Edgar Filing: CAPITAL ONE FINANCIAL CORP

Form 10-Q

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 March 31, 2014

¨	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 website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes 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 April 30, 2014, there were 571,580,051 shares of the registrant’s Common Stock, par value $.01 per share, outstanding.

TABLE OF CONTENTS


		Page
PART I—FINANCIAL INFORMATION			1
Item 1.	Financial Statements		65
	Condensed Consolidated Statements of Income		66
	Condensed Consolidated Statements of Comprehensive Income		67
	Condensed Consolidated Balance Sheets		68
	Condensed Consolidated Statements of Changes in Stockholders’ Equity		69
	Condensed Consolidated Statements of Cash Flows		70
	Notes to Condensed Consolidated Financial Statements		71
	Note 1 — Summary of Significant Accounting Policies		71
	Note 2 — Discontinued Operations		73
	Note 3 — Investment Securities		73
	Note 4 — Loans		82
	Note 5 — Allowance for Loan and Lease Losses		102
	Note 6 — Variable Interest Entities and Securitizations		105
	Note 7 — Goodwill and Other Intangible Assets		110
	Note 8 — Deposits and Borrowings		111
	Note 9 — Derivative Instruments and Hedging Activities		113
	Note 10 — Accumulated Other Comprehensive Income		120
	Note 11 — Earnings Per Common Share		122
	Note 12 — Fair Value of Financial Instruments		123
	Note 13 — Business Segments		136
	Note 14 — Commitments, Contingencies, Guarantees, and Others		138
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)		1
	Summary of Selected Financial Data		1
	Introduction.		5
	Executive Summary and Business Outlook		6
	Critical Accounting Policies and Estimates		9
	Accounting Changes and Developments		10
	Consolidated Results of Operations		10
	Business Segment Financial Performance		15
	Consolidated Balance Sheets Analysis		26
	Off-Balance Sheet Arrangements and Variable Interest Entities		31
	Capital Management		31
	Risk Management		35
	Credit Risk Profile		36
	Liquidity Risk Profile		47
	Market Risk Profile		51
	Supervision and Regulation		53
	Forward-Looking Statements		54
	Supplemental Tables		56
	Glossary and Acronyms		57
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		151
Item 4	Controls and Procedures		151

PART II—OTHER INFORMATION			152
Item 1.	Legal Proceedings		152
Item 1A.	Risk Factors		152
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		152


		i		CAPITAL ONE FINANCIAL CORPORATION (COF)


		Page
Item 3.	Defaults upon Senior Securities		152
Item 4.	Mine Safety Disclosures		152
Item 5.	Other Information		152
Item 6.	Exhibits		152

SIGNATURES			153
EXHIBIT INDEX			154


		ii		CAPITAL ONE FINANCIAL CORPORATION (COF)

INDEX OF MD&A TABLES AND SUPPLEMENTAL TABLES


Table	Description	Page
	MD&A Tables:
1	Consolidated Financial Highlights (Unaudited)		2
2	Business Segment Results		6
3	Average Balances, Net Interest Income and Net Interest Yield		11
4	Rate/Volume Analysis of Net Interest Income		12
5	Non-Interest Income		13
6	Non-Interest Expense		14
7	Credit Card Business Results		16
7.1	Domestic Card Business Results		18
7.2	International Card Business Results		19
8	Consumer Banking Business Results		21
9	Commercial Banking Business Results		24
10	Other Results		26
11	Investment Securities		27
12	Non-Agency Investment Securities Credit Ratings		28
13	Net Loans Held for Investment		29
14	Changes in Representation and Warranty Reserve		30
15	Capital Ratios		33
16	Estimated Common Equity Tier 1 Ratio under Fully Phased-In Basel III Standardized Approach		34
17	Loan Portfolio Composition		37
18	30+ Day Delinquencies		39
19	Aging and Geography of 30+ Day Delinquent Loans		40
20	90+ Day Delinquent Loans Accruing Interest		40
21	Nonperforming Loans and Other Nonperforming Assets		41
22	Net Charge-Offs		42
23	Loan Modifications and Restructurings		43
24	Allowance for Loan and Lease Losses Activity		45
25	Allocation of the Allowance for Loan and Lease Losses		46
26	Liquidity Reserves		47
27	Deposit Composition and Average Deposit Rates		48
28	Short-Term Borrowings		49
29	Contractual Maturity Profile of Outstanding Debt		50
30	Senior Unsecured Debt Credit Ratings		51
31	Interest Rate Sensitivity Analysis		53

	Supplemental Tables:
A	Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures		56


		iii		CAPITAL ONE FINANCIAL CORPORATION (COF)

PART I—FINANCIAL INFORMATION

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

This discussion contains forward-looking statements that are based upon management’s current expectations and are subject to significant uncertainties and changes in circumstances. Please review “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 2013 Annual Report on Form 10-K (“2013 Form 10-K”). Unless otherwise specified, references to notes to our consolidated financial statements refers to the notes to our unaudited condensed consolidated financial statements as of March 31, 2014 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 2013 Form 10-K.

SUMMARY OF SELECTED FINANCIAL DATA

The following table presents selected consolidated financial data from our results of operations for the first quarter of 2014 and 2013, and selected comparative balance sheet data as of March 31, 2014 and December 31, 2013. 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 2013:

•

On November 1, 2013, we completed the acquisition of Beech Street Capital, a privately-held, national originator and servicer of Federal National Mortgage Association (“Fannie Mae”), Federal Home Loan Mortgage Corporation (“Freddie Mac”) and Federal Housing Administration (“FHA”) multifamily commercial real estate loans.

•

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 we received $6.4 billion for the net portfolio assets.

In 2012, we completed the acquisitions of (i) 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”); and (ii) 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”).

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, F.S.B. (“CCB”) acquisitions, which were recorded at fair value at acquisition and subsequently 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 $27.4 billion and $28.6 billion as of March 31,


		1		CAPITAL ONE FINANCIAL CORPORATION (COF)

2014 and December 31, 2013, respectively. The difference between the fair value at acquisition and 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 expected cash flows represents the nonaccretable difference or the amount of principal and interest not considered collectible, which incorporates future expected credit losses over the life of the loans. Decreases in expected cash flows resulting from further credit deterioration will generally result in an impairment charge recognized in our provision for credit losses and an increase in the allowance for loan and lease losses. Charge-offs are not recorded until the expected credit losses within the nonaccretable difference is depleted. In addition, Acquired Loans are not initially classified as delinquent or nonperforming as we expect to collect our net investment in these loans and the nonaccretable difference is expected to absorb the majority of the losses associated with these loans. 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 “MD&A—Credit Risk Profile” and “Note 4—Loans.”

Table 1: Consolidated Financial Highlights (Unaudited)⁽¹⁾


	Three Months Ended March 31,
(Dollars in millions, except per share data as noted)	2014			2013			Change
Income statement
Net interest income	$	4,350		$	4,570			(5	)%
Non-interest income		1,020			981			4

Total net revenue⁽²⁾		5,370			5,551			(3	)
Provision for credit losses		735			885			(17	)
Non-interest expense⁽³⁾		2,932			2,991			(2	)

Income from continuing operations before income taxes		1,703			1,675			2
Income tax provision		579			541			7

Income from continuing operations, net of tax		1,124			1,134			(1	)
Income (Loss) from discontinued operations, net of tax		30			(78	)		138

Net income		1,154			1,056			9
Dividends and undistributed earnings allocated to participating securities		(5	)		(5	)		**
Preferred stock dividends		(13	)		(13	)		**

Net income available to common shareholders	$	1,136		$	1,038			9	%

Common share statistics
Earnings per common share:
Basic earnings per common share	$	1.99		$	1.79			11	%
Diluted earnings per common share		1.96			1.77			11
Weighted average common shares outstanding:
Basic		571.0			580.5			(2	)
Diluted		580.3			586.3			(1	)
Dividends per common share.		0.30			0.05			500
Average balances
Loans held for investment⁽⁴⁾	$	193,722		$	195,997			(1	)%
Interest-earning assets		262,659			272,345			(4	)
Total assets		294,275			303,226			(3	)
Interest-bearing deposits		184,183			190,612			(3	)
Total deposits		205,842			211,555			(3	)
Borrowings		35,978			41,574			(13	)
Common equity		42,006			40,027			5
Total stockholders’ equity		42,859			40,880			5


		2		CAPITAL ONE FINANCIAL CORPORATION (COF)


	Three Months Ended March 31,
(Dollars in millions, except per share data as noted)	2014			2013			Change
Selected performance metrics
Purchase volume⁽⁵⁾	$	47,434		$	45,098			5	%
Total net revenue margin⁽⁶⁾		8.18	%		8.15	%		3	bps
Net interest margin⁽⁷⁾		6.62			6.71			(9	)
Net charge-offs	$	931		$	1,079			(14	)%
Net charge-off rate⁽⁸⁾		1.92	%		2.20	%		(28	)bps
Net charge-off rate (excluding Acquired Loans)⁽⁹⁾		2.24			2.69			(45	)
Return on average assets⁽¹⁰⁾		1.53			1.50			3
Return on average tangible assets⁽¹¹⁾		1.61			1.58			3
Return on average common equity⁽¹²⁾		10.53			11.15			(62	)
Return on average tangible common equity⁽¹³⁾		16.83			18.69			(186	)
Equity-to-assets ratio⁽¹⁴⁾		14.56			13.48			108
Non-interest expense as a % of average loans held for investment⁽¹⁵⁾		6.05			6.10			(5	)
Efficiency ratio⁽¹⁶⁾		54.60			53.88			72
Effective income tax rate from continuing operations		34.0			32.3			170


(Dollars in millions except per share data as noted)	March 31, 2014			December 31, 2013			Change
Balance sheet (period end)
Loans held for investment⁽⁴⁾	$	192,941		$	197,199			(2	)%
Interest-earning assets		259,422			265,170			(2	)
Total assets		290,500			296,933			(2	)
Interest-bearing deposits		184,214			181,880			1
Total deposits		208,324			204,523			2
Borrowings		30,118			40,654			(26	)
Common equity		41,948			40,779			3
Total stockholders’ equity		42,801			41,632			3
Credit quality metrics (period end)
Allowance for loan and lease losses.	$	4,098		$	4,315			(5	)%
Allowance as a % of loans held for investment (“allowance coverage ratio”)		2.12	%		2.19	%		(7	)bps
Allowance as a % of loans held for investment (excluding Acquired Loans)⁽⁹⁾		2.45			2.54			(9	)
30+ day performing delinquency rate		2.22			2.63			(41	)
30+ day performing delinquency rate (excluding Acquired Loans)⁽⁹⁾		2.59			3.08			(49	)
30+ day delinquency rate		2.51			2.96			(45	)
30+ day delinquency rate (excluding Acquired Loans)⁽⁹⁾		2.93			3.46			(53	)
Capital ratios⁽¹⁷⁾
Common equity Tier 1 capital ratio⁽¹⁸⁾		12.98	%		N/A			**
Tier 1 common ratio⁽¹⁹⁾		N/A			12.19	%		**
Tier 1 risk-based capital ratio⁽²⁰⁾		13.36			12.57			79	bps
Total risk-based capital ratio⁽²¹⁾		15.42			14.69			73
Tier 1 leverage ratio⁽²²⁾		10.42			10.06			36
Tangible common equity (“TCE”) ratio⁽²³⁾		9.56			8.89			67
Associates
Full-time equivalent employees (in thousands)		41.1			42.0			(2	)%

**	Change is less than one percent or not meaningful.


		3		CAPITAL ONE FINANCIAL CORPORATION (COF)

⁽¹⁾

We adopted ASU 2014-01 “Accounting for Investments in Qualified Affordable Housing Projects” (Investments in Qualified Affordable Housing Projects) as of January 1, 2014. As permitted by the guidance, we adopted the proportional amortization method of accounting for Investments in Qualified Affordable Housing Projects. The proportional amortization method amortizes the cost of the investment over the period in which we will receive tax credits and other tax benefits, and the resulting amortization is recognized as a component of income tax expense attributable to continuing operations. Historically, these investments were accounted for under the equity method of accounting and the passive losses related to the investments were recognized within non-interest expense. See “Note 1—Summary of Significant Accounting Policies” for additional information. Prior period results and related metrics have been recast to conform to this presentation.

⁽²⁾	Total net revenue was reduced by $163 million and $265 million in the first quarter of 2014 and 2013, respectively, for the estimated uncollectible amount of billed finance charges and fees.

