10-Q
______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________
FORM 10-Q
____________________________________
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2016
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File No. 1-13300
____________________________________
CAPITAL ONE FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter) 
____________________________________
Delaware
 
54-1719854
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
1680 Capital One Drive,
McLean, Virginia
 
22102
(Address of Principal Executive Offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (703) 720-1000
(Former name, former address and former fiscal year, if changed since last report)
(Not applicable)
____________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes ý  No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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
 
ý
  
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  ý
As of April 29, 2016, there were 512,099,463 shares of the registrant’s Common Stock outstanding.

______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________



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

 
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Item 3.
Item 4.
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 
 

 
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INDEX OF MD&A AND SUPPLEMENTAL TABLES
MD&A Tables:
Page
1
2
3
4
5
Non-Interest Income
6
7
7.1
7.2
8
9
Commercial Banking Business Results
10
11
12
13
14
15
16
Estimated Common Equity Tier 1 Capital Ratio under Fully Phased-In Basel III Standardized Approach
17
18
19
Home Loans—Risk Profile by Lien Priority
20
21
Credit Score Distribution
22
23
24
25
26
27
28
29
30
31
32
33
34
 
 
 
Supplemental Table:
 
A
Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures

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

This discussion contains forward-looking statements that are based upon management’s current expectations and are subject to significant uncertainties and changes in circumstances. Please review “Forward-Looking Statements” for more information on the forward-looking statements in this Quarterly Report on Form 10-Q (“this Report”). Our actual results may differ materially from those included in these forward-looking statements due to a variety of factors including, but not limited to, those described in “Part II—Item 1A. Risk Factors” in this Report and in “Part I—Item 1A. Risk Factors” in our 2015 Annual Report on Form 10-K (“2015 Form 10-K”). Unless otherwise specified, references to notes to our consolidated financial statements refer to the notes to our unaudited consolidated financial statements as of March 31, 2016 included in this Report.
 
Management monitors a variety of key indicators to evaluate our business results and financial condition. The following MD&A is provided as a supplement to, and should be read in conjunction with, our unaudited consolidated financial statements and related notes in this Report and the more detailed information contained in our 2015 Form 10-K.
INTRODUCTION
We are a diversified financial services holding company with banking and non-banking subsidiaries. Capital One Financial Corporation and its subsidiaries (the “Company”) offer a broad array of financial products and services to consumers, small businesses and commercial clients through branches, the internet and other distribution channels. As of March 31, 2016, our principal subsidiaries included:
Capital One Bank (USA), National Association (“COBNA”), which offers credit and debit card products, other lending products and deposit products; and
Capital One, National Association (“CONA”), which offers a broad spectrum of banking products and financial services to consumers, small businesses and commercial clients.
The Company is hereafter collectively referred to as “we,” “us” or “our.” COBNA and CONA are collectively referred to as the “Banks.” Certain business terms used in this document are defined in the “MD&A—Glossary and Acronyms” and should be read in conjunction with the consolidated financial statements included in this Report.
Our consolidated total net revenues are derived primarily from lending to consumer and commercial customers net of funding costs associated with interest on deposits, short-term borrowings and long-term debt. We also earn non-interest income which primarily consists of interchange income net of rewards expenses and service charges and other customer-related fees. Our expenses primarily consist of the provision for credit losses, operating expenses (including salaries and associate benefits, occupancy and equipment costs, professional services, communication and data processing expenses and other miscellaneous expenses), marketing expenses and income taxes.
Our principal operations are currently organized for management reporting purposes into three major business segments, which are defined based on the products and services provided or the type of customer served: Credit Card, Consumer Banking and Commercial Banking. The operations of acquired businesses have been integrated into our existing business segments. Certain activities that are not part of a segment, such as management of our corporate investment portfolio and asset/liability management by our centralized Corporate Treasury group, are included in the Other category.
Credit Card: Consists of our domestic consumer and small business card lending, national closed-end installment lending and the international card lending businesses in Canada and the United Kingdom (“U.K.”).
Consumer Banking: Consists of our branch-based lending and deposit gathering activities for consumers and small businesses and national deposit gathering, auto lending and consumer home loan lending and servicing activities.

 
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Commercial Banking: Consists of our lending, deposit gathering and servicing activities provided to commercial real estate and commercial and industrial customers. Our commercial and industrial customers typically include companies with annual revenues between $10 million and $1 billion.
Recent Acquisitions and Dispositions
We regularly explore and evaluate opportunities to acquire financial services and financial assets, including credit card and other loan portfolios, and enter into strategic partnerships as part of our growth strategy. We also explore opportunities to acquire digital companies and related assets to improve our information technology infrastructure and to deliver on our digital strategy. We also regularly consider the potential disposition of certain of our assets, branches, partnership agreements or lines of businesses. We may issue equity or debt in connection with acquisitions, including public offerings, to fund such acquisitions.
On December 1, 2015, we completed the acquisition of the Healthcare Financial Services business of General Electric Capital Corporation (“HFS acquisition”). As part of this acquisition, we recorded approximately $9.2 billion in assets, including $8.3 billion of loans. See “Note 2—Business Developments” in our 2015 Form 10-K for additional information.
We had no significant acquisitions or dispositions in the first quarter of 2016.

 
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SUMMARY OF SELECTED FINANCIAL DATA
The following table presents selected consolidated financial data from our results of operations for the first quarters of 2016 and 2015 and selected comparative balance sheet data as of March 31, 2016 and December 31, 2015. We also provide selected key metrics we use in evaluating our performance.
Table 1: Consolidated Financial Highlights (Unaudited)
 
 
Three Months Ended March 31,
(Dollars in millions, except per share data and as noted)
 
2016
 
2015
 
Change
Income statement
 
 
 
 
 
 
Net interest income
 
$
5,056

 
$
4,576

 
10%

Non-interest income
 
1,164

 
1,071

 
9

Total net revenue
 
6,220

 
5,647

 
10

Provision for credit losses
 
1,527

 
935

 
63

Non-interest expense:
 
 
 
 
 
 
Marketing
 
428

 
375

 
14

Amortization of intangibles
 
101

 
110

 
(8
)
Operating expenses
 
2,694

 
2,564

 
5

Total non-interest expense
 
3,223

 
3,049

 
6

Income from continuing operations before income taxes
 
1,470

 
1,663

 
(12
)
Income tax provision
 
452

 
529

 
(15
)
Income from continuing operations, net of tax
 
1,018

 
1,134

 
(10
)
Income (loss) from discontinued operations, net of tax
 
(5
)
 
19

 
**

Net income
 
1,013

 
1,153

 
(12
)
Dividends and undistributed earnings allocated to participating securities
 
(6
)
 
(6
)
 

Preferred stock dividends
 
(37
)
 
(32
)
 
16

Net income available to common stockholders
 
$
970

 
$
1,115

 
(13
)
Common share statistics
 
 

 
 

 
 

Basic earnings per common share:
 
 
 
 
 
 
Net income from continuing operations
 
$
1.86

 
$
2.00

 
(7)%

Income (loss) from discontinued operations
 
(0.01
)
 
0.03

 
**

Net income per basic common share
 
$
1.85

 
$
2.03

 
(9
)
Diluted earnings per common share:
 
 
 
 
 
