such as the inclusion of accumulated other comprehensive income (“AOCI”) from available for sale (“AFS”) securities, and the deduction of assets related to defined benefit pension and other post-retirement employee benefit plans.

The following table presents a comparison of our Tier 1 common capital and risk weighted assets as of September 30, 2013, calculated under Basel I, to our estimated Common Equity Tier 1 capital and risk weighted assets as of September 30, 2013, calculated under Basel III Standardized as it phases in on January 1, 2014, and January 1, 2015, and when fully phased-in. Our estimate of the Common Equity Tier 1 capital ratio under Basel III Standardized is a non-GAAP financial measure. However, we believe this measure provides useful information to investors and others by measuring our progress against regulatory capital standards that will be applicable to the Company beginning in 2014. See the table and notes below for further discussion on our interpretations, expectations and assumptions used in calculating this ratio.

Table 16: Estimated Common Equity Tier 1 Capital Ratio Under Basel III Standardized

 

     September 30, 2013  

(Dollars in millions, except ratio)

   2014 Phase-In     2015 Phase-In     Full Phase-In  

Tier 1 common capital under Basel I rules

   $ 27,488      $ 27,488      $ 27,488   

Adjustments related to AOCI for securities available for sale and defined benefit pension plans(1)

     (154     (308     (769

All other adjustments(2)

     (153     (463     (1,394
  

 

 

   

 

 

   

 

 

 

Estimated Common Equity Tier 1 capital under Basel III Standardized

   $ 27,181      $ 26,717      $ 25,325   
  

 

 

   

 

 

   

 

 

 

Risk-weighted assets under Basel I rules

   $ 215,829      $ 215,829      $ 215,829   

Adjustments for Basel III Standardized(3)

     (76     11,945        11,249   
  

 

 

   

 

 

   

 

 

 

Estimated risk-weighted assets adjusted for Basel III Standardized

   $ 215,753      $ 227,774      $ 227,078   
  

 

 

   

 

 

   

 

 

 

Estimated Common Equity Tier 1 capital ratio under Basel III Standardized(4)

     12.6     11.7     11.2
  

 

 

   

 

 

   

 

 

 

 

(1) 

Adjustments related to AOCI for securities available for sale and defined benefit plans are phased in at 20% for 2014, at 40% for 2015, and at 100% for 2018 and beyond.

 

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(2) 

All other adjustments are phased-in at 20% for 2014, at 40% for 2015, and at 100% for 2018 and beyond for adjustments related to (i) PCCR intangibles and (ii) Disallowed Deferred Tax Assets from Net Operating Losses and Tax Credit Carry Forwards.

(3) 

Adjustments to Basel I risk weighted assets (“RWA”) include corresponding adjustments to PCCR intangibles, Deferred Tax Assets and certain other assets in the calculation of Common Equity Tier 1 capital under Basel III Standardized.

(4)

Calculated by dividing Estimated Common Equity Tier 1 capital under Basel III Standardized by Estimated risk-weighted assets adjusted for Basel III Standardized.

With respect to the Basel III Advanced Approaches, we expect to enter the parallel run phase no earlier than January 1, 2015. We currently anticipate a multi-year parallel run consistent with the experience of other U.S. banks. By rule, this phase must last at least four consecutive quarters.

Under the Final Rule, when we complete our parallel run for the Advanced Approaches, our minimum risk-based capital requirement will be the greater requirement of the Basel III Standardized and the Basel III Advanced Approaches. See “Supervision and Regulation-Basel II” in our Annual Report on Form 10-K for additional information. We anticipate that we will need to hold more regulatory capital under the Basel III Advanced Approaches than under Basel I or Basel III Standardized to meet our minimum required capital ratios.

Capital Planning and Regulatory Stress Testing

In November 2011, the Federal Reserve finalized capital planning rules applicable to large bank holding companies like us (commonly referred to as Comprehensive Capital Analysis and Review or CCAR). Under the rules, bank holding companies with consolidated assets of $50 billion or more must submit capital plans to the Federal Reserve on an annual basis and must obtain approval from the Federal Reserve before making most capital distributions. The purpose of the rules is to ensure that large bank holding companies have robust, forward-looking capital planning processes that account for their unique risks and capital needs to continue operations through times of economic and financial stress.

On September 24, 2013, the Federal Reserve released an interim final rule that stated, for the first time, that the 2014 CCAR cycle will require us to meet Basel III Standardized capital requirements, with appropriate phase-in provisions applicable to Advanced Approaches institutions during the CCAR planning horizon, under the supervisory severely adverse stress scenario in addition to the capital plan rule’s Tier 1 common ratio using Basel I definitions. See “Recent Developments in Capital Requirements” above for more information regarding Basel III Standardized capital ratios. In November 2013, the Federal Reserve issued supervisory economic stress scenarios for the 2014 CCAR cycle. We plan to submit our 2014 capital plan to the Federal Reserve in early January 2014.

We consider various factors in the management of capital, including the impact of stress on our capital position, as determined by both our internal modeling and Federal Reserve modeling of our capital position in CCAR. In the 2013 stress test cycle, including CCAR, there was a large difference between our estimates of our capital levels under stress and the Federal Reserve’s estimates of our capital levels under stress. In the 2014 stress test cycle, including CCAR, the difference could be larger because, in addition to using its own assumptions in modeling credit losses and pre-provision net revenue, we expect the Federal Reserve will use its own assumptions in modeling balance sheet contraction. Therefore, although our estimated capital levels under stress may suggest that we 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 than our estimates.

Dividends and Stock Purchases

On October 31, 2013, our Board of Directors declared a quarterly common stock dividend per share of $0.30 per share, payable on November 21, 2013 to stockholders of record as of November 11, 2013. The Board of Directors also declared a quarterly dividend on the outstanding shares of the Series B Preferred Stock. Each outstanding share of the Series B Preferred Stock is represented by depository shares, each representing a 1/40th

 

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interest in a share of Series B Preferred Stock. The dividend of $15.00 per share (equivalent to $0.375 per outstanding depository share) will be paid on December 2, 2013 to stockholders of record at the close of business on November 15, 2013.

The declaration and payment of dividends to our stockholders, as well as the amount thereof, are subject to the discretion of our Board of Directors and depend upon our results of operations, financial condition, capital levels, cash requirements, future prospects and other factors deemed relevant by the Board of Directors. As a bank holding company, our ability to pay dividends is largely dependent upon the receipt of dividends or other payments from our subsidiaries. Funds available for dividend payments from COBNA and CONA were $2.5 billion and $195 million, respectively, as of September 30, 2013. There can be no assurance that we will declare and pay any dividends. For additional information on dividends, see “Item 1. Business—Supervision and Regulation—Dividends, Stock Purchases and Transfer of Funds” in our 2012 Form 10-K.

In the third quarter, we began executing our previously announced $1 billion share repurchase program by repurchasing $256 million in shares. We expect to complete the share repurchase program by the end of the year. The timing and exact amount of any common stock repurchases will depend on various factors, including market conditions, our capital position, and internal capital generation. Our share 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.

 

 

RISK MANAGEMENT

 

Overview

Risk management is a critical part of our business model, as all financial institutions are exposed to a variety of risks that can significantly affect their financial performance. In May 2013, we created a Board level Risk Committee that is separate from the Audit Committee to assist the Board in fulfilling its oversight responsibilities related to risk management. The Risk Committee receives management reports from the Chief Risk Officer or his designee related to our enterprise-wide risk management framework, including policies and practices by management to identify, assess, measure and manage key risks across all of our eight major categories of risk: credit risk, liquidity risk, market risk, compliance risk, operational risk, legal risk, reputation risk and strategic risk. Our risk management framework is intended to identify, assess and mitigate risks that affect or have the potential to affect our business. We target financial returns that compensate us for the amount of risk that we take and avoid excessive risk-taking.

Our risk management framework applies at all levels, from the development of the Enterprise Risk Management Program itself to the tactical operations of the front-line business team. In 2013, we enhanced our risk management framework to more fully embody our “Three Lines of Defense” model and more fully capture the expectations of strong risk management. Our risk management framework consists of the following eight key elements:

 

   

Establish governance processes, accountabilities, and risk appetites

   

Identify and assess risks and ownership

   

Develop and operate controls, monitoring and mitigation plans

   

Test and detect control gaps and perform corrective action

   

Escalate key risks and gaps to Executive Management, and when appropriate the Board of Directors

   

Calculate and allocate capital in alignment with risk management and measurement processes (including stress testing)

   

Support with the right culture, talent and skills

   

Enabled by the right data, infrastructure and programs

We provide additional discussion of our risk management principles, roles and responsibilities, framework and risk appetite under “MD&A—Risk Management” in our 2012 Form 10-K. While we have enhanced our framework, our guiding principles, roles and responsibilities have remained consistent.

 

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CREDIT RISK PROFILE

 

Our loan portfolio accounts for the substantial majority of our credit risk exposure. 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, foreign exchange transactions and deposit overdrafts. We provide additional information on credit risk related to our investment securities portfolio under “Consolidated Balance Sheet Analysis—Investment Securities” and credit risk related to derivative transactions in “Note 9—Derivative Instruments and Hedging Activities.”

Loan Portfolio Composition

We provide a variety of lending products. Our primary products include credit cards, auto loans, home loans and commercial loans. For information on our lending policies and procedures, including our underwriting criteria, for our primary loan products, please refer to the “MD&A—Credit Risk Profile” section in our 2012 Form 10-K.

Total loans that we manage consist of held for investment loans recorded on our balance sheet and loans held in our securitization trusts. Table 17 presents the composition of our total loan portfolio, by business segments, as of September 30, 2013 and December 31, 2012. Table 17 also displays acquired loans accounted for based on estimated cash flows expected to be collected, which consists of a limited portion of the credit card loans acquired in the 2012 U.S. card acquisition and the substantial majority of consumer and commercial loans acquired in the ING Direct and CCB acquisitions. For additional information on the accounting for acquired loans, see “MD&A—Credit Risk Profile—Loan Portfolio Composition—Loans Acquired” and “Note 1—Summary of Significant Accounting Policies—Loan” in our 2012 Form 10-K. Table 17 and the credit metrics presented in this section exclude loans held for sale, which are carried at lower of cost or fair value and totaled $180 million and $201 million as of September 30, 2013 and December 31, 2012, respectively.

 

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Table 17: Loan Portfolio Composition

 

    September 30, 2013     December 31, 2012  

(Dollars in millions)

  Loans     Acquired
Loans
    Total(1)     % of
Total
    Loans     Acquired
Loans
    Total(1)     % of
Total
 

Credit Card business:

               

Credit card loans:

               

Domestic credit card loans

  $ 69,468      $ 70      $ 69,538        36.2   $ 82,058      $ 270      $ 82,328        40.0

International credit card loans

    8,031               8,031        4.2        8,614               8,614        4.2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total credit card loans

    77,499        70        77,569        40.4        90,672        270        90,942        44.2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Installment loans:

               

Domestic installment loans

    395        3        398        0.2        795        18        813        0.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total credit card

    77,894        73        77,967        40.6        91,467        288        91,755        44.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consumer Banking business:

               

Auto

    30,797        6        30,803        16.1        27,106        17        27,123        13.2   

Home loan

    7,173        29,644        36,817        19.2        7,697        36,403        44,100        21.4   

Other retail

    3,633        32        3,665        1.9        3,870        34        3,904        1.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer banking

    41,603        29,682        71,285        37.2        38,673        36,454        75,127        36.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial Banking business:(2)

               

Commercial and multifamily real estate

    19,421        102        19,523        10.2        17,605        127        17,732        8.6   

Commercial and industrial

    21,660        188        21,848        11.4        19,660        232        19,892        9.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial lending

    41,081        290        41,371        21.6        37,265        359        37,624        18.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Small-ticket commercial real estate

    1,028               1,028        0.5        1,196               1,196        0.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial banking

    42,109        290        42,399        22.1        38,461        359        38,820        18.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other:

               

Other loans

    128        35        163        0.1        154        33        187        0.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans held for investment

  $ 161,734      $ 30,080      $ 191,814        100.0   $ 168,755      $ 37,134      $ 205,889        100.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

We had a net unamortized premium on purchased loans of $280 million and $461 million as of September 30, 2013 and December 31, 2012, respectively.

(2)

Includes construction loans and land development loans totaling $2.2 billion as of September 30, 2013 and $2.1 billion as of December 31, 2012.

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 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 rate provide an early warning of changes in credit losses. The primary indicator of credit risk in our commercial loan portfolios is 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 credit quality of the portfolio based on regional economic conditions.

 

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Table of Contents

We use borrower credit scores in underwriting for most consumer loans. We do not use credit scores as a primary indicator of credit quality because product differences, loan structure, and other factors drive large differences in credit quality for a given credit score. We continuously adjust our management of credit lines and collection strategies based on customer behavior and risk profile changes.

As noted above, our Credit Card business accounted for $78.0 billion, or 41%, of our total loan portfolio as of September 30, 2013, with Domestic Card accounting for $69.9 billion, or 36%, of our total loan portfolio as of September 30, 2013. In comparison, our Credit Card business accounted for $91.8 billion, or 45%, of our total loan portfolio as of December 31, 2012, with Domestic Card accounting for $83.1 billion, or 40%, of our total loan portfolio as of December 31, 2012. Based on our most recent data, we estimate that approximately one-third of our Domestic Card portfolio had credit scores less than 660 or no score, based on loan balances, as of September 30, 2013, relatively consistent with the proportion of the Domestic Card portfolio with credit scores below 660 or no score as of December 31, 2012. For loans related to the 2012 U.S. card acquisition and certain other partnerships, data is obtained on a lagged basis.

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. Loans acquired as part of the CCB, ING Direct and 2012 U.S. card acquisitions are included in the denominator used in calculating the credit quality metrics presented below. Because some of these loans are accounted for based on expected cash flows to be collected, which takes into consideration future credit losses expected to be incurred, there are no charge-offs or an allowance associated with these loans unless the estimated cash flows expected to be collected decrease subsequent to acquisition. In addition, these loans are not classified as delinquent or nonperforming even though the customer may be contractually past due because we expect that we will fully collect the carrying value of these loans. The accounting and classification of these loans may significantly alter some of our reported credit quality metrics. We therefore supplement certain reported credit quality metrics with metrics adjusted to exclude the impact of these acquired loans.

See “Note 4—Loans” in this Report for additional credit quality information. See “Note 1—Summary of Significant Accounting Policies” in our 2012 Form 10-K for information on our accounting policies for delinquent, nonperforming loans, charge-offs and troubled debt restructurings (“TDRs”) for each of our loan categories.

Delinquency Rates

We consider the entire balance of an account to be delinquent if the minimum required payment is not received by the first statement cycle date equal to or following the due date specified on the customer’s billing statement. Table 18 compares 30+ day performing and total 30+ day delinquency rates, by loan category, as of September 30, 2013 and December 31, 2012. Table 18 also presents these metrics adjusted to exclude from the denominator acquired loans accounted for based on estimated cash flows expected to be collected over the life of the loans.

Our 30+ day delinquency metrics include all held for investment loans 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 and that are also currently classified as performing and accruing interest. The 30+ day delinquency and 30+ day performing delinquency metrics are generally the same for credit card loans, as we continue to classify the substantial majority of credit card 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—Loans” in our 2012 Form 10-K for information on our policies for classifying loans as nonperforming for each of our loan categories.

 

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Table 18: 30+ Day Delinquencies

 

    September 30, 2013     December 31, 2012  
    30+ Day Performing     30+ Day Total     30+ Day Performing     30+ Day Total  

(Dollars in millions)

  Amount     Rate(1)     Adjusted
Rate(2)
    Amount     Rate(1)     Adjusted
Rate(2)
    Amount     Rate(1)     Adjusted
Rate(2)
    Amount     Rate(1)     Adjusted
Rate(2)
 

Credit Card business:

                       

Domestic credit card and installment loans

  $ 2,423        3.46     3.47   $ 2,423        3.46     3.47   $ 3,001        3.61     3.62   $ 3,001        3.61     3.62

International credit card

    310        3.86        3.86        384        4.78        4.78        308        3.58        3.58        387        4.49        4.49   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total credit card

    2,733        3.51        3.51        2,807        3.60        3.60        3,309        3.61        3.62        3,388        3.69        3.70   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consumer Banking business:

                       

Automobile

    1,936        6.29        6.29        2,089        6.78        6.78        1,900        7.00        7.01        2,049        7.55        7.56   

Home loan

    50        0.14        0.70        320        0.87        4.46        59        0.13        0.77        380        0.86        4.94   

Retail banking

    25        0.68        0.68        54        1.48        1.50        30        0.76        0.77        81        2.07        2.09   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer banking

    2,011        2.82        4.83        2,463        3.46        5.92        1,989        2.65        5.14        2,510        3.34        6.49   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial Banking business:

                       

Commercial and multifamily real estate

    87        0.45        0.45        141        0.72        0.73        140        0.79        0.79        248        1.40        1.41   

Commercial and industrial

    22        0.10        0.10        61        0.28        0.28        73        0.37        0.37        135        0.68        0.69   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial lending

    109        0.26        0.27        202        0.49        0.49        213        0.57        0.57        383        1.02        1.03   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Small-ticket commercial real estate

    10        0.98        0.98        23        2.19        2.19        33        2.74        2.74        43        3.60        3.60   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial banking

    119        0.28        0.28        225        0.53        0.53        246        0.63        0.64        426        1.10        1.11   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other:

                       

Other loans

    6        3.45        4.37        21        13.15        16.64        11        5.72        6.95        36        19.25        23.38   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 4,869        2.54     3.01   $ 5,516        2.88     3.41   $ 5,555        2.70     3.29   $ 6,360        3.09     3.77
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

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 acquired loans as applicable.

(2)

Calculated by excluding acquired loans from the denominator.

Table 19 presents an aging of 30+ day delinquent loans included in the above table.

 

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Table 19: Aging and Geography of 30+ Day Delinquent Loans

 

     September 30, 2013     December 31, 2012  

(Dollars in millions)

   Amount      % of
Total Loans(1)
    Amount      % of
Total Loans(1)
 

Total loan portfolio

   $ 191,814         100.0   $ 205,889         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Delinquency status:

          

30 – 59 days

   $ 2,506         1.31   $ 2,664         1.29

60 – 89 days

     1,271         0.66        1,440         0.70   

90 + days

     1,739         0.91        2,256         1.10   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 5,516         2.88   $ 6,360         3.09
  

 

 

    

 

 

   

 

 

    

 

 

 

Geographic region:

          

Domestic

   $ 5,132         2.68   $ 5,973         2.90

International

     384         0.20        387         0.19   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 5,516         2.88   $ 6,360         3.09
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1)

Calculated by dividing loans in each delinquency status category or geographic region as of the end of the period by the total held-for-investment loan portfolio, including acquired loans.

Table 20 summarizes loans that were 90 days or more past due as to interest or principal and still accruing interest as of September 30, 2013 and December 31, 2012. These loans consist primarily of credit card accounts between 90 days and 179 days past due. As permitted by regulatory guidance issued by the Federal Financial Institutions Examination Council (“FFIEC”), we generally 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 20: 90+ Day Delinquent Loans Accruing Interest

 

     September 30, 2013     December 31, 2012  

(Dollars in millions)

   Amount      % of
Total Loans
    Amount      % of
Total Loans
 

Loan category:(1)

          

Credit card

   $ 1,160         1.49   $ 1,510         1.65

Consumer

     1                1           

Commercial

     6         0.01        16         0.04   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,167         0.61   $ 1,527         0.74
  

 

 

    

 

 

   

 

 

    

 

 

 

Geographic region:(2)

          

Domestic

   $ 1,069         0.56   $ 1,427         0.69

International

     98         0.05        100         0.05   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,167         0.61   $ 1,527         0.74
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1)

Delinquency rates are calculated for each loan category by dividing 90+ day delinquent loans accruing interest as of the end of the period by period-end loans held for investment for the specified loan category, including acquired loans as applicable.

(2)

Calculated by dividing loans in each geographic region as of the end of the period by the total loan portfolio.

 

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Nonperforming Assets

Nonperforming assets consist of nonperforming loans and foreclosed property and repossessed assets. Nonperforming loans generally include loans that have been placed on nonaccrual status and certain restructured loans whose contractual terms have been restructured in a manner that grants a concession to a borrower experiencing financial difficulty. We separately track and report acquired loans accounted for based on expected cash flows and disclose our delinquency and nonperforming loan rates with and without acquired loans. See “Note 1—Summary of Significant Accounting Policies—Loans” in our 2012 Form 10-K for information on our policies for classifying loans as nonperforming for each of our loan categories.

Table 21 presents comparative information on nonperforming loans, by loan category, as of September 30, 2013 and December 31, 2012, and the ratio of nonperforming loans to our total loans. We do not classify loans held for sale as nonperforming, as they are recorded at the lower of cost or fair value.

Table 21: Nonperforming Loans and Other Nonperforming Assets(1)(2)

 

     September 30,  2013(3)     December 31, 2012  

(Dollars in millions)

   Amount      % of
Total
HFI Loans
    Amount      % of
Total
HFI  Loans
 

Nonperforming loans held for investment:

          

Credit card business:

          

International credit card

   $ 93         1.16   $ 100         1.16
  

 

 

    

 

 

   

 

 

    

 

 

 

Total credit card

     93         0.12        100         0.11   
  

 

 

    

 

 

   

 

 

    

 

 

 

Consumer Banking business:

          

Auto

     153         0.50        149         0.55   

Home loan

     374         1.01        422         0.96   

Retail banking

     40         1.10        71         1.82   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total consumer banking

     567         0.79        642         0.85   
  

 

 

    

 

 

   

 

 

    

 

 

 

Commercial Banking business:

          

Commercial and multifamily real estate

     70         0.36        137         0.77   

Commercial and industrial

     116         0.53        133         0.67   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total commercial lending

     186         0.45        270         0.72   

Small-ticket commercial real estate

     15         1.49        12         0.97   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total commercial banking

     201         0.47        282         0.73   
  

 

 

    

 

 

   

 

 

    

 

 

 

Other:

          

Other loans

     21         12.94        30         15.85   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total nonperforming loans held for investment(4)

   $ 882         0.46   $ 1,054         0.51
  

 

 

    

 

 

   

 

 

    

 

 

 

Other nonperforming assets:

          

Foreclosed property(5)

   $ 146         0.08   $ 204         0.10

Other assets(6)

     131         0.07        109         0.05   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total other nonperforming assets

     277         0.14        313         0.15   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total nonperforming assets

   $ 1,159         0.60   $ 1,367         0.66
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1)

The ratio of nonperforming loans as a percentage of total loans held for investment is calculated based on the nonperforming loans in each loan category divided by the total outstanding unpaid principal balance of loans held for investment in each loan category. The denominator used in calculating the nonperforming asset ratios consists of total loans held for investment and other nonperforming assets.

(2)

The nonperforming loan ratio, excluding acquired loans from the denominator, for home loan, total consumer banking, and total nonperforming loans held for investment was 5.21%, 1.36%, and 0.55%, respectively, as of September 30, 2013, compared with 5.48%, 1.66%, and 0.62%, respectively, as of December 31, 2012. The nonperforming asset ratio, excluding acquired loans from the denominator, was 0.66% and 0.71% as of September 30, 2013 and December 31, 2012, respectively.

 

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(3)

We recognized interest income for loans classified as nonperforming of $27 million and $22 million in the first nine months of 2013 and 2012, respectively. Interest income foregone related to nonperforming loans was $44 million and $36 million in the first nine months of 2013 and 2012, 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.

(4)

Nonperforming loans as a percentage of loans held for investment, excluding credit card loans from the denominator, was 0.77% and 0.92% as of September 30, 2013 and December 31, 2012, respectively.

(5)

Includes foreclosed properties related to acquired loans of $83 million and $167 million as of September 30, 2013 and December 31, 2012, respectively.

(6) 

Beginning in the third quarter of 2013 we have begun including the net realizable value of auto loans that have been charged down as a result of a bankruptcy filing in addition to 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.

 

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Net Charge-Offs

Net charge-offs consist of the unpaid principal balance of loans held for investment that we determine are uncollectible, net of recovered amounts. We exclude accrued and unpaid finance charges and fees and fraud losses from charge-offs. Costs incurred 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. Our charge-off time frame for loans varies based on the loan type. See “Note 1—Summary of Significant Accounting Policies—Loans” in our 2012 Form 10-K for information on our charge-off policy for each of our loan categories.

Table 22 presents our net charge-off amounts and rates, by business segment, in the third quarter and first nine months of 2013 and 2012.

Table 22: Net Charge-Offs

 

     Three Months Ended September 30,  
     2013     2012  

(Dollars in millions)

   Amount     Rate(1)     Adjusted
Rate(2)
    Amount     Rate(1)     Adjusted
Rate(2)
 

Credit Card business:

            

Domestic credit card and installment loans

   $ 642        3.67     3.68   $ 612        3.04     3.06

International credit card

     92        4.71        4.71        101        4.95        4.95   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total credit card

     734        3.78        3.78        713        3.22        3.23   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consumer Banking business:

            

Automobile

     152        2.01        2.01        115        1.79        1.79   

Home loan

     5        0.06        0.30        32        0.28        1.65   

Retail banking

     13        1.38        1.40        14        1.20        1.22   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer banking

     170        0.95        1.64        161        0.83        1.70   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial Banking business:

            

Commercial and multifamily real estate

     (5     (0.11     (0.11     (2     (0.05     (0.05

Commercial and industrial

     9        0.18        0.18                        
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial lending

     4        0.04        0.04        (2     (0.03     (0.03
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Small-ticket commercial real estate

     4        1.26        1.26        3        0.79        0.79   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial banking

     8        0.07        0.07        1                 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other:

            

Other loans

     5        12.17        15.40        12        30.11        30.11   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 917        1.92     2.29   $ 887        1.75     2.18
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average loans held for investment

   $ 191,135          $ 202,856       

Average loans held for investment (excluding acquired loans)

     160,422            162,698       

 

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     Nine Months Ended September 30,  
     2013     2012  

(Dollars in millions)

   Amount     Rate(1)     Adjusted
Rate(2)
    Amount      Rate(1)     Adjusted
Rate(2)
 

Credit Card business:

             

Domestic credit card and installment loans

   $ 2,218        4.14     4.14   $ 1,653         3.21     3.22

International credit card

     288        4.79        4.79        328         5.32        5.32   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total credit card

     2,506        4.20        4.21        1,981         3.43        3.45   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Consumer Banking business:

             

Automobile

     366        1.69        1.69        262         1.44        1.45   

Home loan

     13        0.04        0.23        59         0.19        1.04   

Retail banking

     44        1.58        1.60        41         1.29        1.30   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total consumer banking

     423        0.77        1.40        362         0.69        1.34   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Commercial Banking business:

             

Commercial and multifamily real estate

     (3     (0.02     (0.02     9         0.07        0.07   

Commercial and industrial

     13        0.08        0.09        1         0.01        0.01   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total commercial lending

     10        0.04        0.04        10         0.04        0.04   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Small-ticket commercial real estate

     9        1.04        1.04        24         2.24        2.24   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total commercial banking

     19        0.06        0.06        34         0.13        0.13   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Other:

             

Other loans

     17        13.31        16.69        28         24.11        24.11   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 2,965        2.05     2.48   $ 2,405         1.75     2.17
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Average loans held for investment

   $ 192,547          $ 182,870        

Average loans held for investment (excluding acquired loans)

     159,359            147,734        

 

(1)

Calculated for each loan category by dividing annualized net charge-offs for the period by average loans held for investment during the period.

(2)

Calculated by excluding acquired loans from the denominator.

Loan Modifications and Restructurings

As part of our customer retention efforts, we may modify loans for certain borrowers who have demonstrated performance under the previous terms. As part of our loss mitigation efforts, we may make loan modifications to a borrower experiencing financial difficulty that are intended to minimize our economic loss and avoid the need for foreclosure or repossession of collateral. We may provide short-term (three to twelve months) or long-term (greater than twelve months) modifications to improve the long-term collectability of the loan. Our most common types of modifications include a reduction in the borrower’s monthly or quarterly principal and interest payment through an extension of the loan term, a reduction in the interest rate, or a combination of both. These modifications may result in our receiving the full amount due, or certain installments due, under the loan over a period of time that is longer than the period of time originally provided for under the terms of the loan. In limited cases, we may curtail the amount of principal owed by the borrower. Loan modifications in which a concession has been granted to a borrower experiencing financial difficulty are accounted for and reported as TDRs. We also classify loan modifications that involve a trial period as TDRs.

Table 23 presents the loan balances as of September 30, 2013 and December 31, 2012 with loan modifications made as part of our loss mitigation efforts, all of which are considered to be TDRs. Table 23 excludes loan modifications that do not meet the definition of a TDR and acquired loans accounted for based on expected cash flows, which we track and report separately.

 

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Table 23: Loan Modifications and Restructurings

 

     September 30, 2013     December 31, 2012  

(Dollars in millions)

   Amount      % of Total
Modifications
    Amount      % of Total
Modifications
 

Modified and restructured loans:

          

Credit card(1)

   $ 791         47.0   $ 873         48.7

Auto

     338         20.1        328         18.3   

Home loan

     217         12.9        145         8.1   

Retail banking

     65         3.9        65         3.6   

Commercial banking

     272         16.1        383         21.3   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,683         100.0   $ 1,794         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Status of modified and restructured loans:

          

Performing

   $ 1,189         70.6   $ 1,419         79.1

Nonperforming

     494         29.4        375         20.9   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,683         100.0   $ 1,794         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) 

Amount reported reflects the total outstanding customer balance, which consists of unpaid principal balance, accrued interest and fees.

The vast majority of our credit card TDR loan modifications involve a reduction in the interest rate on the account and placing the customer on a fixed payment plan not exceeding 60 months. We determine the effective interest rate for purposes of measuring impairment on modified loans that involve a reduction and are considered to be a TDR based on the interest rate in effect immediately prior to the loan entering the modification program. In some cases, the interest rate on a credit card account is automatically increased 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, with the amount of any loan outstanding reflected in the appropriate delinquency category. The loan amount may then be charged-off in accordance with our standard charge-off policy.

The majority of our modified home loans involve a combination of an interest rate reduction, term extension or principal reduction. The vast majority of modified auto and commercial loans include a reduction in interest rate or a term extension.

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. Loans defined as individually impaired, based on applicable accounting guidance, include larger balance commercial nonperforming loans and TDR loans. We do not report nonperforming consumer loans that have not been modified in a TDR as individually impaired, as we collectively evaluate these smaller-balance homogenous loans for impairment in accordance with applicable accounting guidance. Loans held for sale are also not reported as impaired, as these loans are recorded at lower of cost or fair value. Impaired loans also exclude acquired loans accounted for based on expected cash flows because this accounting methodology takes into consideration future credit losses expected to be incurred, as discussed above under “Summary of Selected Financial Data.”

Impaired loans, including TDRs, totaled $1.8 billion as of September 30, 2013 and $2.0 billion as of December 31, 2012. TDRs accounted for $1.7 billion as of September 30, 2013 and $1.8 billion as of December 31, 2012 of impaired loans. We provide additional information on our impaired loans, including the allowance established for these loans, in “Note 4—Loans” and “Note 5—Allowance for Loan and Lease Losses.”

 

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Allowance for Loan and Lease Losses

Our allowance for loan and lease losses represents management’s best estimate of incurred loan and lease credit losses inherent in our held for investment portfolio as of each balance sheet date. We do not maintain an allowance for held for sale loans or acquired 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 credit component. See “Note 1—Summary of Significant Accounting Policies—Allowance for Loan and Lease Losses” in our 2012 Form 10-K for information on the methodology for determining our allowance for loan and lease losses for each of our loan categories.

Table 24 displays changes in our allowance for loan and lease losses for the third quarter and first nine months of 2013 and 2012, which details by loan type, the provision for credit losses recognized in our consolidated statements of income each period and charge-offs recorded against the allowance for loan and lease losses.

 

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Table 24: Allowance for Loan and Lease Losses Activity

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

(Dollars in millions)

   2013     2012     2013     2012  

Balance at beginning of period, as reported

   $ 4,407      $ 4,998      $ 5,156      $ 4,250   

Provision for credit losses(1)

     829        1,028        2,442        3,293   

Charge-offs:

        

Credit Card business:

        

Domestic credit card and installment loans

     (895     (833     (3,047     (2,367

International credit card

     (141     (148     (432     (477
  

 

 

   

 

 

   

 

 

   

 

 

 

Total credit card

     (1,036     (981     (3,479     (2,844
  

 

 

   

 

 

   

 

 

   

 

 

 

Consumer Banking business:

        

Auto

     (210     (166     (545     (428

Home loan

     (6     (37     (18     (80

Retail banking

     (18     (18     (62     (58
  

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer banking

     (234     (221     (625     (566
  

 

 

   

 

 

   

 

 

   

 

 

 

Commercial Banking business:

        

Commercial and multifamily real estate

     (1     (1     (5     (18

Commercial and industrial

     (12     (4     (22     (23
  

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial lending

     (13     (5     (27     (41

Small-ticket commercial real estate

     (4     (4     (16     (28
  

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial banking

     (17     (9     (43     (69

Other loans

     (7     (13     (22     (31
  

 

 

   

 

 

   

 

 

   

 

 

 

Total charge-offs

     (1,294     (1,224     (4,169     (3,510
  

 

 

   

 

 

   

 

 

   

 

 

 

Recoveries:

        

Credit Card business:

        

Domestic credit card and installment loans

     253        221        829        714   

International credit card

     49        47        144        149   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total credit card

     302        268        973        863   
  

 

 

   

 

 

   

 

 

   

 

 

 

Consumer Banking business:

        

Auto

     58        51        179        166   

Home loan

     1        5        5        21   

Retail banking

     5        4        18        17   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer banking

     64        60        202        204   
  

 

 

   

 

 

   

 

 

   

 

 

 

Commercial Banking business:

        

Commercial and multifamily real estate

     6        2        8        8   

Commercial and industrial

     3        5        9        22   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial lending

     9        7        17        30   

Small-ticket commercial real estate

            1        7        5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial banking

     9        8        24        35   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other loans

     2        1        5        3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total recoveries

     377        337        1,204        1,105   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     (917     (887     (2,965     (2,405

Impact of loan transfers, sales and other changes(2)

     14        15        (300     16   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 4,333      $ 5,154        4,333      $ 5,154   
  

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan and lease losses as a percentage of loans held for investment

         2.26     2.54

 

(1)

The total provision for credit losses reported in our consolidated statements of income of $849 million and $2.5 billion in the third quarter and first nine months of 2013, respectively and $1.0 billion and $3.3 billion in the third quarter and first nine months of 2012, respectively, consists of a provision for loan and lease losses and a provision for unfunded lending commitments. The provision for credit

 

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  losses reported in the above table relates only to the provision for loan and lease losses. It does not include the provision for unfunded lending commitments of $20 million and $54 million in the third quarter and first nine months of 2013, respectively, and the negative provision for unfunded lending commitments of $14 million and $29 million in the third quarter and first nine months of 2012, respectively.
(2)

Consists of a reduction in the allowance of $289 million, which was attributable to the Portfolio Sale, in the first nine months of 2013, and a foreign translation gain of $14 million and a foreign translation loss of $11 million in the third quarter and first nine months of 2013, respectively. Consists of a foreign translation gain of $15 million and $16 million for the third quarter and first nine months of 2012, respectively.