⁽³⁾

Includes purchased credit card relationship (“PCCR”) intangible amortization of $98 million and $116 million in the first quarter of 2014 and 2013, respectively, the substantial majority of which is attributable to the 2012 U.S. card acquisition. Also includes core deposit intangible amortization of $36 million and $44 million, and acquisition-related costs of $23 million and $46 million in the first quarter of 2014 and 2013, respectively. These acquisition-related costs are comprised of transaction costs, legal and other professional or consulting fees, restructuring costs, and integration expense.

⁽⁴⁾	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.

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

⁽⁶⁾	Calculated based on annualized total net revenue for the period divided by average interest-earning assets for the period.

⁽⁷⁾	Calculated based on annualized net interest income for the period divided by average interest-earning assets for the period.

⁽⁸⁾	Calculated based on annualized net charge-offs for the period divided by average loans held for investment for the period.

⁽⁹⁾	Calculation of ratio adjusted to exclude Acquired Loans. See “MD&A—Business Segment Financial Performance,” “MD&A—Credit Risk Profile” and “Note 4—Loans” for additional information on the impact of Acquired Loans on our credit quality metrics.

⁽¹⁰⁾	Calculated based on annualized income from continuing operations, net of tax, for the period divided by average total assets for the period.

⁽¹¹⁾	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” for additional information.

⁽¹²⁾

⁽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 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” for additional information.

⁽¹⁴⁾	Calculated based on average stockholders’ equity for the period divided by average total assets for the period.

⁽¹⁵⁾	Calculated based on annualized non-interest expense for the period divided by average loans held for investment for the period.

⁽¹⁶⁾	Calculated based on non-interest expense for the period divided by total net revenue for the period.

⁽¹⁷⁾	Beginning on January 1, 2014, we calculate our regulatory capital under Basel III Standardized Approach subject to transition provisions. Prior to January 1, 2014, we calculated regulatory capital under Basel I.

⁽¹⁸⁾

Common equity Tier 1 capital ratio is a regulatory capital measure calculated based on Common equity 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” for additional information, including the calculation of this ratio.

⁽¹⁹⁾

Tier 1 common capital ratio is a regulatory capital measure calculated based on Tier 1 common equity divided by Basel I 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” for additional information, including the calculation of this ratio.

⁽²⁰⁾

Tier 1 risk-based capital ratio is a regulatory capital 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” for additional information, including the calculation of this ratio.

⁽²¹⁾

Total risk-based capital ratio is a regulatory capital 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” for additional information, including the calculation of this ratio.

⁽²²⁾

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

⁽²³⁾

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” for the calculation of this measure and reconciliation to the comparative GAAP measure.


		4		CAPITAL ONE FINANCIAL CORPORATION (COF)

INTRODUCTION

General

We are a diversified financial services holding company with banking and non-banking subsidiaries. Capital One Financial Corporation and its subsidiaries (the “Company”) offer a broad array of financial products and services to consumers, small businesses and commercial clients through branches, the internet and other distribution channels. As of March 31, 2014, our principal subsidiaries included:

•

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

•

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

The Company is hereafter collectively referred to as “we”, “us” or “our.” COBNA and CONA are collectively referred to as the “Banks.” Certain business terms used in this document are defined in the Glossary and Acronyms and should be read in conjunction with the Consolidated Financial Statements included in this Report.

We had total loans held for investment of $192.9 billion, deposits of $208.3 billion and stockholders’ equity of $42.8 billion as of March 31, 2014, compared with total loans held for investment of $197.2 billion, deposits of $204.5 billion and stockholders’ equity of $41.6 billion as of December 31, 2013.

Our consolidated total net revenues are derived primarily from lending to consumer and commercial customers net of funding costs associated with interest on customer deposits, short-term borrowings and long-term debt. We also earn non-interest income which primarily consists of service charges and other customer related fees, and interchange income net of reward expenses. 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 primary business segments, which are defined primarily based on the products and services provided or the type of customer served: Credit Card, Consumer Banking and Commercial Banking. The operations of acquired businesses have been integrated into our existing business segments. Certain activities that are not part of a segment, such as management of our corporate investment portfolio and asset/liability management by our centralized Corporate Treasury group, are included in the “Other” category.

•

Credit Card: Consists of our domestic consumer and small business card lending, 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 and $1 billion.

Table 2 summarizes our business segment results, which we report based on income from continuing operations, net of tax, for the first quarter of 2014 and 2013 respectively. We provide information on the allocation methodologies used to derive our business segment results in “Note 19—Business Segments” in our 2013 Form 10-K. We also provide 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.


		5		CAPITAL ONE FINANCIAL CORPORATION (COF)

Table 2: Business Segment Results⁽¹⁾


	Three Months Ended March 31,
	2014												2013
	Total Net Revenue⁽²⁾						Net Income (Loss)⁽³⁾						Total Net Revenue⁽²⁾						Net Income (Loss)⁽³⁾
(Dollars in millions)	Amount			% of Total			Amount			% of Total			Amount			% of Total			Amount			% of Total
Credit Card	$	3,310			62	%	$	668			60	%	$	3,651			66	%	$	686			60	%
Consumer Banking		1,583			30			330			29			1,659			30			383			34
Commercial Banking⁽⁴⁾		508			9			137			12			485			8			193			17
Other⁽⁵⁾		(31	)		(1	)		(11	)		(1	)		(244	)		(4	)		(128	)		(11	)

Total from continuing operations	$	5,370			100	%	$	1,124			100	%	$	5,551			100	%	$	1,134			100	%

⁽¹⁾	In the first quarter of 2014, we adopted the proportional amortization method of accounting for Investments in Qualified Affordable Housing Projects. See “Note 1—Summary of Significant Accounting Policies” for additional information. Prior periods have been recast to conform to this presentation.

⁽²⁾	Total net revenue consists of net interest income and non-interest income.

⁽³⁾	Net income for our business segments is reported based on income from continuing operations, net of tax.

⁽⁴⁾	On investments that generate tax-exempt income tax or tax credits, we make certain reclassifications to our Commercial Banking business results to present revenues on a taxable-equivalent basis.

⁽⁵⁾	Includes the residual impact of the allocation of certain items, our centralized Corporate Treasury group activities, as well as other items as described in “Note 19—Business Segments” in our 2013 Form 10-K.

EXECUTIVE SUMMARY AND BUSINESS OUTLOOK

We reported net income of $1.2 billion ($1.96 per diluted common share) on total net revenue of $5.4 billion for the first quarter of 2014. In comparison, we reported net income of $1.1 billion ($1.77 per diluted common share) on total net revenue of $5.6 billion for the first quarter of 2013.

Beginning on January 1, 2014, we calculate our regulatory capital under the Basel III Standardized Approach subject to transition provisions. Our common equity Tier 1 capital ratio, as calculated under the Basel III Standardized Approach, including transition provisions, was 12.98% as of March 31, 2014. Our Tier 1 common ratio, as calculated under Basel I was 12.19% as of December 31, 2013. These numbers are not directly comparable.

On March 26, 2014, we announced that our Board of Directors had authorized the repurchase of up to $2.5 billion of shares of our common stock (“2014 Stock Repurchase Program”). See “Capital Management” below for additional information.

In the first quarter of 2014, we adopted the proportional amortization method of accounting for Investments in Qualified Affordable Housing Projects. These investments are accounted for in our Commercial Banking business and Other segments. Prior period amounts have been recast to conform to the current period presentation. We provide additional information on the adoption under “Accounting Changes and Developments” and “Note 1—Summary of Significant Accounting Policies”.

Below are additional highlights of our performance in the first quarter of 2014. These highlights generally are based on a comparison between the results of the first quarter of 2014 and 2013, except as otherwise noted. The changes in our financial condition and credit performance are generally based on our financial condition and credit performance as of March 31, 2014, compared with our financial condition and credit performance as of December 31, 2013. We provide a more detailed discussion of our financial performance in the sections following this “Executive Summary and Business Outlook.”


		6		CAPITAL ONE FINANCIAL CORPORATION (COF)

Total Company

•

Earnings: Our net income increased by $98 million in the first quarter of 2014, or 9%, to $1.2 billion, compared to $1.1 billion for the first quarter of 2013. Significant drivers of the increase in earnings in the first quarter of 2014 were (i) a decrease in provision for credit losses due to improved credit outlook; and (ii) pre-tax provision benefit of $33 million (which includes a benefit of $47 million in discontinued operations and an expense of $14 million for continuing operations) to the provision for mortgage representation and warranty losses compared to pre-tax provision of $97 million in the first quarter 2013, partially offset by a decrease in net interest income attributable to lower average interest-earning assets.

•

Loans Held for Investment: Period-end loans held for investment decreased by $4.3 billion, or 2%, in the first quarter of 2014, to $192.9 billion as of March 31, 2014, from $197.2 billion as of December 31, 2013. The decrease was due to the expected continued run-off in our acquired home loans portfolio in our Consumer Banking business, seasonal decreases and run-off of certain credit card loans acquired in the 2012 U.S. card acquisition in our Credit Card business and small-ticket commercial real estate loans in our Commercial Banking business. This run-off was partially offset by continued strong auto loan originations in our Consumer Banking business, as well as commercial real estate loan growth in our Commercial Banking business.

•

Charge-off and Delinquency Statistics: Our net charge-off rate decreased by 28 basis points in the first quarter of 2014 to 1.92%, compared to 2.20% for the first quarter of 2013. The decrease in our reported net charge-offs and net charge-off rate were largely due to the improvement in delinquencies and run-off of portfolios with higher credit risk. Our reported 30+ day delinquency rate declined to 2.51% as of March 31, 2014, from 2.96% as of December 31, 2013, and 2.74% as of March 31, 2013. We provide additional information on our credit quality metrics below under “Business Segment Financial Performance” and “Credit Risk Profile.”

•

Allowance for Loan and Lease Losses: We reduced our allowance by $217 million to $4.1 billion as of March 31, 2014, from $4.3 billion as of December 31, 2013. The decrease in the allowance was mainly due to an overall improved credit outlook coupled with improvements in delinquency inventories. The allowance coverage ratio declined to 2.12% as of March 31, 2014, from 2.19% as of December 31, 2013.

•

Representation and Warranty Reserve: The aggregate representation and warranty reserves decreased to $1.1 billion as of March 31, 2014, from $1.2 billion as of December 31, 2013. We recorded a total provision benefit to the provision for mortgage representation and warranty losses of $33 million (which includes a benefit of $47 million in discontinued operations and an expense of $14 million in continuing operations) in the first quarter of 2014, which was primarily driven by updated legal assumptions.

Business Segment Financial Performance

•

Credit Card: Our Credit Card business generated net income from continuing operations of $668 million in the first quarter of 2014, compared with net income from continuing operations of $686 million in the first quarter of 2013. The decrease in net income was driven by a decrease in net interest income primarily due to lower average loans held for investment due to the Portfolio Sale, which was partially offset by a reduction in provision for loan losses. Period-end loans held for investment in our Credit Card business decreased by $5.4 billion to $75.9 billion as of March 31, 2014 from $81.3 billion as of December 31, 2013. The decrease was primarily due to expected seasonal decreases, as well as the expected continued run-off of certain credit card loans acquired in the 2012 U.S. card acquisition.

•

Consumer Banking: Our Consumer Banking business generated net income from continuing operations of $330 million in the first quarter of 2014, compared with net income from continuing operations of $383 million in the first quarter of 2013. The decrease in net income is primarily attributable to net interest


		7		CAPITAL ONE FINANCIAL CORPORATION (COF)

margin compression in the Retail Banking and Auto businesses, and the expected continued run-off in our acquired home loans portfolio, partially offset by growth in auto loans. Period-end loans held for investment in our Consumer Banking business decreased by $35 million to $70.7 billion as of March 31, 2014, from $70.8 billion as of December 31, 2013, due to the expected continued run-off in our acquired home loans portfolio which was partially offset by strong auto loan originations.

•

Commercial Banking: Our Commercial Banking business generated net income from continuing operations of $137 million in the first quarter of 2014, compared with net income from continuing operations of $193 million in the first quarter of 2013. The decrease in net income is primarily due to a higher provision for credit losses. We recorded a provision for credit losses of $40 million in the first quarter of 2014, compared to a benefit of $35 million in the first quarter of 2013. The increase in provision was partially offset by higher revenues due to growth in commercial real estate and commercial and industrial loans. Period-end loans held for investment in our Commercial Banking business increased by $1.2 billion, or 3%, to $46.2 billion as of March 31, 2014, from $45.0 billion as of December 31, 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.