 
Net income from continuing operations
 
$
1.85

 
$
1.97

 
(6
)
Income (loss) from discontinued operations
 
(0.01
)
 
0.03

 
**

Net income per diluted common share
 
$
1.84

 
$
2.00

 
(8
)
Weighted-average common shares outstanding (in millions):
 
 
 
 
 
 
Basic
 
523.5

 
550.2

 
(5
)
Diluted
 
528.0

 
557.2

 
(5
)
Common shares outstanding (period end, in millions)
 
514.5

 
548.0

 
(6
)
Dividends paid per common share
 
$
0.40

 
$
0.30

 
33

Tangible book value per common share (period end)
 
55.94

 
52.19

 
7

Balance sheet (average balances)
 
 
 
 
 
 
Loans held for investment
 
$
226,736

 
$
205,194

 
10%

Interest-earning assets
 
299,456

 
278,427

 
8

Total assets
 
331,919

 
309,401

 
7

Interest-bearing deposits
 
194,125

 
182,998

 
6

Total deposits
 
219,180

 
207,851

 
5

Borrowings
 
53,761

 
46,082

 
17

Common equity
 
45,782

 
44,575

 
3

Total stockholders’ equity
 
49,078

 
46,397

 
6


 
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Three Months Ended March 31,
(Dollars in millions, except per share data and as noted)
 
2016
 
2015
 
Change
Selected performance metrics
 
 

 
 

 
 

Purchase volume(1)
 
$
68,189

 
$
57,383

 
19%

Total net revenue margin(2)
 
8.31%

 
8.11%

 
20
bps
Net interest margin(3)
 
6.75

 
6.57

 
18

Return on average assets
 
1.23

 
1.47

 
(24
)
Return on average tangible assets(4)
 
1.29

 
1.54

 
(25
)
Return on average common equity(5)
 
8.52

 
9.84

 
(132
)
Return on average tangible common equity (“TCE”)(6)
 
12.94

 
15.00

 
(206
)
Equity-to-assets ratio(7)
 
14.79

 
15.00

 
(21
)
Non-interest expense as a percentage of average loans held for investment(8)
 
5.69

 
5.94

 
(25
)
Efficiency ratio(9)
 
51.82

 
53.99

 
(217
)
Effective income tax rate from continuing operations
 
30.7

 
31.8

 
(110
)
Net charge-offs
 
$
1,178

 
$
881

 
34%

Net charge-off rate(10)
 
2.08%

 
1.72%

 
36
bps
(Dollars in millions, except as noted)

March 31,
2016
 
December 31,
2015
 
Change
Balance sheet (period end)
 
 
 
 
 
 
Loans held for investment
 
$
227,613

 
$
229,851

 
(1)%

Interest-earning assets
 
298,348

 
302,007

 
(1
)
Total assets
 
330,346

 
334,048

 
(1
)
Interest-bearing deposits
 
196,597

 
191,874

 
2

Total deposits
 
221,779

 
217,721

 
2

Borrowings
 
50,497

 
59,115

 
(15
)
Common equity
 
44,411

 
43,990

 
1

Total stockholders’ equity
 
47,707

 
47,284

 
1

Credit quality metrics (period end)
 
 
 
 
 
 
Allowance for loan and lease losses
 
$
5,416

 
$
5,130

 
6%

Allowance as a percentage of loans held for investment (“allowance coverage ratio”)
 
2.38%

 
2.23%

 
15
bps
30+ day performing delinquency rate
 
2.33

 
2.69

 
(36
)
30+ day delinquency rate
 
2.64

 
3.00

 
(36
)
Capital ratios
 
 

 
 
 
 
Common equity Tier 1 capital ratio
 
11.1%

 
11.1%

 

Tier 1 capital ratio
 
12.4

 
12.4

 

Total capital ratio
 
14.6

 
14.6

 

Tier 1 leverage ratio
 
10.2

 
10.6

 
(40
)bps
Tangible common equity ratio(11)
 
9.1

 
8.9

 
20

Supplementary leverage ratio(12)
 
8.9

 
9.2

 
(30
)
Other
 
 
 
 
 
 
Employees (in thousands), period end
 
45.8

 
45.4

 
1%

__________
**
Change is not meaningful.
(1) 
Includes credit card purchase transactions, net of returns, for the period for both loans classified as held for investment and loans classified as held for sale. Excludes cash advance and balance transfer transactions.
(2) 
Calculated based on annualized total net revenue for the period divided by average interest-earning assets for the period.
(3) 
Calculated based on annualized net interest income for the period divided by average interest-earning assets for the period.
(4) 
Calculated based on annualized income from continuing operations, net of tax, for the period divided by average tangible assets for the period. See “MD&A—Table A—Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures” for additional information.
(5) 
Calculated based on the annualized sum of (i) income from continuing operations, net of tax; (ii) less dividends and undistributed earnings allocated to participating securities; (iii) less preferred stock dividends, for the period, divided by average common equity. Our calculation of return on average common equity may not be comparable to similarly titled measures reported by other companies.
(6) 
Calculated based on the annualized sum of (i) income from continuing operations, net of tax; (ii) less dividends and undistributed earnings allocated to participating securities; (iii) less preferred stock dividends, for the period, divided by average tangible common equity (“TCE”). Our calculation of return on average TCE may not be comparable to similarly titled measures reported by other companies. See “MD&A—Table A—Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures” for additional information.