Table 25 presents an allocation of our allowance for loan and lease losses by loan category as of September 30, 2013 and December 31, 2012.

Table 25: Allocation of the Allowance for Loan and Lease Losses

 

     September 30, 2013     December 31, 2012  

(Dollars in millions)

   Amount      % of
Total
HFI Loans(1)
    Amount      % of
Total
HFI Loans(1)
 

Credit Card business:

          

Domestic credit card and installment loans

   $ 2,842         4.06   $ 3,526         4.24

International credit card

     403         5.02        453         5.26   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total credit card

     3,245         4.16        3,979         4.34   
  

 

 

    

 

 

   

 

 

    

 

 

 

Consumer Banking business:

          

Auto

     585         1.90        486         1.79   

Home loan

     78         0.21        113         0.26   

Retail banking

     70         1.91        112         2.87   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total consumer banking

     733         1.03        711         0.95   
  

 

 

    

 

 

   

 

 

    

 

 

 

Commercial Banking business:

          

Commercial and multifamily real estate

     139         0.71        239         1.35   

Commercial and industrial

     166         0.76        116         0.58   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total commercial lending

     305         0.74        355         0.94   

Small-ticket commercial real estate

     36         3.50        78         6.52   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total commercial banking

     341         0.80        433         1.12   
  

 

 

    

 

 

   

 

 

    

 

 

 

Other loans

     14         8.59        33         17.65   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 4,333         2.26   $ 5,156         2.50
  

 

 

    

 

 

   

 

 

    

 

 

 

Total allowance coverage ratios:

          

Period-end loans held for investment

   $ 191,814         2.26   $ 205,889         2.50

Period-end loans held for investment (excluding acquired loans)

     161,734         2.66        168,755         3.02   

Nonperforming loans(2)

     882         491.27        1,054         489.18   

Allowance coverage ratios by loan category:

          

Credit card (30+ day delinquent loans)

   $ 2,807         115.60   $ 3,388         117.44

Consumer banking (30+ day delinquent loans)

     2,463         29.76        2,510         28.33   

Commercial banking (nonperforming loans)

     201         169.65        282         153.55   

 

(1)

Calculated based on the allowance for loan and lease losses attributable to each loan category divided by the outstanding balance of loans within the specified loan category.

(2)

As permitted by regulatory guidance issued by the FFIEC, our policy is generally not to classify domestic credit card loans as nonperforming. We generally accrue interest on domestic credit card loans through the date of charge-off, which is typically in the period that the loan becomes 180 days past due. The allowance for loan and lease losses as a percentage of nonperforming loans, excluding the allowance related to our credit card loans, was 123.36% as of September 30, 2013 and 111.67% as of December 31, 2012.

 

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Our allowance decreased by $823 million to $4.3 billion as of September 30, 2013 from $5.2 billion as of December 31, 2012. The reduction in the allowance was mainly due to a reduction in loans balances, an improved credit outlook, and an allowance transfer of $289 million related to the Portfolio Sale. The allowance coverage ratio declined to 2.26% as of September 30, 2013, from 2.50% as of December 31, 2012.

 

 

LIQUIDITY RISK PROFILE

 

We have established liquidity guidelines that are intended to ensure we have sufficient asset-based liquidity to withstand the potential impact of deposit attrition or diminished liquidity in the funding markets. Our guidelines include maintaining an adequate liquidity reserve to cover our potential funding requirements and diversified funding sources to avoid over-dependence on volatile, less reliable funding markets. Our liquidity reserves consist of readily-marketable assets which can be used as a source of liquidity, if needed.

Table 26 below presents the composition of our liquidity reserves as of September 30, 2013 and December 31, 2012.

Table 26: Liquidity Reserves

 

(Dollars in millions)

   September 30,
2013
    December 31,
2012
 

Cash and cash equivalents

   $ 5,718      $ 11,058   

Investment securities available for sale, at fair value(1)

     43,132        63,979   

Investment securities held to maturity, at fair value(1)

     18,662        9   

Less: Pledged and encumbered investment securities

     (12,986     (13,811
  

 

 

   

 

 

 

Unencumbered investment securities

     48,808        50,177   
  

 

 

   

 

 

 

Total liquidity reserves

   $ 54,526      $ 61,235   
  

 

 

   

 

 

 

 

(1)

The weighted average life of our securities was approximately 6.2 years and 4.3 years as of September 30, 2013 and December 31, 2012, respectively.

Our liquidity reserves decreased by $6.7 billion, or 11%, in the first nine months of 2013, to $54.5 billion as of September 30, 2013. This decrease was primarily attributable to a decrease in cash and cash equivalents as we held higher cash as of December 31, 2012 in anticipation of the January 2, 2013 redemption of the $3.65 billion in trust preferred securities. In the third quarter of 2013, we transferred securities with a fair value of $18.3 billion from securities available for sale to securities held to maturity. See “MD&A—Consolidated Balance Sheet Analysis” for additional information on our investment portfolio.

See “MD&A—Risk Management” in our 2012 Form 10-K for additional information on our management of liquidity risk.

Funding

Our funding objective is to establish an appropriate maturity profile using a cost-effective mix of both short-term and long-term funds. We use a variety of funding sources, including deposits, short-term borrowings, the issuance of senior and subordinated notes and other borrowings, and loan 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.

Deposits

Our deposits provide a stable and relatively low cost of funds and are our largest source of funding. Table 27 provides a comparison of the composition of our deposits, average balances, interest expense and average deposit rates for the first nine months of 2013 and full year 2012.

 

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Table 27: Deposit Composition and Average Deposit Rates

 

     Nine Months Ended September 30, 2013  

(Dollars in millions)

   Period End
Balance
     Average
Balance
     Interest
Expense
     % of
Average
Deposits
    Average
Deposit
Rate
 

Non-interest bearing

   $ 22,281       $ 21,293         N/A         10.1     N/A   

Negotiable order of withdrawal (“NOW”) accounts

     44,001         43,221       $ 193         20.5        0.60

Money market deposit accounts

     100,888         103,005         488         49.0        0.63   

Savings accounts

     27,054         27,475         47         13.1        0.23   

Consumer time deposits less than $100,000

     7,930         9,596         133         4.6        1.85   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total core deposits

     202,154         204,590         861         97.3        0.56   

Public fund certificates of deposit of $100,000 or more

     41         50         1                2.67   

Certificates of deposit of $100,000 or more

     3,512         4,115         88         2.0        2.85   

Foreign time deposits

     1,127         1,415         3         0.7        0.28   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total customer deposits

   $ 206,834       $ 210,170       $ 953         100.0     0.60
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     Twelve Months Ended December 31, 2012  

(Dollars in millions)

   Period End
Balance
     Average
Balance
     Interest
Expense
     % of
Average
Deposits
    Average
Deposit
Rate
 

Non-interest bearing

   $ 22,467       $ 19,741         N/A         9.7     N/A   

Negotiable order of withdrawal (“NOW”) accounts

     40,591         34,179       $ 212         16.8        0.62

Money market deposit accounts

     104,540         99,734         684         49.1        0.69   

Savings accounts

     28,285         30,457         101         15.0        0.33   

Consumer time deposits less than $100,000

     11,028         12,762         258         6.4        2.02   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total core deposits

     206,911         196,873         1,255         97.0        0.64   

Public fund certificates of deposit of $100,000 or more

     51         70                          

Certificates of deposit of $100,000 or more

     4,444         4,806         144         2.4        3.00   

Foreign time deposits

     1,079         1,305         4         0.6        0.31   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total customer deposits

   $ 212,485       $ 203,054       $ 1,403         100.0     0.69
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total customer deposits decreased by $5.7 billion during the first nine months of 2013 to $206.8 billion as of September 30, 2013, from $212.5 billion as of December 31, 2012. Our deposits include brokered deposits, which we obtained through the use of third-party intermediaries. Brokered deposits are reported in money market deposit accounts and consumer time deposits in the above table. Brokered deposits totaled $7.7 billion, or 4% of total deposits, as of September 30, 2013. Brokered deposits totaled $10.0 billion, or 5% of total deposits, as of December 31, 2012.

The Federal Deposit Insurance Corporation Improvement Act of 1991 limits the use of brokered deposits to “well-capitalized” insured depository institutions and, with a waiver from the Federal Deposit Insurance Corporation, to “adequately capitalized” institutions. COBNA and CONA were “well-capitalized,” as defined under the federal banking regulatory guidelines, as of both September 30, 2013 and December 31, 2012, and therefore were permitted to maintain brokered deposits. We expect to replace maturing brokered deposits with other sources of funding, which may include funding accessed through the capital markets.

Other Funding Sources

We also access the capital markets to meet our funding needs through the use of federal funds purchased and securities loaned or sold under agreements to repurchase, the issuance of senior and subordinated notes and loan securitization transactions. We participate in the federal funds market daily to take advantage of attractive offers

 

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and to keep a visible presence in the market, which is intended to ensure that we are able to access the federal funds market in a time of need. In addition, we may utilize short-term as well as long-term FHLB advances for our funding needs. FHLB advances are secured by certain of our loan portfolios and investment securities.

Other debt, which consists of federal funds purchased and securities loaned or sold under agreements to repurchase, senior and subordinated notes and other borrowings, including junior subordinated debt and FHLB advances, but excluding securitized debt obligations, totaled $22.3 billion as of September 30, 2013, of which $8.9 billion represented short-term borrowings and $13.4 billion represented long-term debt. Other debt decreased by $16.2 billion in the third quarter of 2013 from a total $38.5 billion as of December 31, 2012, of which $21.1 billion represented short-term borrowings and $17.4 billion represented long-term borrowings.

Table 28 provides information on short-term borrowings, which consist of borrowings with an original contractual maturity of one year or less and therefore, does not include the current portion of long-term debt. Our short-term borrowings typically have not represented a significant portion of our overall funding.

Table 28: Short-Term Borrowings

 

     Three Months Ended September 30,  
     2013      2012  

(Dollars in millions)

   Outstanding
Amount
     Interest
Rate
    Maximum
Month-End
Outstanding
Amount
     Outstanding
Amount
     Interest
Rate
    Maximum
Month-End
Outstanding
Amount
 

Average during the period:

               

Federal funds purchased and repurchase agreements

   $ 2,022         0.11   $ 2,731       $ 800         0.12   $ 967   

FHLB advances

     10,755         0.19        12,451         6,601         0.24        8,250   
  

 

 

    

 

 

      

 

 

    

 

 

   

Total short-term borrowings

   $ 12,777         0.18      $ 7,401         0.23  
  

 

 

    

 

 

      

 

 

    

 

 

   

 

     Nine Months Ended September 30,  
     2013      2012  

(Dollars in millions)

   Outstanding
Amount
     Interest
Rate
    Maximum
Month-End
Outstanding
Amount
     Outstanding
Amount
     Interest
Rate
    Maximum
Month-End
Outstanding
Amount
 

Average during the period:

               

Federal funds purchased and repurchase agreements

   $ 1,534         0.11   $ 2,731       $ 969         0.17   $ 1,228   

FHLB advances

     12,385         0.23        16,600         4,642         0.22        8,250   
  

 

 

    

 

 

      

 

 

    

 

 

   

Total short-term borrowings

   $ 13,919         0.22      $ 5,611         0.21  
  

 

 

    

 

 

      

 

 

    

 

 

   

 

     September 30, 2013     December 31, 2012  

(Dollars in millions)

   Amount      Weighted
Average
Interest
Rate
    Amount      Weighted
Average
Interest
Rate
 

Period-end balance:

          

Federal funds purchased and repurchase agreements

   $ 1,686         0.05   $ 1,248         0.28

FHLB advances

     7,201         0.17        19,900         0.27   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total short-term borrowings

   $ 8,887         0.15   $ 21,148         0.27
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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Table 29 displays the maturity profile, based on contractual maturities, of our securitized debt obligations and other debt as of September 30, 2013.

Table 29: Contractual Maturity Profile of Outstanding Debt

 

     September 30, 2013  

(Dollars in millions)

   Up to
1 Year
    > 1 Year
to 2 Years
    > 2 Years
to 3 Years
    > 3 Years
to 4 Years
    > 4 Years
to 5 Years
    > 5 Years     Total  

Short-term borrowings:

              

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

   $ 1,686      $      $      $      $      $      $ 1,686   

FHLB advances

     7,201                                           7,201   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total short-term borrowings

     8,887                                           8,887   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Long-term debt:

              

Securitized debt obligations

     2,721        252        3,128        3,199               244        9,544   

Senior and subordinated notes:

              

Unsecured senior debt

     2,570        1,653        1,951        890        588        2,031        9,683   

Unsecured subordinated debt

     102               1,135                      1,475        2,712   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total senior and subordinated notes

     2,672        1,653        3,086        890        588        3,506        12,395   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other long-term borrowings:

              

FHLB advances

     945        15        7        36        12        4        1,019   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total long-term debt(1)

     6,338        1,920        6,221        4,125        600        3,754        22,958   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total short-term borrowings and long-term debt

   $ 15,225      $ 1,920      $ 6,221      $ 4,125      $ 600      $ 3,754      $ 31,845   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of total

     48     6     19     13     2     12     100

 

(1)

Includes unamortized discounts, premiums and other cost basis adjustments, which together result in a net reduction of $239 million as of September 30, 2013.

We provide additional information on our short-term borrowings and long-term debt above under “Consolidated Balance Sheet Analysis—Securitized Debt Obligations,” “Consolidated Balance Sheet Analysis—Other Debt” and in “Note 8—Deposits and Borrowings.”

Borrowing Capacity

Under our shelf registration filed with the U.S. Securities and Exchange Commission (“SEC”) on April 30, 2012, from time to time, we may offer and sell an indeterminate aggregate amount of senior or subordinated debt securities, preferred stock, depository shares, common stock, purchase contracts, warrants and units. There is no limit under this shelf registration statement to the amount or number of such securities that we may offer and sell, subject to market conditions. Our current shelf registration will expire three years from the filing date.

In addition to our issuance capacity under the shelf registration statement, we also have access to FHLB advances with a maximum borrowing capacity of $36.9 billion as of September 30, 2013. This borrowing capacity was secured by posting $28.3 billion of loans and $8.6 billion of securities as collateral. We had outstanding FHLB advances and letters of credit of $8.6 billion as of September 30, 2013, and $28.3 billion still available to us to borrow under this program. This funding source is non-revolving and funding availability is subject to market conditions. Our FHLB membership is secured by our investment in FHLB stock, which totaled $423 million and $1.3 billion as of September 30, 2013 and December 31, 2012, respectively.

 

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Credit Ratings

Our credit ratings have a significant impact on 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 30 provides a summary of the credit ratings for the senior unsecured debt of Capital One Financial Corporation, COBNA and CONA as of September 30, 2013 and December 31, 2012.

Table 30: Senior Unsecured Debt Credit Ratings

 

     September 30, 2013      December 31, 2012  
     Capital  One
Financial
Corporation
     Capital One
Bank  (USA),
N.A.
     Capital One,
N.A.
     Capital  One
Financial
Corporation
     Capital One
Bank  (USA),
N.A.
     Capital One,
N.A.
 

Moody’s

     Baa1         A3         A3         Baa1         A3         A3   

S&P

     BBB         BBB+         BBB+         BBB         BBB+         BBB+   

Fitch

     A-         A-         A-         A-         A-         A-   

As of October 31, 2013, Moody’s and Fitch had us on a stable outlook, while S&P had us on negative outlook.

 

 

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.

Interest Rate Risk

Interest rate risk, which represents exposure to instruments whose yield or price varies with the level or 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 repricing 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. We are exposed to changes in foreign exchange rates through our foreign operations. We manage our net exposures through the use of derivatives. The estimated reduction in our 12-month net income due to an adverse, stress-based simulation of foreign exchange rates calculated using the higher of historical and spot implied market volatilities and correlations to a 95% confidence interval was less than 2%, as of September 30, 2013 and December 31, 2012. The precision of this estimate is limited due to the inherent uncertainty of the underlying forecast assumptions.

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 maturity and re-pricing characteristics of our various assets and liabilities through interest rate derivatives. Derivatives are one of the primary tools we use in managing interest rate and foreign exchange

 

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risk. Our current asset/liability management policy includes the use of derivatives to hedge material foreign currency denominated transactions to limit our earnings exposure to foreign exchange risk. We execute our derivative contracts in both over-the-counter and exchange-traded derivative markets. 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 totaled $62.0 billion as of September 30, 2013, compared with $57.8 billion as of December 31, 2012.

Market Risk Measurement

We have prescribed risk management policies and limits established by our Market and Liquidity Risk Policy and approved by the Board of Directors. Our objective is to manage our asset/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 analyses to measure, assess and manage the impact of changes in interest rates and foreign exchange rates on our net interest income and our economic value of equity (defined below).

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 rate was lowered to near zero in December 2008 and since then has remained in a target range of zero to 0.25%, we use a 50 basis point decrease as our declining interest rate scenario, since a scenario where interest rates would decline by 200 basis points is not plausible. In scenarios where a 50 basis point 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

Our net interest income sensitivity measure estimates the impact on our projected 12-month base-line adjusted net interest income resulting from movements in interest rates. Adjusted net interest income consists of net interest income adjusted to include 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 adjusted projected net interest income, we assume an instantaneous plus 200 basis point and minus 50 basis point shock, with the lower rate scenario limited to zero as described above.

Economic Value of Equity

Our economic value of equity sensitivity measure estimates the impact on the net present value of our assets and liabilities, including derivative hedging activity, resulting from movements in interest rates. Our economic value of equity sensitivity measures are calculated based on our existing assets and liabilities, including derivatives, and do not incorporate business growth assumptions or projected plans for funding mix changes. In measuring the sensitivity of interest rate movements on our economic value of equity, we assume a hypothetical instantaneous parallel shift in the level of interest rates of plus 200 basis points and minus 50 basis points to spot rates.

In the third quarter of 2013 we updated models and associated assumptions for our direct deposits, mortgage loan and investment security prepayments which impacted our net interest income and economic value of equity sensitivity metrics. Our new direct deposit model was developed on account level data and incorporates lagged responses in both repricing and customer behavior as external market rates change. Additionally, we have updated our mortgage prepayment model. The modeling changes had a small impact on our economic value of

 

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equity sensitivity measure, but resulted in a larger impact to our next 12-month net interest income sensitivity, driven primarily from the deposit model change. Accordingly, our net interest income sensitivity metric shows more asset sensitivity over the first 12 months, moving from 2.0% in a +200 basis point instantaneous shock (under the old method) to 4.3% using the new assumptions. We have included the table below that shows net interest income and economic value of equity sensitivity as of September 30, 2013 with the new modeling assumptions as well as an estimate of the measures using the prior modeling assumptions.

Table 31 shows the estimated percentage impact on our projected base-line adjusted net interest income and economic value of equity, calculated under the hypothetical interest rate scenarios described above, as of September 30, 2013 and December 31, 2012. 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.

Table 31: Interest Rate Sensitivity Analysis

 

(Dollars in millions)

   New Method
September 30, 2013
    Old Method
September 30, 2013
    December 31, 2012  

Impact on projected base-line adjusted net interest income:

      

+200 basis points

     4.3     2.0     2.7

–50 basis points

     (1.5     (1.7     (1.7

Impact on economic value of equity:

      

+200 basis points

     (5.6     (5.3     (3.1

–50 basis points

     0.1        0.4        (1.4

Our projected net interest income and economic value of equity sensitivity measures were within our prescribed asset/liability policy limits as of September 30, 2013 and December 31, 2012.

Limitations of Market Risk Measures

The interest rate risk models that we use in deriving these measures incorporate contractual information, internally-developed assumptions and proprietary modeling methodologies, which project borrower and depositor behavior patterns in certain interest rate environments. Other market inputs, such as interest rates, market prices and interest rate volatility, are also critical components of our interest rate risk measures. We regularly evaluate, update and enhance these assumptions, models and analytical tools as we believe appropriate to reflect our best assessment of the market environment and the expected behavior patterns of our existing assets and liabilities.

There are inherent limitations in any methodology used to estimate the exposure to changes in market interest rates. The above sensitivity analysis contemplate only certain movements in interest rates and are 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.

 

 

SUPERVISION AND REGULATION

 

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. In June 2011, the Federal Reserve adopted a final rule and an interim final rule (which largely was adopted in final form in July 2012) implementing the portion of the Dodd-Frank Act that limits interchange fees received by a debit card issuer. The final rules limited interchange fees per debit card transaction to $.21 plus five basis points of the

 

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transaction amount and provide for an additional $.01 fraud prevention adjustment to the interchange fee for issuers that meet certain fraud prevention requirements. On July 31, 2013, the U.S. District Court for the District of Columbia issued a ruling that requires the Federal Reserve to reconsider the current permissible interchange amount. On August 21, 2013, the Federal Reserve appealed this ruling and on September 19, 2013, the District Court stayed its ruling pending the appeal. It remains unclear how the ruling and appeal will impact our debit card business.

The Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation recently issued an interagency notice of proposed rulemaking that would implement a quantitative liquidity requirement consistent with the standard established by the Basel Committee on Banking Supervision. The proposed liquidity coverage ratio is designed to promote the short-term resilience of the liquidity risk profile of a covered company, which would include the Company and each of the Banks. The proposed liquidity coverage ratio would require a covered company to maintain an amount of high quality liquid assets (as defined in the rule) that is no less than 100 percent of its total net cash outflows over a prospective 30-calendar day period (as calculated in accordance with the proposed rule). We are in the process of evaluating this proposed rulemaking and assessing its potential impact on our operations.

 

 

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, expenses, capital measures, returns, 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; the projected impact and benefits of the ING Direct and 2012 U.S. card acquisitions (collectively, the “Acquisitions”); 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 and our local markets, including conditions affecting employment levels, interest rates, consumer income 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);

 

   

financial, legal, regulatory, tax or accounting changes or actions, including the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the regulations promulgated thereunder, regulations governing bank capital and liquidity standards, including Basel-related initiatives and potential changes to financial accounting and reporting standards;

 

   

the possibility that we may not fully realize the projected cost savings and other projected benefits of the Acquisitions;

 

   

difficulties and delays in integrating the assets and businesses acquired in the Acquisitions;

 

   

business disruption following the Acquisitions;

 

   

diversion of management time on issues related to the Acquisitions, including integration of the assets and businesses acquired;

 

   

reputational risks and the reaction of customers and counterparties to the Acquisitions;

 

   

disruptions relating to the Acquisitions negatively impacting our ability to maintain relationships with customers, employees and suppliers;

 

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changes in asset quality and credit risk as a result of the Acquisitions

 

   

developments, changes or actions relating to any litigation 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;

 

   

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;

 

   

any significant disruption in our operations or technology platform;

 

   

our ability to maintain a compliance infrastructure suitable for the nature of our business;

 

   

our ability to control costs;

 

   

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;

 

   

any significant disruption of, or loss of public confidence in, the United States Mail service affecting our response rates and consumer payments;

 

   

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 experienced personnel to assist in the management and operations of new products and services;

 

   

changes in the labor and employment markets;

 

   

fraud or misconduct by our customers, employees or business partners;

 

   

competition from providers of products and services that compete with our businesses; 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 II—Item 1A. Risk Factors” in this Report and in “Part I—Item 1A. Risk Factors” in our 2012 Form 10-K.

 

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SUPPLEMENTAL TABLES

 

Table A—Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures Under Basel I

 

(Dollars in millions)

   September 30,
2013
    December 31,
2012
 

Stockholders’ equity to non-GAAP tangible common equity

    

Total stockholders’ equity

   $ 41,750      $ 40,499   

Adjustments: Goodwill and other intangible assets(1)

     (15,760     (16,224

          Noncumulative perpetual preferred stock

     (853     (853
  

 

 

   

 

 

 

Tangible common equity

   $ 25,137      $ 23,422   
  

 

 

   

 

 

 

Total assets to tangible assets

    

Total assets

   $ 289,888      $ 312,918   

Adjustments: Goodwill and other intangible assets(1)

     (15,760     (16,224
  

 

 

   

 

 

 

Tangible assets

   $ 274,128      $ 296,694   
  

 

 

   

 

 

 

Total quarterly average assets to average tangible assets

    

Average total assets

   $ 294,939      $ 308,096   

Adjustments: Average goodwill and other intangible assets(1)

     (15,829     (16,340
  

 

 

   

 

 

 

Average tangible assets

   $ 279,110      $ 291,756   
  

 

 

   

 

 

 

Non-GAAP TCE ratio

    

Tangible common equity

   $ 25,137      $ 23,422   

Tangible assets

     274,128        296,694   

TCE ratio(2)

     9.17     7.89

Regulatory capital ratios

    

Total stockholders’ equity

   $ 41,750      $ 40,499   

Adjustments: Net unrealized (gains) losses on investment securities available for sale recorded in AOCI(3)

     736        (712

          Net losses on cash flow hedges recorded in AOCI(3)

     123        2   

          Disallowed goodwill and other intangible assets(4)

     (14,263     (14,428

          Disallowed deferred tax assets

              

          Noncumulative perpetual preferred stock(5)

     (853     (853

          Other

     (5     (12
  

 

 

   

 

 

 

Tier 1 common capital

     27,488        24,496   

Adjustments: Noncumulative perpetual preferred stock(5)

     853        853   

          Tier 1 restricted core capital items(6)

     2        2   
  

 

 

   

 

 

 

Tier 1 capital

     28,343        25,351   
  

 

 

   

 

 

 

Adjustments: Long-term debt qualifying as Tier 2 capital

     1,909        2,119   

          Qualifying allowance for loan and lease losses

     2,726        2,830   

          Other Tier 2 components

     8        13   
  

 

 

   

 

 

 

Tier 2 capital

     4,643        4,962   
  

 

 

   

 

 

 

Total risk-based capital

   $ 32,986      $ 30,313   
  

 

 

   

 

 

 

Risk-weighted assets(7)

   $ 215,829      $ 223,472   
  

 

 

   

 

 

 

Tier 1 common ratio(8)

     12.74     10.96

Tier 1 risk-based capital ratio(9)

     13.13        11.34   

Total risk-based capital ratio(10)

     15.28        13.56   

 

(1) 

Includes impact from related deferred taxes.

(2) 

Calculated based on tangible common equity divided by tangible assets.

(3) 

Amounts presented are net of tax.

(4) 

Disallowed goodwill and other intangible assets are net of related deferred tax liability.

(5) 

Noncumulative perpetual preferred stock qualifies as Tier 1 capital; however, it does not qualify as Tier 1 common capital.

(6) 

Consists of noncontrolling minority interests.

(7) 

Calculated based on prescribed regulatory guidelines.

(8) 

Tier 1 common ratio is a regulatory capital measure calculated based on Tier 1 common capital divided by risk-weighted assets.

(9) 

Tier 1 risk-based capital ratio is a regulatory capital measure calculated based on Tier 1 capital divided by risk-weighted assets.

(10) 

Total risk-based capital ratio is a regulatory capital measure calculated based on total risk-based capital divided by risk-weighted assets.

 

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Item 1. Financial Information and Supplementary Data

 

     Page  

Financial Statements

     68   

Condensed Consolidated Statements of Income

     69   

Condensed Consolidated Statements of Comprehensive Income

     70   

Condensed Consolidated Balance Sheets

     71   

Condensed Consolidated Statements of Changes in Stockholders’ Equity

     72   

Condensed Consolidated Statements of Cash Flows

     73   

Notes to Condensed Consolidated Financial Statements

     74   

Note   1 — Summary of Significant Accounting Policies

     74   

Note   2 — Discontinued Operations

     76   

Note   3 — Investment Securities

     77   

Note   4 — Loans

     88   

Note   5 — Allowance for Loan and Lease Losses

     112   

Note   6 — Variable Interest Entities and Securitizations

     116   

Note   7 — Goodwill and Other Intangible Assets

     121   

Note   8 — Deposits and Borrowings

     122   

Note   9 — Derivative Instruments and Hedging Activities

     125   

Note 10 — Stockholders’ Equity

     132   

Note 11 — Earnings Per Common Share

     135   

Note 12 — Fair Value of Financial Instruments

     136   

Note 13 — Business Segments

     152   

Note 14 — Commitments, Contingencies and Guarantees

     155   

 

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Table of Contents

CAPITAL ONE FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

(Dollars in millions, except per share-related data)

       2013             2012             2013             2012      

Interest income:

        

Loans, including loans held for sale

   $ 4,579      $ 4,903      $ 13,824      $ 12,817   

Investment securities

     396        335        1,161        968   

Other

     23        16        74        64   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     4,998        5,254        15,059        13,849   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

        

Deposits

     309        371        953        1,055   

Securitized debt obligations

     42        64        143        213   

Senior and subordinated notes

     76        85        240        260   

Other borrowings

     11        88        40        260   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     438        608        1,376        1,788   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     4,560        4,646        13,683        12,061   

Provision for credit losses

     849        1,014        2,496        3,264   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for credit losses

     3,711        3,632        11,187        8,797   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest income:

        

Service charges and other customer-related fees

     530        557        1,614        1,511   

Interchange fees, net

     476        452        1,407        1,188   

Total other-than-temporary impairment

     (16     (2     (34     (27

Less: Portion of other-than-temporary impairment recorded in AOCI

     5        (11     (6     (13
  

 

 

   

 

 

   

 

 

   

 

 

 

Net other-than-temporary impairment recognized in earnings

     (11     (13     (40     (40

Bargain purchase gain

     0        0        0        594   

Other

     96        140        176        458   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

     1,091        1,136        3,157        3,711   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest expense:

        

Salaries and associate benefits

     1,145        1,002        3,329        2,837   

Occupancy and equipment

     369        354        1,075        947   

Marketing

     299        316        946        971   

Professional services

     320        310        956        916   

Communications and data processing

     224        198        667        573   

Amortization of intangibles

     161        199        505        418   

Acquisition-related

     37        48        133        267   

Other

     592        618        1,623        1,762   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expense

     3,147        3,045        9,234        8,691   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     1,655        1,723        5,110        3,817   

Income tax provision

     525        535        1,600        931   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations, net of tax

     1,130        1,188        3,510        2,886   

Loss from discontinued operations, net of tax

     (13     (10     (210     (212
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     1,117        1,178        3,300        2,674   

Dividends and undistributed earnings allocated to participating securities

     (5     (5     (14     (12

Preferred stock dividends

     (13     0        (39     0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common stockholders

   $ 1,099      $ 1,173      $ 3,247      $ 2,662   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per common share:

        

Income from continuing operations

   $ 1.91      $ 2.05      $ 5.94      $ 5.18   

Loss from discontinued operations

     (0.02     (0.02     (0.36     (0.38
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per basic common share

   $ 1.89      $ 2.03      $ 5.58      $ 4.80   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per common share:

        

Income from continuing operations

   $ 1.88      $ 2.03      $ 5.87      $ 5.13   

Loss from discontinued operations

     (0.02     (0.02     (0.36     (0.38
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per diluted common share

   $ 1.86      $ 2.01      $ 5.51      $ 4.75   
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends paid per common share

   $ 0.30      $ 0.05      $ 0.65      $ 0.15   
  

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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CAPITAL ONE FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

(Dollars in millions)

       2013             2012             2013             2012      

Net income

   $ 1,117      $ 1,178      $ 3,300      $ 2,674   

Other comprehensive income (loss) before taxes:

        

Net unrealized gains (losses) on securities available for sale

     1,107        523        (849     734   

Net unrealized gains (losses) on securities held to maturity

     (1,465     0        (1,465     0   

Net unrealized gains (losses) on cash flow hedges

     84        93        (195     188   

Foreign currency translation adjustments

     124        63        (19     74   

Other

     (1     (23     6        (57
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss) before taxes

     (151     656        (2,522     939   

Income tax provision (benefit) related to other comprehensive income

     (104     225        (944     327   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     (47     431        (1,578     612   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 1,070      $ 1,609      $ 1,722      $ 3,286   
  

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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CAPITAL ONE FINANCIAL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

(Dollars in millions, except per share data)

   September 30,
2013
    December 31,
2012
 

Assets:

    

Cash and cash equivalents:

    

Cash and due from banks

   $ 2,855      $ 3,440   

Interest-bearing deposits with banks

     2,481        7,617   

Federal funds sold and securities purchased under agreements to resell

     382        1   
  

 

 

   

 

 

 

Total cash and cash equivalents

     5,718        11,058   

Restricted cash for securitization investors

     390        428   

Securities available for sale, at fair value

     43,132        63,979   

Securities held to maturity, at carrying value

     18,276        9   

Loans held for investment:

    

Unsecuritized loans held for investment

     152,332        162,059   

Restricted loans for securitization investors

     39,482        43,830   
  

 

 

   

 

 

 

Total loans held for investment

     191,814        205,889   

Less: Allowance for loan and lease losses

     (4,333     (5,156
  

 

 

   

 

 

 

Net loans held for investment

     187,481        200,733   

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

     180        201   

Premises and equipment, net

     3,792        3,587   

Interest receivable

     1,304        1,694   

Goodwill

     13,906        13,904   

Other

     15,709        17,325   
  

 

 

   

 

 

 

Total assets

   $ 289,888      $ 312,918   
  

 

 

   

 

 

 

Liabilities:

    

Interest payable

   $ 276      $ 450   

Customer deposits:

    

Non-interest bearing deposits

     22,281        22,467   

Interest bearing deposits

     184,553        190,018   
  

 

 

   

 

 

 

Total customer deposits

     206,834        212,485   

Securitized debt obligations

     9,544        11,398   

Other debt:

    

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

     1,686        1,248   

Senior and subordinated notes

     12,395        12,686   

Other borrowings

     8,220        24,578   
  

 

 

   

 

 

 

Total other debt

     22,301        38,512   

Other liabilities

     9,183        9,574   
  

 

 

   

 

 

 

Total liabilities

     248,138        272,419   
  

 

 

   

 

 

 

Commitments, contingencies and guarantees (see Note 14)

    

Stockholders’ equity:

    

Preferred stock, par value $.01 per share; 50,000,000 shares authorized; 875,000 shares issued and outstanding as of September 30, 2013 and December 31, 2012

     0        0   

Common stock, par value $.01 per share; 1,000,000,000 shares authorized; 635,821,013 and 631,806,585 shares issued as of September 30, 2013 and December 31, 2012, respectively, and 581,943,560 and 582,207,133 shares outstanding as of September 30, 2013 and December 31, 2012, respectively

     6        6   

Additional paid-in capital, net

     26,426        26,188   

Retained earnings

     19,731        16,853   

Accumulated other comprehensive income (loss)

     (839     739   

Less: Treasury stock, at cost; par value $.01 per share; 53,877,453 and 49,599,452 shares as of September 30, 2013 and December 31, 2012, respectively

     (3,574     (3,287
  

 

 

   

 

 

 

Total stockholders’ equity

     41,750        40,499   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 289,888      $ 312,918   
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

CAPITAL ONE FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

 

    Preferred Stock     Common Stock     Additional
Paid-In
Capital
    Retained
Earnings
    Accumulated
Other

Comprehensive
Income (Loss)
    Treasury
Stock
    Total
Stockholders’
Equity
 

(Dollars in millions, except per share data)

  Shares     Amount     Shares     Amount            

Balance as of December 31, 2012

    875,000      $ 0        631,806,585      $ 6      $ 26,188      $ 16,853      $ 739      $ (3,287   $ 40,499   

Comprehensive income (loss)

              3,300        (1,578       1,722   

Cash dividends—common stock $0.65 per share

              (383         (383

Cash dividends—preferred stock 6% per annum

              (39         (39

Purchases of treasury stock

                  (287     (287

Issuances of common stock and restricted stock, net of forfeitures

        2,594,420        0        64              64   

Exercise of stock options and tax benefits of exercises and restricted stock vesting

        1,420,008        0        73              73   

Compensation expense for restricted stock awards and stock options

            101              101   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of September 30, 2013

    875,000      $ 0        635,821,013      $ 6      $ 26,426      $ 19,731      $ (839   $ (3,574   $ 41,750   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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CAPITAL ONE FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

     Nine Months Ended September 30,  

(Dollars in millions)

       2013             2012      

Operating activities:

    

Income from continuing operations, net of tax

   $ 3,510      $ 2,886   

Loss from discontinued operations, net of tax

     (210     (212
  

 

 

   

 

 

 

Net income

     3,300        2,674   
  

 

 

   

 

 

 

Adjustments to reconcile net income to cash provided by operating activities:

    

Provision for credit losses

     2,496        3,264   

Depreciation and amortization, net

     1,647        1,257   

Net gains on sales of securities available for sale

     (3     (42

Impairment losses on securities available for sale

     40        40   

Bargain purchase gain

     0        (594

Loans held for sale:

    

Originations

     (972     (1,242

Gains on sales

     (23     (47

Proceeds from sales and paydowns

     7,800        2,189   

Stock plan compensation expense

     172        153   

Changes in operating assets and liabilities, net of effects of acquisitions:

    

(Increase) decrease in interest receivable

     390        (415

(Increase) decrease in other assets

     1,164        224   

Increase (decrease) in interest payable

     (174     (98

Increase (decrease) in other liabilities

     (282     1,678   

Net cash (used in) provided by operating activities attributable to discontinued operations

     (291     (22
  

 

 

   

 

 

 

Net cash provided by operating activities

     15,264        9,019   
  

 

 

   

 

 

 

Investing activities:

    

Purchases of securities available for sale

     (13,084     (19,131

Proceeds from paydowns and maturities of securities available for sale

     11,785        12,945   

Proceeds from sales of securities available for sale

     1,355        14,274   

Net (increase) decrease in loans held for investment

     2,294        (3,289

Principal recoveries of loans previously charged off

     1,204        1,105   

Additions of premises and equipment

     (622     (359

Net cash paid for acquisitions

     0        (17,603
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     2,932        (12,058
  

 

 

   

 

 

 

Financing activities:

    

Increase in restricted cash for securitization investors

     38        31   

Net increase (decrease) in deposits

     (5,662     601   

Issuance of securitized debt obligations

     1,450        0   

Maturities and paydowns of securitized debt obligations

     (3,304     (3,841

Issuance of senior and subordinated notes

     934        1,250   

Redemption of junior subordinated debentures

     (3,641     0   

Maturities and redemptions of senior and subordinate notes

     (500     (632

Net increase (decrease) in other borrowings

     (12,279     1,759   

Net proceeds from issuances of common stock

     64        3,217   

Net proceeds from issuances of preferred stock

     0        853   

Proceeds from share-based payment activities

     73        57   

Dividends paid on common stock

     (383     (82

Dividends paid on preferred stock

     (39     0   

Purchases of treasury stock

     (287     (43
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (23,536     3,170   
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     (5,340     131   

Cash and cash equivalents at beginning of the period

     11,058        5,838   
  

 

 

   

 

 

 

Cash and cash equivalents at end of the period

   $ 5,718      $ 5,969   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Non-cash items:

    

Fair value of common stock issued in business acquisition

   $ 0      $ 2,638   

Net transfers of loans held for investment to loans held for sale

     6,808        52   

Transfer from securities available for sale to securities held to maturity

     18,275        0   

Redemption of senior and subordinated notes

     (1,969     0   

Issuance of senior and subordinated notes

     1,968        0   

See Notes to Condensed Consolidated Financial Statements.