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 2013 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 2013 Form 10-K for factors that could materially influence our results.

Total Company Expectations

We expect 2014 pre-provision earnings, excluding non-recurring items, of approximately $10 billion. In addition, we expect modest changes in the components of pre-provision earnings with higher revenue offsetting higher expenses. We expect card loans run-off of approximately $1 billion and home loans run-off of $5 billion in 2014. Actual results are expected to vary from these expectations within reasonable margins.

We believe our actions have created a well-positioned balance sheet with strong capital and liquidity. The Federal Reserve did not object to our capital plan submitted on January 6, 2014. Pursuant to the capital plan, we expect to maintain our quarterly dividend of $0.30 per share, subject to approval by the Board of Directors. In addition, the Board of Directors has authorized the repurchase of up to $2.5 billion in shares of our common stock through the end of the first quarter of 2015.

The timing and exact amount of any common stock repurchases will depend on various factors, including market conditions, our capital position and amount of retained earnings. 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. See “MD&A—Capital Management—Capital Planning and Regulatory Stress Testing” for more information.


		8		CAPITAL ONE FINANCIAL CORPORATION (COF)

Business Segment Expectations

Credit Card: We expect to return to year-over-year growth in Domestic Card in the second half of 2014, despite continuing run-off and other strategic choices we have made. We expect that our focus on resilience and strong credit risk underwriting will drive strong credit results, with normal seasonal patterns. Overall, we believe that our Domestic Card business continues to be well-positioned and will continue to deliver strong, sustainable and resilient returns and generate capital on a strong trajectory.

Consumer Banking: In our Consumer Banking business, we expect Auto credit losses will gradually increase from the historic lows of the past few years and Auto revenues, margins, and returns will decline, but remain resilient and within ranges that support an attractive business. In addition, we expect the impacts of the prolonged low interest rate environment to continue to pressure the economics of our Retail deposit businesses even if rates rise in 2014.

Commercial Banking: In our Commercial Banking business, we expect strong credit performance to continue in 2014. While increasing competition, particularly in generic middle-market lending, may continue to impact the pricing and volume of our new loan originations, we continue to expect our focused and specialized approach to deliver strong results in 2014.

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 2013 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

•

Representation and warranty reserves

•

Customer rewards reserves

•

Income taxes

We evaluate our critical accounting estimates and judgments on an ongoing basis and update them, as necessary, based on changing conditions. Management has discussed our critical accounting policies and estimates with the Audit Committee of the Board of Directors.

We provide additional information on our critical accounting policies and estimates under “MD&A—Critical Accounting Policies and Estimates” in our 2013 Form 10-K.


		9		CAPITAL ONE FINANCIAL CORPORATION (COF)

ACCOUNTING CHANGES AND DEVELOPMENTS

Accounting for Investments in Qualified Affordable Housing Projects

In January 2014, the FASB issued guidance permitting an entity to account for investments in qualified affordable housing projects using the proportional amortization method, if certain criteria are met. The proportional method amortizes the cost of the investment over the period in which the investor expects to receive tax credits and other tax benefits, and the resulting amortization is recognized as a component of income taxes attributable to continuing operations. Historically, these investments were under the equity method of accounting and the passive losses related to the investments were recognized within non-interest expense. Prior period results and related metrics have been recast. See “Note 1—Summary of Significant Accounting Policies” for more information.

CONSOLIDATED RESULTS OF OPERATIONS

The section below provides a comparative discussion of our consolidated financial performance for the first quarter of 2014 and 2013. 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 and investment securities, and the interest expense on our interest-bearing liabilities, which include interest-bearing deposits, senior and subordinated notes, securitized debt obligations 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 notional impact of non-interest bearing funding. We expect net interest income and our net interest margin to fluctuate based on changes in interest rates and changes in the amount and composition of our interest-earning assets and interest-bearing liabilities.


		10		CAPITAL ONE FINANCIAL CORPORATION (COF)

Table 3 below presents, for each major category of our interest-earning assets and interest-bearing liabilities, the average outstanding balances, interest income earned, interest expense incurred, average yield and rate for the first quarter of 2014 and 2013.

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


	Three Months Ended March 31,
	2014								2013
(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	$	69,800		$	2,478		14.20	%	$	78,985		$	2,816		14.26	%
International		7,690			319		16.59			8,238			329		15.97

Credit card		77,490			2,797		14.44			87,223			3,145		14.42
Consumer banking		70,836			1,094		6.18			74,456			1,102		5.92
Commercial banking		45,561			395		3.47			38,579			377		3.91
Other		133			21		63.16			183			25		54.64

Total loans, including loans held for sale		194,020			4,307		8.88			200,441			4,649		9.28
Investment securities⁽⁴⁾		62,124			416		2.68			64,798			374		2.31
Cash equivalents and other interest-earning assets		6,515			30		1.84			7,106			28		1.58

Total interest-earning assets	$	262,659		$	4,753		7.24	%	$	272,345		$	5,051		7.42	%

Cash and due from banks		2,881								2,642
Allowance for loan and lease losses		(4,306	)							(4,954	)
Premises and equipment, net		3,838								3,682
Other assets		29,203								29,511

Total assets	$	294,275							$	303,226

Liabilities and stockholders’ equity:
Interest-bearing liabilities:
Deposits	$	184,183		$	276		0.60	%	$	190,612		$	326		0.68	%
Securitized debt obligations		10,418			38		1.46			11,758			56		1.91
Senior and subordinated notes		14,162			77		2.17			11,984			82		2.74
Other borrowings		11,398			12		0.42			17,832			17		0.38

Total interest-bearing liabilities	$	220,161		$	403		0.73	%	$	232,186		$	481		0.83	%

Non-interest bearing deposits		21,659								20,943
Other liabilities		9,596								9,217

Total liabilities		251,416								262,346
Stockholders’ equity		42,859								40,880

Total liabilities and stockholders’ equity	$	294,275							$	303,226

Net interest income/spread				$	4,350		6.51	%				$	4,570		6.59	%

Impact of non-interest bearing funding							0.11								0.12

Net interest margin							6.62	%							6.71	%

⁽¹⁾	In the first quarter of 2014, we adopted the proportional amortization method of accounting for Investments in Qualified Affordable Housing Projects. See “Note 1—Summary of Significant Accounting Policies” for additional information. Prior periods have been recast to conform to this presentation.


		11		CAPITAL ONE FINANCIAL CORPORATION (COF)

⁽²⁾	Past due fees included in interest income totaled approximately $359 million and $480 million in the first quarter of 2014 and 2013, 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.

Net interest income of $4.4 billion in the first quarter of 2014 decreased by $220 million, or 5%, from the first quarter of 2013, primarily driven by decrease in average interest-earning assets and past due fees, partially offset by higher yields in investment securities and lower funding costs.

•

Average Interest-Earning Assets: The decrease in average interest-earning assets in the first quarter of 2014 compared to the first quarter of 2013 was driven by lower loan balances. The decrease in average loan balances is due to the Portfolio Sale in the third quarter of 2013, the continued expected run-off in our acquired home loans portfolio, within our Consumer Banking business and the expected continued run-off of receivables acquired in the 2012 U.S. card acquisition, which was partially offset by continued strong growth in commercial and auto loans. The decrease in average investment securities was due to sales and paydowns outpacing purchases.

•

Net Interest Margin: The decrease in our net interest margin in the first quarter of 2014 compared to the first quarter of 2013 is primarily due to lower yield on our commercial loan portfolio, which was partially offset by a reduction in our cost of funds. Our lowered cost of funds reflects the benefit from the mix of our funding in lower cost consumer and commercial banking deposits.

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

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


	Three Months Ended March 31,
	2014 vs. 2013
(Dollars in millions)	Total Variance			Volume			Rate
Interest income:
Loans:
Credit card	$	(348	)	$	(351	)	$	3
Consumer banking		(8	)		(54	)		46
Commercial banking		18			61			(43	)
Other		(4	)		(7	)		3

Total loans, including loans held for sale		(342	)		(351	)		9

Investment securities		42			(15	)		57
Cash equivalents and other interest-earning assets		2			(2	)		4

Total interest income		(298	)		(368	)		70

Interest expense:
Deposits		(50	)		(11	)		(39	)
Securitized debt obligations		(18	)		(6	)		(12	)
Senior and subordinated notes		(5	)		12			(17	)
Other borrowings		(5	)		(6	)		1

Total interest expense		(78	)		(11	)		(67	)

Net interest income	$	(220	)	$	(357	)	$	137


		12		CAPITAL ONE FINANCIAL CORPORATION (COF)

⁽¹⁾

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

Non-Interest Income

Non-interest income primarily consists of service charges and other customer-related fees, interchange income (net of rewards expense), and other non-interest income. Other non-interest income includes the pre-tax provision for mortgage representation and warranty 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, as well as 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 first quarter of 2014 and 2013.

Table 5: Non-Interest Income


	Three Months Ended March 31,
(Dollars in millions)	2014			2013
Service charges and other customer-related fees	$	474		$	550
Interchange fees, net		440			445
Net other-than-temporary impairment		(5	)		(25	)
Other non-interest income:
(Expense) benefit for mortgage representation and warranty⁽¹⁾		(14	)		9
Net gains from the sale of investment securities		13			2
Net fair value gains (losses) on free-standing derivatives⁽²⁾		13			(5	)
Other		99			5

Total other non-interest income		111			11

Total non-interest income	$	1,020		$	981

⁽¹⁾

We recorded a total pre-tax provision benefit of $33 million (which includes a benefit of $47 million in discontinued operations and an expense of $14 million in continuing operations), and a total pre-tax provision of $97 million related to mortgage representation and warranty losses in the first quarter of 2014 and 2013, respectively.

⁽²⁾

Excludes changes in cumulative credit risk valuation adjustments related to derivatives in a gain position. Credit risk valuation adjustments for derivative assets totaled $7 million as of both of March 31, 2014 and December 31, 2013. See “Note 9—Derivative Instruments and Hedging Activities” for additional information.

Non-interest income of $1.0 billion in the first quarter of 2014, increased by $39 million, or 4%, from $981 million in the first quarter of 2013. The main drivers were (i) a loss related to a debt exchange in 2013 which did not recur in 2014 and (ii) a reduction in net OTTI losses attributable to improved credit outlook. These were partially offset by (i) a reduction in service and customer-related fees related to the continued run-off of certain credit card loans and (ii) a provision for representation and warranty recorded in continuing operations in the first quarter of 2014 compared to a benefit in the first quarter of 2013.

Provision for Credit Losses

Our provision for credit losses in each period is driven by charge-offs, changes to the allowance for loan and lease losses, and changes to the reserve for unfunded lending commitments. We recorded a provision for credit losses of $735 million in the first quarter of 2014, compared with $885 million in the first quarter of 2013.

The decrease in the provision for credit losses of $150 million in the first quarter of 2014 from the first quarter of 2013 was driven by lower charge-offs attributable to credit improvement of the underlying loan portfolio.


		13		CAPITAL ONE FINANCIAL CORPORATION (COF)

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,” “Note 4—Loans” and “Note 5—Allowance for Loan and Lease Losses.” For information on the allowance methodology for each of our loan categories, see “Note 1—Summary of Significant Accounting Policies” in our 2013 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 first quarter of 2014 and 2013.

Table 6: Non-Interest Expense⁽¹⁾⁽²⁾


	Three Months Ended March 31,
(Dollars in millions)	2014		2013
Salaries and associate benefits	$	1,161	$	1,095
Occupancy and equipment		405		357
Marketing		325		317
Professional services		287		322
Communications and data processing		196		216
Amortization of intangibles		143		177
Other non-interest expense:
Collections		99		129
Fraud losses		73		52
Bankcard, regulatory and other fee assessments		113		138
Other		130		188

Other non-interest expense		415		507

Total non-interest expense	$	2,932	$	2,991

⁽¹⁾	In the first quarter of 2014, we adopted the proportional amortization method of accounting for Investments in Qualified Affordable Housing Projects. See “Note 1—Summary of Significant Accounting Policies” for additional information. Prior periods have been recast to conform to this presentation.

⁽²⁾	Includes acquisition-related costs of $23 million and $46 million in the first quarter of 2014 and 2013, respectively. These amounts are comprised of transaction costs, legal and other professional or consulting fees, restructuring costs, and integration expense.