 
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(7) 
Calculated based on average stockholders’ equity for the period divided by average total assets for the period.
(8) 
Calculated based on annualized non-interest expense for the period divided by average loans held for investment for the period.
(9) 
Calculated based on non-interest expense for the period divided by total net revenue for the period.
(10) 
Calculated based on annualized net charge-offs for the period divided by average loans held for investment for the period.
(11) 
The tangible common equity ratio is a non-GAAP measure calculated as TCE divided by tangible assets. See “MD&A—Table A—Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures” for the calculation of this measure and reconciliation to the comparative U.S. GAAP measure.
(12) 
Supplementary leverage ratio is a regulatory capital measure calculated based on Tier 1 capital under the Basel III Standardized Approach divided by total leverage exposure. See “MD&A—Capital Management” for additional information.
EXECUTIVE SUMMARY AND BUSINESS OUTLOOK
We reported net income of $1.0 billion ($1.84 per diluted common share) on total net revenue of $6.2 billion for the first quarter of 2016. In comparison, we reported net income of $1.2 billion ($2.00 per diluted common share) on total net revenue of $5.6 billion for the first quarter of 2015.
Our common equity Tier 1 capital ratio, as calculated under the Basel III Standardized Approach, including transition provisions, was 11.1% as of both March 31, 2016 and December 31, 2015. See “MD&A—Capital Management” below for additional information.
On March 11, 2015, we announced that our Board of Directors authorized the repurchase of up to $3.125 billion of shares of our common stock (“2015 Stock Repurchase Program”). On February 17, 2016, we announced that our Board of Directors had authorized the repurchase of up to an additional $300 million of shares of common stock through the end of the second quarter of 2016 under the 2015 Stock Repurchase Program. Through the end of the first quarter of 2016, we repurchased approximately $2.8 billion of shares of common stock as part of this program, including completion of the previously announced incremental $300 million in share repurchases, and expect to complete the 2015 Stock Repurchase Program by the end of the second quarter of 2016. See “MD&A—Capital Management” below for additional information.
Below are additional highlights of our performance in the first quarter of 2016. These highlights are generally based on a comparison between the results of the first quarters of 2016 and 2015, except as otherwise noted. The changes in our financial condition and credit performance are generally based on our financial condition and credit performance as of March 31, 2016, compared to our financial condition and credit performance as of December 31, 2015. We provide a more detailed discussion of our financial performance in the sections following this “Executive Summary and Business Outlook.”
Total Company Performance
Earnings: Our net income decreased by $140 million to $1.0 billion in the first quarter of 2016 compared to the first quarter of 2015. The decrease in net income from continuing operations in the first quarter of 2016 was driven by (i) an increase in the provision for credit losses in our domestic credit card loan portfolio due to higher charge-offs and an allowance build in the first quarter of 2016 compared to a release in the first quarter of 2015, and in our commercial loan portfolio due to a larger build in both the allowance for loan and lease losses and the reserve for unfunded lending commitments as a result of continued adverse industry conditions impacting our oil and gas portfolio; and (ii) an increase in non-interest expense driven by higher operating and marketing expenses associated with loan growth and continued technology and infrastructure investments. These expenses were partially offset by (i) higher interest income due to growth in our credit card and commercial loan portfolios, partially offset by the planned run-off of our acquired home loan portfolio; and (ii) an increase in non-interest income primarily attributable to higher net interchange fees, partially offset by lower service charges and other customer-related fees primarily due to the continued run-off of our legacy payment protection products in our Domestic Card business, which we exited during the first quarter of 2016.
Loans Held for Investment: Period-end loans held for investment decreased by $2.2 billion to $227.6 billion as of March 31, 2016 from December 31, 2015 driven by seasonal paydowns in our credit card loan portfolio and the planned run-off of our acquired home loan portfolio, partially offset by growth in our auto and commercial loan portfolios. Average loans held for investment increased by $21.5 billion to $226.7 billion in the first quarter of 2016 compared to the first quarter of 2015 primarily driven by continued growth in our credit card, auto and commercial loan portfolios, including loans acquired from the HFS acquisition, partially offset by the planned run-off of our acquired home loan portfolio.

 
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Net Charge-off and Delinquency Statistics: Our net charge-off rate increased by 36 basis points to 2.08% in the first quarter of 2016 compared to the first quarter of 2015 primarily due to seasoning of recent credit card loan originations and rising losses in our oil and gas and taxi medallion lending portfolios within our Commercial Banking business. Our 30+ day delinquency rate decreased by 36 basis points to 2.64% as of March 31, 2016, from December 31, 2015, primarily due to seasonally lower delinquency inventories, partially offset by seasoning of recent credit card loan originations and adverse market conditions impacting our oil and gas and taxi medallion lending portfolios. We provide additional information on our credit quality metrics below under “Business Segment Financial Performance” and “Credit Risk Profile.”
Allowance for Loan and Lease Losses: Our allowance for loan and lease losses increased by $286 million to $5.4 billion as of March 31, 2016 from December 31, 2015. The increase in the allowance for loan and lease losses was primarily driven by continued adverse industry conditions impacting our oil and gas portfolio in our Commercial Banking business as well as continued domestic credit card loan growth and portfolio seasoning. These factors also contributed to a higher allowance coverage ratio, which increased by 15 basis points to 2.38% as of March 31, 2016 from December 31, 2015.
Business Segment Financial Performance
Table 2 summarizes our business segment results, which we report based on revenue and income from continuing operations, net of tax, for the first quarters of 2016 and 2015. We provide information on the allocation methodologies used to derive our business segment results in “Note 20—Business Segments” in our 2015 Form 10-K. We also provide a reconciliation of our total business segment results to our consolidated generally accepted accounting principles in the United States of America (“U.S. GAAP”) results in “Note 13—Business Segments” of this Report.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Table 2: Business Segment Results
 
 
Three Months Ended March 31,
 
 
2016
 
2015
 
 
Total Net
Revenue (Loss)
(1)
 
Net Income(2)
 
Total Net
Revenue (Loss)
(1)
 
Net Income(2)
(Dollars in millions)
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
Credit Card
 
$
3,880

 
62%
 
$
609

 
60%
 
$
3,482

 
62%

 
$
668

 
59%
Consumer Banking
 
1,611

 
26
 
249

 
24
 
1,592

 
28

 
266

 
23
Commercial Banking(3)
 
655

 
11
 
67

 
7
 
575

 
10

 
155

 
14
Other(4)
 
74

 
1
 
93

 
9
 
(2
)
 

 
45

 
4
Total from continuing operations
 
$
6,220

 
100%
 
$
1,018

 
100%
 
$
5,647

 
100%

 
$
1,134

 
100%
__________
(1) 
Total net revenue (loss) consists of net interest income and non-interest income.
(2) 
Net income for our business segments and the Other category is based on income (loss) from continuing operations, net of tax.
(3) 
Some of our tax-related commercial investments generate tax-exempt income or tax credits. Accordingly, we make certain reclassifications within our Commercial Banking business results to present revenues and yields on a taxable-equivalent basis, calculated assuming an effective tax rate approximately equal to our federal statutory tax rate of 35% with offsetting reclassifications to the Other category.
(4) 
Includes the residual impact of the allocation of our centralized Corporate Treasury group activities, unallocated corporate expenses that do not directly support the operations of the business segments and other items as described in “Note 20—Business Segments” in our 2015 Form 10-K.
Credit Card: Our Credit Card business generated net income from continuing operations of $609 million in the first quarter of 2016, compared to net income from continuing operations of $668 million in the first quarter of 2015. The decrease in net income in the first quarter of 2016 was primarily attributable to (i) higher provision for credit losses driven by higher charge-offs and an allowance build, both due to continued loan growth and portfolio seasoning, compared to a release in the first quarter of 2015; and (ii) higher non-interest expense due to higher operating and marketing expenses associated with loan growth. These drivers were partially offset by (i) higher net interest income primarily driven by loan growth; and (ii) higher non-interest income attributable to an increase in net interchange fees, partially offset by a decline in service charges and other customer-related fees primarily due to the continued run-off of our legacy payment protection products in our Domestic Card business, which we exited during the first quarter of 2016. Period-end loans held for investment decreased by $3.4 billion to $92.7 billion as of March 31, 2016 from December 31, 2015, primarily due to expected seasonal paydowns.
Consumer Banking: Our Consumer Banking business generated net income from continuing operations of $249 million in the first quarter of 2016, compared to net income from continuing operations of $266 million in the first quarter of 2015. The decrease in