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The Company

Capital One Financial Corporation, a Delaware Corporation established in 1995 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 September 30, 2013, our principal subsidiaries included:

 

 

Capital One Bank (USA), National Association (“COBNA”), which currently 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 and its subsidiaries are hereafter collectively referred to as “we”, “us” or “our.” CONA and COBNA are collectively referred to as the “Banks.”

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 (the “U.K.”), and through a branch of COBNA in Canada. COEP has authority, among other things, to provide credit card and installment loans. Our branch of COBNA in Canada has the authority to provide credit card loans.

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 (the “ING Direct acquisition”). The ING Direct acquisition resulted in the addition of loans of $40.4 billion, other assets of $53.9 billion and deposits of $84.4 billion as of the acquisition date.

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, National Association consumer credit card program and certain other retained assets and liabilities) (the “2012 U.S. card acquisition,” which we sometimes refer to as the “HSBC U.S. card acquisition”). The 2012 U.S. card acquisition included (i) the acquisition of HSBC’s U.S. credit card portfolio, (ii) its on-going private label and co-branded partnerships, and (iii) other assets, including infrastructure and capabilities. At closing, we acquired approximately 27 million new active accounts, $27.8 billion in outstanding credit card receivables designated as held for investment and $327 million in other net assets.

On September 6, 2013, we completed the sale of the Best Buy private label and co-branded credit card portfolio to Citibank, N.A (“Portfolio Sale”). Pursuant to the agreement with Citibank, N.A, we received $6.4 billion for the net portfolio assets.

Operations and Business Segments

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. See “Note 13—Business Segments” for additional information.

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

Basis of Presentation and Use of Estimates

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the U.S. (“U.S. GAAP”) for interim financial information and should be read in conjunction with the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2012 (the “2012 Form 10-K”). Certain financial information that is normally included in the annual financial statements in accordance with U.S. GAAP, but is not required for interim reporting purposes, has been condensed or omitted. In the opinion of management, all adjustments of a normal recurring nature considered necessary for a fair presentation of our interim unaudited financial statements are reflected.

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 unaudited condensed consolidated financial statements and related disclosures. These estimates are based on information available as of the date of the unaudited condensed consolidated financial statements. While management makes its best judgment, actual amounts or results could differ from these estimates. Interim period results may not be indicative of results for the full year. Certain prior period amounts have been reclassified to conform to the current period presentation.

Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of Capital One Financial Corporation and all other entities in which we have a controlling financial interest. All significant intercompany account balances and transactions have been eliminated.

Significant Accounting Policies

We provide a summary of our significant accounting policies in our 2012 Form 10-K under “Notes to Consolidated Financial Statements—Note 1—Summary of Significant Accounting Policies.” There have been no significant changes to these policies during 2013 other than as disclosed in “Note 5—Allowance for Loan and Lease Losses,” which provides details on our change in our process for estimating the allowance for loan losses and reserve for unfunded lending commitments for our commercial loan portfolio. Below we describe accounting standards that we adopted in 2013 and recently issued accounting standards that we have not yet adopted.

Accounting Standards Adopted in 2013

Comprehensive Income: Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income

In February 2013, the Financial Accounting Standards Board (“FASB”) issued new guidance requiring an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. The new guidance does not change the items which must be reported in other comprehensive income, how such items are measured or when they must be reclassified from other comprehensive income to net income. The guidance was effective for reporting periods beginning after December 15, 2012. Our adoption of the guidance on January 1, 2013 had no impact on our financial condition, results of operations or liquidity as it only affects our disclosures. See “Note 10—Stockholders’ Equity” for further details.

 

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Offsetting Financial Assets and Liabilities

Effective January, 2013 we were required to disclose both gross and net information about instruments and transactions eligible for offset on the balance sheet as well as instruments and transactions subject to an agreement similar to a master netting arrangement. The disclosures are required irrespective of whether such instruments are presented gross or net on the balance sheet. The guidance was effective for annual and interim reporting periods beginning on or after January 1, 2013, with comparative retrospective disclosures required for all periods presented. Our adoption of the guidance had no effect on our financial condition, results of operations or liquidity as it only affects our disclosures. See “Note 9—Derivative Instruments and Hedging Activities” for further details.

New Benchmark Interest Rate for Hedge Accounting Purposes

In July 2013, the FASB issued guidance permitting the use of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate, “OIS”) as a benchmark interest rate for hedge accounting purposes. The addition of OIS expands the number of benchmark interest rates to three, including the US Treasury rate and London Interbank Offered Rate swap rate. The guidance also removes the previous restriction on using different benchmark rates for similar hedges. The guidance is effective for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. See “Note 9—Derivative Instruments and Hedging Activities” for further details regarding the impact derivative contracts designated as qualifying accounting hedges have on our financial condition and results of operations.

Recently Issued but Not Yet Adopted Accounting Standards

Obligations Resulting from Joint and Several Liability Arrangements

In February 2013, the FASB issued guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date, except for obligations addressed within existing guidance in U.S. GAAP. The guidance clarifies that an entity shall measure obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The guidance also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations. The guidance is effective for annual and interim periods beginning after December 15, 2013, with early adoption permitted. We do not expect our adoption of this guidance in the first quarter of 2014 to have a significant effect on our financial condition, results of operations or liquidity as the guidance is consistent with our current practice.

 

 

NOTE 2—DISCONTINUED OPERATIONS

 

Shutdown of Mortgage Origination Operations of our Wholesale Mortgage Banking Unit

In the third quarter of 2007, we closed the mortgage origination operations of our wholesale mortgage banking unit, GreenPoint Mortgage Funding Inc. (“GreenPoint”), which we acquired in December 2006 as part of the North Fork acquisition. The results of the wholesale banking unit have been accounted for as a discontinued operation and are therefore not included in our results from continuing operations for the three and nine months ended September 30, 2013 and 2012. We have no significant continuing involvement in these operations.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

The following table summarizes the results from discontinued operations related to the closure of the mortgage origination operations of out wholesale mortgage banking unit:

Table 2.1: Results of Discontinued Operations

 

    Three Months Ended September 30,     Nine Months Ended September 30,  

(Dollars in millions)

      2013             2012             2013             2012      

Non-interest expense, net

  $ (20   $ (16   $ (335   $ (337
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations before taxes

    (20     (16     (335     (337

Income tax benefit

    (7     (6     (125     (125
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations

  $ (13   $ (10   $ (210   $ (212
 

 

 

   

 

 

   

 

 

   

 

 

 

The loss from discontinued operations includes an expense of $9 million ($6 million, net of tax) for the third quarter of 2013 and $303 million ($190 million, net of tax) and $307 million ($194 million, net of tax) for the first nine months of 2013 and 2012, respectively, attributable to provisions for mortgage loan repurchase losses related to representations and warranties provided on loans previously sold to third parties by the wholesale mortgage banking unit. See “Note 14—Commitments, Contingencies and Guarantees” for further details.

The discontinued mortgage origination operations of our wholesale mortgage banking unit had remaining assets, which consisted primarily of income tax assets, of $315 million and $309 million as of September 30, 2013 and December 31, 2012, respectively. Liabilities, which primarily consisted of reserves for representations and warranties on loans previously sold to third parties, totaled $935 million and $644 million as of September 30, 2013 and December 31, 2012, respectively.

 

 

NOTE 3—INVESTMENT SECURITIES

 

Our investment portfolio consisted primarily of the following: U.S. Treasury debt, U.S. agency debt and corporate debt securities guaranteed by U.S. government agencies; agency and non-agency mortgage-backed securities (“MBS”); other asset-backed securities and other investments. The carrying value of our investments in U.S. Treasury, agency securities and other securities guaranteed by the U.S. government or agencies of the U.S. government represented 76% and 77% of our total investment securities as of September 30, 2013, and December 31, 2012, respectively.

Our investment security portfolio includes securities available for sale as well as securities held to maturity. We reported securities available for sale in our condensed consolidated balance sheets at fair value with unrealized gains and losses recorded, net of tax, as a component of accumulated other comprehensive income (“AOCI”). We report securities held to maturity on our consolidated balance sheets at carrying value. Carrying value is amortized cost, includes any unamortized unrealized gains and losses recognized in AOCI prior to reclassifying the securities from securities available for sale to securities held to maturity. 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. The unrealized holding gain or loss at the date of transfer is retained in AOCI and in the carrying value of the securities held to maturity. Such unrealized gains/(losses) are accreted over the remaining life of the security with no impact on future net income.

In the third quarter of 2013, we transferred securities with a fair value of $18.3 billion on the date of transfer, from securities available for sale to securities held to maturity. We transferred these securities to held to maturity

 

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to reduce the impact of price volatility on accumulated other comprehensive income and in consideration of potential changes to regulatory capital requirements under the final Basel III capital standards. The securities included net pre-tax unrealized losses of $1.5 billion at the date of transfer.

Table 3.1 Overview of Investment Portfolio

 

(Dollars in millions)

   September 30, 2013      December 31, 2012  

Securities available for sale, at fair value

   $ 43,132       $ 63,979   

Securities held to maturity, at carrying value

     18,276         9   
  

 

 

    

 

 

 

Total investments

   $ 61,408       $ 63,988   
  

 

 

    

 

 

 

Table 3.2 Investment Securities Available for Sale

 

     September 30, 2013  

(Dollars in millions)

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses(1)
    Fair
Value
 

Investment securities available for sale:

          

U.S. Treasury debt obligations

   $ 834       $ 3       $ 0      $ 837   

U.S. agency debt obligations(2)

     1         0         0        1   

Corporate debt securities guaranteed by U.S. government
agencies
(3)

     1,311         1         (40     1,272   

Residential mortgage-backed securities (“RMBS”):

          

Agency(4)

     22,009         282         (230     22,061   

Non-agency

     3,277         373         (27     3,623   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total RMBS

     25,286         655         (257     25,684   
  

 

 

    

 

 

    

 

 

   

 

 

 

Commercial mortgage-backed securities (“CMBS”):

          

Agency(4)

     4,130         27         (60     4,097   

Non-agency

     1,697         19         (55     1,661   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total CMBS

     5,827         46         (115     5,758   
  

 

 

    

 

 

    

 

 

   

 

 

 

Other asset-backed securities (“ABS”)(5)

     7,642         48         (34     7,656   

Other securities(6)

     1,951         21         (48     1,924   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total investment securities available for sale

   $ 42,852       $ 774       $ (494   $ 43,132   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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     December 31, 2012  

(Dollars in millions)

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses(1)
    Fair
Value
 

Investment securities available for sale:

          

U.S. Treasury debt obligations

   $ 1,548       $ 4       $ 0      $ 1,552   

U.S. agency debt obligations(2)

     301         2         (1     302   

Corporate debt securities guaranteed by U.S. government agencies(3)

     1,003         10         (1     1,012   

Residential mortgage-backed securities (“RMBS”):

          

Agency(4)

     39,408         652         (58     40,002   

Non-agency

     3,607         312         (48     3,871   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total RMBS

     43,015         964         (106     43,873   
  

 

 

    

 

 

    

 

 

   

 

 

 

Commercial mortgage-backed securities (“CMBS”):

          

Agency(4)

     6,045         103         (4     6,144   

Non-agency

     1,425         62         (2     1,485   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total CMBS

     7,470         165         (6     7,629   
  

 

 

    

 

 

    

 

 

   

 

 

 

Other asset-backed securities (“ABS”)(5)

     8,393         70         (5     8,458   

Other securities(6)

     1,120         34         (1     1,153   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total investment securities available for sale

   $ 62,850       $ 1,249       $ (120   $ 63,979   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) 

Includes cumulative non-credit other-than-temporary (“OTTI”) losses recorded in AOCI. We have $20 million and $38 million of non-credit OTTI losses related to non-agency RMBS as of September 30, 2013 and December 31, 2012, respectively.

(2)

Includes debt securities issued by Fannie Mae, Freddie Mac, and the Department of Housing and Urban Development.

(3)

Consists of corporate debt securities guaranteed by other U.S. government agencies, such as the Export-Import Bank of the United States.

(4)

Includes MBS issued by Fannie Mae and Freddie Mac and MBS guaranteed by Ginnie Mae.

(5)

The other asset-backed securities portfolio was collateralized by approximately 66% credit card loans, 15% auto dealer floor plan inventory loans and leases, 6% auto loans, 4% equipment loans, 1% student loans and 8% of other assets as of September 30, 2013. In comparison, the distribution was approximately 64% credit card loans, 18% auto dealer floor plan inventory loans and leases, 6% auto loans, 5% equipment loans, 1% student loans, 2% commercial paper and 4% of other assets as of December 31, 2012. Approximately 87% of the securities in our other asset-backed security portfolio were rated AAA or its equivalent as of September 30, 2013, compared with 82% as of December 31, 2012.

(6) 

Includes foreign government/agency bonds, covered bonds, corporate securities, municipal securities and equity investments primarily related to activities under the Community Reinvestment Act (“CRA”).

Table 3.3 Investment Securities Held to Maturity

 

    September 30, 2013  

(Dollars in millions)

  Amortized
Cost
    Unrealized
Losses
Recorded
in AOCI(1)
    Carrying
Value
    Gross
Unrealized
Gains
    Gross
Unrealized
Losses
    Fair
Value
 

Investment securities held to maturity:

           

Residential mortgage-backed securities (“RMBS”):

           

Agency(2)

  $ 18,053      $ (1,331   $ 16,722      $ 355      $ (2   $ 17,075   

Commercial mortgage-backed securities (“CMBS”):

           

Agency(2)

    1,688        (134     1,554        33        0        1,587   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investment securities held to maturity

  $ 19,741      $ (1,465   $ 18,276      $ 388      $ (2   $ 18,662   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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     December 31, 2012  

(Dollars in millions)

   Amortized
Cost
     Unrealized
Losses
Recorded
in AOCI(1)
     Carrying
Value
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

Investment securities held to maturity:

                 

Other asset-backed securities (“ABS”)

   $ 9       $ 0       $ 9       $ 0       $ 0       $ 9   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities held to maturity

   $ 9       $ 0       $ 9       $ 0       $ 0       $ 9   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Represents the unrealized holding gain or loss at the date of transfer from available for sale to held to maturity, net of any accretion.

(2) 

Includes MBS issued by Fannie Mae and Freddie Mac and MBS guaranteed by Ginnie Mae.

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 September 30, 2013 and December 31, 2012.

Table 3.4: Securities in Unrealized Loss Position

 

     September 30, 2013  
     Less than 12 Months     12 Months or Longer     Total  

(Dollars in millions)

   Fair Value      Gross
Unrealized
Losses
    Fair Value      Gross
Unrealized
Losses
    Fair Value      Gross
Unrealized
Losses
 

Investment securities available for sale:

               

U.S. agency debt obligations(1)

   $ 0       $ 0      $ 0       $ 0      $ 0       $ 0   

Corporate debt securities guaranteed by U.S. government agencies(2)

     1,151         (40     0         0        1,151         (40

RMBS:

               

Agency(3)

     9,461         (225     499         (5     9,960         (230

Non-agency

     244         (15     343         (12     587         (27
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total RMBS

     9,705         (240     842         (17     10,547         (257
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

CMBS:

               

Agency(3)

     2,745         (59     35         (1     2,780         (60

Non-agency

     1,119         (55     0         0        1,119         (55
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total CMBS

     3,864         (114     35         (1     3,899         (115
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Other ABS

     3,155         (31     251         (3     3,406         (34

Other securities

     1,134         (47     26         (1     1,160         (48
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total investment securities available for sale in a gross unrealized loss position

   $ 19,009       $ (472   $ 1,154       $ (22   $ 20,163       $ (494
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

     December 31, 2012  
     Less than 12 Months     12 Months or Longer     Total  

(Dollars in millions)

   Fair Value      Gross
Unrealized
Losses
    Fair Value      Gross
Unrealized
Losses
    Fair Value      Gross
Unrealized
Losses
 

Investment securities available for sale:

               

U.S. agency debt obligations(1)

   $ 199       $ (1   $ 0       $ 0      $ 199       $ (1

Corporate debt securities guaranteed by U.S. government agencies(2)

     172         (1     0         0        172         (1

RMBS:

               

Agency(3)

     8,720         (46     884         (12     9,604         (58

Non-agency

     196         (19     471         (29     667         (48
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total RMBS

     8,916         (65     1,355         (41     10,271         (106
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

CMBS:

               

Agency(3)

     1,009         (4     0         0        1,009         (4

Non-agency

     201         (2     0         0        201         (2
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total CMBS

     1,210         (6     0         0        1,210         (6
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Other ABS

     1,102         (4     99         (1     1,201         (5

Other securities

     103         0        13         (1     116         (1
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total investment securities available for sale in a gross unrealized loss position

   $ 11,702       $ (77   $ 1,467       $ (43   $ 13,169       $ (120
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(1)

Includes debt securities issued by Fannie Mae, Freddie Mac, and the Department of Housing and Urban Development.

(2)

Includes corporate debt securities guaranteed by other U.S. government agencies, such as the Export-Import Bank of the United States.

(3)

Includes MBS issued by Fannie Mae and Freddie Mac and MBS guaranteed by Ginnie Mae.

As of September 30, 2013, our securities held to maturity had a fair value of $18.7 billion and unrealized losses of $1.5 billion. The unrealized losses related to our securities held to maturity have been in a loss position for less than 12 months as of September 30, 2013.

The gross unrealized losses on our securities available for sale of $494 million as of September 30, 2013 relate to 898 individual securities. The gross unrealized losses on our available-for-sale securities investment of $120 million as of December 31, 2012 relate to 532 individual securities. Our investments in non-agency MBS, non-agency asset-backed securities, and other securities accounted for $164 million, or 33%, of total gross unrealized losses as of September 30, 2013. Of the $494 million gross unrealized losses as of September 30, 2013, $22 million related to investment securities that had been in a loss position for 12 months or longer. As discussed in more detail below, we conduct periodic reviews of all investment securities with unrealized losses to assess whether the impairment is other-than-temporary. Based on our assessments, we have recorded OTTI for a portion of our non-agency residential MBS, which is discussed in more detail in the “Other-Than-Temporary Impairment” section of this footnote.

 

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Maturities and Yields of Investment Securities

The following tables summarizes the remaining scheduled contractual maturities, assuming no prepayments, of our investment securities as of September 30, 2013:

Table 3.5: Contractual Maturities of Securities Available for Sale

 

(Dollars in millions)    September 30, 2013  

Investment securities available for sale

   Amortized Cost      Fair Value  

Due in 1 year or less

   $ 2,064       $ 2,067   

Due after 1 year through 5 years

     6,230         6,238   

Due after 5 years through 10 years

     4,271         4,204   

Due after 10 years(1)

     30,287         30,623   
  

 

 

    

 

 

 

Total

   $ 42,852       $ 43,132   
  

 

 

    

 

 

 

 

(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)    September 30, 2013  

Investment securities held to maturity

   Carrying Value      Fair Value  

Due in 1 year or less

   $ 0       $ 0   

Due after 1 year through 5 years

     0         0   

Due after 5 years through 10 years

     1,045         1,071   

Due after 10 years

     17,231         17,591   
  

 

 

    

 

 

 

Total

   $ 18,276       $ 18,662   
  

 

 

    

 

 

 

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. The table below summarizes, by major security type, the expected maturities and the weighted average yields of our investment securities as of September 30, 2013.

 

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Table 3.7: Expected Maturities and Weighted Average Yields of Securities

 

     September 30, 2013  
     Due in 1 Year
or Less
    Due > 1  Year
through

5 Years
    Due > 5  Years
through

10 Years
    Due > 10 Years     Total  

(Dollars in millions)

   Amount     Amount     Amount     Amount     Amount  

Fair value of securities available for sale:

          

U.S. Treasury debt obligations

   $ 0      $ 837      $ 0      $ 0      $ 837   

U.S. agency debt obligations(2)

     1        0        0        0        1   

Corporate debt securities guaranteed by U.S. government agencies(3)

     0        228        1,030        14        1,272   

RMBS:

          

Agency(4)

     87        6,371        15,603        0        22,061   

Non-agency

     56        1,803        1,600        164        3,623   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total RMBS

     143        8,174        17,203        164        25,684   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CMBS:

          

Agency(4)

     352        2,761        984        0        4,097   

Non-agency

     142        293        1,208        18        1,661   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total CMBS

     494        3,054        2,192        18        5,758   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other ABS

     1,949        4,773        818        116        7,656   

Other securities(5)

     531        484        787        122        1,924   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total securities available for sale

     3,118        17,550        22,030        434        43,132   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amortized cost of securities available for sale

   $ 3,117      $ 17,334      $ 22,007      $ 394      $ 42,852   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average yield for securities available for sale(1)

     1.44     2.45     2.99     5.19     2.68
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value of securities held to maturity:

          

RMBS:

          

Agency(4)

   $ 0      $ 0      $ 11,559      $ 5,163      $ 16,722   

CMBS:

          

Agency(4)

     0        402        1,144        8        1,554   

Total securities held for maturity

     0        402        12,703        5,171        18,276   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value of securities held to maturity

   $ 0      $ 407      $ 12,969      $ 5,286      $ 18,662   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average yield for securities held to maturity(1)

     0.00     2.11     2.34     2.71     2.44
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Yields are calculated based on the amortized cost of each security.

(2)

Includes debt securities issued by Fannie Mae, Freddie Mac, and the Department of Housing and Urban Development.

(3)

Includes corporate debt securities guaranteed by other U.S. government agencies, such as the Export-Import Bank of the United States.

(4)

Includes MBS issued by Fannie Mae and Freddie Mac and MBS guaranteed by Ginnie Mae.

(5)

Yields of tax-exempt securities are calculated on a fully taxable-equivalent (“FTE”) basis.

 

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Other-Than-Temporary Impairment

We evaluate all securities in an unrealized loss position at least quarterly, and more often as market conditions require, to assess whether the impairment is other-than-temporary. Our OTTI assessment is a subjective process which requires the careful use of judgments and assumptions. Accordingly, we consider a number of qualitative and quantitative criteria in our assessment, including the extent and duration of the impairment; recent 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 market conditions.

We assess and recognize OTTI in accordance with the accounting guidance for recognition and presentation of OTTI. Under this guidance, OTTI is recognized in earnings for debt securities that we intent to sell or we believe it is more-likely-than-not that we will be required to sell prior to recovery of the amortized cost basis. For those securities that we do not intend to sell or expect to be required to sell, credit-related impairment is recognized in earnings, with the 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 future cash flows, discounted based on the effective yield. The non-credit component represents the difference between the security’s fair value and the present value of expected future cash flows.

We recorded net OTTI in earnings totaling $11 million and $13 million for the three months ended September 30, 2013 and 2012, respectively, and $40 million for both of the nine months ended September 30, 2013 and 2012. We estimate the portion of losses attributable to credit using a discounted cash flow model and we estimate the expected cash flows from the underlying collateral using internal information to derive key assumptions. Our calculation takes into consideration security specific delinquencies, product specific delinquency roll rates and expected severities. Key assumptions used in estimating the expected cash flows include default rates, loss severity and prepayment rates. Assumptions used can vary widely based on the collateral underlying the securities and are influenced by factors such as collateral type, loan interest rate, geographical location of the borrower, and borrower characteristics.

We believe the $474 million gross unrealized losses as of September 30, 2013 related to securities available for sale for which we have not recognized OTTI are attributable to issuer specific credit spreads and changes in market interest rates and asset spreads. Therefore, we currently do not expect to incur credit losses related to these securities. In addition, we have no intent to sell these securities with unrealized losses, and it is not likely that we will be required to sell these securities prior to recovery of their amortized cost. Accordingly, we have concluded that the impairment on these securities is not other than temporary.

 

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The table below presents activity for the three and nine months ended September 30, 2013 and 2012, related to the credit component of OTTI recognized in earnings on investment debt securities:

Table 3.8 Credit Impairment Rollforward

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 

(Dollars in millions)

       2013              2012              2013              2012      

Credit loss component, beginning of period

   $ 149       $ 95       $ 120       $ 68   

Additions:

           

Initial credit impairment

     3         6         14         16   

Subsequent credit impairment

     8         7         26         24   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total additions

     11         13         40         40   
  

 

 

    

 

 

    

 

 

    

 

 

 

Reductions:

           

Sales of credit-impaired securities

     0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total reductions

     0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Credit loss component, end of period

   $ 160       $ 108       $ 160       $ 108   
  

 

 

    

 

 

    

 

 

    

 

 

 

AOCI Related to Securities

The table below presents for the three and nine months ended September 30, 2013 and 2012, the changes in AOCI related to our debt securities. The net unrealized gains and losses represent fair value adjustments recorded during the period. The net realized gains and losses reclassified from AOCI into earnings includes accretion of the unrealized losses on securities held to maturity into earnings.

Table 3.9: AOCI Related to Securities, Net of Tax

 

     Three Months Ended September 30,  
     2013     2012  

(Dollars in millions)

   Available
for Sale
    Held to
Maturity
    Total     Available
for Sale
    Held to
Maturity
     Total  

Beginning balance AOCI related to securities

   $ (517   $ 0      $ (517   $ 418      $ 0       $ 418   

Net unrealized gains (losses)

     (224     0        (224     327        0         327   

Transfers from available for sale to held to maturity

     916        (916     0        0        0         0   

Net realized (gains) losses reclassified from AOCI into earnings(1)

     0        1        1        (1     0         (1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance AOCI related to securities

   $ 175      $ (915   $ (740   $ 744      $ 0       $ 744   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

     Nine Months Ended September 30,  
     2013     2012  

(Dollars in millions)

   Available
for Sale
    Held to
Maturity
    Total     Available
for Sale
    Held to
Maturity
     Total  

Beginning balance AOCI related to securities

   $ 703      $ 0      $ 703      $ 286      $ 0       $ 286   

Unrealized gains (losses)

     (1,442     0        (1,442     485        0         485   

Transfers from available for sale to held to maturity

     916        (916     0        0        0         0   

Net realized (gains) losses reclassified from AOCI into earnings(1)

     (2     1        (1     (27     0         (27
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance AOCI related to securities

     175        (915     (740     744        0         744   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

(1)

The amortization of unrealized holding gains or losses reported in AOCI for securities held to maturity will be offset by the amortization of the premium or discount created from the transfer into securities held to maturity, which occurred at fair value.

Realized Gains and Losses on Securities

The following table presents the gross realized gains and losses on the sale and redemption of securities available for sale recognized in earnings for the three and nine months ended September 30, 2013 and 2012. The gross realized investment losses presented below exclude credit losses recognized in earnings attributable to OTTI. We also present the proceeds from the sale of securities available for sale for the periods presented. The investment securities we sold were predominantly agency MBS. We did not sell any investment securities that are held to maturity for the nine months ended September 30, 2013 and 2012.

Table 3.10: Realized Gains and Losses on Securities Available for Sale

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

(Dollars in millions)

       2013              2012             2013             2012      

Gross realized investment gains

   $ 0       $ 2      $ 6      $ 51   

Gross realized investment losses

     0         (1     (3     (9
  

 

 

    

 

 

   

 

 

   

 

 

 

Net realized gains

   $ 0       $ 1      $ 3      $ 42   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total proceeds from sales

   $ 35       $ 16      $ 1,355      $ 14,274   
  

 

 

    

 

 

   

 

 

   

 

 

 

Securities Pledged and Received

As part of our liquidity management strategy, we pledge securities to secure borrowings from counterparties including the Federal Home Loan Bank (“FHLB”) and the Federal Reserve Bank. 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 $11.6 billion and $13.8 billion as of September 30, 2013 and December 31, 2012, respectively. We pledged securities held to maturity with a carrying value of $7.1 billion as of September 30, 2013, and we did not pledge any securities held to maturity as of December 31, 2012. All the securities pledged were primarily related to FHLB transactions and Public Fund deposits. We accepted pledges of securities with a fair value of $37 million and $238 million as of September 30, 2013 and December 31, 2012, respectively, primarily related to our derivative transactions.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

Securities Acquired

Our investment portfolio includes certain securities acquired in the ING Direct acquisition and other securities we purchased that were deemed to be credit impaired as of the purchase date. In accordance with accounting guidance for purchased credit-impaired securities, we recorded these securities at fair value as of the purchase date and determined the contractually required payments due based on the total undiscounted amount of all uncollected principal and interest payments, adjusted for the effect of estimated prepayments. We then estimated the undiscounted cash flows we expect to collect. The difference between the contractually required payments due and the cash flows we expect to collect at acquisition, considering the impact of prepayments, is referred to as the nonaccretable difference. The nonaccretable difference, which is neither accreted into income nor recorded on our consolidated balance sheet, reflects estimated future credit losses expected to be incurred over the life of the security. The excess of 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 over the remaining life of the security using the effective interest method. Subsequent to acquisition, we complete quarterly evaluations of expected cash flows. Decreases in expected cash flows attributable to credit result in the recognition of other-than-temporary impairment. Increases in expected cash flows are recognized prospectively over the remaining life of the security as an adjustment to the accretable yield.

Outstanding Balance and Carrying Value of Acquired Securities

The table below presents the outstanding contractual balance and the carrying value of the acquired credit-impaired investment debt securities as of September 30, 2013.

Table 3.11: Outstanding Balance and Carrying Value of Acquired Securities

 

(Dollars in millions)

   September 30,
2013
     December 31,
2012
 

Contractual principal and interest

   $ 4,882       $ 5,242   
  

 

 

    

 

 

 

Carrying value

   $ 2,865       $ 2,887   
  

 

 

    

 

 

 

Amortized Cost

   $ 2,491       $ 2,585   
  

 

 

    

 

 

 

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

Changes in Accretable Yield of Acquired Securities

The following table presents changes in the accretable yield related to the acquired credit-impaired debt securities:

Table 3.12: Changes in Accretable Yield of Acquired Securities

 

(Dollars in millions)

   Purchased
Credit-Impaired
Securities
 

Accretable yield as of December 31, 2011

   $ 0   

Additions from new acquisitions(1)

     1,743   

Accretion recognized in earnings

     (202

Reductions due to disposals, transfers, and other non-credit related changes

     0   

Net reclassifications (to)/from nonaccretable difference

     (29
  

 

 

 

Accretable yield as of December 31, 2012

   $ 1,512   

Additions from new acquisitions

     82   

Accretion recognized in earnings

     (184

Reductions due to disposals, transfers, and other non-credit related changes

     1   

Net reclassifications (to)/from nonaccretable difference

     31   
  

 

 

 

Accretable yield as of September 30, 2013

   $ 1,442   
  

 

 

 

 

(1)

Includes securities acquired in the ING Direct acquisition as well as other securities purchased.

 

 

NOTE 4—LOANS

 

Loan Portfolio Composition

Our total loan portfolio consists of loans held for investment, loans held for sale and loans held in our securitization. Our loan portfolio, by business segment, consists of credit card, consumer banking and commercial banking loans. Credit card loans consist of domestic and international credit card loans as well as installment 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.

Loans Acquired in Business Acquisitions

Our portfolio of loans held for investment includes loans acquired in the Chevy Chase Bank (“CCB”), ING Direct and 2012 U.S. card acquisitions. These loans were recorded at fair value as of the date of each acquisition.

Acquired Loans Accounted for Based on Expected Cash Flows

We use the term “acquired loans” to refer to a limited portion of the credit card loans acquired in the 2012 U.S. card acquisition and the substantial majority of consumer and commercial loans acquired in the ING Direct and CCB acquisitions, which are accounted for based on expected cash flows to be collected. Acquired loans accounted for based on expected cash flows to be collected was $30.1 billion as of September 30, 2013, compared with $37.1 billion as of December 31, 2012.