Non-interest expense of $2.9 billion in the first quarter of 2014, decreased by $59 million, or 2%, from the first quarter of 2013. The decrease reflects a reduction in acquisition-related costs and a decrease in amortization of intangibles attributable to the 2012 U.S card acquisition. These were partially offset by (i) higher operating expenses attributable to growth in our auto loan portfolio; (ii) the change to include auto repossession-related expenses as a component of operating expenses, prior to January 1, 2014 these costs were reported as a component of net charge-offs; and (iii) the growth in Commercial banking business.

Income Taxes

We recorded an income tax provision of $579 million (34.0% effective income tax rate) in the first quarter of 2014, compared to an income tax provision of $541 million (32.3% effective income tax rate) in the first quarter of 2013.

The increase in our effective income tax rate in the first quarter of 2014, from the first quarter of 2013 was primarily attributable to $28 million in discrete tax expense recorded in the first quarter of 2014 for certain state


		14		CAPITAL ONE FINANCIAL CORPORATION (COF)

tax law changes that required a reduction of deferred tax assets and adjustments for the resolution of certain tax issues and audits. In comparison, we recorded $6 million in net discrete tax benefits in the first quarter of 2013 for the adjustment of prior taxes paid, certain state tax rate reductions, and the resolution of certain tax issues and audits.

Our effective income tax rate, excluding the impact of discrete tax items discussed above, was 32.4%, and 32.7% in the first quarter of 2014 and 2013, respectively. The decrease in the effective tax rate excluding discrete items was primarily due to the impact of increased amounts of tax credits and tax exempt income in the first quarter of 2014, over the first quarter of 2013.

We provide additional information on items affecting our income taxes and effective tax rate in our 2013 Form 10-K in “Note 17—Income Taxes.”

Income/Loss from Discontinued Operations, Net of Tax

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

Income from discontinued operations, net of tax, was $30 million as of the first quarter of 2014, compared to a loss of $78 million in the first quarter of 2013. We recorded a total pre-tax release of the mortgage representation and warranty reserve of $47 million ($30 million after taxes) and a pre-tax provision of $107 million ($67 million after taxes) in discontinued operations in the first quarter of 2014 and 2013, respectively.

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 Sheets Analysis—Potential Mortgage Representation and Warranty Liabilities” and “Note 14—Commitments, Contingencies, Guarantees, and Others.”

BUSINESS SEGMENT FINANCIAL PERFORMANCE

Our principal operations are currently organized into three major business segments, which are defined based on the products and services provided or the type of customer served: Credit Card, Consumer Banking and Commercial Banking. The operations of acquired businesses have been integrated into our existing business segments. Certain activities that are not part of a segment, such as management of our corporate investment portfolio and asset/liability management by our centralized Corporate Treasury group, are included in the “Other” category.

The results of our individual businesses, which we report on a continuing operations basis, reflect the manner in which management evaluates performance and makes decisions about funding our operations and allocating resources. We provide additional information on the allocation methodologies used to derive our business segment results in “Note 19—Business Segments” in our 2013 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.


		15		CAPITAL ONE FINANCIAL CORPORATION (COF)

Below we summarize our business segment results for the first quarter of 2014 and 2013 and provide a comparative discussion of these results. We also discuss changes in our financial condition and credit performance statistics as of March 31, 2014, compared with December 31, 2013. We provide a reconciliation of our total business segment results to our reported consolidated results in “Note 13—Business Segments.” We also provide information on the outlook for each of our business segments as described above under “Executive Summary and Business Outlook.”

Credit Card Business

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

Net income from continuing operations in our Credit Card business decreased by $18 million, or 3%, to $668 million in the first quarter of 2014, from $686 million in the first quarter of 2013.

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.

Table 7: Credit Card Business Results


	Three Months Ended March 31,
(Dollars in millions)	2014			2013			Change
Selected income statement data:
Net interest income	$	2,525		$	2,830			(11	)%
Non-interest income		785			821			(4	)

Total net revenue⁽¹⁾		3,310			3,651			(9	)
Provision for credit losses		558			743			(25	)
Non-interest expense		1,726			1,848			(7	)

Income from continuing operations before income taxes		1,026			1,060			(3	)
Income tax provision		358			374			(4	)

Income from continuing operations, net of tax	$	668		$	686			(3	)%

Selected performance metrics:
Average loans held for investment⁽²⁾	$	77,502		$	82,952			(7	)%
Average yield on loans held for investment⁽³⁾		14.43	%		15.16	%		(73	)bps
Total net revenue margin⁽⁴⁾		17.08			17.61			(53	)
Net charge-offs	$	780		$	922			(15	)%
Net charge-off rate		4.02	%		4.45	%		(43	)bps
Card loan premium amortization and other intangible accretion⁽⁵⁾	$	37		$	57			(35	)%
PCCR intangible amortization		98			116			(16	)
Purchase volume⁽⁶⁾		47,434			45,098			5

(Dollars in millions)	March 31, 2014			December 31, 2013			Change
Selected period-end data:
Loans held for investment⁽²⁾	$	75,850		$	81,305			(7	)%
30+ day performing delinquency rate		3.08	%		3.46	%		(38	)bps
30+ day delinquency rate		3.16			3.54			(38	)
Nonperforming loan rate⁽⁷⁾		0.11			0.11			**
Allowance for loan and lease losses	$	2,984		$	3,214			(7	)%
Allowance coverage ratio⁽⁸⁾		3.93	%		3.95	%		(2	)bps


		16		CAPITAL ONE FINANCIAL CORPORATION (COF)

**	Change is less than one percent or not meaningful.

⁽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 $163 million and $265 million in the first quarter of 2014 and 2013, respectively, for the estimated uncollectible amount of billed finance charges and fees. The finance charge and fee reserve totaled $174 million and $190 million as of March 31, 2014 and December 31, 2013, respectively.

⁽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. The transfer of Best Buy loan portfolio from loans held for investment to loans held for sale resulted in an increase in the average yield for the Total Credit Card business of 97 basis points in the first quarter of 2013.

⁽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. The transfer of Best Buy loan portfolio from loans held for investment to loans held for sale resulted in an increase in the net revenue margin for the Total Credit Card business of 112 basis points in the first quarter of 2013.

⁽⁵⁾	Represents the net reduction in interest income attributable to the amortization of premiums on purchased loans accounted for based on contractual cash flows and the accretion of other intangibles associated with the 2012 U.S. card acquisition.

⁽⁶⁾	Consists of credit card purchase transactions, net of returns for the period for both loans classified as held for investment and loans classified as held for sale. Excludes cash advance and balance transfer transactions.

⁽⁷⁾	Calculated by dividing nonperforming loans as of the end of the period by period-end loans held for investment. Nonperforming credit card loans generally include International Card loans that are 90 or 120 days delinquent.

⁽⁸⁾	Calculated by dividing the allowance for loan and lease losses as of the end of the period by period-end loans held for investment.

Key factors affecting the results of our Credit Card business for the first quarter of 2014, compared with the first quarter of 2013, and changes in financial condition and credit performance between March 31, 2014 and December 31, 2013 include the following:

•

Net Interest Income: Net interest income decreased by $305 million, or 11%, in the first quarter of 2014, to $2.5 billion from $2.8 billion in the first quarter of 2013. The decrease in net interest income is primarily driven by (i) the decrease in average loans held for investment due to the Portfolio Sale in 2013 and the expected continued run-off of certain credit card loans acquired in the 2012 U.S. card acquisition and (ii) the decrease in past due fees is attributable to the Portfolio Sale in 2013 and the expected continued run-off of certain credit card loans acquired in the 2012 U.S. card acquisition.

•

Non-Interest Income: Non-interest income decreased by $36 million, or 4%, in the first quarter of 2014, to $785 million from $821 million in the first quarter of 2013. The decrease was primarily driven by a smaller portfolio, resulting in a reduction in customer fees.

•

Provision for Credit Losses: The provision for credit losses related to our Credit Card business decreased by $185 million, or 25%, to $558 million in the first quarter of 2014, from $743 million in the first quarter of 2013. The decrease was driven by lower charge-offs attributable to credit improvement of the underlying loan portfolio in the first quarter of 2014.

•

Non-Interest Expense: Non-interest expense decreased by $122 million, or 7%, in the first quarter of 2014, to $1.7 billion from $1.8 billion in the first quarter of 2013. The decrease was largely due to lower acquisition-related costs and lower operating expenses due to the Portfolio Sale, as well as operating efficiencies. This includes PCCR intangible amortization of $98 million in the first quarter of 2014, compared with $116 million in the first quarter of 2013.

•

Loans Held for Investment: Period-end loans held for investment in our Credit Card business decreased by $5.4 billion, or 7%, to $75.9 billion as of March 31, 2014, from $81.3 billion as of December 31, 2013. The decrease was due to expected seasonal decreases, as well as the expected continued run-off of certain credit card loans acquired in the 2012 U.S. card acquisition.

•

Charge-off and Delinquency Statistics: Our reported net charge-off rate decreased to 4.02% in the first quarter of 2014, from 4.45% in the first quarter of 2013. The decrease were largely due to continued economic improvement, portfolio seasoning, and run-off of certain credit card loans acquired in the 2012 U.S. card acquisition. The 30+ day delinquency rate decreased to 3.16% as of March 31, 2014, from 3.54% as of December 31, 2013.


		17		CAPITAL ONE FINANCIAL CORPORATION (COF)

Domestic Card Business

Domestic Card generated net income from continuing operations of $595 million in the first quarter of 2014, a decrease of $49 million, or 8%, compared with net income from continuing operations of $644 million in the first quarter of 2013. Domestic Card accounted for 89% of total net revenues for our Credit Card business in the first quarter of 2014, compared with 90% in the first quarter of 2013.

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

Table 7.1: Domestic Card Business Results


	Three Months Ended March 31,
(Dollars in millions)	2014			2013			Change
Selected income statement data:
Net interest income	$	2,255		$	2,556			(12	)%
Non-interest income		702			724			(3	)

Total net revenue		2,957			3,280			(10	)
Provision for credit losses		486			647			(25	)
Non-interest expense		1,545			1,633			(5	)

Income from continuing operations before income taxes		926			1,000			(7	)
Income tax provision		331			356			(7	)

Income from continuing operations, net of tax	$	595		$	644			(8	)%

Selected performance metrics:
Average loans held for investment⁽¹⁾	$	69,810		$	74,714			(7	)%
Average yield on loans held for investment⁽²⁾		14.19	%		15.07	%		(88	)bps
Total net revenue margin⁽³⁾		16.94			17.56			(62	)
Net charge-offs	$	700		$	827			(15	)%
Net charge-off rate		4.01	%		4.43	%		(42	)bps
Card loan premium amortization and other intangible accretion⁽⁴⁾	$	37		$	57			(35	)%
PCCR intangible amortization		98			116			(16	)
Purchase volume⁽⁵⁾		44,139			41,831			6

(Dollars in millions)	March 31, 2014			December 31, 2013			Change
Selected period-end data:
Loans held for investment⁽¹⁾	$	68,275		$	73,255			(7	)%
30+ day delinquency rate		3.02	%		3.43	%		(41	)bps
Allowance for loan and lease losses	$	2,622		$	2,836			(8	)%
Allowance coverage ratio⁽⁶⁾		3.84	%		3.87	%		(3	)bps

⁽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. The transfer of Best Buy loan portfolio from loans held for investment to loans held for sale resulted in an increase in the average yield for the Domestic Card business of 107 basis points in the first quarter of 2013.

⁽³⁾

Calculated by dividing annualized total net revenue for the period by average loans held for investment during the period. Annualized interest income includes interest income on loans held for sale. The transfer of Best Buy loan portfolio from loans held for investment to loans held for sale resulted in an increase in the net revenue margin for the Domestic Card business of 123 basis points in the first quarter of 2013.

⁽⁴⁾	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.

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

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


		18		CAPITAL ONE FINANCIAL CORPORATION (COF)

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 primary drivers of the decline in net income for our Domestic Card business in the first quarter of 2014, compared with the first quarter of 2013 were declines in revenue primarily driven by the decrease in average loans held for investment due to the Portfolio Sale in 2013, partially offset by lower provision for loan and lease losses, and operating expenses associated with the reduction in the portfolio size.

The decrease in period-end loans held for investment was due to the expected seasonal decreases and continued run-off of certain credit card loans acquired in the 2012 U.S. card acquisition.