 
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net income in the first quarter of 2016 was primarily attributable to (i) higher provision for credit losses primarily driven by higher charge-offs on auto loans; and (ii) higher non-interest expense largely driven by increased marketing expenses in our retail banking business and higher operating expenses driven by growth in our auto loan portfolio. Period-end loans held for investment were substantially flat, increasing by $219 million, or 0.3%, to $70.6 billion as of March 31, 2016 from December 31, 2015.
Commercial Banking: Our Commercial Banking business generated net income from continuing operations of $67 million in the first quarter of 2016, compared to net income from continuing operations of $155 million in the first quarter of 2015. The decrease in net income in the first quarter of 2016 was primarily attributable to (i) higher provision for credit losses due to a larger build in both the allowance for loan and lease losses and the reserve for unfunded lending commitments as a result of continued adverse industry conditions impacting our oil and gas portfolio; and (ii) higher non-interest expense largely driven by higher operating expenses due to costs associated with the HFS acquisition and continued growth in our Commercial Banking business. These expenses were partially offset by higher net interest income primarily driven by loan growth, including loans acquired in the HFS acquisition, partially offset by spread compression. Period-end loans held for investment increased by $975 million to $64.2 billion as of March 31, 2016 from December 31, 2015, driven by growth across our commercial loan portfolios.
Business Outlook
We discuss below our current expectations regarding our total company performance and the performance of each of our business segments over the near-term based on market conditions, the regulatory environment and our business strategies as of the time we filed this Report. The statements contained in this section are based on our current expectations regarding our outlook for our financial results and business strategies. Our expectations take into account, and should be read in conjunction with, our expectations regarding economic trends and analysis of our business as discussed in “Part I—Item 1. Business” and “Part I—Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2015 Form 10-K. Certain statements are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those in our forward-looking statements. Except as otherwise disclosed, forward-looking statements do not reflect: (i) any change in current dividend or repurchase strategies; (ii) the effect of any acquisitions, divestitures or similar transactions that have not been previously disclosed; or (iii) any changes in laws, regulations or regulatory interpretations, in each case after the date as of which such statements are made. See “Forward-Looking Statements” in this Report for more information on the forward-looking statements included in this Report and “Part I—Item 1A. Risk Factors” in our 2015 Form 10-K for factors that could materially influence our results.
Total Company Expectations
We delivered revenue growth and attractive risk-adjusted returns in the first quarter of 2016, highlighted by strong growth in our Domestic Card business. We believe we are positioned to deliver attractive shareholder returns over the long term, driven by growth and sustainable returns at the higher end of banks, as well as significant capital distribution, subject to regulatory approval.
Changing customer needs and preferences in our retail deposit businesses are driving changes to the function, format and number of our branches. Like all banks, we have been optimizing the format and number of our branches to better meet our evolving customer needs and expect to accelerate these efforts in 2016. While we are still formulating specific plans and timing, we expect to recognize bank optimization charges of approximately $160 million in the “Other” category during 2016.
In addition to these expected bank optimization costs, we also expect the net impact of FDIC surcharges and premium changes to add about $20 million to quarterly operating expenses beginning in the third quarter of 2016. Including the higher expenses associated with these two items, we still expect some improvement in our full-year 2016 efficiency ratio relative to our full-year 2015 efficiency ratio, with continuing improvement in 2017, excluding adjusting items.
We believe our actions have created a well-positioned balance sheet with strong capital and liquidity. Pursuant to our approved 2015 capital plan, we increased our quarterly common stock dividend from $0.30 per share to $0.40 per share starting in the second quarter of 2015. We also expect to repurchase up to $3.125 billion of shares of our common stock pursuant to the 2015 Stock Repurchase Program through the second quarter of 2016. As we continued to repurchase shares pursuant to this program, we reduced our net share count by 12.8 million shares in the first quarter of 2016 and completed the previously announced incremental $300 million in repurchases. We are on track to complete our remaining CCAR authorization by the end of the second quarter of 2016. The timing and exact amount of any common stock repurchases will depend on various factors, including market conditions, opportunities for growth, and our capital position and amount of retained earnings. The 2015 Stock Repurchase Program does not include specific price targets, may be executed through open market purchases or privately negotiated transactions, including

 
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utilizing Rule 10b5-1 programs, and may be suspended at any time. See “MD&A—Capital Management—Dividend Policy and Stock Purchases” for more information.
Business Segment Expectations
Credit Card: In our Domestic Card business, we expect the full-year 2016 charge-off rate to be around four percent, with quarterly seasonal variability. Based on current information and assuming relative stability in consumer behavior, the domestic economy and competitive conditions, we expect full-year 2017 charge-off rate in the low four percent range, with quarterly seasonal variability. Loan growth coupled with our expectations for a rising charge-off rate drove an allowance build in the current quarter, and we expect these same factors to drive allowance additions going forward.
Consumer Banking: In our Consumer Banking business, persistently low interest rates continue to pressure returns in our deposit businesses. We expect the planned run-off in our acquired home loan portfolio, as well as revenue margin compression and gradually rising charge-offs in our auto business, to have a negative effect on Consumer Banking revenues, efficiency ratio and net income in 2016, even as we continue to tightly manage costs.
Commercial Banking: While competition continues to put pressure on loan terms and pricing in our Commercial Banking business, we continue to see good growth opportunities in select specialty industry verticals. Credit pressures continue to be focused in our oil and gas and taxi medallion lending portfolios and we expect that our oil and gas portfolio will continue to present challenges. While our current reserves fully reflect all the information we have today, future developments and continued turmoil in the energy industry could lead to further reserve builds and possibly increasing charge-offs.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in accordance with U.S. GAAP requires management to make a number of judgments, estimates and assumptions that affect the amount of assets, liabilities, income and expenses on the consolidated financial statements. Understanding our accounting policies and the extent to which we use management judgment and estimates in applying these policies is integral to understanding our financial statements. We provide a summary of our significant accounting policies under “Note 1—Summary of Significant Accounting Policies” in our 2015 Form 10-K.
We have identified the following accounting policies as critical because they require significant judgments and assumptions about highly complex and inherently uncertain matters and the use of reasonably different estimates and assumptions could have a material impact on our results of operations or financial condition. These critical accounting policies govern:
Loan loss reserves
Asset impairment
Fair value of financial instruments
Representation and warranty reserves
Customer rewards reserves
We evaluate our critical accounting estimates and judgments on an ongoing basis and update them, as necessary, based on changing conditions. Management has discussed our critical accounting policies and estimates with the Audit Committee of the Board of Directors. There have been no changes to our critical accounting policies and estimates since the 2015 Form 10-K.
We provide additional information on our critical accounting policies and estimates under “MD&A—Critical Accounting Policies and Estimates” in our 2015 Form 10-K.
ACCOUNTING CHANGES AND DEVELOPMENTS
See “Note 1—Summary of Significant Accounting Policies” for information on accounting standards adopted in 2016, as well as recently issued accounting standards not yet required to be adopted and the expected impact of these changes in accounting standards.

 
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CONSOLIDATED RESULTS OF OPERATIONS
The section below provides a comparative discussion of our consolidated financial performance for the first quarters of 2016 and 2015. Following this section, we provide a discussion of our business segment results. You should read this section together with our “Executive Summary and Business Outlook,” where we discuss trends and other factors that we expect will affect our future results of operations.
Net Interest Income
Net interest income represents the difference between the interest income, including certain fees, earned on our interest-earning assets and the interest expense on our interest-bearing liabilities. Interest-earning assets include loans, investment securities and other interest-earning assets and interest-bearing liabilities include interest-bearing deposits, securitized debt obligations, senior and subordinated notes, and other borrowings. Generally, we include in interest income any past due fees on loans that we deem collectible. Our net interest margin, based on our consolidated results, represents the difference between the yield on our interest-earning assets and the cost of our interest-bearing liabilities, including the notional impact of non-interest bearing funding. We expect net interest income and our net interest margin to fluctuate based on changes in interest rates and changes in the amount and composition of our interest-earning assets and interest-bearing liabilities.