We regularly update our estimate of the amount of expected principal and interest to be collected from these loans and evaluate the results on an aggregated pool basis for loans with common risk characteristics. Probable

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

decreases in expected loan principal cash flows would trigger the recognition of impairment 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. We reduced the allowance and provision for credit losses by $10 million for the three months ended September 30, 2013 and reduced the allowance and provision for credit losses by $25 million for the nine months ended September 30, 2013 related to certain pools of acquired loans. The cumulative impairment recognized on acquired loans totaled $32 million and $57 million as of September 30, 2013 and December 31, 2012, respectively. The credit performance of the remaining pools has generally been more favorable than expected, which has resulted in the reclassification of amounts from the nonaccretable difference to the accretable yield.

Table 4.1 below presents the composition of our portfolio of loans held for investment, which includes restricted loans for securitization investors, as of September 30, 2013 and December 31, 2012.

Table 4.1: Loan Portfolio Composition

 

(Dollars in millions)

   September 30,
2013
     December 31,
2012
 

Credit Card business:

     

Domestic credit card loans

   $ 69,538       $ 82,328   

International credit card loans

     8,031         8,614   
  

 

 

    

 

 

 

Total credit card loans

     77,569         90,942   
  

 

 

    

 

 

 

Domestic installment loans

     398         813   
  

 

 

    

 

 

 

Total credit card

     77,967         91,755   
  

 

 

    

 

 

 

Consumer Banking business:

     

Auto

     30,803         27,123   

Home loan

     36,817         44,100   

Other retail

     3,665         3,904   
  

 

 

    

 

 

 

Total consumer banking

     71,285         75,127   
  

 

 

    

 

 

 

Commercial Banking business:(1)

     

Commercial and multifamily real estate

     19,523         17,732   

Commercial and industrial

     21,848         19,892   
  

 

 

    

 

 

 

Total commercial lending

     41,371         37,624   

Small-ticket commercial real estate

     1,028         1,196   
  

 

 

    

 

 

 

Total commercial banking

     42,399         38,820   

Other:

     

Other loans

     163         187   
  

 

 

    

 

 

 

Total loans

   $ 191,814       $ 205,889   
  

 

 

    

 

 

 

 

(1) 

Includes construction loans and land development loans totaling $2.2 billion and $2.1 billion as of September 30, 2013 and December 31, 2012, respectively.

On February 19, 2013, we announced our agreement with Best Buy Stores, L.P. (“Best Buy”) to end our contractual credit card relationship early and to sell the Best Buy loan portfolio of private label and co-branded credit card accounts that we acquired in the 2012 U.S. card acquisition to Citibank, N.A. (“Citibank”). We reclassified the assets subject to the sale agreement, which included loans of approximately $7 billion as of the date of the transfer, to the held for sale category from the held for investment category in the first quarter.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

We transferred the net assets subject to the sale agreement to the held for sale category upon meeting the pertinent criteria for this classification during the first quarter of 2013. The loan portfolio was transferred to held for sale based upon the carrying value of the loans, including the transfer of the allowance for loan losses. All other net assets subject to the sale agreement were transferred to held for sale at fair value less costs to sell. During the held for sale period, we continued to recognize interest and fee income on the transferred loans, and did not recognize any impacts from charge-offs and recoveries unless these net charge-offs exceeded the associated transferred allowance for loan losses. The amortization and accretion on the related intangibles ceased upon the transfer to the held for sale category. The sale of the portfolio to Citibank was completed on September 6, 2013. We recognized $19 million of lower of cost or market adjustments related to the portfolio assets. We had total loans held for sale of $180 million and $201 million as of September 30, 2013 and December 31, 2012, respectively.

Credit Quality

We closely monitor economic conditions and loan performance trends to manage and evaluate our exposure to credit risk. Trends in delinquency ratios are an indicator, among other considerations, of credit risk within our loan portfolios. The level of nonperforming assets 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 asset rates, as well as charge-off rates and our internal risk ratings of larger balance, commercial loans.

The following table summarizes the payment status of loans in our total loan portfolio, including an aging of delinquent loans, loans 90 days or more past due that continue to accrue interest and loans classified as nonperforming. We present the information below on the credit performance of our loan portfolio, by major loan category, including key metrics that we use in tracking changes in the credit quality of each of our loan portfolios. The delinquency aging includes all past due loans, both performing and nonperforming, as of September 30, 2013 and December 31, 2012.

Loans 90 days or more past due totaled approximately $1.7 billion and $2.3 billion as of September 30, 2013 and December 31, 2012, respectively. Loans classified as nonperforming totaled $882 million and $1.1 billion as of September 30, 2013 and December 31, 2012, respectively.

 

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Table 4.2: Credit Quality

 

    September 30, 2013  

(Dollars in millions)

  Current     30-59
Days
    60-89
Days
    ³ 90
Days
    Total
Delinquent
Loans
    Acquired
Loans
    Total
Loans
    ³ 90 Days
and
Accruing(1)
    Nonperforming
Loans(1)
 

Credit Card:

                 

Domestic credit card

  $ 67,440      $ 812      $ 549      $ 1,062      $ 2,423      $ 73      $ 69,936      $ 1,062      $ 0   

International credit card

    7,647        147        90        147        384        0        8,031        98        93   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total credit card

    75,087        959        639        1,209        2,807        73        77,967        1,160        93   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consumer Banking:

                 

Auto

    28,708        1,351        585        153        2,089        6        30,803        0        153   

Home loan

    6,853        56        28        236        320        29,644        36,817        0        374   

Retail banking

    3,579        20        7        27        54        32        3,665        1        40   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer banking

    39,140        1,427        620        416        2,463        29,682        71,285        1        567   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial Banking:

                 

Commercial and multifamily real estate

    19,280        81        5        55        141        102        19,523        5        70   

Commercial and industrial

    21,599        21        2        38        61        188        21,848        1        116   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial lending

    40,879        102        7        93        202        290        41,371        6        186   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Small-ticket commercial real estate

    1,005        14        2        7        23        0        1,028        0        15   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial banking

    41,884        116        9        100        225        290        42,399        6        201   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other:

                 

Other loans

    107        4        3        14        21        35        163        0        21   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 156,218      $ 2,506      $ 1,271      $ 1,739      $ 5,516      $ 30,080      $ 191,814      $ 1,167      $ 882   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of Total loans

    81.4     1.3     0.7     0.9     2.9     15.7     100.0     0.6     0.5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

    December 31, 2012  

(Dollars in millions)

  Current     30-59
Days
    60-89
Days
    ³ 90
Days
    Total
Delinquent
Loans
    Acquired
Loans
    Total
Loans
    ³ 90 Days
and
Accruing(1)
    Nonperforming
Loans(1)
 

Credit Card:

                 

Domestic credit card

  $ 79,852      $ 932      $ 659      $ 1,410      $ 3,001      $ 288      $ 83,141      $ 1,410      $ 0   

International credit card

    8,227        145        89        153        387        0        8,614        100        100   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total credit card

    88,079        1,077        748        1,563        3,388        288        91,755        1,510        100   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consumer Banking:

                 

Auto

    25,057        1,341        559        149        2,049        17        27,123        0        149   

Home loan

    7,317        63        29        288        380        36,403        44,100        0        422   

Retail banking

    3,789        26        10        45        81        34        3,904        1        71   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer banking

    36,163        1,430        598        482        2,510        36,454        75,127        1        642   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial Banking:

                 

Commercial and multifamily real estate

    17,357        64        77        107        248        127        17,732        2        137   

Commercial and industrial

    19,525        57        3        75        135        232        19,892        14        133   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial lending

    36,882        121        80        182        383        359        37,624        16        270   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Small-ticket commercial real estate

    1,153        28        9        6        43        0        1,196        0        12   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial banking

    38,035        149        89        188        426        359        38,820        16        282   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other:

                 

Other loans

    118        8        5        23        36        33        187        0        30   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 162,395      $ 2,664      $ 1,440      $ 2,256      $ 6,360      $ 37,134      $ 205,889      $ 1,527      $ 1,054   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of Total loans

    78.9     1.3     0.7     1.1     3.1     18.0     100.0     0.7     0.5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Acquired loans are excluded from loans reported as 90 days and accruing interest as well as nonperforming loans.

Credit Card

Our credit card loan portfolio is generally highly diversified across millions of accounts and multiple geographies without significant individual exposures. We therefore generally manage credit risk on a portfolio basis. The risk in our credit card portfolio is correlated with broad economic trends, such as unemployment rates, gross domestic product (“GDP”), and home values, as well as customer liquidity, which can have a material effect on credit performance. The primary factors we assess in monitoring the credit quality and risk of our credit card portfolio are delinquency and charge-off trends, including an analysis of the migration of loans between delinquency categories over time. The table below displays the geographic profile of our credit card loan portfolio and delinquency statistics as of as of September 30, 2013 and December 31, 2012. We also present comparative net charge-offs for the third quarter and first nine months of 2013 and 2012.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

Table 4.3: Credit Card: Risk Profile by Geographic Region and Delinquency Status

 

     September 30, 2013  

(Dollars in millions)

   Loans      % of
Total(1)
    Acquired
Loans
     % of
Total(1)
    Total      % of
Total(1)
 

Domestic credit card and installment loans:

               

California

   $ 7,585         9.7   $ 7         0.0   $ 7,592         9.7

New York

     5,060         6.5        7         0.0        5,067         6.5   

Texas

     4,757         6.1        5         0.0        4,762         6.1   

Florida

     4,086         5.2        4         0.0        4,090         5.2   

Illinois

     3,441         4.4        3         0.0        3,444         4.4   

Pennsylvania

     3,253         4.2        3         0.0        3,256         4.2   

Ohio

     2,811         3.6        3         0.0        2,814         3.6   

New Jersey

     2,607         3.4        2         0.0        2,609         3.4   

Michigan

     2,478         3.2        2         0.0        2,480         3.2   

Other

     33,785         43.3        37         0.1        33,822         43.4   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total domestic credit card and installment loans

     69,863         89.6        73         0.1        69,936         89.7   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

International credit card:

               

United Kingdom

     3,447         4.4        0         0.0        3,447         4.4   

Canada

     4,584         5.9        0         0.0        4,584         5.9   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total international credit card

     8,031         10.3        0         0.0        8,031         10.3   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total credit card and installment loans

   $ 77,894         99.9   $ 73         0.1   $ 77,967         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Selected credit metrics:

               

30+ day delinquencies(2)

   $ 2,786         3.57   $ 21         0.03   $ 2,807         3.60

90+ day delinquencies(2)

     1,201         1.54        8         0.01        1,209         1.55   

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

     December 31, 2012  

(Dollars in millions)

   Loans      % of
Total(1)
    Acquired
Loans
     % of
Total(1)
    Total      % of
Total(1)
 

Domestic credit card and installment loans:

               

California

   $ 9,245         10.0   $ 31         0.1   $ 9,276         10.1

Texas

     5,910         6.5        23         0.0        5,933         6.5   

New York

     5,846         6.4        23         0.0        5,869         6.4   

Florida

     4,835         5.3        17         0.0        4,852         5.3   

Illinois

     4,100         4.5        15         0.0        4,115         4.5   

Pennsylvania

     3,861         4.2        14         0.0        3,875         4.2   

Ohio

     3,351         3.6        12         0.0        3,363         3.6   

New Jersey

     3,060         3.3        10         0.0        3,070         3.3   

Michigan

     2,917         3.2        11         0.0        2,928         3.2   

Other

     39,728         43.3        132         0.2        39,860         43.5   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total domestic credit card and installment loans

     82,853         90.3        288         0.3        83,141         90.6   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

International credit card:

               

United Kingdom

     3,678         4.0        0         0.0        3,678         4.0   

Canada

     4,936         5.4        0         0.0        4,936         5.4   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total international credit card

     8,614         9.4        0         0.0        8,614         9.4   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total credit card and installment loans

   $ 91,467         99.7   $ 288         0.3   $ 91,755         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Selected credit metrics:

               

30+ day delinquencies(2)

   $ 3,326         3.62   $ 62         0.07   $ 3,388         3.69

90+ day delinquencies(2)

     1,530         1.67        33         0.03        1,563         1.70   

 

(1) 

Percentages by geographic region within the domestic and international credit card portfolios are calculated based on the total held-for- investment credit card loans as of the end of the reported period.

(2) 

Delinquency rates calculated by dividing delinquent credit card loans by the total balance of credit card loans held for investment as of the end of the reported period.

Table 4.4: Credit Card: Net Charge-offs

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2013     2012     2013     2012  

(Dollars in millions)

   Amount      Rate     Amount      Rate     Amount      Rate     Amount      Rate  

Net charge-offs:

                    

Domestic credit card

   $ 642         3.67   $ 612         3.04   $ 2,218         4.14   $ 1,653         3.21

International credit card

     92         4.71        101         4.95        288         4.79        328         5.32   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total(1)

   $ 734         3.78   $ 713         3.22   $ 2,506         4.20   $ 1,981         3.43
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) 

Calculated by dividing annualized net charge-offs by average credit card loans held for investment for the three and nine months ended September 30, 2013 and 2012.

The 30+ day delinquency rate for our entire credit card loan portfolio decreased to 3.60% as of September 30, 2013, from 3.69% as of December 31, 2012, reflecting underlying credit improvement trends.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

Consumer Banking

Our consumer banking loan portfolio consists of auto, home loan and retail banking loans. Similar to our credit card loan portfolio, the risk in our consumer banking loan portfolio is correlated with broad economic trends, such as unemployment rates, 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 factors 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 acquired loans. We also present the delinquency and nonperforming loan rates of our consumer banking loan portfolio, excluding acquired loans, as of September 30, 2013 and December 31, 2012, and net charge-offs for the third quarter and first nine months of 2013 and 2012.

Table 4.5: Consumer Banking: Risk Profile by Geographic Region, Delinquency Status and Performing Status

 

(Dollars in millions)

   September 30, 2013  
   Loans     Acquired Loans     Total  
   Loans      % of
Total(1)
    Loans      % of
Total(1)
    Loans      % of
Total(1)
 

Auto:

               

Texas

   $ 4,624         6.5   $ 0         0.0   $ 4,624         6.5

California

     3,159         4.4        0         0.0        3,159         4.4   

Florida

     1,949         2.7        0         0.0        1,949         2.7   

Louisiana

     1,663         2.3        0         0.0        1,663         2.3   

Georgia

     1,628         2.3        0         0.0        1,628         2.3   

Illinois

     1,244         1.8        0         0.0        1,244         1.8   

Ohio

     1,212         1.7        0         0.0        1,212         1.7   

Other

     15,318         21.5        6         0.0        15,324         21.5   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total auto

     30,797         43.2        6         0.0        30,803         43.2   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Home loan:

               

California

     1,032         1.5        7,503         10.5        8,535         12.0   

New York

     1,539         2.2        1,322         1.9        2,861         4.1   

Illinois

     89         0.1        2,311         3.2        2,400         3.3   

Maryland

     413         0.6        1,568         2.2        1,981         2.8   

New Jersey

     366         0.5        1,460         2.1        1,826         2.6   

Virginia

     340         0.5        1,445         2.0        1,785         2.5   

Florida

     172         0.2        1,553         2.2        1,725         2.4   

Other

     3,222         4.5        12,482         17.5        15,704         22.0   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total home loan

     7,173         10.1        29,644         41.6        36,817         51.7   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Retail banking:

               

Louisiana

     1,282         1.8        0         0.0        1,282         1.8   

New York

     859         1.2        0         0.0        859         1.2   

Texas

     780         1.1        0         0.0        780         1.1   

New Jersey

     271         0.4        0         0.0        271         0.4   

Maryland

     115         0.2        18         0.0        133         0.2   

Virginia

     85         0.1        10         0.0        95         0.1   

California

     38         0.0        0         0.0        38         0.0   

Other

     203         0.3        4         0.0        207         0.3   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total retail banking

     3,633         5.1        32         0.0        3,665         5.1   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total consumer banking

   $ 41,603         58.4   $ 29,682         41.6   $ 71,285         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

     September 30, 2013  
     Auto     Home Loan     Retail Banking     Total Consumer
Banking
 

(Dollars in millions)

   Amount      Rate     Amount      Rate     Amount      Rate     Amount      Rate  

Credit performance:(2)

                    

30+ day delinquencies

   $ 2,089         6.78   $ 320         0.87   $ 54         1.48   $ 2,463         3.46

90+ day delinquencies

     153         0.50        236         0.64        27         0.74        416         0.58   

Nonperforming loans

     153         0.50        374         1.01        40         1.10        567         0.79   

 

     December 31, 2012  
     Loans     Acquired Loans     Total  

(Dollars in millions)

   Loans      % of
Total(1)
    Loans      % of
Total(1)
    Loans      % of
Total(1)
 

Auto:

               

Texas

   $ 4,317         5.7   $ 0         0.0   $ 4,317         5.7

California

     2,676         3.6        0         0.0        2,676         3.6   

Florida

     1,621         2.1        0         0.0        1,621         2.1   

Louisiana

     1,504         2.0        0         0.0        1,504         2.0   

Georgia

     1,404         1.9        0         0.0        1,404         1.9   

Illinois

     1,134         1.5        0         0.0        1,134         1.5   

Ohio

     1,032         1.4        0         0.0        1,032         1.4   

Other

     13,418         17.8        17         0.1        13,435         17.9   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total auto

     27,106         36.0        17         0.1        27,123         36.1   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Home loan:

               

California

     1,168         1.6        9,098         12.1        10,266         13.7   

New York

     1,678         2.2        1,598         2.1        3,276         4.3   

Illinois

     102         0.1        2,875         3.8        2,977         3.9   

Maryland

     403         0.5        1,878         2.5        2,281         3.0   

New Jersey

     402         0.5        1,717         2.3        2,119         2.8   

Virginia

     342         0.5        1,748         2.3        2,090         2.8   

Florida

     183         0.3        1,863         2.5        2,046         2.8   

Other

     3,419         4.6        15,626         20.8        19,045         25.4   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total home loan

     7,697         10.3        36,403         48.4        44,100         58.7   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Retail banking:

               

Louisiana

     1,447         1.9        0         0.0        1,447         1.9   

New York

     864         1.2        0         0.0        864         1.2   

Texas

     844         1.1        0         0.0        844         1.1   

New Jersey

     312         0.4        0         0.0        312         0.4   

Maryland

     96         0.1        20         0.1        116         0.2   

Virginia

     78         0.1        9         0.0        87         0.1   

California

     47         0.1        0         0.0        47         0.1   

Other

     182         0.2        5         0.0        187         0.2   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total retail banking

     3,870         5.1        34         0.1        3,904         5.2   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total consumer banking

   $ 38,673         51.4   $ 36,454         48.6   $ 75,127         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

     December 31, 2012  
     Auto     Home Loan     Retail Banking     Total Consumer
Banking
 

(Dollars in millions)

   Amount      Rate     Amount      Rate     Amount      Rate     Amount      Rate  

Credit performance:(2)

                    

30+ day delinquencies

   $ 2,049         7.55   $ 380         0.86   $ 81         2.07   $ 2,510         3.34

90+ day delinquencies

     149         0.55        288         0.65        45         1.15        482         0.64   

Nonperforming loans

     149         0.55        422         0.96        71         1.82        642         0.85   

 

(1) 

Percentages by geographic region are calculated based on the total held-for-investment consumer banking loans as of the end of the reported period.

(2) 

Credit performance statistics exclude acquired loans, which were recorded at fair value at acquisition. Although acquired loans may be contractually delinquent, we separately track these loans and do not include them in our delinquency and nonperforming loan statistics as the fair value recorded at acquisition included an estimate of credit losses expected to be realized over the remaining lives of the loans.

Table 4.6: Consumer Banking: Net Charge-offs

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2013     2012     2013     2012  

(Dollars in millions)

   Amount      Rate     Amount      Rate     Amount      Rate     Amount      Rate  

Net charge-offs:

                    

Auto

   $ 152         2.01   $ 115         1.79   $ 366         1.69   $ 262         1.44
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Home Loan

     5         0.06        32         0.28        13         0.04        59         0.19   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Retail Banking

     13         1.38        14         1.20        44         1.58        41         1.29   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Consumer Banking(1)

   $ 170         0.95   $ 161         0.83   $ 423         0.77   $ 362         0.69
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) 

Calculated by dividing annualized net charge-offs by average loans held for investment for the three and nine months ended September 30, 2013 and 2012.

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 our overall home 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 since the home price peak in 2006 and the 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 and loans. The following table presents the distribution of our home loan portfolio as of September 30, 2013 and December 31, 2012, based on selected key risk characteristics.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

Table 4.7: Home Loan: Risk Profile by Vintage, Geography, Lien Priority and Interest Rate Type

 

(Dollars in millions)

   September 30, 2013  
   Loans     Acquired Loans     Total Home Loans  
   Amount      % of
Total(1)
    Amount      % of
Total(1)
    Amount      % of
Total(1)
 

Origination year:

               

< = 2005

   $ 2,984         8.1   $ 4,203         11.4   $ 7,187         19.5

2006

     546         1.5        2,555         6.9        3,101         8.4   

2007

     387         1.0        5,451         14.8        5,838         15.8   

2008

     219         0.6        4,311         11.7        4,530         12.3   

2009

     135         0.4        2,697         7.3        2,832         7.7   

2010

     149         0.4        4,510         12.3        4,659         12.7   

2011

     269         0.7        4,990         13.6        5,259         14.3   

2012

     1,982         5.4        849         2.3        2,831         7.7   

2013

     502         1.4        78         0.2        580         1.6   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 7,173         19.5   $ 29,644         80.5   $ 36,817         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Geographic concentration:(2)

               

California

   $ 1,032         2.8   $ 7,503         20.4   $ 8,535         23.2

New York

     1,539         4.2        1,322         3.6        2,861         7.8   

Illinois

     89         0.2        2,311         6.3        2,400         6.5   

Maryland

     413         1.1        1,568         4.3        1,981         5.4   

New Jersey

     366         1.0        1,460         4.0        1,826         5.0   

Virginia

     340         0.9        1,445         3.9        1,785         4.8   

Florida

     172         0.5        1,553         4.2        1,725         4.7   

Arizona

     92         0.2        1,506         4.1        1,598         4.3   

Washington

     103         0.3        1,374         3.7        1,477         4.0   

Louisiana

     1,307         3.6        50         0.1        1,357         3.7   

Other

     1,720         4.7        9,552         25.9        11,272         30.6   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 7,173         19.5   $ 29,644         80.5   $ 36,817         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Lien type:

               

1st lien

   $ 6,085         16.5   $ 29,210         79.3   $ 35,295         95.8

2nd lien

     1,088         3.0        434         1.2        1,522         4.2   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 7,173         19.5   $ 29,644         80.5   $ 36,817         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Interest rate type:

               

Fixed rate

   $ 2,438         6.6   $ 3,582         9.7   $ 6,020         16.3

Adjustable rate

     4,735         12.9        26,062         70.8        30,797         83.7   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 7,173         19.5   $ 29,644         80.5   $ 36,817         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

     December 31, 2012  
     Loans     Acquired Loans     Total Home Loans  

(Dollars in millions)

   Amount      % of
Total(1)
    Amount      % of
Total(1)
    Amount      % of
Total(1)
 

Origination year:

               

< = 2005

   $ 3,483         7.9   $ 4,858         11.0   $ 8,341         18.9

2006

     621         1.4        2,865         6.5        3,486         7.9   

2007

     446         1.0        6,189         14.0        6,635         15.0   

2008

     257         0.6        5,210         11.8        5,467         12.4   

2009

     167         0.4        3,438         7.8        3,605         8.2   

2010

     188         0.4        6,024         13.7        6,212         14.1   

2011

     324         0.7        6,705         15.2        7,029         15.9   

2012

     2,211         5.1        1,114         2.5        3,325         7.6   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 7,697         17.5   $ 36,403         82.5   $ 44,100         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Geographic concentration:(2)

               

California

   $ 1,168         2.7   $ 9,098         20.6   $ 10,266         23.3

New York

     1,678         3.8        1,598         3.6        3,276         7.4   

Illinois

     102         0.2        2,875         6.5        2,977         6.7   

Maryland

     403         0.9        1,878         4.3        2,281         5.2   

New Jersey

     402         0.9        1,717         3.9        2,119         4.8   

Virginia

     342         0.8        1,748         4.0        2,090         4.8   

Florida

     183         0.4        1,863         4.2        2,046         4.6   

Arizona

     95         0.2        1,828         4.1        1,923         4.3   

Washington

     113         0.3        1,766         4.0        1,879         4.3   

Colorado

     126         0.3        1,594         3.6        1,720         3.9   

Other

     3,085         7.0        10,438         23.7        13,523         30.7   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 7,697         17.5   $ 36,403         82.5   $ 44,100         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Lien type:

               

1st lien

   $ 6,502         14.8   $ 35,905         81.4   $ 42,407         96.2

2nd lien

     1,195         2.7        498         1.1        1,693         3.8   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 7,697         17.5   $ 36,403         82.5   $ 44,100         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Interest rate type:

               

Fixed rate

   $ 2,534         5.8   $ 4,037         9.1   $ 6,571         14.9

Adjustable rate

     5,163         11.7        32,366         73.4        37,529         85.1   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 7,697         17.5   $ 36,403         82.5   $ 44,100         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) 

Percentages within each risk category calculated based on total held-for-investment home loans.

(2) 

Represents the ten states in which we have the highest concentration of home loans.

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

Commercial Banking

We evaluate the credit risk of commercial loans individually and use a risk-rating system to determine the credit quality of our commercial loans. We assign internal risk ratings to loans based on relevant information about the ability of borrowers to service their debt. In determining the risk rating of a particular loan, among the factors considered are the borrower’s current financial condition, historical credit performance, projected future credit performance, prospects for support from financially responsible guarantors, the estimated realizable value of any collateral and current economic trends. The ratings 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 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 review of the credit exposures and evaluation and determination of the allowance for commercial loans. Loans of $1 million or more designated as criticized performing and criticized nonperforming are reviewed quarterly by management for further deterioration or improvement to determine if they are appropriately classified/graded and whether impairment exists. Noncriticized loans greater than $1 million are specifically reviewed, at least annually, to determine the appropriate loan grading. In addition, during the renewal process of any loan or if a loan becomes past due, we evaluate the risk rating.

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

The following table presents the geographic distribution and internal risk ratings of our commercial loan portfolio as of September 30, 2013 and December 31, 2012.

Table 4.8: Commercial Banking: Risk Profile by Geographic Region and Internal Risk Rating

 

    September 30, 2013  

(Dollars in millions)

  Commercial
&
Multifamily
Real Estate
    % of
Total(1)
    Commercial
and
Industrial
    % of
Total(1)
    Small-ticket
Commercial
Real Estate
    % of
Total(1)
    Total
Commercial
    % of
Total(1)
 

Geographic concentration:(2)

               

Loans:

               

Northeast

  $ 13,849        70.9   $ 5,619        25.7   $ 619        60.2   $ 20,087        47.4

Mid-Atlantic

    1,865        9.6        1,318        6.0        36        3.5        3,219        7.6   

South

    2,321        11.9        9,998        45.8        62        6.0        12,381        29.2   

Other

    1,386        7.1        4,725        21.6        311        30.3        6,422        15.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans

    19,421        99.5        21,660        99.1        1,028        100.0        42,109        99.3   

Acquired loans

    102        0.5        188        0.9        0        0.0        290        0.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 19,523        100.0   $ 21,848        100.0   $ 1,028        100.0   $ 42,399        100.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Internal risk rating:(3)

               

Loans:

               

Noncriticized

  $ 18,859        96.6   $ 21,078        96.5   $ 1,003        97.5   $ 40,940        96.5

Criticized performing

    492        2.5        466        2.1        10        1.0        968        2.3   

Criticized nonperforming

    70        0.4        116        0.5        15        1.5        201        0.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans

    19,421        99.5        21,660        99.1        1,028        100.0        42,109        99.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Acquired loans:

               

Noncriticized

    73        0.4        168        0.8        0        0.0        241        0.6   

Criticized performing

    29        0.1        20        0.1        0        0.0        49        0.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total acquired loans

    102        0.5        188        0.9        0        0.0        290        0.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 19,523        100.0   $ 21,848        100.0   $ 1,028        100.0   $ 42,399        100.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

    December 31, 2012  

(Dollars in millions)

  Commercial
&
Multifamily
Real Estate
    % of
Total(1)
    Commercial
and
Industrial
    % of
Total(1)
    Small-ticket
Commercial
Real Estate
    % of
Total(1)
    Total
Commercial
    % of
Total(1)
 

Geographic concentration:(2)

               

Loans:

               

Northeast

  $ 13,299        75.0   $ 5,460        27.4   $ 723        60.5   $ 19,482        50.2

Mid-Atlantic

    1,398        7.9        1,149        5.8        47        3.9        2,594        6.7   

South

    2,055        11.6        9,182        46.2        72        6.0        11,309        29.1   

Other

    853        4.8        3,869        19.4        354        29.6        5,076        13.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans

    17,605        99.3        19,660        98.8        1,196        100.0        38,461        99.1   

Acquired loans

    127        0.7        232        1.2        0        0.0        359        0.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 17,732        100.0   $ 19,892        100.0   $ 1,196        100.0   $ 38,820        100.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Internal risk rating:(3)

               

Loans:

               

Noncriticized

  $ 16,614        93.7   $ 19,073        95.9   $ 1,152        96.3   $ 36,839        94.9

Criticized performing

    853        4.8        454        2.3        33        2.8        1,340        3.5   

Criticized nonperforming

    138        0.8        133        0.6        11        0.9        282        0.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans

    17,605        99.3        19,660        98.8        1,196        100.0        38,461        99.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Acquired loans:

               

Noncriticized

    77        0.4        228        1.2        0        0.0        305        0.8   

Criticized performing

    50        0.3        4        0.0        0        0.0        54        0.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total acquired loans

    127        0.7        232        1.2        0        0.0        359        0.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 17,732        100.0   $ 19,892        100.0   $ 1,196        100.0   $ 38,820        100.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Percentages calculated based on total held-for-investment commercial loans in each respective loan category as of the end of the reported period.

(2)

Northeast consists of CT, ME, MA, NH, NJ, NY, PA and VT. Mid-Atlantic consists of DE, DC, MD, VA and WV. South consists of AL, AR, FL, GA, KY, LA, MS, MO, NC, SC, TN and TX.

(3) 

Criticized exposures correspond to the “Special Mention,” “Substandard” and “Doubtful” asset categories defined by banking regulatory authorities.

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

The following table presents information about our impaired loans, excluding acquired loans, which are reported separately and discussed below as of September 30, 2013 and December 31, 2012:

Table 4.9: Impaired Loans

 

    September 30, 2013  

(Dollars in millions)

  With an
Allowance
    Without
an
Allowance
    Total
Recorded
Investment
    Related
Allowance
    Net
Recorded
Investment
    Unpaid
Principal
Balance
    Average
Recorded
Investment
    Interest
Income
Recognized
 

Credit card and installment loans:

               

Domestic credit card and installment loans

  $ 623      $ 0      $ 623      $ 145      $ 478      $ 607      $ 656      $ 50   

International credit card and installment loans

    168        0        168        104        64        161        169        8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total credit card and installment loans(1)

    791        0        791        249        542        768        825        58   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consumer banking:

               

Auto

    163        175        338        16        322        563        330        46   

Home loan

    217        0        217        17        200        255        184        5   

Retail banking

    68        23        91        18        73        233        94        2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer banking

    448        198        646        51        595        1,051        608        53   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial banking:

               

Commercial and multifamily real estate

    78        93        171        4        167        154        237        0   

Commercial and industrial

    108        99        207        15        192        267        227        1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial lending

    186        192        378        19        359        421        464        1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Small-ticket commercial real estate

    16        0        16        7        9        24        19        0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial banking

    202        192        394        26        368        445        483        1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 1,441      $ 390      $ 1,831      $ 326      $ 1,505      $ 2,264      $ 1,916      $ 112   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

    December 31, 2012  

(Dollars in millions)

  With an
Allowance
    Without
an
Allowance
    Total
Recorded
Investment
    Related
Allowance
    Net
Recorded
Investment
    Unpaid
Principal
Balance
    Average
Recorded
Investment
    Interest
Income
Recognized
 

Credit card and installment loans:

               

Domestic credit card and installment loans

  $ 701      $ 0      $ 701      $ 230      $ 471      $ 678      $ 687      $ 70   

International credit card and installment loans

    172        0        172        101        71        164        192        11   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total credit card and installment loans(1)

    873        0        873        331        542        842        879        81   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consumer banking:

               

Auto

    169        159        328        20        308        606        130        31   

Home loan

    145        0        145        13        132        167        120        4   

Retail banking

    61        35        96        7        89        118        88        3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer banking

    375        194        569        40        529        891        338        38   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial banking:

               

Commercial and multifamily real estate

    168        112        280        32        248        315        353        8   

Commercial and industrial

    152        92        244        22        222        277        227        6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial lending

    320        204        524        54        470        592        580        14   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Small-ticket commercial real estate

    3        11        14        1        13        21        23        0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial banking

    323        215        538        55        483        613        603        14   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 1,571      $ 409      $ 1,980      $ 426      $ 1,554      $ 2,346      $ 1,820      $ 133   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Credit card and installment loans include finance charges and fees.

Troubled debt restructuring (“TDR”) loans accounted for $1.7 billion and $1.8 billion of impaired loans as of September 30, 2013 and December 31, 2012, respectively. Consumer TDR loans classified as performing totaled $996 million and $1.2 billion as of September 30, 2013 and December 31, 2012, respectively. Commercial TDR loans classified as performing totaled $193 million and $253 million as of September 30, 2013 and December 31, 2012, respectively.