International Card Business

International Card generated net income from continuing operations of $73 million in the first quarter of 2014, an increase of $31 million, or 74%, compared with net income from continuing operations of $42 million in the first quarter of 2013. International Card accounted for 11% of total net revenues for our Credit Card business in the first quarter of 2014, compared with 10% in the first quarter of 2013.

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

Table 7.2: International Card Business Results


	Three Months Ended March 31,
(Dollars in millions)	2014			2013			Change
Selected income statement data:
Net interest income	$	270		$	274			(1	)%
Non-interest income		83			97			(14	)

Total net revenue		353			371			(5	)
Provision for credit losses		72			96			(25	)
Non-interest expense		181			215			(16	)

Income from continuing operations before income taxes		100			60			67
Income tax provision		27			18			50

Income from continuing operations, net of tax	$	73		$	42			74	%

Selected performance metrics:
Average loans held for investment⁽¹⁾	$	7,692		$	8,238			(7	)%
Average yield on loans held for investment⁽²⁾		16.64	%		15.97	%		67	bps
Total net revenue margin⁽³⁾		18.38			18.01			37
Net charge-offs	$	80		$	95			(16	)%
Net charge-off rate		4.17	%		4.59	%		(42	)bps
Purchase volume⁽⁴⁾	$	3,295		$	3,267			1	%


(Dollars in millions)	March 31, 2014			December 31, 2013			Change
Selected period-end data:
Loans held for investment⁽¹⁾	$	7,575		$	8,050			(6	)%
30+ day performing delinquency rate		3.59	%		3.71	%		(12	)bps
30+ day delinquency rate		4.41			4.56			(15	)
Nonperforming loan rate⁽⁵⁾		1.07			1.10			(3	)
Allowance for loan and lease losses	$	362		$	378			(4	)%
Allowance coverage ratio⁽⁶⁾		4.77	%		4.70	%		7	bps


		19		CAPITAL ONE FINANCIAL CORPORATION (COF)

⁽¹⁾	Credit card period-end loans held for investment and average loans held for investment include accrued finance charges and fees, net of the uncollectible amount.

⁽²⁾	Calculated by dividing annualized interest income for the period by average loans held for investment during the period.

⁽³⁾	Calculated by dividing annualized total net revenue for the period by average loans held for investment during the period.

⁽⁴⁾	Consists of international card purchase transactions, net of returns for the period. Excludes cash advance and balance transfer transactions.

⁽⁵⁾	Calculated by dividing nonperforming loans as of the end of the period by period-end loans held for investment. Nonperforming credit card loans include International Card loans that are generally 90 or 120 days delinquent.

⁽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.

The primary drivers of the improvement in results for our International Card business in the first quarter of 2014, compared with the first quarter of 2013, included: (i) a reduction in non-interest expense resulting from operating efficiencies and timing of spend; 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. These were partially offset by a reduction in revenue driven by lower average loans held for investments.

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 $330 million in the first quarter of 2014, compared with net income from continuing operations of $383 million in the first quarter of 2013.

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


		20		CAPITAL ONE FINANCIAL CORPORATION (COF)

Table 8: Consumer Banking Business Results


	Three Months Ended March 31,
(Dollars in millions)	2014			2013			Change
Selected income statement data:
Net interest income	$	1,433		$	1,478			(3	)%
Non-interest income		150			181			(17	)

Total net revenue		1,583			1,659			(5	)
Provision for credit losses		140			175			(20	)
Non-interest expense		930			890			4

Income from continuing operations before income taxes		513			594			(14	)
Income tax provision		183			211			(13	)

Income from continuing operations, net of tax	$	330		$	383			(14	)%

Selected performance metrics:
Average loans held for investment:⁽¹⁾
Auto	$	32,387		$	27,477			18	%
Home loan		34,646			43,023			(19	)
Retail banking		3,630			3,786			(4	)

Total consumer banking	$	70,663		$	74,286			(5	)%

Average yield on loans held for investment⁽²⁾		6.18	%		5.93	%		25	bps
Average deposits	$	168,676		$	171,089			(1	)%
Average deposit interest rate		0.57	%		0.64	%		(7	)bps
Core deposit intangible amortization	$	30		$	37			(19	)%
Net charge-offs		148			143			3
Net charge-off rate		0.84	%		0.78	%		6	bps
Net charge-off rate (excluding Acquired Loans)		1.37			1.47			(10	)
Auto loan originations	$	4,727		$	3,789			25	%

(Dollars in millions)	March 31, 2014			December 31, 2013			Change
Selected period-end data:
Loans held for investment:⁽¹⁾
Auto	$	33,080		$	31,857			4	%
Home loan		34,035			35,282			(4	)
Retail banking		3,612			3,623			**

Total consumer banking	$	70,727		$	70,762			**	%

30+ day performing delinquency rate		2.57	%		3.20	%		(63	)bps
30+ day performing delinquency rate (excluding Acquired Loans)⁽³⁾		4.17			5.32			(115	)
30+ day delinquency rate		3.14			3.89			(75	)
30+ day delinquency rate (excluding Acquired Loans)⁽³⁾		5.09			6.47			(138	)
Nonperforming loans rate⁽⁴⁾		0.74			0.86			(12	)
Nonperforming loans rate (excluding Acquired Loans)⁽³⁾		1.20			1.44			(24	)
Nonperforming asset rate⁽⁵⁾		1.00			1.12			(12	)
Nonperforming asset rate (excluding Acquired Loans)⁽³⁾		1.62			1.86			(24	)
Allowance for loan and lease losses	$	744		$	752			(1	)%
Allowance coverage ratio⁽⁶⁾		1.05	%		1.06	%		(1	)bps
Deposits	$	171,529		$	167,652			2	%
Loans serviced for others		6,868			7,665			(10	)


		21		CAPITAL ONE FINANCIAL CORPORATION (COF)

**	Change is less than one percent or not meaningful.

⁽¹⁾

Includes Acquired Loans with carrying value of $27.1 billion and $28.2 billion as of March 31, 2014 and December 31, 2013, respectively. The average balance of Consumer Banking loans held for investment, excluding Acquired Loans, was $43.2 billion and $39.2 billion in the first quarter of 2014 and 2013, respectively.

⁽²⁾	Calculated by dividing annualized interest income for the period by average loans held for investment during the period.

⁽³⁾	Calculation of ratio adjusted to exclude impact from Acquired Loans. See “Credit Risk Profile” and “Note 4—Loans” for additional information on the impact of Acquired Loans on our credit quality metrics.

⁽⁴⁾

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

⁽⁵⁾	Calculated by dividing nonperforming assets as of the end of the period by the sum of period-end loans held for investment, foreclosed properties, and other foreclosed assets.

⁽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 Consumer Banking business for the first quarter of 2014, compared with the first quarter of 2013, and changes in financial condition and credit performance between March 31, 2014 and December 31, 2013 include the following:

•

Net Interest Income: Net interest income decreased by $45 million, or 3%, in the first quarter of 2014, to $1.4 billion from $1.5 billion in the first quarter of 2013. The decrease in net interest income is primarily attributable to compression in deposit spreads in the Retail Banking business and decrease in home loans held for investment, partially offset by higher net interest income generated by growth in auto loans held for investment.

Consumer Banking yields increased in the first quarter of 2014, to 6.2% as compared to 5.9% in the first quarter of 2013. This increase is driven by changes in mix towards higher yield auto loans driven by growth in auto and the continued run-off of the acquired home loans portfolio. While the shift to auto loans drove an increase in the total Consumer Banking yield, the average yield on auto loans decreased to 9.0% in the first quarter of 2014 as compared to 10.1% in the first quarter of 2013. This decrease is primarily attributable to a shift in the credit quality mix of our auto loan portfolio and increased competition in Auto business. The average yield on home loans was 3.7% in the first quarter of 2014 compared to 3.3% in the first quarter of 2013. The higher yield in home loans is driven by an increase in expected cash flows as a result of credit improvement on the acquired portfolios.

•

Non-Interest Income: Non-interest income decreased by $31 million, or 17%, in the first quarter of 2014, to $150 million from $181 million in the first quarter of 2013, primarily driven by higher provision for representation and warranty for our home loans portfolio related to our continuing operations.

•

Provision for Credit Losses: The provision for credit losses decreased by $35 million or 20% in the first quarter of 2014, to $140 million from $175 million in the first quarter of 2013, driven primarily by a lower allowance build in our Auto business.

•

Non-Interest Expense: Non-interest expense increased by $40 million, or 4%, in the first quarter of 2014, to $930 million from $890 million in the first quarter of 2013. The increase was largely due to the growth in our auto loan portfolio and the change to include the auto repossession-related expenses as a component of operating expenses. Prior to January 1, 2014 these costs were reported as a component of net charge-offs.

•

Loans Held for Investment: Period-end loans in the Consumer Banking business was flat in the first quarter of 2014 compared to December 31, 2013, primarily due to the expected continued run-off of our acquired home loan portfolio, offset by growth in the auto portfolio.

•

Deposits: Period-end deposits in our Consumer Banking business increased by $3.8 billion, or 2%, to $171.5 billion as of March 31, 2014, from $167.7 billion as of December 31, 2013, primarily driven by typical seasonality of deposits reflected in strong deposit growth in Retail Banking.

•

Charge-off and Delinquency Statistics: The reported net charge-off rate increased by 6 basis points to 0.84% in the first quarter of 2014, from 0.78% in the first quarter of 2013. The 30+ day delinquency rate decreased


		22		CAPITAL ONE FINANCIAL CORPORATION (COF)

by 75 basis points to 3.14% as of March 31, 2014, from 3.89% as of December 31, 2013. The increase in the net charge-off rate and decrease in 30+ delinquency rate reflects a mix shift towards auto, which carries higher charge-off rates than our home loans portfolio.

Commercial Banking Business

The primary sources of revenue for our Commercial Banking business are net interest income from loans and deposits and non-interest income from customer fees. Because we have some investments that generate tax-exempt income or tax credits, we make certain reclassifications to our Commercial Banking business results to present revenues on a taxable-equivalent basis. Expenses primarily consist of the provision for credit losses, 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.

On November 1, 2013, we acquired Beech Street Capital, a privately-held, national originator and servicer of Fannie Mae, Freddie Mac and FHA multifamily commercial real estate loans. Beech Street Capital results are reported within the Commercial Banking business.

On January 1, 2014, we adopted the proportional amortization method of accounting for Investments in Qualified Affordable Housing Projects. The proportional amortization method amortizes the cost of the investment over the period in which we will receive tax credits and other tax benefits, and the resulting amortization is recognized as a component of income taxes attributable to continuing operations. Historically, these investments were accounted for under the equity method of accounting and the passive losses related to the investments were recognized within non-interest expense. See “Note 1—Summary of Significant Accounting Policies” for more information.

Our Commercial Banking business generated net income from continuing operations of $137 million in the first quarter of 2014, compared with net income from continuing operations of $193 million in the first quarter of 2013.

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


		23		CAPITAL ONE FINANCIAL CORPORATION (COF)

Table 9: Commercial Banking Business Results⁽¹⁾


	Three Months Ended March 31,
(Dollars in millions)	2014			2013			Change
Selected income statement data:
Net interest income	$	421		$	401			5	%
Non-interest income		87			84			4

Total net revenue		508			485			5
Provision (benefit) for credit losses		40			(35	)		214
Non-interest expense		255			221			15

Income from continuing operations before income taxes		213			299			(29	)
Income tax provision		76			106			(28	)

Income from continuing operations, net of tax	$	137		$	193			(29	)%

Selected performance metrics:
Average loans held for investment:⁽²⁾
Commercial and multifamily real estate	$	20,962		$	17,454			20	%
Commercial and industrial		23,541			19,949			18

Total commercial lending		44,503			37,403			19
Small-ticket commercial real estate		932			1,173			(21	)

Total commercial banking	$	45,435		$	38,576			18	%

Average yield on loans held for investment⁽³⁾		3.47	%		3.91	%		(44	)bps
Average deposits	$	31,627		$	30,335			4	%
Average deposit interest rate		0.25	%		0.28	%		(3	)bps
Core deposit intangible amortization	$	6		$	7			(14	)%
Net charge-offs		4			7			(43	)
Net charge-off rate		0.04	%		0.07	%		(3	)bps

(Dollars in millions)	March 31, 2014			December 31, 2013			Change
Selected period-end data:
Loans held for investment⁽²⁾:
Commercial and multifamily real estate	$	21,256		$	20,750			2	%
Commercial and industrial		24,064			23,309			3

Total commercial lending		45,320			44,059			3
Small-ticket commercial real estate		910			952			(4	)

Total commercial banking	$	46,230		$	45,011			3	%

Nonperforming loans rate		0.33	%		0.33	%		**	bps
Nonperforming asset rate⁽⁴⁾		0.36			0.37			(1	)
Allowance for loan and lease losses	$	362		$	338			7	%
Allowance coverage ratio⁽⁵⁾		0.78	%		0.75	%		3	bps
Deposits	$	31,485		$	30,567			3	%
Loans serviced for others		11,073			10,786			3

**	Change is less than one percent or not meaningful.

⁽¹⁾	In the first quarter of 2014, we adopted the proportional amortization method of accounting for Investments in Qualified Affordable Housing Projects. See “Note 1—Summary of Significant Accounting Policies” for additional information. Prior periods have been recast to conform to this presentation.