 
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Table 3 below presents, for each major category of our interest-earning assets and interest-bearing liabilities, the average outstanding balances, interest income earned, interest expense incurred, average yield and rate for the first quarters of 2016 and 2015.
Table 3: Average Balances, Net Interest Income and Net Interest Margin
 
 
Three Months Ended March 31,
 
 
2016
 
2015
(Dollars in millions)
 
Average
Balance
 
Interest
Income/
Expense(1)(2)
 
Average Yield/
Rate
 
Average
Balance
 
Interest
Income/
Expense(1)(2)
 
Average Yield/
Rate
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
 
Credit card:
 
 
 
 
 
 
 
 
 
 
 
 
Domestic credit card
 
$
85,319

 
$
3,071

 
14.40%
 
$
74,875

 
$
2,660

 
14.21%

International credit card
 
7,839

 
323

 
16.48
 
7,811

 
291

 
14.90

Total credit card
 
93,158

 
3,394

 
14.57
 
82,686

 
2,951

 
14.28

Consumer banking
 
70,441

 
1,088

 
6.18
 
71,595

 
1,120

 
6.26

Commercial banking(3)
 
63,884

 
539

 
3.37
 
51,461

 
415

 
3.23

Other
 
90

 
64

 
284.44
 
112

 
54

 
192.86

Total loans, including loans held for sale
 
227,573

 
5,085

 
8.94
 
205,854

 
4,540

 
8.82

Investment securities
 
65,156

 
415

 
2.55
 
63,181

 
406

 
2.57

Cash equivalents and other interest-earning assets
 
6,727

 
17

 
1.01
 
9,392

 
28

 
1.19

Total interest-earning assets
 
$
299,456

 
$
5,517

 
7.37
 
$
278,427

 
$
4,974

 
7.15

Cash and due from banks
 
3,355

 
 
 
 
 
3,099

 
 
 
 
Allowance for loan and lease losses
 
(5,131
)
 
 
 
 
 
(4,371
)
 
 
 
 
Premises and equipment, net
 
3,642

 
 
 
 
 
3,701

 
 
 
 
Other assets
 
30,597

 
 
 
 
 
28,545

 
 
 
 
Total assets
 
$
331,919

 
 
 
 
 
$
309,401

 
 
 
 
Liabilities and stockholders’ equity:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
$
194,125

 
$
283

 
0.58
 
$
182,998

 
$
271

 
0.59

Securitized debt obligations
 
15,361

 
48

 
1.25
 
11,563

 
33

 
1.14

Senior and subordinated notes
 
21,993

 
106

 
1.93
 
20,595

 
79

 
1.53

Other borrowings and liabilities
 
17,176

 
24

 
0.56
 
14,721

 
15

 
0.41

Total interest-bearing liabilities
 
$
248,655

 
$
461

 
0.74
 
$
229,877

 
$
398

 
0.69

Non-interest-bearing deposits
 
25,055

 
 
 
 
 
24,853

 
 
 
 
Other liabilities
 
9,131

 
 
 
 
 
8,274

 
 
 
 
Total liabilities
 
282,841

 
 
 
 
 
263,004

 
 
 
 
Stockholders’ equity
 
49,078

 
 
 
 
 
46,397

 
 
 
 
Total liabilities and stockholders’ equity
 
$
331,919

 
 
 
 
 
$
309,401

 
 
 
 
Net interest income/spread
 
 
 
$
5,056

 
6.63
 
 
 
$
4,576

 
6.46

Impact of non-interest-bearing funding
 
 
 
 
 
0.12
 
 
 
 
 
0.11

Net interest margin
 
 
 
 
 
6.75%
 
 
 
 
 
6.57
%
__________
(1)  
Past due fees included in interest income totaled approximately $351 million and $354 million in the first quarters of 2016 and 2015, respectively.
(2) 
Interest income and interest expense and the calculation of average yields on interest-earning assets and average rates on interest-bearing liabilities include the impact of hedge accounting.
(3) 
Some of our tax-related commercial investments generate tax-exempt income or tax credits. Accordingly, we make certain reclassifications within our Commercial Banking business results to present revenues and yields on a taxable-equivalent basis, calculated assuming an effective tax rate approximately equal to our federal statutory rate of 35% with offsetting reclassifications to the Other category.
Net interest income increased by $480 million to $5.1 billion in the first quarter of 2016 compared to the first quarter of 2015 primarily driven by growth in our credit card and commercial loan portfolios and an additional day in the first quarter of 2016.

 
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Net interest margin increased by 18 basis points to 6.75% in the first quarter of 2016 compared to the first quarter of 2015, primarily driven by continued growth in our domestic credit card loan portfolio, the planned run-off of the acquired home loan portfolio in our Consumer Banking business and an additional day in the first quarter of 2016, partially offset by declining yields in our auto portfolio.
 
 
 
 
 
 
 
 
 
 
 
 
 
Table 4 displays the change in our net interest income between periods and the extent to which the variance is attributable to (i) changes in the volume of our interest-earning assets and interest-bearing liabilities; or (ii) changes in the interest rates related to these assets and liabilities.
Table 4: Rate/Volume Analysis of Net Interest Income(1)
 
 
Three Months Ended March 31,
 
 
2016 vs. 2015
(Dollars in millions)
 
Total Variance
 
Volume
 
Rate
Interest income:
Loans:
 
 
 
 
 
 
Credit card
 
$
443

 
$
380

 
$
63

Consumer banking
 
(32
)
 
(18
)
 
(14
)
Commercial banking(2)
 
124

 
104

 
20

Other
 
10

 
(11
)
 
21

Total loans, including loans held for sale
 
545

 
455

 
90

Investment securities
 
9

 
13

 
(4
)
Cash equivalents and other interest-earning assets
 
(11
)
 
(7
)
 
(4
)
Total interest income
 
543

 
461

 
82

Interest expense:
 
 
 
 
 
 
Deposits
 
12

 
16

 
(4
)
Securitized debt obligations
 
15

 
11

 
4

Senior and subordinated notes
 
27

 
6

 
21

Other borrowings and liabilities
 
9

 
3

 
6

Total interest expense
 
63

 
36

 
27

Net interest income
 
$
480

 
$
425

 
$
55

__________
(1) 
We calculate the change in interest income and interest expense separately for each item. The portion of interest income or interest expense attributable to both volume and rate is allocated proportionately when the calculation results in a positive value. When the portion of interest income or interest expense attributable to both volume and rate results in a negative value, the total amount is allocated to volume or rate, depending on which amount is positive.
(2) 
Some of our tax-related commercial investments generate tax-exempt income or tax credits. Accordingly, we make certain reclassifications within our Commercial Banking business results to present revenues and yields on a taxable-equivalent basis, calculated assuming an effective tax rate approximately equal to our federal statutory rate of 35% with offsetting reclassifications to the Other category.
Non-Interest Income
Non-interest income primarily consists of interchange income net of rewards expense, service charges and other customer-related fees, and other non-interest income. Other non-interest income includes the pre-tax net benefit for mortgage representation and warranty losses related to continuing operations, gains and losses from the sale of investment securities, gains and losses on derivatives not accounted for in hedge accounting relationships and hedge ineffectiveness.