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

As part of our loan modifications 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 types, amounts and financial effects of loans modified and accounted for as troubled debt restructurings during the period:

Table 4.10: Troubled Debt Restructurings

 

            Three Months Ended September 30, 2013  
            Reduced Interest Rate     Term Extension      Balance Reduction  

(Dollars in millions)

   Total
Loans
Modified(1)
     % of
TDR
Activity(2)(8)
    Average
Rate
Reduction(3)
    % of
TDR
Activity(4)(8)
    Average
Term
Extension
(Months)(5)
     % of
TDR
Activity(6)(8)
    Gross
Balance
Reduction(7)
 

Credit card:

                

Domestic credit card

   $ 80         100     11.24     0     0         0   $ 0   

International credit card

     46         100        25.26        0        0         0        0   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total credit card

     126         100        16.34        0        0         0        0   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Consumer banking:

                

Auto

     73         32        1.04        54        9         45        30   

Home loan

     10         45        3.33        58        25         13        0   

Retail banking

     6         9        3.89        60        6         0        0   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total consumer banking

     89         31        1.45        55        11         38        30   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Commercial banking:

                

Commercial and multifamily real estate

     18         67        1.74        54        43         0        0   

Commercial and industrial

     15         0        0.00        100        7         0        0   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total commercial lending

     33         36        1.74        75        21         0        0   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Small-ticket commercial real estate

     4         0        0.00        0        0         0        0   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total commercial banking

     37         32        1.74        67        21         0        0   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 252         66     12.79     29     14         14   $ 30   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

            Nine Months Ended September 30, 2013  
            Reduced Interest Rate     Term Extension      Balance Reduction  

(Dollars in millions)

   Total
Loans
Modified(1)
     % of
TDR
Activity(2)(8)
    Average
Rate
Reduction(3)
    % of
TDR
Activity(4)(8)
    Average
Term
Extension
(Months)(5)
     % of
TDR
Activity(6)(8)
    Gross
Balance
Reduction(7)
 

Credit card:

                

Domestic credit card

   $ 234         100     11.90     0     0         0   $ 0   

International credit card

     144         100        24.89        0        0         0        0   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total credit card

     378         100        16.85        0        0         0        0   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Consumer banking:

                

Auto

     196         31        1.53        54        9         45        79   

Home loan

     78         23        2.95        18        99         22        3   

Retail banking

     25         6        3.61        61        8         0        0   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total consumer banking

     299         27        1.89        45        18         35        82   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Commercial banking:

                

Commercial and multifamily real estate

     50         24        1.74        76        16         0        0   

Commercial and industrial

     31         0        0        68        7         1        0   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total commercial lending

     81         15        1.74        73        13         0        0   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Small-ticket commercial real estate

     5         0        0        0        0         0        0   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total commercial banking

     86         14        1.74        69        13         0        0   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 763         62     13.93     25     16         14   $ 82   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

          Three Months Ended September 30, 2012  
          Reduced Interest Rate     Term Extension     Balance Reduction  

(Dollars in millions)

  Total
Loans
Modified(1)
    % of
TDR
Activity(2)(8)
    Average
Rate
Reduction(3)
    % of TDR
Activity(4)(8)
    Average
Term
Extension
(Months)(5)
    % of
TDR
Activity(6)(8)
    Gross
Balance
Reduction(7)
 

Credit card:

             

Domestic credit card

  $ 109        100     11.77     0     0        0   $ 0   

International credit card

    51        99        24.38        0        0        0        0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total credit card

    160        100        15.82        0        0        0        0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consumer banking:

             

Auto

    213        73        10.62        76        17        89        143   

Home loan

    41        83        2.96        79        148        67        9   

Retail banking

    5        7        1.30        95        7        0        0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer banking

    259        73        9.25        77        38        84        152   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial banking:

             

Commercial and multifamily real estate

    1        0        0.00        100        24        0        0   

Commercial and industrial

    33        10        1.11        98        20        0        0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial lending

    34        10        1.11        98        20        0        0   

Small-ticket commercial real estate

    0        0        0.00        0        0        0        0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial banking

    34        10        1.11        98        20        0        0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 453        78     12.15     51     35        48   $ 152   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

          Nine Months Ended September 30, 2012  
          Reduced Interest Rate     Term Extension     Balance Reduction  

(Dollars in millions)

  Total
Loans
Modified(1)
    % of
TDR
Activity(2)(8)
    Average
Rate
Reduction(3)
    % of  TDR
Activity(4)(8)
    Average
Term
Extension
(Months)(5)
    % of
TDR
Activity(6)(8)
    Gross
Balance
Reduction(7)
 

Credit card:

             

Domestic credit card

  $ 254        100     11.24     0     0        0   $ 0   

International credit card

    166        99        24.17        0        0        0        0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total credit card

    420        100        15.39        0        0        0        0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consumer banking:

             

Auto

    258        73        9.07        80        15        74        143   

Home loan

    58        67        2.49        72        131        49        9   

Retail banking

    19        2        1.72        99        10        0        0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer banking

    335        68        7.93        80        33        65        152   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial banking:

             

Commercial and multifamily real estate

    29        16        1.72        100        10        0        0   

Commercial and industrial

    99        7        4.18        98        15        0        0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial lending

    128        9        3.24        99        14        0        0   

Small-ticket commercial real estate

    0        0        0.00        0        0        0        0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial banking

    128        9        3.24        99        14        0        0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 883        75     12.60     44     27        25   $ 152   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Represents total loans modified and accounted for as a TDR during the period. Paydowns, charge-offs and any other changes in the loan carrying value subsequent to the loan entering TDR status are not reflected.

(2) 

Percentage of loans modified and accounted for as a TDR during the period that were granted a reduced interest rate.

(3) 

Weighted average interest rate reduction for those loans that received an interest rate concession.

(4) 

Percentage of loans modified and accounted for as a TDR during the period that were granted a maturity date extension.

(5) 

Weighted average change in maturity date for those loans that received a maturity date extension.

(6) 

Percentage of loans modified and accounted for as a TDR during the period that were granted forgiveness or forbearance of a portion of their balance.

(7) 

Total amount 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.

(8) 

Due to multiple concessions granted to some troubled borrowers, percentages may total more than 100% for certain loan types.

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

TDR—Subsequent Payment Defaults of Completed TDR Modifications

The following table presents the type, number and amount of loans accounted for as TDRs that experienced a payment default during the period and had completed a modification event in the twelve months prior to the payment default. A payment default occurs if the loan is either 90 days or more delinquent or the loan has been charged-off as of the end of the period presented.

Table 4.11: TDR—Subsequent Payment Defaults

 

     Three Months Ended September 30, 2013      Nine Months Ended September 30, 2013  

(Dollars in millions)

   Number of
Contracts
     Total
Loans
     Number of
Contracts
     Total
Loans
 

Credit card:

           

Domestic credit card

     10,114       $ 16         28,957       $ 53   

International credit card(1)

     12,641         36         35,769         104   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total credit card

     22,755         52         64,726         157   
  

 

 

    

 

 

    

 

 

    

 

 

 

Consumer banking:

           

Auto

     2,321         17         7,178         49   

Home loan

     7         1         25         2   

Retail banking

     41         3         99         5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer banking

     2,369         21         7,302         56   
  

 

 

    

 

 

    

 

 

    

 

 

 

Commercial banking:

           

Commercial and multifamily real estate

     3         4         10         15   

Commercial and industrial

     13         11         20         19   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial lending

     16         15         30         34   

Small-ticket commercial real estate

     0         0         1         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial banking

     16         15         31         34   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     25,140       $ 88         72,059       $ 247   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

     Three Months Ended September 30, 2012      Nine Months Ended September 30, 2012  

(Dollars in millions)

   Number of
Contracts
     Total
Loans
     Number of
Contracts
     Total
Loans
 

Credit card:

           

Domestic credit card

     12,314       $ 22         30,484       $ 61   

International credit card(1)

     11,903         40         36,956         127   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total credit card

     24,217         62         67,440         188   
  

 

 

    

 

 

    

 

 

    

 

 

 

Consumer banking:

           

Auto

     1,121         10         2,986         27   

Home loan

     12         1         79         7   

Retail banking

     14         2         83         9   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer banking

     1,147         13         3,148         43   
  

 

 

    

 

 

    

 

 

    

 

 

 

Commercial banking:

           

Commercial and multifamily real estate

     0         0         5         8   

Commercial and industrial

     4         2         12         17   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial lending

     4         2         17         25   

Small-ticket commercial real estate

     0         0         3         2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial banking

     4         2         20         27   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     25,368       $ 77         70,608       $ 258   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

The regulatory regime in the U.K. requires U.K. credit card businesses to accept payment plan proposals even when the proposed payments are 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.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

Outstanding Balance and Carrying Value of Acquired Loans

The table below presents the outstanding contractual balance and the carrying value of loans from the CCB, ING Direct and 2012 U.S. card acquisitions accounted for based on expected cash flows as of September 30, 2013 and December 31, 2012. The table displays separately loans considered credit-impaired at acquisition and loans not considered credit-impaired at acquisition.

Table 4.12: Acquired Loans

 

     September 30, 2013      December 31, 2012  

(Dollars in millions)

   Total      Impaired
Loans
     Non-
Impaired
Loans
     Total      Impaired
Loans
     Non-
Impaired
Loans
 

Contractual balance

   $ 32,266       $ 5,318       $ 26,948       $ 39,321       $ 6,195       $ 33,126   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Carrying value(1)

   $ 30,125       $ 3,447       $ 26,678       $ 37,109       $ 4,069       $ 33,040   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Includes $32 million and $57 million of cumulative impairment as of September 30, 2013 and December 31, 2012, respectively.

Changes in Accretable Yield

We decreased the allowance related to these loans by $10 million and $25 million for the three and nine months ended September 30, 2013, respectively. We recorded impairment benefit of $10 million through our provision for credit losses and increased the allowance by $31 million for the three months ended September 30, 2013 and 2012, respectively. We recorded an impairment benefit of $25 million and impairment increase of $42 million for the nine months ended September 30, 2013 and 2012, respectively. The cumulative impairment recognized on these acquired loans totaled $32 million and $57 million as of September 30, 2013 and December 31, 2012, respectively.

The following table presents changes in the accretable yield on loans related to the CCB, ING Direct, and 2012 U.S. card acquisitions:

Table 4.13: Changes in Accretable Yield on Acquired Loans

 

(Dollars in millions)

   Total
Loans
    Impaired
Loans
    Non-
Impaired
Loans
 

Accretable yield as of December 31, 2011

   $ 1,752      $ 1,566      $ 186   

Acquired loans accretable yield(1)

     5,616        306        5,310   

Accretion recognized in earnings

     (1,316     (390     (926

Reclassifications from nonaccretable difference for loans with improving cash flows(2)(3)

     860        448        412   

Reductions in accretable yield for non-credit related changes in expected cash flows(4)

     (704     (31     (673
  

 

 

   

 

 

   

 

 

 

Accretable yield as of December 31, 2012

   $ 6,208      $ 1,899      $ 4,309   
  

 

 

   

 

 

   

 

 

 

Accretion recognized in earnings

     (879     (313     (566

Reclassifications from nonaccretable difference for loans with improving cash flows(2)

     883        538        345   

Increases/(Reductions) in accretable yield for non-credit related changes in expected cash flows(4)

     397        (25     422   
  

 

 

   

 

 

   

 

 

 

Accretable yield as of September 30, 2013

   $ 6,609      $ 2,099      $ 4,510   
  

 

 

   

 

 

   

 

 

 

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

 

(1) 

Includes revised acquisition date accretable yield for ING Direct acquired loans.

(2) 

Represents increases in accretable yields for those pools with increases that are primarily the result of improved credit performance.

(3) 

Includes the implementation of the 2012 OCC update to the Bank Accounting Advisory Series, which requires write-down of performing consumer loans restructured in bankruptcy to collateral value. Includes reductions of $28 million and $44 million for purchased credit-impaired loans and non-impaired loans, respectively.

(4) 

Represents changes in accretable yields for those pools with reductions that are driven primarily by changes in actual and estimated prepayments.

Unfunded Lending Commitments

We manage the potential risk in credit commitments by limiting the total amount of arrangements, both by individual customer and in total, by monitoring the size and maturity structure of these portfolios and by applying the same credit standards for all of our credit activities. Unused credit card lines available to our customers totaled $276.6 billion and $298.9 billion as of September 30, 2013 and December 31, 2012, respectively. While these amounts represented the total available 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.

In addition to available unused credit card lines, we enter into commitments to extend credit that are legally binding conditional agreements having fixed expirations or termination dates and specified interest rates and purposes. These commitments generally require customers to maintain certain credit standards. Collateral requirements and loan-to-value 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. The outstanding unfunded commitments to extend credit, other than credit card lines, were approximately $20.6 billion and $17.5 billion as of September 30, 2013 and December 31, 2012, respectively.

We maintain a reserve for unfunded loan commitments and letters of credit to absorb estimated probable losses related to these unfunded credit facilities in other liabilities on our consolidated balance sheets. See “Note 5— Allowance for Loan and Lease Losses” below for additional information.

 

 

NOTE 5—ALLOWANCE FOR LOAN AND LEASE LOSSES

 

We maintain an allowance for loan and lease losses 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. We do not maintain an allowance for held-for-sale loans or acquired loans that are performing, in accordance with or better than our expectations, as of the date of acquisition, as the fair value of these loans already reflect a credit component.

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 unfunded lending commitments is included in the provision for credit losses on our consolidated statements of income and the related reserve for unfunded lending commitments is included in other liabilities on our consolidated balance sheets.

In the first quarter of 2013, we changed our process for estimating the allowance and reserve for unfunded lending commitments for our commercial loan portfolio. See “Note 5—Allowance for Loan and Lease Losses” in our Quarterly Report on Form 10-Q for the period ended March 31, 2013 for more information. These changes resulted in a net increase in the combined allowance and reserve for unfunded lending commitments of $37 million as of March 31, 2013 and a corresponding increase in the provision for credit losses of $37 million in the first quarter of 2013. The gross impact of these changes resulted in a decrease in the allowance of $2 million and

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

an increase in the reserve for unfunded lending commitments of $39 million as of March 31, 2013. We do not expect these changes to have a material impact on our future allowance and reserve for unfunded lending commitments for our commercial loan portfolio.

See “Note 1—Summary of Significant Accounting Policies” of our 2012 Form 10-K for further discussion on the methodologies and policies for determining our allowance for loan and lease losses for each of our loan portfolio segments.

Allowance for Loan and Lease Losses Activity

The allowance for loan and lease losses is increased through the provision for credit losses and reduced by net charge-offs. The provision for credit losses, which is charged to earnings, 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 included. The table below summarizes changes in the allowance for loan and lease losses, by portfolio segment, for the three months ended September 30, 2013 and 2012:

Table 5.1: Allowance for Loan and Lease Losses

 

(Dollars in millions)

  Three Months Ended September 30, 2013  
  Credit
Card
    Consumer     Commercial     Other(1)     Total
Allowance
    Unfunded
Lending
Commitments
Reserve
    Combined
Allowance
&
Unfunded
Reserve
 
    Auto     Home
Loan
    Retail
Banking
    Total
Consumer
           

Balance as of June 30, 2013

  $ 3,349      $ 537      $ 79      $ 86      $ 702      $ 338      $ 18      $ 4,407      $ 69      $ 4,476   

Provision for credit losses

    617        200        5        (3     202        11        (1     829        20        849   

Charge-offs

    (1,036     (210     (6     (18     (234     (17     (7     (1,294     0        (1,294

Recoveries

    302        58        1        5        64        9        2        377        0        377   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

    (734     (152     (5     (13     (170     (8     (5     (917     0        (917

Other changes(2)

    13        0        (1     0        (1     0        2        14        0        14   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of September 30, 2013

  $ 3,245      $ 585      $ 78      $ 70      $ 733      $ 341      $ 14      $ 4,333      $ 89      $ 4,422   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(Dollars in millions)

  Nine Months Ended September 30, 2013  
  Credit
Card
    Consumer     Commercial     Other(1)     Total
Allowance
    Unfunded
Lending
Commitments
Reserve
    Combined
Allowance
&
Unfunded
Reserve
 
    Auto     Home
Loan
    Retail
Banking
    Total
Consumer
           

Balance as of December 31, 2012

  $ 3,979      $ 486      $ 113      $ 112      $ 711      $ 433      $ 33      $ 5,156      $ 35      $ 5,191   

Provision for credit losses

    2,073        464        (22     2        444        (73     (2     2,442        54        2,496   

Charge-offs

    (3,479     (545     (18     (62     (625     (43     (22     (4,169     0        (4,169

Recoveries

    973        179        5        18        202        24        5        1,204        0        1,204   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

    (2,506     (366     (13     (44     (423     (19     (17     (2,965     0        (2,965

Other changes(2)

    (301     1        0        0        1        0        0        (300     0        (300
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of September 30, 2013

  $ 3,245      $ 585      $ 78      $ 70      $ 733      $ 341      $ 14      $ 4,333      $ 89      $ 4,422   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

(Dollars in millions)

  Three Months Ended September 30, 2012  
  Credit
Card
    Consumer     Commercial     Other(1)     Total
Allowance
    Unfunded
Lending
Commitments
Reserve
    Combined
Allowance
&
Unfunded
Reserve
 
    Auto     Home
Loan
    Retail
Banking
    Total
Consumer
           

Balance as of June 30, 2012

  $ 3,750      $ 447      $ 87      $ 135      $ 669      $ 535      $ 44      $ 4,998      $ 51      $ 5,049   

Provision for credit losses

    892        138        64        1        203        (74     7        1,028        (14     1,014   

Charge-offs

    (981     (166     (37     (18     (221     (9     (13     (1,224     0        (1,224

Recoveries

    268        51        5        4        60        8        1        337        0        337   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

    (713     (115     (32     (14     (161     (1     (12     (887     0        (887

Other changes(2)

    15        0        0        0        0        0        0        15        0        15   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of September 30, 2012

  $ 3,944      $ 470      $ 119      $ 122      $ 711      $ 460      $ 39      $ 5,154      $ 37      $ 5,191   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(Dollars in millions)

  Nine Months Ended September 30, 2012  
  Credit
Card
    Consumer     Commercial     Other(1)     Total
Allowance
    Unfunded
Lending
Commitments
Reserve
    Combined
Allowance
&
Unfunded
Reserve
 
    Auto     Home
Loan
    Retail
Banking
    Total
Consumer
           

Balance as of December 31, 2011

  $ 2,847      $ 391      $ 98      $ 163      $ 652      $ 715      $ 36      $ 4,250      $ 66      $ 4,316   

Provision for credit losses

    3,062        341        80        0        421        (221     31        3,293        (29     3,264   

Charge-offs

    (2,844     (428     (80     (58     (566     (69     (31     (3,510     0        (3,510

Recoveries

    863        166        21        17        204        35        3        1,105        0        1,105   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

    (1,981     (262     (59     (41     (362     (34     (28     (2,405     0        (2,405

Other changes(2)

    16        0        0        0        0        0        0        16        0        16   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of September 30, 2012

  $ 3,944      $ 470      $ 119      $ 122      $ 711      $ 460      $ 39      $ 5,154      $ 37      $ 5,191   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Other consists of our discontinued GreenPoint mortgage operations loan portfolio and our community redevelopment loan portfolio.

(2) 

Consists of a reduction in the allowance of $289 million, which was attributable to Portfolio Sale, in the first nine months of 2013, and a foreign translation gain of $14 million and a foreign translation loss of $11 million in the third quarter and first nine months of 2013, respectively. Consists of a foreign translation gain of $15 million and $16 million for the third quarter and first nine months of 2012, respectively.

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

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 loan category and impairment methodology, and the recorded investment of the related loans as of September 30, 2013 and December 31, 2012:

Table 5.2: Components of Allowance for Loan and Lease Losses by Impairment Methodology

 

(Dollars in millions)

  September 30, 2013  
  Credit
Card
    Consumer     Total
Consumer
    Commercial     Other     Total  
    Auto     Home
Loan
    Retail
Banking
         

Allowance for loan and lease losses by impairment methodology:

               

Collectively evaluated(1)

  $ 2,996      $ 569      $ 33      $ 52      $ 654      $ 312      $ 14      $ 3,976   

Asset-specific(2)

    249        16        17        18        51        26        0        326   

Acquired loans(3)

    0        0        28        0        28        3        0        31   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total allowance for loan and lease losses

  $ 3,245      $ 585      $ 78      $ 70      $ 733      $ 341      $ 14      $ 4,333   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Held-for-investment loans by impairment methodology:

               

Collectively evaluated(1)

  $ 77,103      $ 30,459      $ 6,957      $ 3,542      $ 40,958      $ 41,714      $ 129      $ 159,904   

Asset-specific(2)

    791        338        217        91        646        394        0        1,831   

Acquired loans(3)

    73        6        29,643        32        29,681        291        34        30,079   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total held-for-investment loans

  $ 77,967      $ 30,803      $ 36,817      $ 3,665      $ 71,285      $ 42,399      $ 163      $ 191,814   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance as a percentage of period-end held-for-investment loans

    4.16     1.90     0.21     1.91     1.03     0.80     8.59     2.26

 

(Dollars in millions)

  December 31, 2012  
  Credit
Card
    Consumer     Total
Consumer
    Commercial     Other     Total  
    Auto     Home
Loan
    Retail
Banking
         

Allowance for loan and lease losses by impairment methodology:

               

Collectively evaluated(1)

  $ 3,648      $ 466      $ 47      $ 104      $ 617      $ 376      $ 32      $ 4,673   

Asset-specific(2)

    331        20        13        7        40        54        1        426   

Acquired loans(3)

    0        0        53        1        54        3        0        57   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total allowance for loan and lease losses

  $ 3,979      $ 486      $ 113      $ 112      $ 711      $ 433      $ 33      $ 5,156   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Held-for-investment loans by impairment methodology:

               

Collectively evaluated(1)

  $ 90,594      $ 26,778      $ 7,552      $ 3,774      $ 38,104      $ 37,923      $ 154      $ 166,775   

Asset-specific(2)

    873        328        145        96        569        538        0        1,980   

Acquired loans(3)

    288        17        36,403        34        36,454        359        33        37,134   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total held-for-investment loans

  $ 91,755      $ 27,123      $ 44,100      $ 3,904      $ 75,127      $ 38,820      $ 187      $ 205,889   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance as a percentage of period-end held-for-investment loans

    4.34     1.79     0.26     2.87     0.95     1.12     17.65     2.50

 

(1) 

The component of the allowance for credit card and other consumer loans that we collectively evaluate for impairment is based on a statistical calculation. The component of the allowance for commercial loans, which 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) 

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.

(3) 

The acquired loans component of the allowance is accounted for based on expected cash flows. See “Note 4—Loans” for details on these loans.

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

 

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. Historically, our primary involvement with VIEs has been related to our securitization transactions in which we transferred assets from our balance sheet to securitization trusts. These securitization trusts typically meet the definition of a VIE. We have generally securitized credit card loans, auto loans, home loans and installment 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 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 vast majority of the VIEs in which we are involved have been consolidated in our financial statements.

Summary of Consolidated and Unconsolidated VIEs

The table below presents a summary of VIEs, aggregated based on VIEs with similar characteristics, in which we had continuing involvement or held a variable interest as of September 30, 2013 and December 31, 2012. We separately present information for consolidated and unconsolidated VIEs.

For consolidated VIEs, we present the carrying amount of assets and liabilities reflected on our consolidated balance sheets. The assets of consolidated VIEs primarily consist of cash and loans, which we report on our consolidated balance sheets under restricted cash and restricted loans, respectively, for securitization investors. The assets of a particular VIE are the primary source of funds to settle its obligations. The creditors of the VIEs typically do not have recourse to the general credit of our 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 became worthless and we were required to meet our maximum remaining funding obligations.

Table 6.1: Carrying Amount of Consolidated and Unconsolidated VIEs

 

     September 30, 2013  
     Consolidated      Unconsolidated  

(Dollars in millions)

   Carrying
Amount
of Assets
     Carrying
Amount of
Liabilities
     Carrying
Amount
of Assets
     Carrying
Amount of
Liabilities
     Maximum
Exposure to
Loss
 

Securitization-related VIEs:

              

Credit card loan securitizations(1)

   $ 39,837       $ 11,850       $ 0       $ 0       $ 0   

Home loan securitizations(2)

     34         31         201         17         224   

Other asset securitizations(1)

     0         0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total securitization-related VIEs

     39,871         11,881         201         17         224   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other VIEs:

              

Affordable housing entities

     0         0         2,887         420         2,887   

Entities that provide capital to low-income and rural communities

     389         98         6         5         6   

Other

     1         0         100         0         100   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total other VIEs

     390         98         2,993         425         2,993   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total VIEs

   $ 40,261       $ 11,979       $ 3,194       $ 442       $ 3,217   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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     December 31, 2012  
     Consolidated      Unconsolidated  

(Dollars in millions)

   Carrying
Amount
of Assets
     Carrying
Amount of
Liabilities
     Carrying
Amount
of Assets
     Carrying
Amount of
Liabilities
     Maximum
Exposure to
Loss
 

Securitization-related VIEs:

              

Credit card loan securitizations(1)

   $ 44,238       $ 13,488       $ 0       $ 0       $ 0   

Home loan securitizations(2)

     41         38         212         17         237   

Other asset securitizations(1)

     19         19         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total securitization-related VIEs

     44,298         13,545         212         17         237   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other VIEs:

              

Affordable housing entities

     0         0         2,390         414         2,390   

Entities that provide capital to low-income and rural communities

     375         88         6         4         6   

Other

     1         0         201         86         201   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total other VIEs

     376         88         2,597         504         2,597   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total VIEs

   $ 44,674       $ 13,633       $ 2,809       $ 521       $ 2,834   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Represents the gross assets and liabilities owned by the VIE, which includes seller’s interest and retained and repurchased notes held by other related parties.

(2) 

The carrying amount of assets of non-consolidated securitization-related VIEs consists of retained interests associated with the securitization of option-adjustable rate mortgage loans (“option-arms”) and letters of credit related to manufactured housing securitizations. These are reported on our consolidated balance sheets under other assets. The carrying amount of liabilities of non-consolidated securitization-related VIEs is comprised of obligations on certain swap agreements associated with the securitization of manufactured housing loans.

Securitization-related VIEs

In a securitization transaction, assets from our balance sheet are transferred to a trust we establish, which typically meets the definition of a VIE. The trust then issues various forms of interests in those assets to investors. We typically receive cash proceeds and/or other interests in the securitization trust for the assets we transfer. If the transfer of the assets to an unconsolidated securitization trust qualifies as a sale, we remove the assets from our consolidated balance sheet and recognize a gain or loss on the transfer. Alternatively, if the transfer does not qualify as a sale but instead is considered a secured borrowing or the transfer of assets is to a consolidated VIE, the assets remain on our consolidated balance sheets and we record an offsetting liability for the proceeds received.

Our continuing involvement in the majority of our securitization transactions consists primarily of holding certain retained interests and acting as the primary servicer. We have the option to repurchase receivables from the trust if the outstanding balance of the receivables falls to a level where the cost exceeds the benefits of servicing such receivables. In some cases, we are contractually required to exercise the repurchase option if the primary servicer fails to do so. We also may have exposure associated with contractual obligations to repurchase previously transferred loans due to breaches of representations and warranties. See “Note 14—Commitments, Contingencies and Guarantees” for information related to reserves we have established for our potential mortgage representation and warranty exposure.

 

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The table below presents the securitization-related VIEs in which we had continuing involvement as of September 30, 2013 and December 31, 2012:

Table 6.2: Continuing Involvement in Securitization-Related VIEs

 

     Non-Mortgage      Mortgage  

(Dollars in millions)

   Credit
Card
     Other
Loan
     Option
Arm
    GreenPoint
HELOCs
    GreenPoint
Manufactured
Housing
 

September 30, 2013:

            

Securities held by third-party investors

   $ 9,513       $ 0       $ 2,400      $ 129      $ 1,025   

Receivables in the trust

     39,447         0         2,482        123        1,031   

Cash balance of spread or reserve accounts

     3         0         8        N/A        147   

Retained interests

     Yes         Yes         Yes        Yes        Yes   

Servicing retained

     Yes         Yes         Yes (1)      Yes (1)      No (2) 

Amortization event(3)

     No         No         No        No        No   

December 31, 2012:

            

Securities held by third-party investors

   $ 11,347       $ 13       $ 2,702      $ 158      $ 1,117   

Receivables in the trust

     43,811         19         2,794        151        1,123   

Cash balance of spread or reserve accounts

     0         0         8        0        164   

Retained interests

     Yes         Yes         Yes        Yes        Yes   

Servicing retained

     Yes         Yes         Yes (1)      Yes (1)      No (2) 

Amortization event(3)

     No         No         No        Yes        No   

 

(1) 

We continue to service some of the outstanding balance of securitized mortgage receivables.

(2) 

The core servicing activities for the manufactured housing securitizations are done 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 such as charge-off rates or delinquency rates below certain predetermined thresholds. Generally, the occurrence of an amortization event changes the sequencing and amount of trust-related cash flows to the benefit of senior noteholders.

Non-Mortgage Securitizations

As of September 30, 2013 and December 31, 2012, we were deemed to be the primary beneficiary of all of our non-mortgage securitization trusts. Accordingly, all of these trusts have been consolidated in our financial statements. For additional information on our principal involvement with non-mortgage securitization trusts and the impact of the consolidation of these trusts on our financial statements, see “Note 1—Summary of Significant Accounting Policies” and “Note 7—Variable Interest Entities and Securitizations” of our 2012 Form 10-K.

Mortgage Securitizations

Option-ARM Loans

We had previously securitized option-ARM mortgage loans by transferring the mortgage 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 our mortgage loan securitization trusts was $2.4 billion and $2.7 billion as of September 30, 2013 and December 31, 2012, respectively.

We continue to service some of the outstanding balance of securitized mortgage receivables. We also retain rights to future cash flows arising from the receivables, 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 from securitized and sold receivables, using our best estimates of the

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

key assumptions which include credit losses, prepayment speeds and discount rates commensurate with the risks involved. For the trusts that we continue to service, we do not consolidate these entities because we do not have the right to receive benefits that could potentially be significant 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 because we do not have the power to direct the activities that most significantly impact the economic performance of the trusts.

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 the borrowers make principal payments, these securities receive their net pro rata portion of those payments in cash and advances of negative amortization are refunded accordingly. 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. 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. See “Note 9 —Derivative Instruments and Hedging Activities” for further details on these derivatives.

GreenPoint Mortgage HELOCs

Our discontinued wholesale mortgage banking unit, GreenPoint, previously sold home equity lines of credit in whole loan sales and subsequently acquired residual interests in certain trusts which securitized some of those loans. As the residual interest holder, GreenPoint is required to fund advances on the home equity lines of credit when certain performance triggers are met due to deterioration in asset performance. As of September 30, 2013 and December 31, 2012, we funded $29 million and $28 million in cumulative advances, respectively, which are generally expensed as funded due to the low likelihood of recovery. We also have unfunded commitments of $7 million and $8 million related to those interests for both our consolidated and non-consolidated VIEs as of September 30, 2013 and December 31, 2012, respectively. We were deemed to be the primary beneficiary, and have therefore consolidated, one of these trusts as of September 30, 2013 and December 31, 2012. We have not consolidated the remaining trusts because we either lack the power to direct the activities that most significantly impact the economic performance of the trust 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.

GreenPoint Mortgage Manufactured Housing

We retain the primary obligation for certain provisions of corporate guarantees, recourse sales and clean-up calls related to the discontinued manufactured housing operations of GreenPoint Credit LLC (“GPC”), which was sold to a third party in 2004. Although we are the primary obligor, recourse obligations related to former GPC whole loan sales, commitments to exercise mandatory clean-up calls on certain GPC securitization transactions and servicing were transferred to a third party in the sale transaction. We do not consolidate the trusts used for the securitization of manufactured housing loans because we do not have the power to direct the activities that most significantly impact the economic performance of the trusts since we no longer service the loans.

We were required to fund letters of credit in 2004 to cover losses and are obligated to fund future amounts under swap agreements for certain transactions. We have the right to receive any funds remaining in the letters of credit after the securities are released. The amount available under the letters of credit was $147 million and $164 million as of September 30, 2013 and December 31, 2012, respectively. The fair value of the expected residual balances on the funded letters of credit was $41 million and $50 million as of September 30, 2013 and December 31, 2012, respectively, and is included in other assets on the consolidated balance sheets.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

The unpaid principal balance of manufactured housing securitization transactions where we are the residual interest holder was $1.0 billion and $1.1 billion as of September 30, 2013 and December 31, 2012, respectively. In the event the third party servicer does not fulfill on its obligation to exercise the clean-up calls on certain transactions, the option reverts to us and we would assume approximately $420 million of loans receivable upon our execution of the clean-up call with the requirement to absorb any losses on the loans receivable.

We monitor the underlying assets for trends in delinquencies and related losses and review the purchaser’s financial strength as well as servicing performance. These factors are considered in assessing the adequacy of the liabilities established for these obligations and the valuations of the assets.

Other VIEs

Affordable Housing Entities

As part of our community reinvestment initiatives, we invest in private investment funds that make equity investments in multifamily 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. 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. As of September 30, 2013 and December 31, 2012 our interests consisted of assets of approximately $2.9 billion and $2.4 billion, respectively. Our maximum exposure to these entities is limited to our variable interests in the entities and was $2.9 billion as of September 30, 2013. The creditors of the VIEs have no recourse to our general credit and we do not provide additional financial or other support during the period that we were not previously contractually required to provide. The total assets of the unconsolidated investment funds that were VIEs as of September 30, 2013 and December 31, 2012 were approximately $8.7 billion and $7.7 billion, 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 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 we do not consider VIEs. The assets of the VIEs that we consolidated as of September 30, 2013 and as of December 31, 2012 totaled approximately $389 million and $375 million, respectively. The assets of the consolidated VIEs 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 total assets of the VIEs that we held an interest in but were not required to consolidate as of September 30, 2013 and December 31, 2012 totaled approximately $6 million. Our interests in these unconsolidated VIEs are reflected on our consolidated balance sheets in loans held for investment and other assets. Our maximum exposure to these entities is limited to our variable interest of $6 million as of September 30, 2013. The creditors of the VIEs have no recourse to our general credit. We have not provided additional financial or other support during the period that we were not previously contractually required to provide.

 

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Other

We also have a variable interest in a trust that has a royalty interest in certain oil and gas properties. The activities of the trust are financed solely with debt. The total assets of the trust were $215 million and $255 million as of September 30, 2013 and December 31, 2012, respectively. We were not required to consolidate the trust because we do not have the power to direct the activities of the trust that most significantly impact the trust’s economic performance. Our retained interest in the trust, which totaled approximately $98 million and $114 million as of September 30, 2013 and December 31, 2012, respectively, is reflected on our consolidated balance sheets under loans held for investment. Our maximum exposure is limited to our variable interest of $98 million as of September 30, 2013. The creditors of the trust have no recourse to our general credit. We have not provided additional financial or other support during the period that we were not previously contractually required to provide.

 

 

NOTE 7—GOODWILL AND OTHER INTANGIBLE ASSETS

 

The table below displays the components of goodwill and other intangible assets subject to amortization as of September 30, 2013 and December 31, 2012. Goodwill is presented separately on our consolidated balance sheets. Other intangible assets are included in other assets on our consolidated balance sheets.

Table 7.1: Components of Goodwill and Other Intangible Assets

 

     September 30, 2013      December 31, 2012  

(Dollars in millions)

   Gross
Carrying
Value
     Accumulated
Amortization
    Net
Carrying
Value
     Gross
Carrying
Value
     Accumulated
Amortization
    Net
Carrying
Value
 

Unamortized intangible assets:

               

Goodwill

   $ 13,906         N/A      $ 13,906       $ 13,904         N/A      $ 13,904   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Amortized intangible assets:

               

Purchased credit card relationship intangibles(1)

     2,125         (682     1,443         2,242         (378     1,864   

Core deposit intangibles

     1,771         (1,402     369         1,771         (1,275     496   

Other(2)

     329         (166     163         354         (143     211   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total amortized intangible assets

   $ 4,225       $ (2,250   $ 1,975       $ 4,367       $ (1,796   $ 2,571   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) 

During the first quarter of 2013, purchased credit card relationship intangibles with a net carrying value of $89 million related to the Best Buy loan portfolio, which was acquired in the 2012 U.S. card acquisition, was reclassified from intangibles to held for sale. See “Note 4 —Loans” for further discussion of the Portfolio Sale, which closed during the third quarter of 2013.

(2) 

Consists of brokerage relationship intangibles, partnership and other contract intangibles, trademark/name intangibles and other intangibles.

Amortization expense for amortized intangible assets, which is presented separately on our consolidated statements of income, totaled $161 million and $199 million for the three months ended September 30, 2013 and 2012, respectively and $505 million and $418 million for the nine months ended September 30, 2013 and 2012, respectively.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

The following table presents goodwill attributable to each of our business segments as of September 30, 2013 and December 31, 2012.