⁽²⁾

Includes Acquired Loans with carrying value of $224 million and $262 million as of March 31, 2014 and December 31, 2013, respectively. The average balance of commercial banking loans held for investment, excluding Acquired Loans, was $45.2 billion and $38.2 billion in the first quarter of 2014 and 2013, respectively.

⁽³⁾	Calculated by dividing annualized interest income for the period by average loans held for investment during the period.


		24		CAPITAL ONE FINANCIAL CORPORATION (COF)

⁽⁴⁾	Calculated by dividing nonperforming assets as of the end of the period by the sum of period-end loans held for investment, foreclosed properties, and other foreclosed assets.

⁽⁵⁾	Calculated by dividing the allowance for loan and lease losses as of the end of the period by period-end loans held for investment.

Key factors affecting the results of our Commercial Banking business for the first quarter of 2014, compared with the first quarter of 2013, and changes in financial condition and credit performance between March 31, 2014 and December 31, 2013 include the following:

•

Net Interest Income: Net interest income increased by $20 million, or 5%, in the first quarter of 2014, to $421 million from $401 million in the first quarter of 2013. The increase was driven by growth in commercial loans and higher deposit balances, partially offset by lower loan yields driven by market and competitive pressures.

•

Non-Interest Income: Non-interest income increased by $3 million, or 4%, in the first quarter of 2014, to $87 million, from $84 million in the first quarter of 2013, driven by increased revenue related to fee-based products and services from the Beech Street Capital acquisition, partially offset by other one-time items.

•

Provision for Credit Losses: Provision for credit losses increased by $75 million, in the first quarter of 2014, to $40 million, from a benefit of $35 million in the first quarter of 2013, primarily related to growth in the portfolio. The increase in allowance for loan and lease losses and reserve for unfunded lending commitments was $36 million in the first quarter of 2014, compared with a release of $41 million in the first quarter of 2013.

•

Non-Interest Expense: Non-interest expense increased by $34 million, or 15%, in the first quarter of 2014, to $255 million, from $221 million in the first quarter of 2013, driven by operating expenses associated with continued investments in business growth and Beech Street Capital.

•

Loans Held for Investment: Period-end loans held for investment in our Commercial Banking business increased by $1.2 billion, or 3%, to $46.2 billion as of March 31, 2014, from $45.0 billion as of December 31, 2013. The increase was driven by strong loan growth in the commercial and industrial and commercial real estate business.

•

Deposits: Period-end deposits in the Commercial Banking business increased by $918 million, or 3%, to $31.5 billion as of March 31, 2014, from $30.6 billion as of December 31, 2013, driven by typical seasonality and our strategy to deepen and expand relationships with commercial customers.

•

Charge-off Statistics: The net charge-off rate was 0.04% in the first quarter of 2014, compared to 0.07% in the first quarter of 2013. The nonperforming loan rate remained unchanged at 0.33% both as of March 31, 2014 and December 31, 2013. The continued strength in the credit metrics in our Commercial Banking business reflected stable credit trends and underlying collateral values.

“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 decreased by $117 million, or 91%, in the first quarter of 2014 to $11 million from $128 million in the first quarter of 2013. The decrease was primarily due to higher net interest income driven by higher interest rates, lower funding costs, continued run-off of higher rate brokered deposits, as well as the absence of the one-time charge associated with our redemption of trust preferred securities in January 2013.


		25		CAPITAL ONE FINANCIAL CORPORATION (COF)

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

Table 10: Other Results⁽¹⁾


	Three Months Ended March 31,
(Dollars in millions)	2014			2013			Change
Selected income statement data:
Net interest expense⁽²⁾	$	(29	)	$	(139	)		79	%
Non-interest income		(2	)		(105	)		98

Total net revenue		(31	)		(244	)		87
Provision (benefit) for credit losses		(3	)		2			(250	)
Non-interest expense		21			32			(34	)

Loss from continuing operations before income taxes		(49	)		(278	)		82
Income tax benefit		(38	)		(150	)		75

Loss from continuing operations, net of tax	$	(11	)	$	(128	)		91	%

⁽¹⁾	In the first quarter of 2014, we adopted the proportional amortization method of accounting for Investments in Qualified Affordable Housing Projects. See “Note 1—Summary of Significant Accounting Policies” for additional information. Prior periods have been recast to conform to this presentation.

⁽²⁾

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

CONSOLIDATED BALANCE SHEETS ANALYSIS

Total assets of $290.5 billion as of March 31, 2014 decreased by $6.4 billion, or 2%, from $296.9 billion as of December 31, 2013. Total liabilities of $247.7 billion as of March 31, 2014, decreased by $7.6 billion, or 3%, from $255.3 billion as of December 31, 2013. Stockholders’ equity increased by $1.2 billion to $42.8 billion as of March 31, 2014. The increase in stockholders’ equity was primarily attributable to our net income of $1.2 billion for the first quarter of 2014.

Following is a discussion of material changes in the major components of our assets and liabilities during the first quarter of 2014. 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 liquidity requirements for the company and our customers and our market risk exposure in accordance with our risk appetite.

Investment Securities

Our investment portfolio consists primarily of the following: U.S. Treasury debt, U.S. agency debt and corporate debt securities guaranteed by U.S. government agencies (“Agency”); Agency and non-agency residential mortgage-backed securities (“RMBS”) and commercial mortgage-backed securities (“CMBS”); other asset-backed securities (“ABS”) 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 78% and 77% of our total investment securities portfolio as of March 31, 2014 and December 31, 2013, respectively.

Our investment portfolio includes securities available for sale as well as securities held to maturity. We classify securities as available for sale or held to maturity based on our investment strategy and management’s assessment of our intent and ability to hold the securities until maturity. We report securities available for sale in our consolidated balance sheets at fair value with unrealized gains and losses recorded, net of tax, as a component of accumulated


		26		CAPITAL ONE FINANCIAL CORPORATION (COF)

other comprehensive income (“AOCI”). We report securities held to maturity on our consolidated balance sheets at carrying value. Carrying value generally consists of amortized cost. For securities transferred from available for sale to held to maturity, carrying value also includes unrealized gains and losses recognized in AOCI at the date of transfer. Such unrealized gains or losses are accreted over the remaining life of the security with no impact on future net income.

During the first quarter of 2014, the fair value of our investment portfolio increased by $199 million, or 3% from $61.0 billion as of December 31, 2013 to $61.2 billion as of March 31, 2014. This increase was primarily driven by lower interest rates.

We had gross unrealized gains of $855 million and gross unrealized losses of $458 million on available-for sale investment securities as of March 31, 2014, compared with gross unrealized gains of $799 million and gross unrealized losses of $631 million as of December 31, 2013. The decrease in gross unrealized losses in the first quarter of 2014 was primarily driven by the lower interest rates in the first quarter of 2014. Of the $458 million in gross unrealized losses as of March 31, 2014, $86 million was related to securities that had been in a loss position for more than 12 months.

Table 11 presents the amortized cost, carrying value and fair value for the major categories of our portfolio of investment securities as of March 31, 2014 and December 31, 2013.

Table 11: Investment Securities


	March 31, 2014				December 31, 2013
(Dollars in millions)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Investment securities available for sale
U.S. Treasury debt obligations	$	827	$	829	$	831	$	833
U.S. Agency debt obligations		1		1		1		1
Corporate debt securities guaranteed by U.S. government agencies		1,147		1,113		1,282		1,234
RMBS:
Agency		21,241		21,245		21,572		21,479
Non-agency		3,070		3,561		3,165		3,600

Total RMBS		24,311		24,806		24,737		25,079

CMBS:
Agency		4,131		4,075		4,262		4,198
Non-agency		1,879		1,855		1,854		1,808

Total CMBS		6,010		5,930		6,116		6,006

Other ABS⁽¹⁾		6,577		6,606		7,123		7,136
Other securities⁽²⁾		1,451		1,436		1,542		1,511

Total investment securities available for sale	$	40,324	$	40,721	$	41,632	$	41,800


(Dollars in millions)	Carrying Value		Fair Value		Carrying Value		Fair Value
Investment securities held to maturity
Agency RMBS	$	18,313	$	18,591	$	17,443	$	17,485
Agency CMBS		1,837		1,872		1,689		1,700

Total investment securities held to maturity	$	20,150	$	20,463	$	19,132	$	19,185


		27		CAPITAL ONE FINANCIAL CORPORATION (COF)

⁽¹⁾

ABS collateralized by credit card loans constituted approximately 67% and 65% of the other ABS portfolio as of March 31, 2014, and December 31, 2013, respectively, and ABS collateralized by auto dealer floor plan inventory loans and leases constituted approximately 13% and 15% of the other ABS portfolio as of March 31, 2014 and December 31, 2013, respectively. Approximately 88% of the securities in our other asset-backed security portfolio were rated AAA or its equivalent as of March 31, 2014, compared with 87% as of December 31, 2013.

⁽²⁾	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 high credit ratings and low credit risk, such as securities issued and guaranteed by the U.S. Treasury and other government sponsored enterprises or agencies. Approximately 91% and 92% of our total investment securities portfolio was rated AA+ or its equivalent, or better as of March 31, 2014 and December 31, 2013, respectively, while approximately 6% and 5% was below investment grade as of March 31, 2014 and December 31, 2013, respectively. 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 March 31, 2014 and December 31, 2013.

Table 12: Non-Agency Investment Securities Credit Ratings


	March 31, 2014											December 31, 2013
(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	$	3,070		—	%		4	%		96	%	$	3,165		—	%		4	%		96	%
Non-agency CMBS		1,879		96			—			4			1,854		99			1			—
Other asset-backed securities		6,577		88			11			1			7,123		87			12			1
Other securities⁽¹⁾		1,451		3			88			9			1,542		9			82			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 loans held for investment recorded on our consolidated balance sheets and consolidated 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 March 31, 2014 and December 31, 2013.


		28		CAPITAL ONE FINANCIAL CORPORATION (COF)

Table 13: Net Loans Held for Investment


	March 31, 2014						December 31, 2013
(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	$	75,850	$	2,984	$	72,866	$	81,305	$	3,214	$	78,091
Consumer Banking		70,727		744		69,983		70,762		752		70,010
Commercial Banking		46,230		362		45,868		45,011		338		44,673
Other		134		8		126		121		11		110

Total	$	192,941	$	4,098	$	188,843	$	197,199	$	4,315	$	192,884

Period-end loans held for investment decreased by $4.3 billion, or 2%, in the first quarter of 2014, to $192.9 billion as of March 31, 2014, from $197.2 billion as of December 31, 2013. The decrease was due to the expected run-off of our acquired home loans portfolio in our Consumer Banking business, seasonal decreases and run-off of certain credit card loans acquired in the 2012 U.S. card acquisition in our Credit Card business and small-ticket commercial real estate loans in our Commercial Banking business. This run-off was partially offset by continued strong auto loan originations in our Consumer Banking business, as well as commercial and industrial and commercial real estate loan growth in our Commercial Banking business.

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, increased to $259 million as of March 31, 2014, from $218 million as of December 31, 2013. We provide additional information for loans held for sale in “Note 4—Loans.”

Customer Deposits

Our customer deposits represent our largest source of funding for our operations, providing a sizable and consistent source of low-cost funds. Total customer deposits increased by $3.8 billion to $208.3 billion as of March 31, 2014, from $204.5 billion as of December 31, 2013. The increase in deposits was driven by seasonality and growth in retail banking, which reflected our focus on deepening deposit relationships with existing customers and our continued marketing strategy to attract new business. We provide information on the composition of our deposits, average outstanding balances, interest expense and yield below in “Liquidity Risk Profile.”