 
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Table 5 displays the components of non-interest income for the first quarters of 2016 and 2015.
Table 5: Non-Interest Income
 
 
Three Months Ended March 31,
(Dollars in millions)
 
2016
 
2015
Interchange fees, net
 
$
596

 
$
496

Service charges and other customer-related fees
 
404

 
437

Net other-than-temporary impairment recognized in earnings
 
(8
)
 
(15
)
Other non-interest income:
 
 
 
 
Benefit (provision) for mortgage representation and warranty losses(1)
 
1

 
(1
)
Net gains (losses) from the sale of investment securities
 

 
2

Net fair value gains (losses) on free-standing derivatives
 
30

 
10

Other
 
141

 
142

Total other non-interest income
 
172

 
153

Total non-interest income
 
$
1,164

 
$
1,071

__________
(1) 
Represents the benefit (provision) for mortgage representation and warranty losses recorded in continuing operations. For the total impact to the net benefit for mortgage representation and warranty losses, including the portion recognized in our consolidated statements of income as a component of discontinued operations, see “MD&A—Consolidated Balance Sheets Analysis—Table 14: Changes in Representation and Warranty Reserve.”
Non-interest income increased by $93 million to $1.2 billion in the first quarter of 2016 compared to the first quarter of 2015 primarily driven by an increase in interchange fees due to higher purchase volume in our Credit Card business and a customer rewards liability release within the retail banking business related to the discontinuation of certain debit card and deposit products, partially offset by (i) increased rewards expense due to higher purchase volume and continued expansion of our rewards franchise; and (ii) lower service charges and other customer-related fees primarily due to the continued run-off of our legacy payment protection products in our Domestic Card business, which we exited during the first quarter of 2016.
Provision for Credit Losses
Our provision for credit losses in each period is driven by net charge-offs, changes to the allowance for loan and lease losses and changes to the reserve for unfunded lending commitments. We recorded a provision for credit losses of $1.5 billion and $935 million in the first quarters of 2016 and 2015, respectively. The provision for credit losses as a percentage of net interest income was 30.2% and 20.4% in the first quarters of 2016 and 2015, respectively.
Our provision for credit losses increased by $592 million in the first quarter of 2016 compared to the first quarter of 2015. The increase was primarily driven by an increase in our domestic credit card loan portfolio due to higher charge-offs and an allowance build in the first quarter of 2016 compared to a release in the first quarter of 2015, and in our commercial loan portfolio due to a larger build in both the allowance for loan and lease losses and the reserve for unfunded lending commitments as a result of continued adverse industry conditions impacting our oil and gas portfolio.
We provide additional information on the provision for credit losses and changes in the allowance for loan and lease losses within “Credit Risk Profile—Summary of Allowance for Loan and Lease Losses,” “Note 4—Loans” and “Note 5—Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments.” For information on the allowance methodology for each of our loan categories, see “Note 1—Summary of Significant Accounting Policies” in our 2015 Form 10-K.
Non-Interest Expense
Non-interest expense consists of ongoing operating expenses, such as salaries and associate benefits, occupancy and equipment costs, professional services, communications and data processing expenses and other non-interest expenses, as well as marketing costs and amortization of intangibles.

 
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Table 6 displays the components of non-interest expense for the first quarters of 2016 and 2015.
Table 6: Non-Interest Expense
 
 
Three Months Ended March 31,
(Dollars in millions)
 
2016
 
2015
Salaries and associate benefits
 
$
1,270

 
$
1,211

Occupancy and equipment
 
458

 
435

Marketing
 
428

 
375

Professional services
 
278

 
296

Communications and data processing
 
243

 
202

Amortization of intangibles
 
101

 
110

Other non-interest expense:
 
 
 
 
Collections
 
81

 
84

Fraud losses
 
90

 
67

Bankcard, regulatory and other fee assessments
 
107

 
109

Other
 
167

 
160

Other non-interest expense
 
445

 
420

Total non-interest expense
 
$
3,223

 
$
3,049

Non-interest expense increased by $174 million to $3.2 billion in the first quarter of 2016 compared to the first quarter of 2015. The increase was primarily due to higher operating and marketing expenses associated with loan growth and continued technology and infrastructure investments.
Income (Loss) from Discontinued Operations, Net of Tax
Income (loss) from discontinued operations reflects ongoing costs, which primarily consist of mortgage loan repurchase representation and warranty charges, related to the mortgage origination operations of our former wholesale mortgage banking unit, GreenPoint Mortgage Funding, Inc. (“GreenPoint”), which was closed in 2007. Loss from discontinued operations, net of tax, was $5 million in the first quarter of 2016, compared to income from discontinued operations of $19 million in the first quarter of 2015. We recorded a provision net of tax for mortgage representation and warranty reserve of $2 million ($3 million before tax) in the first quarter of 2016, compared to a $12 million benefit net of tax ($19 million before tax) in the first quarter of 2015.
We provide additional information on the net provision for mortgage representation and warranty losses and the related reserve for representation and warranty claims in “Consolidated Balance Sheets Analysis—Mortgage Representation and Warranty Reserve” and “Note 14—Commitments, Contingencies, Guarantees and Others.”
Income Taxes
We recorded income tax provisions of $452 million (30.7% effective income tax rate) and $529 million (31.8% effective income tax rate) in the first quarters of 2016 and 2015, respectively. Our effective tax rate on income from continuing operations varies between periods due, in part, to fluctuations in our pre-tax earnings, which affects the relative tax benefit of tax-exempt income, tax credits and other permanent tax items.
The decrease in our effective income tax rate in the first quarter of 2016, from the first quarter of 2015, was primarily due to reduced pre-tax earnings, increased tax credits and increased tax-exempt income.
We provide additional information on items affecting our income taxes and effective tax rate under “Note 18—Income Taxes” in our 2015 Form 10-K.

 
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BUSINESS SEGMENT FINANCIAL PERFORMANCE
Our principal operations are currently organized into three major business segments, which are defined based on the products and services provided or the type of customer served: Credit Card, Consumer Banking and Commercial Banking. The operations of acquired businesses have been integrated into our existing business segments. Certain activities that are not part of a segment, such as management of our corporate investment portfolio and asset/liability management by our centralized Corporate Treasury group, are included in the Other category.
The results of our individual businesses, which we report on a continuing operations basis, reflect the manner in which management evaluates performance and makes decisions about funding our operations and allocating resources. We provide additional information on the allocation methodologies used to derive our business segment results in “Note 20—Business Segments” in our 2015 Form 10-K.
We refer to the business segment results derived from our internal management accounting and reporting process as our “managed” presentation, which differs in some cases from our reported results prepared based on U.S. GAAP. There is no comprehensive authoritative body of guidance for management accounting equivalent to U.S. GAAP; therefore, the managed presentation of our business segment results may not be comparable to similar information provided by other financial services companies. In addition, our individual business segment results should not be used as a substitute for comparable results determined in accordance with U.S. GAAP.
Below we summarize our business segment results for the first quarters of 2016 and 2015 and provide a comparative discussion of these results. We also discuss changes in our financial condition and credit performance statistics as of March 31, 2016, compared to December 31, 2015. We provide a reconciliation of our total business segment results to our reported consolidated results in “Note 13—Business Segments.” Additionally, we provide information on the outlook for each of our business segments as described above under “Executive Summary and Business Outlook.”
Credit Card Business
The primary sources of revenue for our Credit Card business are interest income, net interchange income and fees collected from customers. Expenses primarily consist of the provision for credit losses, operating costs such as salaries and associate benefits, occupancy and equipment, professional services and communications and data processing expenses, as well as marketing expenses.
Our Credit Card business generated net income from continuing operations of $609 million and $668 million in the first quarters of 2016 and 2015, respectively.