Table 7.2: Goodwill Attributable to Business Segments

 

     Credit     Consumer      Commercial         

(Dollars in millions)

   Card     Banking      Banking      Total  

Balance as of December 31, 2012

   $ 5,003      $ 4,583       $ 4,318       $ 13,904   

Acquisitions

     0        3         0         3   

Other adjustments

     (1     0         0         (1
  

 

 

   

 

 

    

 

 

    

 

 

 

Balance as of September 30, 2013

   $ 5,002      $ 4,586       $ 4,318       $ 13,906   
  

 

 

   

 

 

    

 

 

    

 

 

 

 

 

NOTE 8—DEPOSITS AND BORROWINGS

 

Customer Deposits

Our customer deposits, which are our largest source of funding for our operations and asset growth, consist of non-interest bearing and interest-bearing deposits, including demand deposits, money market deposits, negotiable order of withdrawal (“NOW”) accounts, savings accounts and certificates of deposit.

As of September 30, 2013, we had $184.6 billion in interest-bearing deposits, of which $3.6 billion represented large denomination certificates of $100,000 or more. As of December 31, 2012, we had $190.0 billion in interest-bearing deposits, of which $4.5 billion represents large denomination certificates of $100,000 or more.

Securitized Debt Obligations

Borrowings due to securitization investors decreased by $1.9 billion during the first nine months of 2013 to $9.5 billion as of September 30, 2013, from $11.4 billion as of December 31, 2012. The decrease is driven by maturities, paydowns, and repurchases of our securitization debt of $3.3 billion during the nine months ended September 30, 2013. These reductions were partially offset by the execution of $1.45 billion of credit card securitization transactions during the nine months ended September 30, 2013.

Other Debt

We filed a shelf registration statement with the U.S. Securities & Exchange Commission (“SEC”) on April 30, 2012, which will expire three years from the filing date, under which, from time to time, we may offer and sell an indeterminate aggregate amount of senior or subordinated debt securities, preferred stock, depository shares, common stock, purchase contracts, warrants and units. There is no limit under this shelf registration statement to the amount or number of such securities that we may offer and sell, subject to market conditions.

Senior and Subordinated Notes

As of September 30, 2013, we had $12.4 billion of senior and subordinated notes outstanding, net of fair value hedging losses of $124 million. As of December 31, 2012, we had $12.7 billion of senior and subordinated notes outstanding, net of fair value hedging losses of $857 million. In the first nine months of 2013, we issued $850 million of long-term senior unsecured debt. The offering of senior notes included $250 million of floating-rate debt due 2016 and $600 million of fixed-debt rate due 2018.

 

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In the first quarter of 2013, we exchanged $1.2 billion of outstanding 8.80% subordinated notes due 2019. The transaction involved offering current holders market value plus an exchange premium for these outstanding notes, which consideration was paid through a combination of $1.4 billion of new 3.375% subordinated notes due 2023 and cash of $209 million. In the second quarter of 2013, we exchanged $763 million of outstanding 6.75% senior notes due 2017. The transaction involved offering current holders market value plus an exchange premium for these outstanding notes, which consideration was paid through a combination of $839 million of new 3.5% senior notes due 2023 and cash of $88 million. Both exchanges were accounted for as a modification of debt.

See “Note 9—Derivative Instruments and Hedging Activities” for information about our fair value hedging activities.

Junior Subordinated Debentures

In the first quarter of 2013 in connection with our redemption of our trust preferred securities, we redeemed our junior subordinated debt with an aggregate carrying value of $3.65 billion, resulting in a $65 million loss on extinguishment of debt.

FHLB Advances

In addition to issuance capacity under the shelf registration statement, we have access to other borrowing programs, including advances from the FHLB. Our FHLB membership is secured by our investment in FHLB stock which totaled $423 million and $1.3 billion as of September 30, 2013 and December 31, 2012, respectively, and is included in other assets on our consolidated balance sheets.

We had outstanding FHLB advances, which were secured by our investment securities, residential home loans, multifamily loans, commercial real-estate loans and home equity lines of credit, totaling $8.2 billion and $20.9 billion as of September 30, 2013 and December 31, 2012, respectively.

Composition of Customer 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 September 30, 2013 and December 31, 2012. Our total short-term borrowings consist of federal funds purchased and securities loaned and 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 fair value hedge accounting adjustments.

Table 8.1: Components of Customer Deposits, Short-term Borrowings and Long-term Debt

 

(Dollars in millions)

   September 30,
2013
     December 31,
2012
 

Deposits:

     

Non-interest bearing deposits

   $ 22,281       $ 22,467   

Interest-bearing deposits

     184,553         190,018   
  

 

 

    

 

 

 

Total deposits

   $ 206,834       $ 212,485   
  

 

 

    

 

 

 

Short-term borrowings:

     

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

   $ 1,686       $ 1,248   

FHLB advances

     7,201         19,900   
  

 

 

    

 

 

 

Total short-term borrowings

   $ 8,887       $ 21,148   
  

 

 

    

 

 

 

 

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     September 30, 2013      December 31,
2012
 

(Dollars in millions)

   Maturity
Date
     Interest
Rate
    Weighted
Average
Interest Rate
    Outstanding
Amount
    

Long-term debt:

            

Securitized debt obligations

     2014 - 2030         0.22 - 6.40%        1.62   $ 9,544       $ 11,398   

Senior and subordinated notes:

            

Fixed unsecured senior debt

     2013 - 2023         1.00 - 7.38%        3.91     8,933         8,623   

Floating unsecured senior debt

     2014 - 2016         0.70 - 1.42%        1.01     750         500   
         

 

 

    

 

 

 

Total unsecured senior debt

          3.68     9,683         9,123   

Fixed unsecured subordinated debt

     2014 - 2023         3.38 - 8.80%        4.98     2,712         3,563   
         

 

 

    

 

 

 

Total senior and subordinated notes

            12,395         12,686   

Other long-term borrowings:

            

Fixed junior subordinated debt

     N/A         N/A        N/A        0         3,641   

FHLB advances

     2013 - 2023         0.33 - 6.88%        0.76     1,019         1,037   
         

 

 

    

 

 

 

Total long-term debt

          $ 22,958       $ 28,762   
         

 

 

    

 

 

 

Total short-term borrowings and long-term debt

          $ 31,845       $ 49,910   
         

 

 

    

 

 

 

Components of Interest Expense

The following table displays interest expense attributable to short-term borrowings and long-term debt for the three and nine months ended September 30, 2013 and 2012:

Table 8.2: Components of Interest Expense

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 

(Dollars in millions)

       2013              2012              2013              2012      

Short-term borrowings:

           

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

   $ 0       $ 0       $ 1       $ 1   

FHLB advances

     6         4         22         8   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total short-term borrowings

     6         4         23         9   
  

 

 

    

 

 

    

 

 

    

 

 

 

Long-term debt:

           

Securitized debt obligations(1)

     42         64         143         213   

Senior and subordinated notes:(1)

           

Unsecured senior debt

     58         56         174         170   

Unsecured subordinated debt

     18         29         66         90   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total senior and subordinated notes

     76         85         240         260   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other long-term borrowings:

           

Junior subordinated debt

     0         79         1         236   

FHLB advances

     2         2         7         8   

Other

     3         3         9         7   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total long-term debt

     123         233         400         724   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total short-term borrowings and long-term debt

   $ 129       $ 237       $ 423       $ 733   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Interest expense includes the impact from hedge accounting.

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

 

NOTE 9—DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

 

Use of Derivatives

We manage our asset/liability position and market risk exposure in accordance with prescribed risk management policies and limits established by our Market and Liquidity Risk Policy and approved by our Board of Directors. Our primary market risk stems 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 manage our interest rate sensitivity through several approaches, which include, but are not limited to, changing the maturity and re-pricing characteristics of various balance sheet categories and by entering into interest rate derivatives. Derivatives are also utilized to manage our exposure to changes in foreign exchange rates. Derivative instruments may be privately negotiated contracts, which are often referred to as over-the-counter (“OTC”) derivatives, or they may be listed and traded on an exchange. We execute our derivative contracts in both the OTC and exchange-traded derivative markets. In addition to interest rate swaps, we use a variety of other derivative instruments, including caps, floors, options, futures and forward contracts, to manage our interest rate and foreign currency risk. On a regular basis, we enter into customer-accommodation derivative transactions. We engage in these transactions as a service to our commercial banking customers to facilitate their risk management objectives. We typically offset the market risk exposure to our customer-accommodation derivatives through derivative transactions with other counterparties.

Accounting for Derivatives

We account for derivatives pursuant to the accounting standards for derivatives and hedging activities. The outstanding notional amount of our derivative contracts totaled $62.0 billion as of September 30, 2013, compared with $57.8 billion as of December 31, 2012. The notional amount provides an indication of the volume of our derivatives activity and is used as the basis on which interest and other payments are determined; however, it is generally not the amount exchanged. Derivatives are recorded at fair value in our consolidated balance sheets. The fair value of a derivative represents our estimate of the amount at which a derivative could be exchanged in an orderly transaction between market participants. We report derivatives in a gain position, or derivative assets, in our consolidated balance sheets as a component of other assets. We report derivatives in a loss position, or derivative liabilities, in our consolidated balance sheets as a component of other liabilities. We report derivative asset and liability amounts on a gross basis based on individual contracts, which does not take into consideration the effects of master netting agreements or collateral netting. The fair value of derivative assets and derivative liabilities reported in our consolidated balance sheets was $988 million and $587 million, respectively, as of September 30, 2013, compared with $1.8 billion and $400 million, respectively, as of December 31, 2012.

Our derivatives are designated as either qualifying accounting hedges or free-standing derivatives. Free-standing derivatives consist of customer-accommodation derivatives and economic hedges that we enter into for risk management purposes that are not linked to specific assets or liabilities or to forecasted transactions and, therefore, do not qualify for hedge accounting. Qualifying accounting hedges are designated as fair value hedges or cash flow hedges.

 

   

Fair Value Hedges: We designate derivatives as fair value hedges 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 liabilities.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

   

Cash Flow Hedges: We designate derivatives as cash flow hedges 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 occur. To the extent that any ineffectiveness exists in the hedge relationships, the amounts are recorded in current period earnings. Our cash flow hedges consist of interest rate swaps that are intended to hedge the variability in interest payments on some of our variable rate assets through 2018. These hedges have the effect of converting some of our variable rate assets to a fixed rate. We also have entered into forward foreign currency derivative contracts to hedge our exposure to variability in cash flows related to foreign currency denominated intercompany borrowings.

 

   

Free-Standing Derivatives: We use free-standing derivatives to hedge the risk of changes in the fair value of residential mortgage servicing rights (“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.

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

Balance Sheet Presentation

The following table summarizes the fair value and related outstanding notional amounts of derivative instruments reported in our consolidated balance sheets as of September 30, 2013 and December 31, 2012. The fair value amounts 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.

Table 9.1: Derivative Assets and Liabilities at Fair Value

 

     September 30, 2013      December 31, 2012  
     Notional or
Contractual
Amount
     Derivatives at Fair Value      Notional or
Contractual
Amount
     Derivatives at Fair Value  

(Dollars in millions)

          Assets              Liabilities                 Assets              Liabilities      

Derivatives designated as accounting hedges:

                 

Interest rate contracts:

                 

Fair value interest rate contracts

   $ 14,970       $ 336       $ 129       $ 15,902       $ 1,020       $ 0   

Cash flow interest rate contracts

     14,525         16         110         13,025         116         14   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total interest rate contracts

     29,495         352         239         28,927         1,136         14   

Foreign exchange contracts:

                 

Cash flow foreign exchange contracts

     4,515         15         60         5,212         18         40   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total foreign exchange contracts

     4,515         15         60         5,212         18         40   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives designated as accounting hedges

     34,010         367         299         34,139         1,154         54   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Derivatives not designated as accounting hedges:

                 

Interest rate contracts covering:

                 

MSRs

     262         1         3         147         12         2   

Customer accommodation

     23,126         399         201         18,900         479         273   

Other interest rate exposures

     2,068         33         18         2,553         45         22   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total interest rate contracts

     25,456         433         222         21,600         536         297   

Foreign exchange contracts

     1,398         183         46         1,372         158         46   

Other contracts

     1,086         5         20         701         0         3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives not designated as accounting hedges

     27,940         621         288         23,673         694         346   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives

   $ 61,950       $ 988       $ 587       $ 57,812       $ 1,848       $ 400   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

Offsetting of Financial Assets and Liabilities

We present our derivative assets and liabilities and repurchase agreements as gross amounts in our consolidated balance sheet. The following tables summarize gross and net information about our derivative transactions and repurchase agreements subject to legally enforceable master netting agreements and the corresponding collateral received or pledged.

Table 9.2: Offsetting of Financial Assets and Financial Liabilities

 

                          Gross Amounts Not
Offset in the Balance
Sheet
       

(Dollars in millions)

   Gross
Amounts  of
Recognized
Assets
     Gross
Amounts

Offset  in the
Balance
Sheet
     Net Amounts of
Assets Presented

in the Balance
Sheet
     Financial
Instruments
    Collateral
Received
    Net
Amount
 

As of September 30, 2013

               

Derivatives

   $ 988       $ 0       $ 988       $ (259   $ (326 )(1)    $ 403 (2) 
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ 988       $ 0       $ 988       $ (259   $ (326   $ 403   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

                          Gross Amounts Not
Offset in the Balance

Sheet
       

(Dollars in millions)

   Gross
Amounts  of
Recognized
Liabilities
     Gross
Amounts

Offset  in the
Balance
Sheet
     Net Amounts of
Liabilities

Presented in the
Balance Sheet
     Financial
Instruments
    Collateral
Pledged
    Net
Amount
 

As of September 30, 2013

               

Derivatives

   $ 587       $ 0       $ 587       $ (259   $ (144 )(1)    $ 184 (2) 

Repurchase agreements

     777         0         777         0        (777     0   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ 1,364       $ 0       $ 1,364       $ (259   $ (921   $ 184   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

                          Gross Amounts Not
Offset in the Balance

Sheet
       

(Dollars in millions)

   Gross
Amounts of
Recognized
Assets
     Gross
Amounts

Offset in  the
Balance
Sheet
     Net Amounts of
Assets Presented

in the Balance
Sheet
     Financial
Instruments
    Collateral
Received
    Net
Amount
 

As of December 31, 2012

               

Derivatives

   $ 1,848       $ 0       $ 1,848       $ (220   $ (1,160 )(1)    $ 468   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ 1,848       $ 0       $ 1,848       $ (220   $ (1,160   $ 468   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

                          Gross Amounts Not
Offset in the Balance

Sheet
       

(Dollars in millions)

   Gross
Amounts of
Recognized
Liabilities
     Gross
Amounts

Offset in  the
Balance
Sheet
     Net Amounts  of
Liabilities

Presented in the
Balance Sheet
     Financial
Instruments
    Collateral
Pledged
    Net
Amount
 

As of December 31, 2012

               

Derivatives

   $ 400       $ 0       $ 400       $ (220   $ (98 )(1)    $ 82 (2) 

Repurchase agreements

     1,235         0         1,235         0        (1,235     0   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ 1,635       $ 0       $ 1,635       $ (220   $ (1,333   $ 82   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

(1)

When we receive or pledge collateral, we factor in accrued interest when calculating net positions with counterparties.

(2)

The majority of the net position relates to customer-accommodation derivatives. Customer-accommodation derivatives are cross-collateralized by the associated commercial loans and we do not require additional collateral on these transactions.

Under our existing enforceable master netting arrangements, we have the right to offset contracts with the same counterparty. Under these arrangements, either counterparty can request the net settlement of all contracts through a single payment upon default on or termination of any one contract.

Income Statement Presentation and AOCI

The following tables summarize the impact of derivatives and the related hedged items on 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 three and nine months ended September 30, 2013 and 2012:

Table 9.3: Gains and Losses on Fair Value Hedges and Free-Standing Derivatives

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

(Dollars in millions)

       2013             2012             2013             2012      

Derivatives designated as accounting hedges(1):

        

Fair value interest rate contracts:

        

Gains (losses) recognized in earnings on derivatives

   $ 3      $ 16      $ (409   $ 95   

Gains (losses) recognized in earnings on hedged items

     (10     (36     380        (123
  

 

 

   

 

 

   

 

 

   

 

 

 

Net fair value hedge ineffectiveness gains (losses)

     (7     (20     (29     (28
  

 

 

   

 

 

   

 

 

   

 

 

 

Derivatives not designated as accounting hedges(1):

        

Interest rate contracts covering:

        

MSRs

     0        1        (8     4   

Customer accommodation

     6        11        31        29   

Other interest rate exposures

     4        (1     (5     (58
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     10        11        18        (25

Foreign exchange contracts

     0        (5     (4     (14

Other contracts(2)

     (18     (3     (25     (6
  

 

 

   

 

 

   

 

 

   

 

 

 

Total gains (losses) on derivatives not designated as accounting hedges

     (8     3        (11     (45
  

 

 

   

 

 

   

 

 

   

 

 

 

Net derivative gains (losses) recognized in earnings

   $ (15   $ (17   $ (40   $ (73
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Amounts are recorded in our consolidated statements of income in other non-interest income.

(2) 

Includes derivative instruments used to hedge mortgage pipeline and certain free-standing derivatives.

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

Cash Flow Hedges

The table below shows the net gains (losses) related to derivatives designated as cash flow hedges for the three and nine months ended September 30, 2013 and 2012:

Table 9.4: Gains and Losses on Derivatives Designated as Cash Flow Hedges

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

(Dollars in millions)

       2013             2012             2013             2012      

Gains (losses) recorded in AOCI:

        

Cash flow hedges:

        

Interest rate contracts

   $ 65      $ 60      $ (82   $ 121   

Foreign exchange contracts

     (6     (7     (16     (18
  

 

 

   

 

 

   

 

 

   

 

 

 

Net derivative gains (losses) recognized in AOCI

   $ 59      $ 53      $ (98   $ 103   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gains (losses) recorded in earnings:

        

Cash flow hedges:

        

Gains (losses) reclassified from AOCI into earnings:

        

Interest rate contracts(1)

   $ 14      $ 12      $ 40      $ 32   

Foreign exchange contracts(2)

     (8     3        (17     (8
  

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

     6        15        23        24   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gains (losses) recognized in earnings due to ineffectiveness:

        

Interest rate contracts(2)

     1        0        0        0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net derivative gains (losses) recognized in earnings

   $ 7      $ 15      $ 23      $ 24   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Amounts reclassified are recorded in our consolidated statements of income in interest income or interest expense.

(2) 

Amounts reclassified are recorded in our consolidated statements of income in other non-interest income.

We expect to reclassify net after-tax losses of $164 million recorded in AOCI as of September 30, 2013, related to derivatives designated as cash flow hedges to earnings over the next 12 months, which we expect to offset against the cash flows associated with the hedged forecasted transactions. The maximum length of time over which forecasted transactions were hedged was five years as of September 30, 2013. 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.

Credit Risk-Related Contingency Features

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 derivative counterparties would have the right to terminate the derivative contract and close-out the existing positions. Other derivative contracts include provisions that would, in the event of a downgrade of our debt credit rating below investment grade, allow our derivative counterparties to demand immediate and ongoing full overnight collateralization on derivative instruments in a net liability position. Certain of our derivative contracts may allow, in the event of a downgrade of our debt credit rating of any kind, our derivative counterparties to demand additional collateralization 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 $1 million and $7 million as of September 30, 2013 and December 31, 2012, respectively. We were required to post collateral totaling $144 million and $109 million as of September 30, 2013 and

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

December 31, 2012, respectively, for our derivative transactions. If our debt credit rating had fallen below investment grade, we would have been required to post additional variation margin, which represents the impact of daily position mark-to-market calculations, of $1 million and $4 million as of September 30, 2013 and December 31, 2012, respectively. In addition, we would have been required to post independent margin of $67 million as of both September 30, 2013 and December 31, 2012, in compliance with the terms of certain of our swap agreements.

Derivative 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 contractual 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 assets, assuming no recoveries of underlying collateral. To mitigate the risk of counterparty default, we maintain collateral agreements with certain derivative counterparties. These agreements typically require both parties to maintain collateral in the event the fair values of derivative financial instruments exceed established thresholds. We received cash collateral from derivatives counterparties totaling $288 million and $922 million as of September 30, 2013 and December 31, 2012, respectively. We also received securities from derivatives counterparties totaling $37 million and $238 million as of September 30, 2013 and December 31, 2012, respectively, which we have the ability to repledge.

We record counterparty credit risk valuation adjustments on our derivative assets 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 contract, collateral and creditworthiness of the counterparty. The cumulative counterparty credit risk valuation adjustment recorded on our consolidated balance sheets as a reduction in the derivative asset balance was $9 million as of both September 30, 2013 and December 31, 2012. We also adjust the fair value of our derivative liabilities to reflect the impact of our 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 $4 million and $1 million as of September 30, 2013 and December 31, 2012, respectively.

During the second quarter of 2013, it became mandatory for Capital One to clear certain categories of derivative transactions through a central clearinghouse. We anticipate our cleared derivatives notional and margin amounts outstanding to grow in the future and expect our bilateral OTC derivatives portfolio to shrink as additional categories of derivatives are mandated for clearing by the CFTC. As a result, over time, our counterparty credit risk is expected to shift from our bilateral counterparties and consolidate at central clearinghouses.

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

 

NOTE 10—STOCKHOLDERS’ EQUITY

 

The following table presents the components of accumulated other comprehensive income as of September 30, 2013 and December 31, 2012, as well as the current period activity related to our other comprehensive income. AOCI is presented net of deferred tax of $500 million and $443 million, as of September 30, 2013 and December 31, 2012, respectively.

Table 10.1: Accumulated Other Comprehensive Income

 

     Three Months Ended September 30, 2013  

(Dollars in millions)

   Securities
Available
for Sale
    Other-than-
Temporary
Impairment
     Securities
Held to
Maturity(1)
    Cash
Flow
Hedges
    Foreign
Currency
Translation
Adjustments
    Other     Total  

AOCI as of June 30, 2013

   $ (532   $ 15       $ 0      $ (129   $ (111   $ (35   $ (792

Other comprehensive income (loss) before reclassifications

     689        3         (916     59        124        (1     (42

Net realized (gains) losses reclassified from AOCI into earnings

     0        0         1        (6     0        0        (5
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive income (loss)

     689        3         (915     53        124        (1     (47
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

AOCI as of September 30, 2013

   $ 157      $ 18       $ (915   $ (76   $ 13      $ (36   $ (839
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Nine Months Ended September 30, 2013  

(Dollars in millions)

   Securities
Available
for Sale
    Other-than-
Temporary
Impairment
    Securities
Held to
Maturity(1)
    Cash
Flow
Hedges
    Foreign
Currency
Translation
Adjustments
    Other     Total  

AOCI as of December 31, 2012

   $ 708      $ (5   $ 0      $ 45      $ 32      $ (41   $ 739   

Other comprehensive income (loss) before reclassifications

     (549     23        (916     (98     (19     4        (1,555

Net realized (gains) losses reclassified from AOCI into earnings

     (2     0        1        (23     0        1        (23
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive income (loss)

     (551     23        (915     (121     (19     5        (1,578
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

AOCI as of September 30, 2013

   $ 157      $ 18      $ (915   $ (76   $ 13      $ (36   $ (839
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

The amortization of unrealized holding gains or losses reported in AOCI for securities held to maturity will be offset by the amortization of the premium or discount created from the transfer into securities held to maturity, which occurred at fair value.

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

Table 10.2: Reclassifications from AOCI

 

    Amount Reclassified from AOCI      

(Dollars in millions)

  Three Months
Ended  September 30,
2013
    Nine Months
Ended  September 30,
2013
    Affected Income Statement Line Item

Net unrealized gains (losses) on securities available for sale:

     

Sale of available for sale securities

  $ 0      $ 3      Other - Non-interest income
    0        1      Income tax provision
 

 

 

   

 

 

   
    0        2      Net income

Net unrealized gains (losses) on securities held to maturity(1):

     

Held to maturity securities

  $ (2   $ (2   Other - Non-interest income
    (1     (1   Income tax benefit
 

 

 

   

 

 

   
    (1     (1   Net income

Net unrealized gains on cash flow hedges:

     

Interest rate contracts

    23        65      Other - Non-interest income

Foreign exchange contracts

    (13     (27   Other - Non-interest expense
 

 

 

   

 

 

   
    10        38     
    4        15      Income tax provision
 

 

 

   

 

 

   
    6        23      Net income

Other:

     

Other

    0        (1   Salaries and associate benefits
    0        0      Income tax provision
 

 

 

   

 

 

   
    0        (1   Net income
 

 

 

   

 

 

   

Total reclassifications

  $ 5      $ 23     
 

 

 

   

 

 

   

 

(1)

The amortization of unrealized holding gains or losses reported in AOCI for securities held to maturity will be offset by the amortization of the premium or discount created from the transfer into securities held to maturity, which occurred at fair value.

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

The table below summarizes other comprehensive income activity and the related tax impact for the three and nine months ended September 30, 2013 and 2012:

Table 10.3: Comprehensive Income

 

     Three Months Ended September 30,  
     2013     2012  

(Dollars in millions)

   Before
Tax
    Provision
(Benefit)
    After
Tax
    Before
    Tax    
    Provision
(Benefit)
    After
Tax
 

Other comprehensive income:

            

Net unrealized gains (losses) on securities available for sale

   $ 1,104      $ 415      $ 689      $ 449      $ 169      $ 280   

Other-than-temporary impairment not recognized in earnings

     3        0        3        74        28        46   

Net unrealized gains (losses) on securities held to maturity

     (1,465     (550     (915     0        0        0   

Net unrealized gains (losses) on cash flow hedges

     84        31        53        93        33        60   

Foreign currency translation adjustments

     124        0        124        63        0        63   

Other

     (1     0        (1     (23     (5     (18
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

   $ (151   $ (104   $ (47   $ 656      $ 225      $ 431   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Nine Months Ended September 30,  
     2013     2012  

(Dollars in millions)

   Before
Tax
    Provision
(Benefit)
    After
Tax
    Before
    Tax    
    Provision
(Benefit)
    After
Tax
 

Other comprehensive income:

            

Net unrealized gains (losses) on securities available for sale

   $ (885   $ (334   $ (551   $ 607      $ 229      $ 378   

Other-than-temporary impairment not recognized in earnings

     36        13        23        127        47        80   

Net unrealized gains (losses) on securities held to maturity

     (1,465     (550     (915     0        0        0   

Net unrealized gains (losses) on cash flow hedges

     (195     (74     (121     188        67        121   

Foreign currency translation adjustments

     (19     0        (19     74        0        74   

Other

     6        1        5        (57     (16     (41
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

   $ (2,522   $ (944   $ (1,578   $ 939      $ 327      $ 612   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

 

NOTE 11—EARNINGS PER COMMON SHARE

 

The following table sets forth the computation of basic and diluted earnings per common share:

Table 11.1: Computation of Basic and Diluted Earnings per Common Share

 

     Three Months Ended September 30,     Nine Months Ended September 30,  

(Dollars and shares in millions, except per share data)

           2013                     2012                     2013                     2012          

Basic earnings per share

        

Income from continuing operations, net of tax

   $ 1,130      $ 1,188      $ 3,510      $ 2,886   

Loss from discontinued operations, net of tax

     (13     (10     (210     (212
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     1,117        1,178        3,300        2,674   

Dividends and undistributed earnings allocated to participating securities(1)

     (5     (5     (14     (12

Preferred stock dividends

     (13     0        (39     0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common stockholders

   $ 1,099      $ 1,173      $ 3,247      $ 2,662   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total weighted-average basic shares outstanding

     582.3        578.3        581.4        555.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share

   $ 1.89      $ 2.03      $ 5.58      $ 4.80   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     Three Months Ended September 30,      Nine Months Ended September 30,  

(Dollars and shares in millions, except per share data)

           2013                      2012                      2013                      2012          

Diluted earnings per share(2)

           

Net income available to common stockholders

   $ 1,099       $ 1,173       $ 3,247       $ 2,662   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total weighted-average basic shares outstanding

     582.3         578.3         581.4         555.0   

Stock options, warrants, contingently issuable shares, and other

     8.8         5.8         7.6         5.1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total weighted-average diluted shares outstanding

     591.1         584.1         589.0         560.1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per share

   $ 1.86       $ 2.01       $ 5.51       $ 4.75   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Includes undistributed earnings allocated to participating securities using the two-class method under the accounting guidance for computing earnings per share.

(2)

Excluded from the computation of diluted earnings per share was 5 million and 6 million of awards, options or warrants, for the three months ended September 30, 2013 and 2012, respectively, and 6 million and 7 million of awards, options or warrants, for the nine months ended September 30, 2013 and 2012, respectively, because their inclusion would be anti-dilutive.

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

 

NOTE 12—FAIR VALUE OF FINANCIAL INSTRUMENTS

 

Fair value 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 (also referred to as an exit price). 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

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 into earnings. We have not made any material fair value option elections as of September 30, 2013 and December 31, 2012.

Level 1, 2 and 3 Valuation Techniques

Financial instruments are considered Level 1 when the valuation is based on quoted prices in active markets for identical assets or liabilities. Level 2 financial instruments are valued using quoted prices for similar 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. Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable and when the determination of the fair value requires significant management judgment or estimation.

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

The following table displays our assets and liabilities measured on our condensed consolidated balance sheets at fair value on a recurring basis as of September 30, 2013 and December 31, 2012:

Table 12.1: Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

     September 30, 2013  
     Fair Value Measurements Using         

(Dollars in millions)

   Level 1      Level 2      Level 3      Total  

Assets

           

Securities available for sale:

           

U.S. Treasury debt obligations

   $ 837       $ 0       $ 0       $ 837   

U.S. agency debt obligations

     0         1         0         1   

Corporate debt securities guaranteed by U.S. government agencies

     0         346         926         1,272   

Residential mortgage-backed securities

     0         24,363         1,321         25,684   

Commercial mortgage-backed securities

     0         5,454         304         5,758   

Other asset-backed securities

     0         7,343         313         7,656   

Other securities

     134         1,752         38         1,924   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

     971         39,259         2,902         43,132   

Other assets:

           

Mortgage servicing rights

     0         25         58         83   

Derivative assets(1)

     5         929         54         988   

Retained interests in securitizations and other

     0         0         201         201   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 976       $ 40,213       $ 3,215       $ 44,404   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Other liabilities:

           

Derivative liabilities(1)

   $ 8       $ 540       $ 39       $ 587   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 8       $ 540       $ 39       $ 587   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

     December 31, 2012  
     Fair Value Measurements Using         

(Dollars in millions)

   Level 1      Level 2      Level 3      Total  

Assets

           

Securities available for sale:

           

U.S. Treasury debt obligations

   $ 1,552       $ 0       $ 0       $ 1,552   

U.S. agency debt obligations

     0         302         0         302   

Corporate debt securities guaranteed by U.S. government agencies

     0         362         650         1,012   

Residential mortgage-backed securities

     0         42,538         1,335         43,873   

Commercial mortgage-backed securities

     0         7,042         587         7,629   

Other asset-backed securities

     0         8,356         102         8,458   

Other securities

     145         993         15         1,153   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

     1,697         59,593         2,689         63,979   

Other assets:

           

Mortgage servicing rights

     0         0         55         55   

Derivative assets(1)

     1         1,757         90         1,848   

Retained interests in securitizations and other

     0         0         204         204   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 1,698       $ 61,350       $ 3,038       $ 66,086   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Other liabilities:

           

Derivative liabilities(1)

   $ 1       $ 361       $ 38       $ 400   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 1       $ 361       $ 38       $ 400   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Does not reflect $5 million and $9 million recognized as a net valuation allowance on derivative assets and liabilities for non-performance risk as of September 30, 2013 and December 31, 2012, respectively. Non-performance risk is reflected in other assets/liabilities on the balance sheet and offset through the income statement in other income.

The determination of the classification of financial instruments in Level 2 or Level 3 of 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 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. During the third quarter of 2013 and the first nine months of 2013 we had minimal movements between Levels 1 and 2.

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

Level 3 Instruments Only

Financial instruments are considered Level 3 when their values are determined using pricing models, which include comparison of prices from multiple sources, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable or there is significant variability among pricing sources. Level 3 financial instruments also include those for which the determination of fair value requires significant management judgment or estimation. The tables below present a reconciliation for all assets and liabilities measured and recognized at fair value on a recurring basis using significant unobservable inputs (Level 3). When assets and liabilities are transferred between levels, we recognize the transfer as of the end of the period.