Securitized Debt Obligations

Securitization debt obligations decreased by $506 million during the first quarter of 2014, to $9.8 billion as of March 31, 2014, from $10.3 billion as of December 31, 2013. The decrease was driven by maturities of $1.5 billion partially offset by the issuances of $950 million of credit card securitization debt during the first quarter of 2014. We provide additional information on our borrowings below in “Liquidity Risk Profile.”

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 Federal Home Loan Banks (“FHLB”) advances, but excluding securitized debt obligations, totaled $20.3 billion as of March 31, 2014, of which $4.4 billion represented short-term borrowings and $15.9 billion represented long-term debt. Other debt totaled $30.4 billion as of December 31, 2013, of which $16.2 billion represented short-term borrowings and $14.2 billion represented long-term borrowings.


		29		CAPITAL ONE FINANCIAL CORPORATION (COF)

The decrease of $10.1 billion in the first quarter of 2014 was primarily attributable to net maturities of $12.4 billion of FHLB advances, as well as the maturity of $275 million of unsecured senior notes. These decreases in our other debt were partially offset by the issuance of $2.0 billion of unsecured senior notes as well as a $629 million increase in our federal funds purchased and securities loaned or sold under agreements to repurchase in the first quarter of 2014. We provide additional information on our borrowings below in “Liquidity Risk Profile” and 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, LLC, which was acquired in February 2005; GreenPoint, which was acquired in December 2006 as part of the North Fork acquisition; and CCB, which was acquired in February 2009 and subsequently merged into CONA.

We have established representation and warranty reserves for losses associated with the mortgage loans sold by each subsidiary that we consider to be both probable and reasonably estimable, including both litigation and non-litigation liabilities. These reserves are reported in our consolidated balance sheets as a component of other liabilities. The reserve setting process relies heavily on estimates, which are inherently uncertain, and requires the application of judgment. We evaluate these estimates on a quarterly basis. We build our representation and warranty reserves through the provision for mortgage representation and warranty losses, which we report in our consolidated statements of income as a component of non-interest income for loans originated and sold by CCB and Capital One Home Loans, LLC and as a component of discontinued operations for loans originated and sold by GreenPoint. In establishing the representation and warranty reserves, we consider a variety of factors depending on the category of purchaser.

The aggregate reserves for all three subsidiaries totaled $1.1 billion as of March 31, 2014, compared with $1.2 billion as of December 31, 2013.

The table below summarizes changes in our representation and warranty reserves in the first quarter of 2014 and 2013.

Table 14: Changes in Representation and Warranty Reserve


	Three Months Ended March 31,
(Dollars in millions)	2014			2013
Representation and warranty repurchase reserve, beginning of period⁽¹⁾	$	1,172		$	899
Provision (benefit) for mortgage representation and warranty losses⁽²⁾		(33	)		97
Net realized losses		(11	)		(2	)

Representation and warranty repurchase reserve, end of period⁽¹⁾	$	1,128		$	994

⁽¹⁾	Reported in our consolidated balance sheets as a component of other liabilities.

⁽²⁾

We recorded a total pre-tax provision benefit of $33 million (which includes a benefit of $47 million in discontinued operations and an expense of $14 million in continuing operations), and a total pre-tax provision of $97 million (which includes an expense of $107 million in discontinued operations and a benefit of $10 million in continuing operations) to our provision for mortgage representation and warranty losses in the first quarter of 2014 and 2013, respectively.

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 March 31, 2014, is approximately $2.5 billion, a decline from our estimate of $2.6 billion as of December 31, 2013. The estimate as of March 31, 2014 covers all reasonably possible losses relating to representation and warranty claim activity.


		30		CAPITAL ONE FINANCIAL CORPORATION (COF)

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, Guarantees, and Others.”

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 (“VIE”). 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 $3.3 billion and $423 million, respectively, as of March 31, 2014, and our maximum exposure to loss was $3.8 billion as of March 31, 2014. 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 internal risk-based capital assessments, including our economic capital and internal stress testing frameworks. The level and composition of our capital may also be influenced by rating agency guidelines, subsidiary capital requirements, the business environment, conditions in the financial markets and assessments of potential future losses due to adverse changes in our business and market environments.

Capital Standards and Prompt Corrective Action

Bank holding companies and national banks are subject to capital adequacy standards adopted by the Federal Reserve and the 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. National banks, as insured depository institutions, are also subject to Prompt Corrective Action (“PCA”) capital regulations, which require the U.S. federal banking agencies to take “prompt corrective action” for banks that do not meet established capital requirements.

In July 2013, the Federal Reserve, the OCC and the FDIC (collectively, the U.S. federal banking agencies) finalized a new capital rule (the “Final Rule”) that implements the Basel III capital accord developed by the Basel Committee on Banking Supervision (“Basel Committee”) and certain Dodd-Frank Act capital provisions and updates the PCA capital requirements.

The Final Rule amended both the Advanced Approaches and the Basel I frameworks, establishing a new Common Equity Tier 1 Capital requirement and setting higher minimum capital ratio requirements. Certain provisions of the Final Rule began to take effect on January 1, 2014 for Advanced Approaches banking organizations. The Company refers to the amended Basel I framework as the “Basel III Standardized Approach,” and the amended Advanced Approaches framework as the “Basel III Advanced Approaches.”


		31		CAPITAL ONE FINANCIAL CORPORATION (COF)

Prior to being revised in the Final Rule, the minimum risk-based capital requirements adopted by the U.S. federal banking agencies followed the Basel I framework originally promulgated pursuant to the Basel Committee’s Basel I Accord. At the end of 2012, the Company met one of the two independent eligibility criteria set by banking regulators for becoming subject to the advanced approaches capital rules (the “Advanced Approaches” regime), based upon the framework originally promulgated as a result of the Basel II Accord. As a result, the Company has undertaken a multi-year process of implementing the Advanced Approaches regime for calculating risk-weighted assets and regulatory capital levels. The Company will be subject to a parallel run under Advanced Approaches beginning in 2015, during which it will calculate capital ratios under both Basel III Standardized Approach and Basel III Advanced Approaches, though it will continue to use the Basel III Standardized Approach for purposes of meeting regulatory capital requirements. By rule, the parallel run must last at least four consecutive quarters. The first quarter of 2016 is the earliest possible date on which the Company would use the Advanced Approaches framework to calculate its regulatory capital and risk-weighted assets for purposes of risk-based capital requirements. Consistent with the experience of other U.S. banks, it is quite possible that our parallel run will last longer than the four quarter minimum.

As of January 1, 2014, the new minimum risk-based capital requirements for Advanced Approaches banking organizations include a Common Equity Tier 1 Capital ratio of at least 4.0%, a Tier 1 Risk-Based Capital ratio of at least 5.5%, a Total Risk-Based Capital ratio of at least 8% and a Tier 1 Leverage Capital ratio of at least 4%. On January 1, 2015, the minimum risk-based capital ratio requirements will increase to 4.5% for the Common Equity Tier 1 Capital ratio and to 6.0% for the Tier 1 Risk-Based Capital ratio. The minimum requirements for the Total Risk-Based Capital ratio and Tier 1 Leverage Capital ratio will not change from 2014 to 2015.

Insured depository institutions are also subject to PCA capital regulations. Under current PCA regulations, an insured depository institution is considered to be well capitalized if it maintains a Tier 1 Risk-Based Capital ratio of at least 6%, a Total Risk-Based Capital ratio of at least 10%, a Tier 1 Leverage capital ratio of at least 5%, and is not subject to any written agreement, order, capital directive, or prompt corrective action directive issued by its regulator. While the Final Rule increases some of the thresholds for the PCA capital categories and adds the new Common Equity Tier 1 Capital ratio to the PCA regulations, the changes are not effective until January 1, 2015. Beginning on January 1, 2015, the well capitalized level for the Tier 1 Risk-Based Capital ratio will increase to 8% and the well capitalized level for the Common Equity Tier 1 Capital ratio will be established at 6.5%. The well capitalized levels for the Total Risk-Based Capital ratio and Tier 1 Leverage Capital ratios will not change.

Prior to 2014, we also disclosed a Tier 1 Common Capital 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. There was no mandated minimum or “well capitalized” standard for the Tier 1 Common Capital ratio.

We disclose a non-GAAP Tangible Common Equity ratio in “MD&A—Summary of Selected Financial Data.” While the TCE ratio is a capital measure widely used by investors, analysts, rating agencies, 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 “MD&A—Supplemental Tables—Table A: Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures.”

Table 15 provides a comparison of our regulatory capital ratios under the U.S. federal banking agencies’ capital adequacy standards as of March 31, 2014 and December 31, 2013. 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 began using the Basel III Standardized Approach for calculating our regulatory capital, subject to applicable transition provisions. 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 will use the Basel III Standardized Approach for calculating our risk-weighted assets in our regulatory capital ratios.


		32		CAPITAL ONE FINANCIAL CORPORATION (COF)

Table 15: Capital Ratios⁽¹⁾⁽²⁾

March 31, 2014

December 31, 2013

Capital
Ratio

Minimum
Capital
Adequacy

Well
Capitalized

Capital
Ratio

Minimum
Capital
Adequacy

Well
Capitalized

Capital One Financial Corp:

Common equity Tier 1⁽³⁾

12.98

4.00

N/A

N/A

Tier 1 common⁽⁴⁾

N/A

12.19

N/A

Tier 1 risk-based capital⁽⁵⁾

13.36

5.50

6.00

12.57

4.00

6.00

Total risk-based capital⁽⁶⁾

15.42

8.00

10.00

14.69

8.00

10.00

Tier 1 leverage⁽⁷⁾

10.42

4.00

N/A

10.06

4.00

N/A

Capital One Bank (USA) N.A.:

Common equity Tier 1⁽³⁾

12.69

4.00

N/A

N/A

Tier 1 risk-based capital⁽⁵⁾

12.69

5.50

6.00

11.47

4.00

6.00

Total risk-based capital⁽⁶⁾

16.26

8.00

10.00

14.90

8.00

10.00

Tier 1 leverage⁽⁷⁾

10.53

4.00

5.00

10.21

4.00

5.00

Capital One, N.A.:

Common equity Tier 1⁽³⁾

13.27

4.00

N/A

N/A

Tier 1 risk-based capital⁽⁵⁾

13.27

5.50

6.00

12.67

4.00

6.00

Total risk-based capital⁽⁶⁾

14.36

8.00

10.00

13.76

8.00

10.00

Tier 1 leverage⁽⁷⁾

9.23

4.00

5.00

8.96

4.00

5.00

⁽¹⁾	In the first quarter of 2014, we adopted the proportional amortization method of accounting for Investments in Qualified Affordable Housing Projects. See “Note 1—Summary of Significant Accounting Policies” for additional information. Prior periods have been recast to conform to this presentation.

⁽²⁾

Capital ratios are calculated based on the Basel I capital framework as of December 31, 2013 and calculated based on the Basel III Standardized Approach framework, subject to applicable transition provisions, as of March 31, 2014. 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” for additional information.

⁽³⁾	Basel III Common equity Tier 1 capital ratio is a regulatory measure calculated based on Common equity Tier 1 capital divided by risk-weighted assets.

⁽⁴⁾	Tier 1 common capital ratio is a regulatory capital measure under Basel I calculated based on Tier 1 common capital divided by Basel I risk-weighted assets.

⁽⁵⁾	Tier 1 risk-based capital ratio is a regulatory capital measure calculated based on Tier 1 capital divided by risk-weighted assets.

⁽⁶⁾	Total risk-based capital ratio is a regulatory capital measure calculated based on total risk-based capital divided by risk-weighted assets.

⁽⁷⁾	Tier 1 leverage ratio is a regulatory capital measure calculated based on Tier 1 capital divided by average assets, after certain adjustments.

Our Common Equity Tier 1 Capital ratio, as calculated under the Basel III Standardized Approach framework, subject to transition provisions, was 12.98% as of March 31, 2014. Our Tier 1 common capital ratio, as calculated under Basel I, was 12.19% as of December 31, 2013. These numbers are not directly comparable due to methodological differences in the calculation of the ratios and the transition requirements under the Final Rule. Capital One Financial Corporation exceeded U.S. federal banking agencies’ minimum capital requirements and the Banks also exceeded minimum regulatory requirements and were “well capitalized” under PCA requirements as of March 31, 2014 and December 31, 2013.