 
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Table 7 summarizes the financial results of our Credit Card business, which is comprised of Domestic Card and International Card, and displays selected key metrics for the periods indicated.
Table 7: Credit Card Business Results
 
 
Three Months Ended March 31,
(Dollars in millions)
 
2016
 
2015
 
Change
Selected income statement data:
 
 
 
 
 
 
Net interest income
 
$
3,033

 
$
2,666

 
14%

Non-interest income
 
847

 
816

 
4

Total net revenue(1)
 
3,880

 
3,482

 
11

Provision (benefit) for credit losses
 
1,071

 
669

 
60

Non-interest expense
 
1,863

 
1,776

 
5

Income (loss) from continuing operations before income taxes
 
946

 
1,037

 
(9
)
Income tax provision (benefit)
 
337

 
369

 
(9
)
Income (loss) from continuing operations, net of tax
 
$
609

 
$
668

 
(9
)
Selected performance metrics:
 
 
 
 
 
 
Average loans held for investment(2)
 
$
92,987

 
$
82,581

 
13

Average yield on loans held for investment(3)
 
14.60%

 
14.30%

 
30
bps
Total net revenue margin(4)
 
16.69

 
16.87

 
(18
)
Net charge-offs
 
$
950

 
$
719

 
32%

Net charge-off rate
 
4.09%

 
3.48%

 
61
bps
Purchased credit card relationship (“PCCR”) intangible amortization
 
$
70

 
$
84

 
(17)%

Purchase volume(5)
 
68,189

 
57,383

 
19

 
 
 
 
 
 
 
(Dollars in millions)
 
March 31, 2016
 
December 31, 2015
 
Change
Selected period-end data:
 
 
 
 
 
 
Loans held for investment(2)
 
$
92,699

 
$
96,125

 
(4)%

30+ day performing delinquency rate
 
3.11%

 
3.36%

 
(25
)bps
30+ day delinquency rate
 
3.15

 
3.40

 
(25
)
Nonperforming loan rate
 
0.05

 
0.06

 
(1
)
Allowance for loan and lease losses
 
$
3,785

 
$
3,654

 
4%

Allowance coverage ratio(6)
 
4.08%

 
3.80%

 
28
bps
__________
(1) 
We recognize billed finance charges and fee income on open-ended loans in accordance with the contractual provisions of the credit arrangements and estimate the uncollectible amount on a quarterly basis. The estimated uncollectible amount of billed finance charges and fees is reflected as a reduction in revenue and is not included in our net charge-offs. Total net revenue was reduced by $228 million and $147 million in the first quarters of 2016 and 2015, respectively, for the estimated uncollectible amount of billed finance charges and fees. The finance charge and fee reserve totaled $264 million and $262 million as of March 31, 2016 and December 31, 2015, respectively.
(2) 
Period-end loans held for investment and average loans held for investment include accrued finance charges and fees, net of the estimated uncollectible amount.
(3) 
Calculated by dividing annualized interest income for the period by average loans held for investment during the period. Interest income excludes various allocations including funds transfer pricing that assigns certain balance sheet assets, deposits and other liabilities and their related revenue and expenses attributable to each business segment.
(4) 
Calculated by dividing annualized total net revenue for the period by average loans held for investment during the period for the specified loan category. Interest income also includes interest income on loans held for sale.
(5) 
Consists of credit card purchase transactions, net of returns for the period for both loans classified as held for investment and loans classified as held for sale. Excludes cash advance and balance transfer transactions.
(6) 
Calculated by dividing the allowance for loan and lease losses as of the end of the period by period-end loans held for investment.

 
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Key factors affecting the results of our Credit Card business for the first quarter of 2016, compared to the first quarter of 2015, and changes in financial condition and credit performance between March 31, 2016 and December 31, 2015 include the following:
Net Interest Income: Net interest income increased by $367 million to $3.0 billion in the first quarter of 2016, primarily driven by loan growth in our Domestic Card business.
Non-Interest Income: Non-interest income increased by $31 million to $847 million in the first quarter of 2016. The increase was primarily attributable to an increase in interchange fees driven by higher purchase volume, partially offset by (i) increased rewards expense due to higher purchase volume and continued expansion of our rewards franchise; and (ii) lower service charges and other customer-related fees primarily due to the continued run-off of our legacy payment protection products in our Domestic Card business, which we exited during the first quarter of 2016.
Provision for Credit Losses: The provision for credit losses increased by $402 million to $1.1 billion in the first quarter of 2016, primarily driven by higher charge-offs and an allowance build, both due to continued loan growth and portfolio seasoning, compared to a release in the first quarter of 2015.
Non-Interest Expense: Non-interest expense increased by $87 million to $1.9 billion in the first quarter of 2016. The increase was due to higher operating and marketing expenses associated with loan growth.
Loans Held for Investment: Period-end loans held for investment decreased by $3.4 billion to $92.7 billion as of March 31, 2016 from December 31, 2015, primarily due to expected seasonal paydowns. Average loans held for investment increased by $10.4 billion to $93.0 billion in the first quarter of 2016 compared to the first quarter of 2015, primarily due to loan growth across our domestic and international card loan portfolios, partially offset by the impact of foreign exchange rates in our international card loan portfolio driven by the strengthening of the U.S. dollar in the first quarter of 2016.
Net Charge-off and Delinquency Statistics: The net charge-off rate increased by 61 basis points to 4.09% in the first quarter of 2016 compared to the first quarter of 2015, due to the seasoning of our domestic card portfolio growth. The 30+ day delinquency rate decreased by 25 basis points to 3.15% as of March 31, 2016 from December 31, 2015 due to seasonally lower delinquency inventories.
Domestic Card Business
Domestic Card generated net income from continuing operations of $564 million and $621 million in the first quarters of 2016 and 2015, respectively. Domestic Card accounted for 91% of total net revenues and 93% of net income of our Credit Card business in both the first quarters of 2016 and 2015.