Table 12.2: Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

 

    Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Three Months Ended September 30, 2013
 
          Total Gains or  (Losses)
(Realized/Unrealized)
    Purchases     Sales     Issuances     Settlements     Transfers
Into
Level 3(2)
    Transfers
Out of
Level 3(2)
    Balance,
September 30,
2013
    Net
Unrealized
Gains

(Losses)
Included

in Net
Income
Related to
Assets and

Liabilities
Still Held as of
September 30,
2013(3)
 

(Dollars in millions)

  Balance,
July 1,
2013
    Included
in Net
Income(1)
    Included  in
Other
Comprehensive
Income
                 

Assets:

                     

Securities available for sale:

                     

Corporate debt securities guaranteed by U.S. government agencies

  $ 832      $ 0      $ 4      $ 61      $ 0      $ 0      $ (19   $ 47      $ 1      $ 926      $ 0   

Residential mortgage-backed securities

    1,535        (6     57        85        0        0        (72     152        (430     1,321        (5

Commercial mortgage-backed securities

    461        0        (2     96        0        0        (4     48        (295     304        0   

Other asset-backed securities

    109        0        6        129        0        0        0        84        (15     313        0   

Other securities

    16        0        0        30        0        0        (6     0        (2     38        0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total securities available for sale

    2,953        (6     65        401        0        0        (101     331        (741     2,902        (5

Other assets:

                     

Mortgage servicing rights

    61        (5     0        0        0        4        (2     0        0        58        (5

Derivative assets

    72        (13     0        0        0        4        (3     0        (6     54        (13

Retained interest in securitization and other

    198        3        0        0        0        0        0        0        0        201        3   

Liabilities:

                     

Other liabilities

                     

Derivative liabilities

    42        4        0        0        0        3        (9     0        (1     39        4   

 

139


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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

    Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Three Months Ended September 30, 2012
 
          Total Gains or (Losses)
(Realized/Unrealized)
    Purchases     Sales     Issuances     Settlements     Transfers
Into
Level 3(2)
    Transfers
Out of
Level 3(2)
    Balance,
September 30,
2012
    Net
Unrealized
Gains

(Losses)
Included

in Net
Income
Related to

Assets and
Liabilities
Still Held as of
September 30,
2012(3)
 

(Dollars in millions)

  Balance,
July 1,
2012
    Included
in Net
Income(1)
    Included in
Other
Comprehensive
Income
                 

Assets:

                     

Securities available for sale:

                     

Corporate debt securities guaranteed by U.S. government agencies

  $ 64      $ 0      $ (1   $ 85      $ 0      $ 0      $ (1   $ 140      $ 0      $ 287      $ 0   

Residential mortgage-backed securities

    1,170        (5     91        194        0        0        (76     74        (392     1,056        (5

Commercial mortgage-backed securities

    267        0        10        204        0        0        3        50        (173     361        0   

Other asset-backed securities

    293        0        9        229        0        0        0        82        (68     545        0   

Other securities

    10        0        0        0        0        0        (1     0        0        9        0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total securities available for sale

    1,804        (5     109        712        0        0        (75     346        (633     2,258        (5

Other assets:

                     

Mortgage servicing rights

    84        (7     0        0        0        1        (2     0        0        76        (7

Derivative assets

    103        10        0        0        0        8        (11     0        (1     109        10   

Retained interest under utilizations and other

    140        69        0        0        0        0        0        0        0        209        69   

Liabilities:

                     

Other liabilities:

                     

Derivative liabilities

    34        13        0        0        0        5        (4     0        (1     47        13   

Other

    13        9        0        0        0        0        0        0        0        22        9   

 

140


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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

    Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Nine Months Ended September 30, 2013
 
          Total Gains or (Losses)
(Realized/Unrealized)
    Purchases     Sales     Issuances     Settlements     Transfers
Into
Level 3(2)
    Transfers
Out of
Level 3(2)
    Balance,
September 30,
2013
    Net
Unrealized
Gains

(Losses)
Included

in Net
Income
Related to
Assets and

Liabilities
Still Held as of
September 30,
2013(3)
 

(Dollars in millions)

  Balance,
January 1,
2013
    Included
in Net
Income(1)
    Included in
Other
Comprehensive
Income
                 

Assets:

                     

Securities available for sale:

                     

Corporate debt securities guaranteed by U.S. government agencies

  $ 650      $ 0      $ (31   $ 272      $ 0      $ 0      $ (47   $ 125      $ (43   $ 926      $ 0   

Residential mortgage-backed securities

    1,335        (16     141        277        0        0        (217     681        (880     1,321        (21

Commercial mortgage-backed securities

    587        0        (49     643        (10     0        (31     168        (1,004     304        0   

Other asset-backed securities

    102        (1     12        169        (41     0        (2     98        (24     313        (1

Other securities

    15        0        0        30        0        0        (6     1        (2     38        0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total securities available for sale

    2,689        (17     73        1,391        (51     0        (303     1,073        (1,953     2,902        (22

Other assets:

                     

Mortgage servicing rights

    55        25        0        0        0        9        (5     0        (26     58        25   

Derivative assets

    90        (20     0        0        0        8        (15     0        (9     54        (20

Retained interest in securitizations and other

    204        (3     0        0        0        0        0        0        0        201        (3

Liabilities:

                     

Other liabilities:

                     

Derivative liabilities

    38        15        0        0        0        13        (25     0        (2     39        15   

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

    Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Nine Months Ended September 30, 2012
 
          Total Gains or (Losses)
(Realized/Unrealized)
    Purchases     Sales     Issuances     Settlements     Transfers
Into
Level 3(2)
    Transfers
Out of
Level 3(2)
    Balance,
September 30,
2012
    Net
Unrealized
Gains

(Losses)
Included
in Net

Income
Related to
Assets and

Liabilities
Still Held as of
September 30,
2012(3)
 

(Dollars in millions)

  Balance,
January 1,
2012
    Included
in Net
Income(1)
    Included in
Other
Comprehensive
Income
                 

Assets:

                     

Securities available for sale:

                     

Corporate debt securities guaranteed by U.S. government agencies

  $ 0      $ 0      $ 0      $ 135      $ 0      $ 0      $ (2   $ 154      $ 0      $ 287      $ 0   

Residential mortgage-backed securities

    195        (6     78        2,477        (640     0        (226     302        (1,124     1,056        (6

Commercial mortgage-backed securities

    274        5        20        674        (76     0        (16     63        (583     361        5   

Other asset-backed securities

    32        0        22        384        0        0        (3     214        (104     545        0   

Other securities

    12        0        0        0        0        0        (6     9        (6     9        0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total securities available for sale

    513        (1     120        3,670        (716     0        (253     742        (1,817     2,258        (1

Other assets:

                     

Mortgage servicing rights

    93        (18     0        0        0        9        (8     0        0        76        (18

Derivative assets

    103        55        0        0        0        12        (73     13        (1     109        55   

Retained interest in securitization and other

    145        64        0        0        0        0        0        0        0        209        64   

Liabilities:

                     

Other liabilities

                     

Derivative liabilities

    279        18        0        0        0        37        (276     (8     (3     47        18   

Other

    12        10        0        0        0        0        0        0        0        22        10   

 

(1)

Gains (losses) related to Level 3 mortgage servicing rights and Level 3 derivative assets and derivative liabilities are reported in other non-interest income, which is a component of non-interest income. Gains (losses) related to Level 3 retained interests in securitizations are reported in servicing and securitizations income, which is a component of non-interest income.

(2)

The transfers out of Level 3 for the third quarter and first nine months of 2013 and 2012 were primarily driven by greater consistency among multiple pricing sources. The transfers into Level 3 were primarily driven by less consistency among vendor pricing on individual securities.

(3)

The amount presented for unrealized gains (loss) for assets still held as of the reporting date primarily represents impairments for securities available for sale, accretion on certain fixed maturity securities, change in fair value of derivative instruments and mortgage servicing rights transaction. The impairments are reported in total other-than-temporary losses as a component of non-interest income.

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.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

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 from our trading and investing functions, including our Corporate Valuations Group (“CVG”), Fair Value Committee (“FVC”) and Model Validation Group (“MVG”), participate in the review and validation process. 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 at the FVC to a more senior committee called the Valuations Advisory Committee (“VAC”) for resolution. The VAC is chaired by the Chief Financial Officer. Membership of the VAC includes the Chief Risk Officer.

The CVG performs periodic independent verification of fair value measurements to determine if assigned fair values are reasonable. For example, in cases where we rely on third party pricing services to obtain fair value measures, we analyze pricing variances among different pricing sources and validate the final price used by comparing the information to additional sources, including dealer pricing indications in transaction results and other internal sources, where necessary. Additional validation procedures performed by the CVG include reviewing (either directly or indirectly through the reasonableness of assigned fair values) valuation inputs and assumptions, and monitoring acceptable variances between recommended prices and validation prices. The CVG and the Trade Analytics and Valuation team (“TAV”) perform due diligence reviews of the third party pricing services by comparing their prices with prices from other sources and reviewing other control documentation. Additionally, when necessary, the CVG and TAV challenge prices from third party vendors to ensure reasonableness of prices through a pricing challenge process. This may include a request for a transparency of the assumptions used by the third party.

The FVC, which includes representation from business areas, our Risk Management division and our Finance division, is a forum for discussing fair market valuations, inputs, assumptions, methodologies, variance thresholds, valuation control environment and material risks or concerns related to fair market valuations. Additionally, the FVC is empowered to resolve valuation disputes between the primary valuation providers and the CVG. It provides guidance and oversight to ensure an appropriate valuation control environment. The FVC regularly reviews and approves our valuation methodologies to ensure that our methodologies and practices are consistent with industry standards and adhere to regulatory and accounting guidance. The Chief Financial Officer determines when material issues or concerns regarding valuations shall be raised to the Audit Committee or other delegated committee of the Board of Directors.

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. The MVG is part of the Model Risk Office and validates all models and provides ongoing monitoring of their performance, including the validation and monitoring of the performance of all valuation models.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table presents the significant unobservable inputs relied upon to determine the fair values of our recurring Level 3 financial instruments. We utilize multiple third party pricing services to obtain fair value measures 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

 

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represents a composite summary of all information we are able to obtain for a majority of our securities. The unobservable input information for all other Level 3 financial instruments is based on the assumptions used in our internal valuation models.

Table 12.3: Quantitative Information about Level 3 Fair Value Measurements

 

Quantitative Information about Level 3 Fair Value Measurements

(Dollars in millions)

  Fair Value at
September 30,
2013
   

Significant
Valuation
Techniques

 

Significant

Unobservable

Inputs

   Range   Weighted
Average

Assets:

          

Securities available for sale:

          

Residential mortgage-backed securities

 

$

1,321

  

 

Discounted cash

flows (3rd party

pricing)

 

Yield

Constant prepayment rate

Default rate

Loss severity

   1-25%
0-45%
0-22%
0-85%
  5%
5%
8%
50%

Commercial mortgage-backed securities

 

$

304

  

 

Discounted cash

flows (3rd party

pricing)

 

Yield

Constant prepayment rate

   2-4%
0-20%
  3%
13%

Other asset-backed securities

  $ 313     

Discounted cash

flows (3rd party

pricing)

 

Yield

Constant prepayment rate Default rate

Loss severity

   3-8%
0-24%
0-20%
0-88%
  4%
3%
12%
67%

U.S. government guaranteed debt and other securities

 

$

964

  

 

Discounted cash

flows (3rd party pricing)

  Yield    2-3%   2%

Other assets:

          

Mortgage servicing rights

  $ 58     

Discounted cash

flows

  Total prepayment rate Discount rate Servicing cost ($ per loan)    8.18-32.52%
9.95-17.07%
$85-$420
  18.83%
10.57%
$93

Derivative assets

  $ 54      Discounted cash flows   Swap rates    2.76-3.47%   3.36%

Retained interests in securitization and other

 

$

201

  

  Discounted cash flows  

Life of receivables (months) Constant prepayment rate Discount rate

Default rate

Loss severity

   37-105
1.63-6.71%
4.25-13.57%
1.56-7.37%
14.82-89.45%
  83
4.88%
13.19%
4.80%
21.98%

Liabilities:

          

Other liabilities:

          

Derivative liabilities

  $ 39      Discounted cash flows   Swap rates    2.76-3.43%   3.34%

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

Quantitative Information about Level 3 Fair Value Measurements

(Dollars in millions)

  Fair Value at
December 31,
2012
   

Significant
Valuation
Techniques

 

Significant

Unobservable

Inputs

   Range   Weighted
Average

Assets:

          

Securities available for sale:

          

Residential mortgage-

   

Discounted

 

Yield

   0-24%   5%

backed securities

  $ 1,335      cash flows   Constant prepayment rate    0-26%   6%
    (3rd party   Default rate    0-21%   9%
    pricing)   Loss severity    4-75%   52%

Commercial mortgage-

   

Discounted

 

Yield

   1-3%   2%

backed securities

  $ 587      cash flows   Constant prepayment rate    0-15%   11%
    (3rd party       
    pricing)       

Other asset-backed

   

Discounted

 

Yield

   1-24%   4%

securities

  $ 102      cash flows   Constant prepayment rate    0-5%   2%
    (3rd party   Default rate    1-28%   15%
    pricing)   Loss severity    46-88%   72%

U.S. government

   

Discounted

  Yield    1-4%   2%

guaranteed debt and other securities

  $ 665      cash flows       
    (3rd party       
    pricing)       

Other assets:

          

Mortgage servicing rights

  $ 55     

Discounted

 

Total prepayment rate

   11.77-32.99%   19.37%
    cash flows   Discount rate    9.95-37.88%   12.66%
      Servicing cost ($ per loan)    $81-$864   $302

Derivative assets

  $ 90     

Discounted

cash flows

  Swap rates    1.82-2.58%   2.46%
          

Retained interests in

   

Discounted

 

Life of receivables (months)

   29-243   66

securitization and other

  $ 204      cash flows   Constant prepayment rate    1.25-22.21%   13.52%
      Discount rate    2.90-13.57%   12.70%

Liabilities:

          

Other liabilities:

          

Derivative liabilities

  $ 38     

Discounted

  Swap rates    1.82-2.55%   2.42%
    cash flows       

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

We are required to measure and recognize certain other financial assets at fair value on a nonrecurring basis in the consolidated balance sheets. These financial assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when we evaluate impairment).

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. The fair value of loans held for sale is determined using a discounted cash flow model or the fair value of the underlying collateral, less the estimated cost to sell. Held-for-sale loans that are valued using a discounted cash flow model are classified as Level 2. Loans that are valued using fair value less the estimated

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

cost to sell have significant unobservable inputs and are classified as Level 3 under the fair value hierarchy. Fair value adjustments to loans held for sale are recorded in other non-interest income in our consolidated statements of income.

Loans Held For Investment, Net

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. Due to the use of unobservable inputs, loans held for investment are classified as Level 3 under the fair value hierarchy. Fair value adjustments for loans held for investment are recorded in provision for credit losses in the consolidated statement of income.

Foreclosed Property and Other Repossessed Assets

Foreclosed property and other repossessed assets are carried at the lower of the carrying amount or fair value less costs to sell. Due to the use of significant unobservable inputs, foreclosed property is classified as Level 3 under the fair value hierarchy. Fair value adjustments for foreclosed property are recorded in other non-interest expense in the consolidated statement of income.

Other Assets

Nonrecurring other assets measured at fair value consist of long-lived assets held for sale. These assets are recorded in other assets in our consolidated balance sheets. These assets are carried at the lower of their carrying amount or fair value less costs to sell. Due to the use of unobservable inputs, long-lived assets held for sale are classified as Level 3 under the fair value hierarchy. Fair value adjustments for other assets are recorded in other non-interest expense in the consolidated statement of income.

For assets measured at fair value on a nonrecurring basis and still held on the consolidated balance sheet, the following table provides the fair value measures by level of valuation assumptions used and the gains or losses recognized for these assets as a result of fair value measurements.

The following table presents the carrying amounts of all assets that were still held as of September 30, 2013 and December 31, 2012, and for which a nonrecurring fair value measurement was recorded during the nine and twelve months then ended.

Table 12.4: Nonrecurring Fair Value Measurements Related to Assets Still Held at Period End

 

    September 30, 2013  
    Fair Value Measurements Using     Assets
at Fair
Value
    Significant
Valuation
Techniques
  Significant
Unobservable
Inputs
  Range   Weighted
Average
 
                 

(Dollars in millions)

  Level 1     Level 2     Level 3            

Assets:

               

Loans held for sale

  $ 0      $ 51      $ 0      $ 51      N/A   N/A   N/A     N/A   

Loans held for investment

    0        0        102        102      Appraisal
Value
  Non-
recoverable rate
  0-49%     15

Foreclosed property(1)

    0        0        43        43      Appraisal
Value
  Cost to Sell   10-14%     10

Other(2)

    0        0        13        13      Appraisal
Value
  Cost to Sell   6-6%     6
 

 

 

   

 

 

   

 

 

   

 

 

         

Total

  $ 0      $   51      $ 158      $ 209           
 

 

 

   

 

 

   

 

 

   

 

 

         

 

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     December 31, 2012  
     Fair Value Measurements Using      Assets
at Fair
Value
     Significant
Valuation
Techniques
   Significant
Unobservable
Inputs
   Range   Weighted
Average
 
                      

(Dollars in millions)

   Level 1      Level 2      Level 3                

Assets:

                      

Loans held for sale

   $ 0       $ 201       $ 0       $ 201       N/A    N/A    N/A     N/A   

Loans held for investment

     0         0         162         162       Appraisal
Value
   Non-
recoverable rate
   0-100%     13
                      

Foreclosed property(1)

     0         0         50         50       Appraisal
Value
   Cost to Sell    10-14%     11
                      

Other(2)

     0         0         59         59       Appraisal
Value
   Cost to Sell    6-6%     6
                      
  

 

 

    

 

 

    

 

 

    

 

 

            

Total

   $ 0       $ 201       $ 271       $ 472              
  

 

 

    

 

 

    

 

 

    

 

 

            

 

(1)

Represents the fair value and related losses of foreclosed properties that were written down subsequent to their initial classification as foreclosed properties.

(2)

Consists of long lived assets classified as held for sale.

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 September 30, 2013 and 2012.

Table 12.5: Nonrecurring Fair Value Measurements Included in Earnings Related to Assets Still Held at Period End

 

     Total Gains (Losses)
Nine Months Ended September 30,
 

(Dollars in millions)

           2013                     2012          

Assets:

    

Loans held for sale

   $ 0      $ 52   

Loans held for investment

     (27     (87

Foreclosed property(1)

     (8     (21

Other(2)

     (8     (4
  

 

 

   

 

 

 

Total

   $ (43   $ (60
  

 

 

   

 

 

 

 

(1)

Represents the fair value and related losses of foreclosed properties that were written down subsequent to their initial classification as foreclosed properties.

(2)

Consists of long lived assets classified as held for sale.

 

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Fair Value of Financial Instruments

The following reflects the fair value of financial instruments, whether or not recognized on the condensed consolidated balance sheets at fair value, as of September 30, 2013 and December 31, 2012:

Table 12.6: Fair Value of Financial Instruments

 

     September 30, 2013      Fair Value Measurements Using  

(Dollars in millions)

   Carrying
Amount
     Estimated
Fair Value
     Level 1      Level 2      Level 3  

Financial assets:

              

Cash and cash equivalents

   $ 5,718       $ 5,718       $ 5,718       $ 0       $ 0   

Restricted cash for securitization investors

     390         390         390         0         0   

Securities available for sale

     43,132         43,132         971         39,259         2,902   

Securities held to maturity

     18,276         18,662         0         18,540         122   

Net loans held for investment

     187,481         192,919         0         0         192,919   

Loans held for sale

     180         180         0         180         0   

Interest receivable

     1,304         1,304         0         1,304         0   

Mortgage servicing rights

     83         83         0         25         58   

Derivative assets

     988         988         5         929         54   

Retained interests in securitizations and other

     201         201         0         0         201   

Financial liabilities:

              

Non-interest bearing deposits

   $ 22,281       $ 22,281       $ 22,281       $ 0       $ 0   

Interest-bearing deposits

     184,553         179,151         0         17,589         161,562   

Securitized debt obligations

     9,544         10,315         0         10,067         248   

Senior and subordinated notes

     12,395         12,904         0         12,904         0   

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

     1,686         1,686         1,686         0         0   

Other borrowings

     8,220         8,228         0         8,228         0   

Interest payable

     276         276         0         276         0   

Derivative liabilities

     587         587         8         540         39   

 

     December 31, 2012      Fair Value Measurements Using  

(Dollars in millions)

   Carrying
Amount
     Estimated
Fair Value
     Level 1      Level 2      Level 3  

Financial assets:

              

Cash and cash equivalents

   $ 11,058       $ 11,058       $ 11,058       $ 0       $ 0   

Restricted cash for securitization investors

     428         428         428         0         0   

Securities available for sale

     63,979         63,979         1,697         59,593         2,689   

Securities held to maturity

     9         9         0         9         0   

Net loans held for investment

     200,733         205,000         0         0         205,000   

Loans held for sale

     201         201         0         201         0   

Interest receivable

     1,694         1,694         0         1,694         0   

Mortgage servicing rights

     55         55         0         0         55   

Derivatives

     1,848         1,848         1         1,757         90   

Retained interests in securitizations and other

     204         204         0         0         204   

Financial liabilities:

              

Non-interest bearing deposits

   $ 22,467       $ 22,467       $ 22,467       $ 0       $ 0   

Interest-bearing deposits

     190,018         189,423         0         22,216         167,207   

Securitized debt obligations

     11,398         11,590         0         11,252         338   

Senior and subordinated notes

     12,686         13,312         0         13,312         0   

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

     1,248         1,248         1,248         0         0   

Other borrowings

     24,578         24,616         346         24,215         55   

Interest payable

     450         450         0         450         0   

Derivatives

     400         400         1         361         38   

 

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The following describes the valuation techniques used in estimating the fair value of our financial instruments as of September 30, 2013 and December 31, 2012. We applied the fair value provisions to the financial instruments not recognized on the consolidated balance sheet at fair value, which include securities held to maturity, loans held for investment, interest receivable, non-interest bearing and interest bearing deposits, other borrowings, senior and subordinated notes, and interest payable. 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 of our established valuation techniques.

Cash and Cash Equivalents

The carrying amounts of cash and due from banks, federal funds sold and securities purchased under agreements to resell and interest-bearing deposits with banks approximate fair value.

Restricted Cash for Securitization Investors

The carrying amounts of restricted cash for securitization investors approximate their fair value due to their relatively short-term nature.

Investment Securities

Quoted prices in active markets are used to measure the fair value of U.S. Treasury debt obligations. For other investment categories, we utilize multiple third-party pricing services to obtain fair value measures for the large majority of our securities. A pricing service may be considered as the primary pricing provider for certain types of securities, and the designation of the primary pricing provider may vary depending on the type of securities. 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 measurement for the various types of securities.

Certain securities are classified as Level 2 and 3, the majority of which are collateralized mortgage obligations and mortgage-backed securities. Level 2 and 3 classifications indicate that significant valuation assumptions are not consistently observable in the market. When significant assumptions are not consistently observable, fair values are derived using the best available data. Such data may include quotes provided by a dealer, the use of external pricing services, independent pricing models, or other model-based valuation techniques such as calculation of the present values of future cash flows incorporating assumptions such as benchmark yields, spreads, prepayment speeds, credit ratings, and losses. The techniques used by the pricing services utilize observable market data to the extent available. Pricing models may be used, which can vary by asset class and may incorporate available trade, bid and other market information. Across asset classes, information such as trader/dealer input, 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 evaluated pricing applications may apply available information through processes such as benchmarking curves, like securities, sector groupings, and matrix pricing to prepare valuations. In addition, model processes are used by the pricing services to develop prepayment and interest rate scenarios.

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 and validated. Additionally, on an on-going basis we may select a sample of securities and test the third-party valuation by obtaining more detailed information about the pricing methodology, sources of information, and assumptions used to value the securities.

The significant unobservable inputs used in the fair value measurement of our residential, asset-backed and commercial securities include yield, prepayment rate, default rate and loss severity in the event of default.

 

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Significant increases (decreases) in any of those inputs in isolation or combination would result in a significant change in fair value measurement. Generally, an increase in the yield assumption will result in a decrease in fair value measurement, however, an increase or decrease in prepayment rate, default rate or loss severity may have a different impact on the fair value given various characteristics of the security including the capital structure of the deal, credit enhancement for the security or other factors.

There was a considerable decrease in the market value of our portfolio holdings as of September 30, 2013, compared with December 31, 2012 due to higher interest rates.

Loans Held For Sale

Our estimation of the fair value of loans classified as held for sale was determined using current secondary market prices for loan pools with similar characteristics. The carrying amount of loans held for sale as of September 30, 2013 and December 31, 2012 approximates fair value.

Net Loans Held For Investment

The fair values of credit card loans, installment loans, auto loans, home loans and commercial loans were estimated using a discounted cash flow method, a form of the income approach. Discount rates were 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 excluded any value related to customer account relationships. The fair value of these loans as of September 30, 2013 remained substantially unchanged compared to the previous quarter as the impact of higher market rates was offset by improved credit performance in our card, mortgage and commercial loan portfolios.

Interest Receivable

The carrying amount of interest receivable approximates the fair value of this asset due to its relatively short-term nature.

Derivative Assets and Liabilities

We use both exchange-traded derivatives and over-the-counter (“OTC”) derivatives to manage our interest rate and foreign currency risk exposure. Quoted market prices are available and used for our exchange-traded derivatives, which we classify as Level 1. However, substantially all of our derivatives are traded in OTC markets where quoted market prices are not always readily available. Therefore, we value most OTC derivatives using valuation techniques, which include internally-developed models. We primarily rely on market observable inputs for our models, such as interest rate yield curves, credit curves, option volatility and currency rates, that vary depending on the type of derivative and nature of the underlying rate, price or index upon which the derivative’s value is based. Where model inputs can be observed in a liquid market and the model does not require significant judgment, such derivatives are typically classified as Level 2 of the fair value hierarchy. 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, the derivatives are classified as Level 3.

The impact of counterparty non-performance risk is considered when measuring the fair value of derivative assets. These derivatives are included in other assets on the balance sheet.

We validate the pricing obtained from the internal models through comparison of pricing to additional sources, including external valuation agents and other internal sources. Pricing variances among different pricing sources are analyzed and validated.

 

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Mortgage Servicing Rights

Mortgage servicing rights (“MSRs”) do not trade in an active market with readily observable prices. Accordingly, 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 market participants use in estimating future net servicing income, including estimates of prepayment speeds, discount rate, cost to service, contractual servicing fee income, ancillary income and late fees. We record MSRs at fair value on a recurring basis. 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 determined exit price for the assets and the MSRs are classified as Level 2.

Non-Interest Bearing Deposits

The carrying amount of non-interest bearing deposits approximates fair value.

Interest-Bearing Deposits

The fair value of interest-bearing deposits was determined based on discounted expected cash flows using discount rates consistent with current market rates for similar products with similar remaining terms.

Securitized Debt Obligations

We utilized multiple third party pricing services to obtain fair value measures for the large majority of our securitized debt obligations. The techniques used by the pricing services utilize observable market data to the extent available; and pricing models may be used which incorporate available trade, bid and other market information as described in the above section. We used internal pricing models, discounted cash flow models or similar techniques to estimate the fair value of certain securitization trusts where third-party pricing was not available.

Senior and Subordinated Notes

We engage multiple third party pricing services in order to estimate the fair value of senior and subordinated notes. The pricing service utilizes a pricing model that incorporates available trade, bid and other market information. It also incorporates spread assumptions, volatility assumptions and relevant credit information into the pricing models.

Federal Funds Purchased and Securities Loaned or Sold under Agreements to Repurchase and Other Borrowings

The carrying amount of federal funds purchased and repurchase agreements approximates fair value. The fair value of FHLB advances was determined based on discounted expected cash flows using discount rates consistent with current market rates for FHLB advances with similar remaining terms. The decrease in fair value of our other borrowings at September 30, 2013 was primarily due to market interest rates being slightly higher than the interest rates on the debt we own or the debt we issued.

Interest Payable

The carrying amount of interest payable approximates the fair value of this liability due to its relatively short-term nature.

 

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NOTE 13—BUSINESS SEGMENTS

 

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.

Basis of Presentation

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. Our business segment results are intended to reflect each segment as if it were a stand-alone business. We use an internal management accounting and reporting process to derive our business segment results. Our internal management accounting 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 market 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 provide additional information on the allocation methodologies used to derive our business segment results in “Note 20—Business Segments” in our 2012 Form 10-K.

 

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Segment Results and Reconciliation

The following tables present our business segment results for the three and nine months ended September 30, 2013 and 2012 as well as selected balance sheet data as of September 30, 2013 and December 31, 2012 and a reconciliation of our total business segment results to our reported consolidated income from continuing operations, assets and deposits. Prior period amounts have been recast to conform to the current period presentation.

Table 13.1: Segment Results and Reconciliation

 

    Three Months Ended September 30, 2013  

(Dollars in millions)

  Credit
Card
    Consumer
Banking
    Commercial
Banking
    Other     Consolidated
Total
 

Net interest income

  $ 2,757      $ 1,481      $ 480      $ (158   $ 4,560   

Non-interest income

    834        184        87        (14     1,091   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenue

    3,591        1,665        567        (172     5,651   

Provision for credit losses

    617        202        31        (1     849   

Non-interest expense:

         

Amortization of intangibles:

         

PCCR intangible amortization

    106        0        0        0        106   

Core deposit intangible amortization

    0        34        6        0        40   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total PCCR and core deposit intangible amortization

    106        34        6        0        146   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other non-interest expense

    1,798        893        260        50        3,001   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expense

    1,904        927        266        50        3,147   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

    1,070        536        270        (221     1,655   

Income tax provision (benefit)

    376        191        96        (138     525   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations, net of tax

  $ 694      $ 345      $ 174      $ (83   $ 1,130   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Period-end total loans held for investment

  $ 77,967      $ 71,285      $ 42,399      $ 163      $ 191,814   

Period-end total customer deposits

    0        168,437        30,592        7,805        206,834   

 

    Three Months Ended September 30, 2012  

(Dollars in millions)

  Credit
Card
    Consumer
Banking
    Commercial
Banking
    Other     Consolidated
Total
 

Net interest income

  $ 2,991      $ 1,501      $ 432      $ (278   $ 4,646   

Non-interest income

    826        260        87        (37     1,136   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenue

    3,817        1,761        519        (315     5,782   

Provision for credit losses

    892        202        (87     7        1,014   

Non-interest expense:

         

Amortization of intangibles:

         

PCCR intangible amortization

    131        0        0        0        131   

Core deposit intangible amortization

    0        41        8        0        49   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total PCCR and core deposit intangible amortization

    131        41        8        0        180   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other non-interest expense

    1,659        936        245        25        2,865   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expense

    1,790        977        253        25        3,045   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

    1,135        582        353        (347     1,723   

Income tax provision (benefit)

    394        206        125        (190     535   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations, net of tax

  $ 741      $ 376      $ 228      $ (157   $ 1,188   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Period-end total loans held for investment

  $ 89,033      $ 76,738      $ 37,209      $ 152      $ 203,132   

Period-end total customer deposits

    0        173,100        28,670        11,485        213,255   

 

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     Nine Months Ended September 30, 2013  

(Dollars in millions)

   Credit
Card
     Consumer
Banking
     Commercial
Banking
    Other     Consolidated
Total
 

Net interest income

   $ 8,391       $ 4,437       $ 1,391      $ (536   $ 13,683   

Non-interest income

     2,487         554         264        (148     3,157   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total net revenue

     10,878         4,991         1,655        (684     16,840   

Provision for credit losses

     2,073         444         (18     (3     2,496   

Non-interest expense:

            

Amortization of intangibles:

            

PCCR intangible amortization

     332         0         0        0        332   

Core deposit intangible amortization

     0         106         21        0        127   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total PCCR and core deposit intangible amortization

     332         106         21        0        459   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Other non-interest expense

     5,239         2,621         772        143        8,775   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total non-interest expense

     5,571         2,727         793        143        9,234   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     3,234         1,820         880        (824     5,110   

Income tax provision (benefit)

     1,135         648         313        (496     1,600   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Income from continuing operations, net of tax

   $ 2,099       $ 1,172       $ 567      $ (328   $ 3,510   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Period-end total loans held for investment

   $ 77,967       $ 71,285       $ 42,399      $ 163      $ 191,814   

Period-end total customer deposits

     0         168,437         30,592        7,805        206,834   
     Nine Months Ended September 30, 2012  

(Dollars in millions)

   Credit
Card
     Consumer
Banking
     Commercial
Banking
    Other     Consolidated
Total
 

Net interest income

   $ 7,333       $ 4,285       $ 1,290      $ (847   $ 12,061   

Non-interest income

     2,195         621         254        641        3,711   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total net revenue

     9,528         4,906         1,544        (206     15,772   

Provision for credit losses

     3,061         420         (250     33        3,264   

Non-interest expense:

            

Amortization of intangibles:

            

PCCR intangible amortization

     223         0         0        0        223   

Core deposit intangible amortization

     0         120         26        0        146   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total PCCR and core deposit intangible amortization

     223         120         26        0        369   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Other non-interest expense

     4,698         2,759         739        126        8,322   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total non-interest expense

     4,921         2,879         765        126        8,691   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     1,546         1,607         1,029        (365     3,817   

Income tax provision (benefit)

     536         569         363        (537     931   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Income from continuing operations, net of tax

   $ 1,010       $ 1,038       $ 666      $ 172      $ 2,886   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Period-end total loans held for investment

   $ 89,033       $ 76,738       $ 37,209      $ 152      $ 203,132   

Period-end total customer deposits

     0         173,100         28,670        11,485        213,255   

 

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NOTE 14—COMMITMENTS, CONTINGENCIES AND GUARANTEES

 

Contingent Payments Related to Acquisitions and Partnership Agreements

Certain of our acquisition and partnership agreements include contingent payment provisions in which we agree to provide future payments, up to a maximum amount, based on certain performance criteria. Our contingent payment arrangements are generally based on the difference between the expected credit performance of specified loan portfolios as of the date of the applicable agreement and the actual future performance. To the extent that actual losses associated with these portfolios are less than the expected level, we agree to share a portion of the benefit with the seller. The maximum contingent payment amount related to our acquisitions totaled $30 million as of September 30, 2013. The actual payment amount related to the $30 million was determined as of September 30, 2013 and paid on October 15, 2013. As such, we had a liability for contingent payments related to these arrangements of $30 million and $165 million as of September 30, 2013 and December 31, 2012, respectively.

Guarantees

We have credit exposure on agreements that we entered into to absorb a portion of the risk of loss on certain manufactured housing securitizations issued by GPC in 2000. Our maximum credit exposure related to these agreements totaled $17 million and $19 million as of September 30, 2013 and December 31, 2012, respectively. These agreements are recorded in our consolidated balance sheets as a component of other liabilities. Our recorded liability under these agreements was $17 million and $17 million as of September 30, 2013 and December 31, 2012, respectively.

See “Note 6—Variable Interest Entities and Securitizations” for additional information about our manufactured housing securitization transactions.

Letters of Credit

We issue letters of credit (financial standby, performance standby and commercial) 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. 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 customer acceptances, and the results of these reviews are considered in assessing the adequacy of our allowance for loan and lease losses.

We had standby letters of credit and commercial letters of credit with contractual amounts of $2.0 billion and $1.9 billion as of September 30, 2013 and December 31, 2012, respectively. The carrying value of outstanding letters of credit, which we include in other liabilities in our consolidated balance sheets, was $4 million as of September 30, 2013. These financial guarantees had expiration dates ranging from 2013 to 2025 as of September 30, 2013.

Payment Protection Insurance

In the U.K., we previously sold payment protection insurance (“PPI”). In response to an elevated level of customer complaints across the industry, heightened media coverage and pressure from consumer advocacy groups, the U.K. Financial Conduct Authority (“FCA”) investigated and raised concerns about the way some

 

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companies have handled complaints related to the sale of these insurance policies. In connection with this matter, we have established a reserve related to PPI, which totaled $154 million and $220 million as of September 30, 2013 and December 31, 2012, respectively.

Potential Mortgage Representation & 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, which was acquired in February 2005; GreenPoint Mortgage Funding, Inc. (“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 ongoing 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 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 after giving effect to any recoveries on the collateral. In some instances, rather than repurchase the loans, a subsidiary may agree to make cash payments to make an investor 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 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 outstanding principal balance as of September 30, 2013 and December 31, 2012:

Table 14.1: Unpaid Principal Balance of Mortgage Loans Originated and Sold to Third Parties Based on Category of Purchaser (UPB is estimated)

 

     Unpaid Principal Balance      Original Unpaid Principal Balance  

(Dollars in billions)

   September 30,
2013
     December 31,
2012
     Total      2008      2007      2006      2005  

Government sponsored enterprises (“GSEs”)(1)

   $ 3       $ 4       $ 11       $ 1       $ 4       $ 3       $ 3   

Insured Securitizations

     5         5         20         0         2         8         10   

Uninsured Securitizations and Other

     19         23         80         3         15         30         32   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 27       $ 32       $ 111       $ 4       $ 21       $ 41       $ 45   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

GSEs include Fannie Mae and Freddie Mac.

 

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Between 2005 and 2008, our subsidiaries sold an aggregate amount of $11 billion in original principal balance mortgage loans to the GSEs.

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 the bond insurance. Further, approximately $16 billion original principal balance was placed in securitizations as to which the monoline bond insurers have made repurchase 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 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 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 are currently held by 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 $27 billion in unpaid principal balance remains outstanding as of September 30, 2013, of which approximately $6 billion in unpaid principal balance is at least 90 days delinquent. Approximately $20 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 requests relating to approximately $2.6 billion original principal balance of mortgage loans as of September 30, 2013, compared with $2.4 billion as of December 31, 2012. Currently, repurchase demands predominantly relate to the 2006 and 2007 vintages. We have received relatively few repurchase demands from the 2008 and 2009 vintages, mostly because GreenPoint ceased originating mortgages in August 2007.

 

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The following table presents information on pending repurchase requests by counterparty category and timing of initial repurchase request. The amounts presented are based on original loan principal balances.