As described above, we are currently using the Basel III Standardized Approach for calculating our regulatory capital, subject to transition periods. Basel III Standardized Common Equity Tier 1 Capital under the Final Rule includes additional adjustments and deductions not included in Tier 1 common capital calculated under Basel I, such as the inclusion of the unrealized gains and losses on available-for-sale securities included in AOCI and the deduction of assets related to defined benefit pension and other post-retirement employee benefit plans. These adjustments are phased-in at 20% for 2014, at 40% for 2015, at 60% for 2016, at 80% for 2017 and at 100% for 2018. Also as described above, we will continue to use Basel I for calculating our risk-weighted assets in our regulatory capital ratios in 2014. However, beginning on January 1, 2015, we must use the Basel III Standardized Approach for calculating our risk-weighted assets in our regulatory capital ratios.


		33		CAPITAL ONE FINANCIAL CORPORATION (COF)

The following table compares our Common Equity Tier 1 Capital and risk-weighted assets as of March 31, 2014, calculated based on the Final Rule, subject to applicable transition provisions, to our estimated Common Equity Tier 1 Capital and risk-weighted assets as of March 31, 2014, calculated under Basel III Standardized Approach, as it applies when fully phased-in. 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 Ratio under Fully Phased-In Basel III Standardized Approach


(Dollars in millions, except ratio)
Common Equity Tier 1 Capital under Basel III Standardized as of March 31, 2014	$	28,434
Adjustments related to unrealized gains (losses) on available for sale securities in AOCI and defined benefit pension plans⁽¹⁾		(528	)
Adjustments related to PCCR intangible⁽¹⁾		(1,254	)
Other adjustments⁽¹⁾⁽²⁾		(30	)

Estimated Common Equity Tier 1 Capital under Fully Phased-In Basel III Standardized	$	26,622

Risk-weighted assets under Basel I	$	219,047

Adjustments for Basel III Standardized⁽³⁾		8,878

Estimated risk-weighted assets under Fully Phased-in Basel III Standardized	$	227,925

Estimated Common Equity Tier 1 Capital Ratio under Fully Phased-In Basel III Standardized⁽⁴⁾⁽⁵⁾		11.7	%

⁽¹⁾	Includes full phase-In.

⁽²⁾	Other adjustments are related to disallowed deferred tax assets from net operating losses and tax credit carry forwards, mortgage servicing rights and other intangibles net of associated deferred tax liabilities.

⁽³⁾

Adjustments to the Basel I approach to calculating risk-weighted assets include higher risk weights for 90 days or more past due exposures, high volatility commercial real estate, securitization exposures and corresponding adjustments to PCCR intangibles, deferred tax assets and certain other assets in the calculation of Common Equity Tier 1 Capital under the Basel III Standardized Approach.

⁽⁴⁾	Calculated by dividing estimated Common Equity Tier 1 Capital under the Fully Phased-In Basel III Standardized Approach by estimated risk-weighted assets under the Basel III Standardized Approach.

⁽⁵⁾	Comparable to our Common equity Tier 1 as of March 31, 2014 of 12.98% calculated under Basel III Standardized Approach subject to transition provisions

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 III and U.S. Capital Rules” in our 2013 Annual Report on Form 10-K for additional information. Based on our business mix, we anticipate that we will need to hold more regulatory capital under the Basel III Advanced Approaches than under Basel I or the Basel III Standardized Approach to meet our minimum required regulatory 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 these 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 January 6, 2014 we submitted our capital plan to the Board of Governors of the Federal Reserve as part of the 2014 CCAR cycle. On March 26, 2014, we were informed by the Board of Governors of the Federal Reserve that it had completed its review under the CCAR process and that it did not object to our proposed capital distribution plans submitted pursuant to CCAR.


		34		CAPITAL ONE FINANCIAL CORPORATION (COF)

As a result of this non-objection to our capital plan, we expect to maintain our quarterly dividend of $0.30 per share, subject to approval by our Board of Directors. In addition, our Board of Directors has authorized the repurchase of up to $2.5 billion of shares of common stock through the end of the first quarter of 2015.

Dividend Policy and Stock Purchases

We paid common stock dividends of $0.30 per share in the first quarter of 2014. We paid preferred stock dividends of $15.00 per share on the outstanding shares of our 6.00% fixed rate non-cumulative perpetual preferred stock, Series B (the “Series B Preferred Stock”) during the first quarter of 2014. On May 1, 2014, our Board of Directors declared a quarterly dividend of $0.30 per share of common stock, payable May 22, 2014 to stockholders of record as of May 12, 2014, and a quarterly dividend of $15.00 per share of Series B Preferred Stock. Each outstanding share of the Series B Preferred Stock is represented by depositary shares, each representing a 1/40th 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 June 2, 2014 to stockholders of record at the close of business on May 16, 2014.

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. Regulatory restrictions exist that limit the ability of the Banks to transfer funds to our bank holding company. Funds available for dividend payments from COBNA and CONA were $1.6 billion and $76 million, respectively, as of March 31, 2014. There can be no assurance that we will declare and pay any dividends. For additional information on dividends, see “Part I-Item 1. Business—Supervision and Regulation—Dividends, Stock Purchases and Transfer of Funds” in our 2013 Form 10-K.

As highlighted under “Capital Planning and Regulatory Stress Testing” above, we plan to repurchase up to $2.5 billion of common stock within the CCAR 2014 approval period from the second quarter of 2014 through the first quarter of 2015. The timing and exact amount of any common stock repurchases will depend on various factors, including market conditions, our capital position and amount of retained earnings. 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. For additional information on stock repurchases, see “Part I-Item 1. Business-Supervision and Regulation-Dividends, Stock Repurchases and Transfer of Funds” in our 2013 Form 10-K.

RISK MANAGEMENT

Overview

We use a risk framework to manage risk. We execute against our risk management framework with the “Three Lines of Defense” risk management model to demonstrate and structure the roles, responsibilities and accountabilities in the organization for taking and managing risk. The “First Line of Defense” is comprised of the business areas that through their day-to-day business activities take risk on our behalf. As the business owner, the first line is responsible for identifying, assessing, managing and controlling that risk, and for mitigating our overall risk exposure. The “Second Line of Defense” provides oversight of first line risk taking and management, and is comprised of our Risk Management organization and other staff control functions. The second line assists in determining risk capacity, risk appetite, and the strategies, policies and structure for managing risks. The second line is both an ‘expert advisor’ to the first line and an ‘effective challenger’ of first line risk activities. The “Third Line of Defense” is comprised of our Internal Audit and Credit Review functions. The third line provides independent and objective assurance to senior management and to the Board of Directors that first and second


		35		CAPITAL ONE FINANCIAL CORPORATION (COF)

line risk management and internal control systems and its governance processes are well-designed and working as intended. Our risk framework, which is built around governance, processes and people, consists of the following eight key elements:

•

Establish governance processes, accountabilities, and risk appetites

•

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 2013 Form 10-K.

CREDIT RISK PROFILE

Our loan portfolio accounts for the substantial majority of our credit risk exposure. These activities are also governed under our credit policy and are subject to independent review and approval. Below we provide information about the composition of our loan portfolio, key concentrations and credit performance metrics.

We also engage in certain non-lending activities that may give rise to credit and counterparty settlement risk, including the purchase of securities for our investment securities portfolio, entering into derivative transactions to manage our market risk exposure and to accommodate customers, foreign exchange transactions, and customer overdrafts. We provide additional information on credit risk related to our investment securities portfolio under “Consolidated Balance Sheets 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, see “MD&A—Credit Risk Profile” in our 2013 Form 10-K.

Our total loan portfolio consists of loans held for investment, loans held for sale and loans underlying our securitization trusts. Loans underlying our securitization trusts are reported on our consolidated balance sheets in restricted loans for securitization investors. Table 17 presents the composition of our portfolio of loans held for investment, by business segments, as of March 31, 2014 and December 31, 2013. Table 17 also displays Acquired Loans. For additional information on the accounting for Acquired Loans, see “MD&A—Credit Risk Profile—Loan Portfolio Composition” and “Note 1—Summary of Significant Accounting Policies” in our 2013 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 $259 million and $218 million as of March 31, 2014 and December 31, 2013, respectively.


		36		CAPITAL ONE FINANCIAL CORPORATION (COF)

Table 17: Loan Portfolio Composition


	March 31, 2014									December 31, 2013
(Dollars in millions)	Loans		Acquired Loans		Total		% of Total			Loans		Acquired Loans		Total		% of Total
Credit Card:
Credit card loans:
Domestic credit card and installment loans⁽¹⁾	$	68,222	$	53	$	68,275		35.4	%	$	73,192	$	63	$	73,255		37.1	%
International credit card loans		7,575		—		7,575		3.9			8,050		—		8,050		4.1

Total credit card		75,797		53		75,850		39.3			81,242		63		81,305		41.2

Consumer Banking:
Auto		33,077		3		33,080		17.1			31,852		5		31,857		16.2
Home loan		6,977		27,058		34,035		17.6			7,098		28,184		35,282		17.9
Retail banking		3,560		52		3,612		1.9			3,587		36		3,623		1.8

Total consumer banking		43,614		27,113		70,727		36.6			42,537		28,225		70,762		35.9

Commercial Banking:⁽²⁾
Commercial and multifamily real estate		21,188		68		21,256		11.0			20,666		84		20,750		10.5
Commercial and industrial		23,908		156		24,064		12.5			23,131		178		23,309		11.8

Total commercial lending		45,096		224		45,320		23.5			43,797		262		44,059		22.3

Small-ticket commercial real estate		910		—		910		0.5			952		—		952		0.5

Total commercial banking		46,006		224		46,230		24.0			44,749		262		45,011		22.8

Other:
Other loans		134		—		134		0.1			121		—		121		0.1

Total loans held for investment	$	165,551	$	27,390	$	192,941		100.0	%	$	168,649	$	28,550	$	197,199		100.0	%

⁽¹⁾	Domestic credit card loans includes installment loans of $261 million and $323 million as of March 31, 2014 and December 31, 2013, respectively.

⁽²⁾	Includes construction loans and land development loans totaling $2.1 billion and $2.0 billion as of March 31, 2014 and December 31, 2013, respectively.

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.

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.


		37		CAPITAL ONE FINANCIAL CORPORATION (COF)

As noted above, our Credit Card business accounted for $75.9 billion, or 39%, of our total loan portfolio as of March 31, 2014, with Domestic Card accounting for $68.3 billion, or 35%, of our total loan portfolio as of March 31, 2014. In comparison, our Credit Card business accounted for $81.3 billion, or 41%, of our total loan portfolio as of December 31, 2013, with Domestic Card accounting for $73.3 billion, or 37%, of our total loan portfolio as of December 31, 2013. Based on our most recent data, we estimate that approximately one-third of our Domestic Card portfolio had credit scores equal or below 660 or no score, based on loan balances, as of March 31, 2014, consistent with the proportion of the Domestic Card portfolio with credit scores equal or below 660 or no score as of December 31, 2013.

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. We also present adjusted credit quality metrics excluding impact from Acquired Loans.

See “Note 4—Loans” in this Report for additional credit quality information. See “Note 1—Summary of Significant Accounting Policies” in our 2013 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 March 31, 2014 and December 31, 2013. Table 18 also presents these metrics adjusted to exclude from the denominator Acquired Loans accounted for based on expected cash flows expected to be collected over the life of the loans.

Our 30+ day delinquency metrics include all loans held for investment that are 30 or more days past due, whereas our 30+ day performing delinquency metrics include loans that are 30 or more days past due 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” in our 2013 Form 10-K for information on our policies for classifying loans as nonperforming for each of our loan categories.


		38		CAPITAL ONE FINANCIAL CORPORATION (COF)

Table 18: 30+ Day Delinquencies


	March 31, 2014																December 31, 2013
	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:
Domestic credit card and installment loans	$	2,062		3.02	%		3.02	%	$	2,062		3.02	%		3.02	%	$	2,514		3.43	%		3.43	%	$	2,514		3.43	%		3.43	%
International credit card loans		272		3.59			3.59			334		4.41			4.41			299		3.71			3.71			367		4.56			4.56

Total credit card		2,334		3.08			3.08			2,396		3.16			3.16			2,813		3.46			3.46			2,881		3.54			3.55

Consumer Banking:
Auto		1,750		5.29			5.29			1,862		5.63			5.63			2,181		6.85			6.85			2,375		7.46			7.46
Home loan		42		0.12			0.60			303		0.89			4.34			55		0.16			0.78			323		0.91			4.55
Retail banking		27		0.74			0.75