Table 14.2: Open Pipeline All Vintages (all entities)(1)

 

(Dollars in millions) (All amounts are Original Principal Balance)

   GSEs     Insured
Securitizations
    Uninsured
Securitizations
and Other
    Total  

Open claims as of December 31, 2011

   $ 176      $ 1,243      $ 672      $ 2,091   

Gross new demands received

     189        366        291        846   

Loans repurchased/made whole

     (233     (3     (138     (374

Demands rescinded

     (75     (30     (40     (145

Reclassifications(2)

     2        3        (4     1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Open claims as of December 31, 2012

   $ 59      $ 1,579      $ 781      $ 2,419   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross new demands received

     121        40        191        352   

Loans repurchased/made whole

     (40     (5     (20     (65

Demands rescinded

     (94     0        (21     (115
  

 

 

   

 

 

   

 

 

   

 

 

 

Open claims as of September 30, 2013

   $ 46      $ 1,614      $ 931      $ 2,591   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

The open pipeline includes all repurchase requests ever received by our subsidiaries where either the requesting party has not formally rescinded the repurchase request and where our subsidiary has not agreed to either repurchase the loan at issue or make the requesting party whole with respect to its losses. Accordingly, repurchase requests denied by our subsidiaries and not pursued by the counterparty remain in the open pipeline, with the exception of certain aged repurchase requests submitted by parties without contractual standing to pursue such requests, which may be removed from the pipeline. 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.

(2) 

Represents adjustments to correct the counterparty category as of December 31, 2012 for amounts that were misclassified. The reclassification had no impact on the total pending repurchase requests; however, it resulted in an increase in open claims attributable to GSEs and Insured Securitizations and a decrease in open claims attributable to Uninsured Securitizations and Other.

The following table summarizes changes in our representation and warranty reserves for the three and nine months ended September 30, 2013 and 2012, and for full year 2012:

Table 14.3: Changes in Representation and Warranty Reserves

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

(Dollars in millions)

       2013             2012             2013             2012      

Representation and warranty repurchase reserve, beginning of period(1)

   $ 1,156      $ 1,002      $ 899      $ 943   

Provision for mortgage representation and warranty losses(2)

     (4     0        276        349   

Net realized losses

     (7     (83     (30     (373
  

 

 

   

 

 

   

 

 

   

 

 

 

Representation and warranty repurchase reserve, end of period(1)

   $ 1,145      $ 919      $ 1,145      $ 919   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Reported in our consolidated balance sheets as a component of other liabilities.

(2) 

The pre-tax portion of the provision for mortgage representation and warranty losses recognized in our condensed consolidated statements of income as a component of non-interest income was a benefit of $13 million and $27 million in the third quarter and first nine months of 2013, respectively compared with a loss of $42 million in the first nine months of 2012. The portion of the provision for mortgage representation and warranty recognized in our consolidated statements of income as a component of discontinued operations totaled $9 million and $303 million in the third quarter and first nine months of 2013, respectively and $307 million in first nine months of 2012.

 

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As indicated in the table below, most of the reserves relate to the $27 billion in original principal balance of mortgage loans sold directly to the GSEs or to the Active Insured Securitizations.

Table 14.4: Allocation of Representation and Warranty Reserves

 

     Reserve Liability         

(Dollars in millions, except for loans sold)

   September 30,
2013
     December 31,
2012
     Loans Sold
2005 to 2008(1)
 

Selected period-end data:

        

GSEs and Active Insured Securitizations

   $ 970       $ 817       $ 27   

Inactive Insured Securitizations and Others

     175         82         84   
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,145       $ 899       $ 111   
  

 

 

    

 

 

    

 

 

 

 

(1) 

Reflects, in billions, the total original principal balance of mortgage loans originated by our subsidiaries and sold to third party investors between 2005 and 2008.

In establishing reserves for the $11 billion original principal balance of GSE loans, we rely on the historical relationship between GSE loan losses and repurchase outcomes for each GSE, adjusted for any settlements, to estimate: (1)the percentage of current and future GSE loan defaults that we anticipate will result in repurchase requests from the GSEs over the lifetime of the GSE loans; and (2)the percentage of those repurchase requests that we anticipate will result in actual repurchases. We rely on estimated collateral valuations and loss forecast models to estimate our lifetime liability on GSE loans. This reserving approach to the GSE loans reflects the historical interaction with the GSEs around repurchase requests, and also includes anticipated repurchases resulting from mortgage insurance rescissions. Although our assumed future claims rate considers the most recent claims experience and actual repurchases, an increase in GSE claims and/or repurchases could result in an increase in our reserve. We have entered into and completed repurchase or settlement agreements with respect to the majority of our exposure within this category.

For the $16 billion original principal balance in Active Insured Securitizations, our reserving approach reflects our historical interaction with monoline bond insurers around repurchase requests. Typically, monoline bond insurers allege a very high repurchase rate with respect to the mortgage loans in the Active Insured Securitization category. In response to these repurchase requests, our subsidiaries typically request information from the monoline bond insurers demonstrating that the contractual requirements around a valid repurchase request have been satisfied. In response to these requests for supporting documentation, monoline bond insurers typically initiate litigation. Accordingly, our reserves within the Active Insured Securitization segment are not based upon the historical repurchase rate with monoline bond insurers, but rather upon the expected resolution of litigation with the monoline bond insurers. Every bond insurer within this category is pursuing a substantially similar litigation strategy either through active or probable litigation. 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 anticipated factual and legal record to estimate the lifetime legal liability for each securitization. We rely on our own past monoline settlement ratios in addition to considering publicly available industry monoline settlement ratios to establish these reserves. Our reserves with respect to the U.S. Bank Litigation, the DBSP Litigation, and the Ambac Litigation, in each case as 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.

 

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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 direct and 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.

For the $22 billion original principal balance of mortgage loans sold to private investors as whole loans, we establish reserves by relying on our historical and anticipated claims and repurchase rates to estimate lifetime liability.

The aggregate reserves for all three subsidiaries totaled $1.1 billion as of September 30, 2013, compared with $899 million as of December 31, 2012. We recorded a total benefit for mortgage representation and warranty losses for our representation and warranty repurchase exposure of $4 million in the third quarter of 2013, which was primarily driven by updated economic loss modeling. During the quarter, we had settlements of repurchase requests totaling $7 million that were charged against the reserves.

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 September 30, 2013 is approximately $2.5 billion, a decline from our estimate of $2.7 billion as of December 31, 2012. The estimate as of September 30, 2013 covers all reasonably possible losses relating to representation and warranty claim activity, including those relating to the U.S. Bank Litigation, the DBSP Litigation, the Ambac Litigation, the FHFA Litigation, the LXS Trust Litigation and the FHLB of Boston Litigation.

In estimating reasonably possible future losses in excess of our current reserves, we assume a portion of the inactive securitizations become active and for all 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 assume claim rates or loss rates for these risk categories will be as high as those assumed for the Active Insured Securitizations, however, based on industry precedent. 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 we will resolve any loan repurchase requests relating to loans originated more than six years ago at a discount as compared to those originated within six years of a repurchase claim because of the pending legal arguments in various matters around the applicable statute of limitations.

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

 

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reasonably possible 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 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 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. 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 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, the DBSP Litigation, the Ambac Litigation, the FHFA Litigation, the LXS Trust Litigation and the FHLB of Boston 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 could be approximately $250 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, and the very large or indeterminate damages sought in some of these matters, there is significant uncertainty as to the ultimate liability we may incur from these litigation matters and an adverse outcome in one or more of these matters could be material to our results of operations or cash flows for any particular reporting period.

Interchange Litigation

In 2005, a number of entities, each purporting to represent a class of retail merchants, filed antitrust lawsuits (the “Interchange 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. 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. On July 13, 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. This agreement is

 

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contingent on final court approval of the class settlement. In November 2012, the court granted preliminary approval of the class settlement. In September 2013, the court held oral argument to consider final approval of the class settlement. Several merchant plaintiffs have also opted out of the class settlement, some of which have sued MasterCard, Visa and various member banks, including Capital One (collectively “the Opt-Out Plaintiffs”). These cases are in their preliminary stages.

As members of Visa, our subsidiary banks have indemnification obligations to Visa with respect to final judgments and settlements, including the Interchange Lawsuits. In the first quarter of 2008, Visa completed an IPO of its stock. With IPO proceeds, Visa established an escrow account for the benefit of member banks to fund certain litigation settlements and claims, including the Interchange Lawsuits. As a result, in the first quarter of 2008, we reduced our Visa-related indemnification liabilities of $91 million recorded in other liabilities with a corresponding reduction of other non-interest expense. We made an election in accordance with the accounting guidance for fair value option for financial assets and liabilities on the indemnification guarantee to Visa, and the fair value of the guarantee at December 31, 2012 and September 30, 2013 was zero. Separately, in January 2011, we entered into a MasterCard Settlement and Judgment Sharing Agreement, along with other defendant banks, which apportions between MasterCard and its member banks the costs and liabilities of any judgment or settlement arising from the Interchange Lawsuits.

In March 2011, a furniture store owner named Mary Watson filed a proposed class action in the Supreme Court of British Columbia against Visa, MasterCard, and several banks, including Capital One (the “Watson Litigation”). The lawsuit asserts, among other things, that the defendants conspired to fix the merchant discount fees that merchants pay on credit card transactions in violation of Section 45 of the Competition Act and seeks unspecified damages and injunctive relief. In addition, Capital One has been named as a defendant in similar proposed class action claims filed in other jurisdictions in Canada. The Court heard oral argument on plaintiffs’ motion for class certification in the Watson Litigation in April, 2013, and the parties await a ruling.

Late Fees Litigation

In 2007, a number of individual plaintiffs, each purporting to represent a class of cardholders, filed antitrust lawsuits in the U.S. District Court for the Northern District of California against several issuing banks, including us. These lawsuits allege, among other things, that the defendants conspired to fix the level of late fees and over-limit fees charged to cardholders, and that these fees are excessive. In May 2007, the cases were consolidated for all purposes, and a consolidated amended complaint was filed alleging violations of federal statutes and state law. The amended complaint requests civil monetary damages, which could be trebled, and injunctive relief. In November 2007, the court dismissed the amended complaint. Plaintiffs appealed that order to the Ninth Circuit Court of Appeals. The plaintiffs’ appeal challenges the dismissal of their claims under the National Bank Act, the Depository Institutions Deregulation Act of 1980 and the California Unfair Competition Law (the “UCL”), but not their antitrust conspiracy claims. In June 2009, the Ninth Circuit Court of Appeals stayed the matter pending the bankruptcy proceedings of one of the defendant financial institutions. After numerous stays since 2009, the Ninth Circuit entered an order lifting the stay on August 29, 2012, and will now hear the appeal. The Ninth Circuit held oral argument on February 11, 2013, and the parties await the court’s decision.

Credit Card Interest Rate Litigation

The Capital One Bank Credit Card Interest Rate Multi-district Litigation matter was created as a result of a June 2010 transfer order issued by the United States Judicial Panel on Multi-district Litigation (“MDL”), which consolidated for pretrial proceedings in the U.S. District Court for the Northern District of Georgia two pending putative class actions against COBNA-Nancy Mancuso, et al. v. Capital One Bank (USA), N.A., et al., (E.D. Virginia); and Kevin S. Barker, et al. v. Capital One Bank (USA), N.A., (N.D. Georgia), A third action, Jennifer

 

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L. Kolkowski v. Capital One Bank (USA), N.A., (C.D. California) was subsequently transferred into the MDL. On August 2, 2010, the plaintiffs in the MDL filed a Consolidated Amended Complaint. The Consolidated Amended Complaint alleges in a putative class action that COBNA breached its contractual obligations, and violated the Truth in Lending Act (“TILA”), the California Consumers Legal Remedies Act, the UCL, the California False Advertising Act, the New Jersey Consumer Fraud Act, and the Kansas Consumer Protection Act when it raised interest rates on certain credit card accounts. The MDL plaintiffs seek statutory damages, restitution, attorney’s fees and an injunction against future rate increases. Fact discovery is now closed. On August 8, 2011, Capital One filed a motion for summary judgment, which remains pending with the court. On July 22, 2013, the MDL plaintiffs filed a supplemental opposition to Capital One’s motion for summary judgment. As a result of a settlement in another matter, the California-based UCL and TILA claims in the MDL are extinguished.

Mortgage Repurchase Litigation

On February 5, 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. (the “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 two of the plaintiffs - 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. On March 3, 2010, the Court granted GreenPoint’s motion to dismiss with respect to plaintiffs Syncora and CIFG and 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. On February 28, 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 (the “First Department”). In April, 2013, the First Department affirmed the dismissal of Syncora and CIFG from the case.

In September, 2010, DB Structured Products, Inc. (“DBSP”) named GreenPoint in a third-party complaint, filed in the New York County Supreme Court, alleging breach of contract and seeking indemnification (the “DBSP Litigation”). In the underlying suit, Assured Guaranty Municipal Corp. (“AGM”) sued DBSP for alleged breaches of representations and warranties made by DBSP with respect to certain residential mortgage loans that collateralize a securitization insured by AGM and sponsored by DBSP. DBSP purchased the HELOC loans from GreenPoint in 2006. The entire securitization, almost all of which is insured by AGM, is comprised of loans with an aggregate original principal balance of approximately $353 million. DBSP asserts that any liability it faces lies with GreenPoint, alleging that DBSP’s representations and warranties to AGM are substantially similar to the representations and warranties made by GreenPoint to DBSP. GreenPoint filed a motion to dismiss the complaint in October 2010, which the court denied on July 25, 2011.

On October 24, 2012, Capital One, N.A., (“CONA”) as successor to Chevy Chase Bank, F.S.B. (“CCB”), was named as a defendant in a lawsuit filed in the Southern District of New York by Ambac Assurance Corporation and the Segregated Account of Ambac Assurance Corporation (the “Ambac Litigation”). Plaintiffs allege, among other things, that CONA (as successor to Chevy Chase Bank (“CCB”)) breached certain representations and warranties in contracts relating to six securitizations with an aggregate original principal balance of approximately $5.2 billion which were sponsored by a CCB affiliate in 2006 and 2007 and backed by loans

 

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originated by CCB. Almost half of the securities issued by the six trusts are insured by Ambac. Plaintiffs seek unspecified damages, an order compelling CONA to indemnify Ambac for all accrued and future damages based on alleged breaches of representations and warranties relating to a limited sampling of loans in the portfolio, the repurchase of specific mortgage loans to which the alleged breaches of representations and warranties relate, and all related fees, costs, and interest. CONA moved to dismiss the complaint on January 14, 2013, and that motion remains pending.

On May 30, June 29, and July 30, 2012, FHFA (acting as conservator for Freddie Mac) filed three summons with notice in the New York state court against GreenPoint, on behalf of the trustees for three RMBS trusts backed by loans originated by GreenPoint with an aggregate original principal balance of $3.4 billion. On January 25, 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. (the “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. GreenPoint moved to dismiss the complaint on April 4, 2013.

On July 8, 2013, Lehman XS Trust, Series 2006-4N, by its trustee U.S. Bank, N.A. filed a lawsuit in the Southern District of New York against GreenPoint alleging breaches of representations and warranties made in certain loan sale agreements, pursuant to which GreenPoint sold mortgage loans with an original principal balance of $915 million to Lehman Brothers for securitization and sale to investors. The lawsuit (“the LXS Trust Litigation”) seeks specific performance of GreenPoint’s obligation to repurchase certain allegedly breaching loans, or in the alternative, the repurchase of all loans in the trust, the award of rescissory damages, costs, fees and interest.

As noted above in the section entitled Potential Mortgage Representation & 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. Please see above for more details.

FHLB Securities Litigation

On April 20, 2011, the Federal Home Loan Bank of Boston (the “FHLB of Boston”) filed suit against dozens of mortgage industry participants in Massachusetts Superior Court, alleging, among other things, violations of Massachusetts state securities laws in the sale and marketing of certain residential mortgage-backed securities (the “FHLB of Boston Litigation”). Capital One Financial Corporation and Capital One, National Association are named in the complaint as alleged successors in interest to Chevy Chase Bank, which allegedly marketed some of the mortgage-backed securities at issue in the litigation. The FHLB of Boston seeks rescission, unspecified damages, attorneys’ fees, and other unspecified relief. The case was removed to the United States District Court for the District of Massachusetts in May 2011. FHLB of Boston filed an Amended Complaint on June 29, 2012, and the Company’s motion to dismiss was denied on September 30, 2013.

Checking Account Overdraft Litigation

In May, 2010, Capital One Financial Corporation and COBNA were named as defendants in a putative class action named Steen v. Capital One Financial Corporation, et al., filed in the U.S. District Court for the Eastern District of Louisiana. Plaintiff challenges practices relating to fees for overdraft and non-sufficient funds fees on consumer checking accounts. Plaintiff alleges that our methodology for posting transactions to customer accounts is designed to maximize the generation of overdraft fees, supporting claims for breach of contract, breach of the covenant of good faith and fair dealing, unconscionability, conversion, unjust enrichment and violations of state unfair trade practices laws. Plaintiff seeks a range of remedies, including restitution, disgorgement, injunctive

 

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relief, punitive damages and attorneys’ fees. In May 2010, the case was transferred to the Southern District of Florida for coordinated pre-trial proceedings as part of a multi-district litigation (MDL) involving numerous defendant banks, In re Checking Account Overdraft Litigation. In January 2011, plaintiffs filed a second amended complaint against CONA in the MDL court. In February 2011, CONA filed a motion to dismiss the second amended complaint. On March 21, 2011, the MDL court granted CONA’s motion to dismiss claims of breach of the covenant of good faith and fair dealing under Texas law, but denied the motion to dismiss in all other respects. On June 21, 2012, the MDL court granted plaintiff’s motion for class certification. The modified scheduling order entered by the MDL court on August 13, 2013, contemplates the conclusion of discovery in the first quarter of 2014 and we anticipate a remand to the Eastern District of Louisiana in the second quarter of 2014.

Hawaii, Mississippi, Missouri and New Mexico State Attorney General Payment Protection Matters

On April 12, 2012, the Attorney General of Hawaii filed a lawsuit in First Circuit Court in Hawaii against Capital One Bank (USA) N.A., and Capital One Services, LLC. The case is one of several similar lawsuits filed by the Attorney General of Hawaii against various banks challenging the marketing and sale of payment protection and credit monitoring products. On June 28, 2012, the Attorney General of Mississippi filed substantially similar suits against Capital One and several other banks. On April 17, 2013, the Attorney General of New Mexico also filed substantially similar suits against Capital One and several other banks. All three state attorney general complaints allege that Capital One enrolls customers in such programs without their consent and that Capital One enrolls customers in such programs in circumstances in which the customer is not eligible to receive benefits for the product in question. All suits allege unjust enrichment and violation of Unfair and Deceptive Practices Act statutes. The remedies sought in the lawsuits include an injunction prohibiting the Company from engaging in the alleged violations, restitution for all persons allegedly injured by the complained of practices, civil penalties and costs.

On May 18, 2012, Capital One removed the Hawaii AG case to U.S. District Court, District of Hawaii. On November 30, 2012, the court denied the Hawaii AG’s motion to remand. The Hawaii AG petitioned to appeal the District Court’s decision to the Ninth Circuit Court of Appeals, which was granted by the Ninth Circuit on April 1, 2013. The District Court case is now stayed pending the appeal.

On August 10, 2012, Capital One removed the Mississippi AG case to the U.S. District Court, Southern District of Mississippi. On July 31, 2013, the court denied the Mississippi AG’s motion to remand. The Mississippi AG petitioned to appeal the District Court’s decision to the Fifth Circuit Court of Appeals, which was granted by the Fifth Circuit on October 3, 2013.

On June 3, 2013, Capital One removed the New Mexico AG case to the U.S. District Court, District of New Mexico. In response, on July 2, 2013, the New Mexico AG filed an Amended Complaint in federal court, adding a claim for alleged violations of the Truth in Lending Act.

Relatedly, Capital One has provided information to the Attorney General of Missouri as part of an industry-wide informal inquiry initiated in August, 2011, relating to the marketing of payment protection products.

Intellectual Ventures Corp., et al.

On June 19, 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 United States District Court for the Eastern District of Virginia. In the Complaint, IV alleges 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

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

other patents in several other federal courts. Capital One’s motion to dismiss was denied without prejudice on August 28, 2013. Capital One filed an answer and counterclaim alleging antitrust violations. Discovery in the case is ongoing and the final pretrial conference is currently scheduled for December 19, 2013.

Derivative Actions

On August 17, 2012, a derivative action, titled Iron Workers Mid-South Pension Fund v. Fairbank, et al., Case No. 2012 14130 (“Iron Workers Action”), was filed by a putative stockholder on behalf of the Company in Virginia Circuit Court of Fairfax County (hereafter “Virginia Circuit Court”) against certain current and former directors and officers of the Company, alleging breach of the fiduciary duty of loyalty, gross mismanagement, corporate waste, and unjust enrichment. The allegations stem from the Company’s entering into consent orders with the Office of the Comptroller of the Currency and the Consumer Financial Protection Bureau regarding vendor sales practices of payment protection and credit monitoring products. Plaintiff shareholder generally alleges that the alleged failure of the Company’s officers and directors to oversee certain practices between 2010 and early 2012 caused harm to the Company, which is named as a “nominal defendant.” The action includes claims for, among other things, damages in favor of the Company, certain corporate actions to purportedly improve the Company’s corporate governance and internal procedures, and an award of costs and expenses to the putative plaintiff stockholder, including attorneys’ fees. On September 19, 2012, a second derivative complaint, titled Barovic v. Fairbank, et al., Case No. 2012 14130, was filed by another putative stockholder on behalf of the Company also in the Virginia Circuit Court. The Barovic derivative complaint is substantially identical to the Iron Workers’ Action (collectively “Derivative Actions”). The defendants removed the Derivative Actions to federal court and moved to dismiss the complaints. On June 24, 2013, the court granted Capital One’s motion to dismiss, finding that the plaintiffs did not adequately allege facts showing that the Board could not be impartial in responding to a litigation demand. The court also dismissed with prejudice the claims for unjust enrichment and corporate waste, and the claims against the named officer defendants. The plaintiffs filed an amended complaint on July 8, 2013, which Capital One moved to dismiss with prejudice on July 25, 2013. On October 8, 2013, the Court granted Capital One’s motion to dismiss the amended complaint with prejudice, thereby dismissing the consolidated matter in its entirety.

Telephone Consumer Protection Act Litigation

In December 2012, the Capital One Telephone Consumer Protection Act (“TCPA”) Litigation Multi-district Litigation matter was created as a result of a transfer order issued by the United States Judicial Panel on Multi-district Litigation (“TCPA MDL”), which consolidated for pretrial proceedings in the U.S. District Court for the Northern District of Illinois three pending putative class actions-Bridgett Amadeck, et al. v. Capital One Financial Corporation, et al. (W.D. Washington); Nicholas Martin, et al. v. Capital One Bank (USA), N.A., et al. (N.D. Illinois); and Charles C. Patterson v. Capital One Bank (USA), N.A., et al. (N.D. Illinois)-and several individual lawsuits. On February 28, 2013, the putative class action plaintiffs in the TCPA MDL filed a Consolidated Master Class Action Complaint. The Consolidated Master Class Action Complaint and individual lawsuits allege that COBNA and/or entities acting on its behalf violated the TCPA by contacting consumers on their cellular telephones using an automatic telephone dialing system and/or artificial or prerecorded voice without first obtaining prior express consent to do so. The plaintiffs seek statutory damages for alleged negligent and willful violations of the TCPA, attorneys’ fees, costs, and injunctive relief.

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.

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

For a discussion of the quantitative and qualitative disclosures about market risk, see “Part I—Item 2. MD&A—Market Risk Management.”

Item 4. Controls and Procedures

Overview

We are required under applicable laws and regulations to maintain controls and procedures, which include disclosure controls and procedures as well as internal control over financial reporting, as further described below.

(a) Disclosure Controls and Procedures

Disclosure Controls and Procedures

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 September 30, 2013, the end of the period covered by this Report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2013, 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. During the third quarter of 2013, we continued to evaluate and implement changes to processes, information technology systems and other components of internal control over financial reporting related to the ING Direct and 2012 U.S. card acquisitions. During the quarter, these changes included conversion of the HSBC acquired Branded Book portfolio to the Capital One card legacy platform. Otherwise, there were no changes in our internal control over financial reporting during the third quarter of 2013 which have materially affected, or are reasonably like to materially affect, our internal control over financial reporting.

 

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings

The information required by Item 1 is included in “Notes to Condensed Consolidated Financial Statements—Note 14—Commitments, Contingencies and Guarantees.”

Item 1A. Risk Factors

We are not aware of any material changes from the risk factors set forth under “Part I—Item 1A. Risk Factors” in our 2012 Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table shows shares of our common stock we repurchased during the third quarter of 2013:

 

(Dollars in millions, except per share information)

   Total
Number

of  Shares
Purchased
     Average
Price Paid
per Share(3)
     Total Number of
Shares Purchased as
Part of Publicly
Announced

Plans
     Maximum
Amount That May
Yet be Purchased
Under the Plan

or Program(4)
 

July 1-31, 2013

           

Open market repurchases(1)

           $               $ 1,000   

Employee transactions(2)

     12,518         66.03                 N/A   

August 1-31, 2013

           

Open market repurchases(1)

                             1,000   

Employee transactions(2)

     7,032         69.50                 N/A   

September 1-30, 2013

           

Open market repurchases(1)

     3,743,355         68.40         3,743,355         744   

Employee transactions(2)

     805         64.04                 N/A   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     3,763,710       $ 68.39         3,743,355       $ 744   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Represents repurchases under the $1 billion common stock repurchase program authorized by our Board of Directors and announced on July 2, 2013. We may repurchase shares through March 31, 2014. Shares repurchased under the 2013 Share Repurchase Plan are considered treasury stock.

(2)

Shares purchased represent shares purchased and share swaps made in connection with stock option exercises and the withholding of shares to cover taxes on restricted stock awards whose restrictions have lapsed.

(3)

Excludes commission costs

(4)

The amount authorized by the Board of Directors under the 2013 Share Repurchase Plan excludes commission costs.

N/A Not applicable

Item 3. Defaults upon Senior Securities

None.

Item 5. Other Information

On October 31, 2013, the Company’s Board of Directors approved changes to the Company’s Amended and Restated Bylaws, including changing the general advance notice period for annual meetings to ninety to one hundred twenty days before the first anniversary of the preceding year’s annual meeting. Prior to these amendments, the advance notice period for annual meetings was seventy to ninety days before such anniversary. The amendments to the Company’s bylaws include similar changes to the advance notice period for stockholder nominations for applicable special meetings of stockholders As a result of these amendments, the

 

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deadlines for stockholders wishing to present other business or nominations at the Company’s 2014 Annual Stockholder Meeting have changed from the dates disclosed in the Company’s Definitive Proxy Statement dated March 20, 2013. The deadline for submitting proposals for inclusion in the Company’s proxy statement for its 2014 Annual Stockholder Meeting pursuant to Rule 14a-8 under the Securities Exchange Act of 1934 has not changed and remains November 20, 2013.

Under the Company’s amended bylaws, if a stockholder wishes to present other business before the stockholders at the Company’s 2014 Annual Stockholder Meeting or nominate a director candidate, the stockholder must give proper written notice of any such business or nominee to the Company’s Corporate Secretary not before January 2, 2014, and not after February 1, 2014. If the Company’s 2014 Annual Stockholder Meeting is not within thirty days before or sixty days after May 2, 2014, the anniversary date of the Company’s 2013 Annual Stockholder Meeting, notice must be delivered no earlier than the one hundred twentieth day prior to such annual meeting and not later than the close of business on the later of the ninetieth day prior to such meeting or ten days following any notice or publication of the meeting. A stockholder’s notice must include the information specified in the Company’s bylaws concerning the business or nominee.

Item 6. Exhibits

An index to exhibits has been filed as part of this report beginning on page 171 and is incorporated herein by reference.

 

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SIGNATURES

Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  CAPITAL ONE FINANCIAL CORPORATION
Date: November 6, 2013   By:  

/s/ STEPHEN S. CRAWFORD

    Stephen S. Crawford
    Chief Financial Officer

 

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EXHIBIT INDEX

CAPITAL ONE FINANCIAL CORPORATION

QUARTERLY REPORT ON FORM 10-Q

DATED September 30, 2013

Commission File No. 1-13300

The following exhibits are incorporated by reference or filed herewith. References to (i) the “2003 Form 10-K” are to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2003, filed on March 5, 2004; (ii) the “2004 Form 10-K” are to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2004, filed on March 9, 2005; (iii) the “2008 Form 10-K” are to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2008, filed on February 26, 2009; and (iv) the “2011 Form 10-K” are to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2011, filed on February 29, 2012.

 

Exhibit No.

  

Description

2.1    Stock Purchase Agreement, dated as of December 3, 2008, by and among Capital One Financial Corporation, B.F. Saul Real Estate Investment Trust, Derwood Investment Corporation, and B.F. Saul Company Employee’s Profit Sharing and Retirement Trust (incorporated by reference to Exhibit 2.4 of the Corporation’s 2008 Form 10-K).
2.2.1    Purchase and Sale Agreement, dated as of June 16, 2011, by and among Capital One Financial Corporation, ING Groep N.V., ING Bank N.V., ING Direct N.V. and ING Direct Bancorp (incorporated by reference to Exhibit 2.1 of the Corporation’s Current Report on Form 8-K, filed on June 22, 2011).
2.2.2    First Amendment to the Purchase and Sale Agreement by and among Capital One Financial Corporation, ING Groep N.V., ING Bank N.V., ING Direct N.V. and ING Direct Bancorp, dated as of February 17, 2012 (incorporated by reference to Exhibit 2.2.2 of the Corporation’s 2011 Form 10-K).
2.3.1    Purchase and Assumption Agreement, dated as of August 10, 2011, by and among Capital One Financial Corporation, HSBC Finance Corporation, HSBC USA Inc. and HSBC Technology and Services (USA) Inc. (incorporated by reference to Exhibit 2.1 of the Corporation’s Current Report on Form-8-K, filed on August 12, 2011).
2.3.2    Purchaser Transition Services Agreement between HSBC Technology and Services (USA) Inc. and Capital One Services, LLC, dated as of May 1, 2012 (incorporated by reference to Exhibit 10.1 of the Corporation’s Quarterly Report on Form 10-Q for the period ended June 30, 2012).
3.1    Restated Certificate of Incorporation of Capital One Financial Corporation, (as amended and restated May 16, 2011) (incorporated by reference to Exhibit 3.4 of the Corporation’s Current Report on Form 8-K, filed on May 17, 2011).
3.2    Amended and Restated Bylaws of Capital One Financial Corporation (incorporated by reference to Exhibit 3.1 of the Corporation’s Current Report on Form 8-K, filed on November 5, 2013).
3.3    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 Corporation’s Current Report on Form 8-K on August 20, 2012).
4.1.1    Specimen certificate representing the common stock of Capital One Financial Corporation (incorporated by reference to Exhibit 4.1 of the Corporation’s 2003 Form 10-K).
4.1.2    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 Corporation’s Form 8-A filed on December 4, 2009).

 

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Exhibit No.

  

Description

4.1.3    Deposit Agreement, dated August 20, 2012 (incorporated by reference to Exhibit 4.1 of the Corporation’s Current Report on Form 8-K filed on August 20, 2012).
4.2.1    Senior Indenture dated as of November 1, 1996 between Capital One Financial Corporation and The Bank of New York Mellon Trust Company, N.A., formerly known as The Bank of New York Trust Company, N.A. (as successor to Harris Trust and Savings Bank), as trustee (incorporated by reference to Exhibit 4.1 of the Corporation’s Report on Form 8-K, filed on November 13, 1996).
4.2.2    Supplemental Indenture, dated June 6, 2013, between Capital One Financial Corporation and the Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.2 of the Corporation’s Current Report on Form 8-K, filed on June 6, 2013).
4.2.3    Registration Rights Agreement, dated June 6, 2013, between Capital One Financial Corporation and Deutsche Bank Securities Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and J.P. Morgan Securities LLC, as representatives of the dealer managers (incorporated by reference to Exhibit 4.3 of the Corporation’s Current Report on Form 8-K, filed on June 6, 2013).
4.2.4    Copy of 6.25% Notes, due 2013, of Capital One Financial Corporation (incorporated by reference to Exhibit 4.5.5 of the 2003 Form 10-K).
4.2.5    Copy of 5.25% Notes, due 2017, of Capital One Financial Corporation (incorporated by reference to Exhibit 4.5.6 of the 2004 Form 10-K).
4.2.6    Copy of 5.50% Senior Notes, due 2015, of Capital One Financial Corporation (incorporated by reference to Exhibit 4.1 of the Corporation’s Quarterly Report on Form 10-Q for the period ending June 30, 2005).
4.2.7    Specimen of 6.750% Senior Note, due 2017, of Capital One Financial Corporation (incorporated by reference to Exhibit 4.1 of the Corporation’s Report on Form 8-K, filed on September 5, 2007).
4.2.8    Specimen of 7.375% Senior Note, due 2014, of Capital One Financial Corporation (incorporated by reference to Exhibit 4.1 of the Corporation’s Report on Form 8-K, filed on May 22, 2009).
4.2.9    Specimen of Floating Rate Senior Note due 2014, of Capital One Financial Corporation (incorporated by reference to Exhibit 4.3 of the Corporation’s Current Report on Form 8-K, filed on July 19, 2011).
4.2.10    Specimen of 2.125% Senior Note due 2014, of Capital One Financial Corporation (incorporated by reference to Exhibit 4.4 of the Corporation’s Current Report on Form 8-K, filed on July 19, 2011).
4.2.11    Specimen of 3.150% Senior Note due 2016, of Capital One Financial Corporation (incorporated by reference to Exhibit 4.5 of the Corporation’s Current Report on Form 8-K, filed on July 19, 2011).
4.2.12    Specimen of 4.750% Senior Note due 2021, of Capital One Financial Corporation (incorporated by reference to Exhibit 4.6 of the Corporation’s Current Report on Form 8-K, filed on July 19, 2011).
4.2.13    Specimen of Floating Rate Senior Note due 2015, of Capital One Financial Corporation (incorporated by reference to Exhibit 4.2 of the Corporation’s Current Report on Form 8-K, filed on November 6, 2012).

 

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Exhibit No.

  

Description

4.2.14    Specimen of 1.000% Senior Note due 2015, of Capital One Financial Corporation (incorporated by reference to Exhibit 4.3 of the Corporation’s Current Report on Form 8-K, filed on November 6, 2012).
4.2.15    Specimen of 3.50% Senior Note due 2023, of Capital One Financial Corporation (incorporated by reference to Exhibit A of Exhibit 4.2 of the Corporation’s Current Report on Form 8-K, filed June 6, 2013).
4.3.1    Indenture, dated as of August 29, 2006, between Capital One Financial Corporation and The Bank of New York Mellon Trust Company, N.A., as indenture trustee (incorporated by reference to Exhibit 4.1 of the Corporation’s Current Report on Form 8-K, filed on August 31, 2006).
4.3.2    Copy of Subordinated Note Certificate (incorporated by reference to Exhibit 4.2 of the Corporation’s Current Report on Form 8-K, filed on August 31, 2006).
12.1*    Computation of Ratio of Earnings to Fixed Charges.
12.2*    Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends.
31.1*    Certification of Richard D. Fairbank.
31.2*    Certification of Stephen S. Crawford.
32.1*    Certification** of Richard D. Fairbank.
32.2*    Certification** of Stephen S. Crawford.
101.INS*    XBRL Instance Document.
101.SCH*    XBRL Taxonomy Extension Schema Document.
101.CAL*    XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*    XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*    XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*    XBRL Taxonomy Extension Presentation Linkbase Document.

 

* Indicates a document being filed with this Form 10-Q.
** Information in this Form 10-Q furnished herewith shall not be deemed to be “filed” for the purposes of Section 18 of the 1934 Act or otherwise subject to the liabilities of that section.

 

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