 
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Table 7.1 summarizes the financial results for Domestic Card and displays selected key metrics for the periods indicated.
Table 7.1: Domestic Card Business Results
 
 
Three Months Ended March 31,
(Dollars in millions)
 
2016
 
2015
 
Change
Selected income statement data:
 
 
 
 
 
 
Net interest income
 
$
2,756

 
$
2,421

 
14%

Non-interest income
 
774

 
743

 
4

Total net revenue(1)
 
3,530

 
3,164

 
12

Provision (benefit) for credit losses
 
972

 
610

 
59

Non-interest expense
 
1,671

 
1,580

 
6

Income (loss) from continuing operations before income taxes
 
887

 
974

 
(9
)
Income tax provision (benefit)
 
323

 
353

 
(8
)
Income (loss) from continuing operations, net of tax
 
$
564

 
$
621

 
(9
)
Selected performance metrics:
 
 
 
 
 
 
Average loans held for investment(2)
 
$
85,148

 
$
74,770

 
14

Average yield on loans held for investment(3)
 
14.43%

 
14.23%

 
20
bps
Total net revenue margin(4)
 
16.58

 
16.93

 
(35
)
Net charge-offs
 
$
887

 
$
664

 
34%

Net charge-off rate
 
4.16%

 
3.55%

 
61
bps
PCCR intangible amortization
 
$
70

 
$
84

 
(17)%

Purchase volume(5)
 
62,617

 
52,025

 
20

 
 
 
 
 
 
 
(Dollars in millions)
 
March 31, 2016
 
December 31, 2015
 
Change
Selected period-end data:
 
 
 
 
 
 
Loans held for investment(2)
 
$
84,561

 
$
87,939

 
(4)%

30+ day delinquency rate
 
3.09%

 
3.39%

 
(30
)bps
Allowance for loan and lease losses
 
$
3,440

 
$
3,355

 
3%

Allowance coverage ratio(6)
 
4.07%

 
3.82%

 
25
bps
__________
(1) 
We recognize billed finance charges and fee income on open-ended loans in accordance with the contractual provisions of the credit arrangements and estimate the uncollectible amount on a quarterly basis. The estimated uncollectible amount of billed finance charges and fees is reflected as a reduction in revenue and is not included in our net charge-offs.
(2) 
Period-end loans held for investment and average loans held for investment include accrued finance charges and fees, net of the estimated uncollectible amount.
(3) 
Calculated by dividing annualized interest income for the period by average loans held for investment during the period. Interest income excludes various allocations including funds transfer pricing that assigns certain balance sheet assets, deposits and other liabilities and their related revenue and expenses attributable to each business segment.
(4) 
Calculated by dividing annualized total net revenue for the period by average loans held for investment during the period.
(5) 
Consists of domestic card purchase transactions, net of returns, for the period for both loans classified as held for investment and loans classified as held for sale. Excludes cash advance and balance transfer transactions.
(6)
Calculated by dividing the allowance for loan and lease losses as of the end of the period by period-end loans held for investment.
Because our Domestic Card business accounts for the substantial majority of our Credit Card business, the key factors driving the results discussed above are similar to the key factors affecting our total Credit Card business. Net income for our Domestic Card business decreased in the first quarter of 2016, compared to the first quarter of 2015 due to higher provision for credit losses, operating and marketing expenses associated with continued loan growth, partially offset by higher net interest income resulting from loan growth.


 
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International Card Business
International Card generated net income from continuing operations of $45 million and $47 million in the first quarters of 2016 and 2015, respectively. The decrease in net income in the first quarter of 2016 was primarily due to (i) an increase in the provision for credit losses due to higher loss rates; and (ii) the impact of foreign exchange rates driven by the strengthening of the U.S. dollar in the first quarter of 2016. These expenses were largely offset by higher net interest income primarily driven by loan growth and higher loan yield due to changes in the product mix of the portfolio.
Table 7.2 summarizes the financial results for International Card and displays selected key metrics for the periods indicated.
Table 7.2: International Card Business Results
 
 
Three Months Ended March 31,
(Dollars in millions)
 
2016
 
2015
 
Change
Selected income statement data:
 
 
 
 
 
 
Net interest income
 
$
277

 
$
245

 
13%

Non-interest income
 
73

 
73

 

Total net revenue
 
350

 
318

 
10

Provision (benefit) for credit losses
 
99

 
59

 
68

Non-interest expense
 
192

 
196

 
(2
)
Income (loss) from continuing operations before income taxes
 
59

 
63

 
(6
)
Income tax provision (benefit)
 
14

 
16

 
(13
)
Income (loss) from continuing operations, net of tax
 
$
45

 
$
47

 
(4
)
Selected performance metrics:
 
 
 
 
 

Average loans held for investment(1)
 
$
7,839

 
$
7,811

 

Average yield on loans held for investment(2)
 
16.47%

 
14.93%

 
154
bps
Total net revenue margin(3)
 
17.85

 
16.31

 
154

Net charge-offs
 
$
63

 
$
55

 
15%

Net charge-off rate
 
3.24%

 
2.80%

 
44
bps
Purchase volume(4)
 
$
5,572

 
$
5,358

 
4%

 
 
 
 
 
 
 
(Dollars in millions)
 
March 31, 2016
 
December 31, 2015
 
Change
Selected period-end data:
 
 
 
 
 
 
Loans held for investment(1)
 
$
8,138

 
$
8,186

 
(1)%

30+ day performing delinquency rate
 
3.32%

 
2.98%

 
34
bps
30+ day delinquency rate
 
3.76

 
3.46

 
30

Nonperforming loan rate
 
0.59

 
0.65

 
(6
)
Allowance for loan and lease losses
 
$
345

 
$
299

 
15%

Allowance coverage ratio(5)
 
4.24%

 
3.66%

 
58
bps
__________
(1) 
Period-end loans held for investment and average loans held for investment include accrued finance charges and fees, net of the estimated uncollectible amount.
(2) 
Calculated by dividing annualized interest income for the period by average loans held for investment during the period. Interest income excludes various allocations including funds transfer pricing that assigns certain balance sheet assets, deposits and other liabilities and their related revenue and expenses attributable to each business segment.
(3) 
Calculated by dividing annualized total net revenue for the period by average loans held for investment during the period.
(4) 
Consists of international card purchase transactions, net of returns for the period. Excludes cash advance and balance transfer transactions.
(5) 
Calculated by dividing the allowance for loan and lease losses as of the end of the period by period-end loans held for investment.

 
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Consumer Banking Business
The primary sources of revenue for our Consumer Banking business are net interest income from loans and deposits and non-interest income from service charges and customer-related fees. Expenses primarily consist of the provision for credit losses, operating costs, such as salaries and associate benefits, occupancy and equipment costs, professional services and communications and data processing expenses, as well as marketing expenses.
Our Consumer Banking business generated net income from continuing operations of $249 million and $266 million in the first quarters of 2016 and 2015, respectively.
Table 8 summarizes the financial results of our Consumer Banking business and displays selected key metrics for the periods indicated.
Table 8: Consumer Banking Business Results
 
 
Three Months Ended March 31,
(Dollars in millions)
 
2016
 
2015
 
Change
Selected income statement data:
 
 
 
 
 
 
Net interest income
 
$
1,420

 
$
1,434

 
(1)%

Non-interest income
 
191

 
158

 
21

Total net revenue
 
1,611

 
1,592

 
1

Provision (benefit) for credit losses
 
230

 
206

 
12

Non-interest expense
 
990

 
970

 
2

Income (loss) from continuing operations before income taxes
 
391

 
416

 
(6
)
Income tax provision (benefit)
 
142

 
150

 
(5
)
Income (loss) from continuing operations, net of tax
 
$
249

 
$
266

 
(6
)
Selected performance metrics:
 
 
 
 
 
 
Average loans held for investment:(1)
 
 
 
 
 
 
Auto
 
$
41,962

 
$
38,387

 
9

Home loan
 
24,781

 
29,493

 
(16
)
Retail banking
 
3,553

 
3,561

 

Total consumer banking
 
$
70,296

 
$
71,441

 
(2
)
Average yield on loans held for investment(2)
 
6.18%

 
6.26
%
 
(8
)bps
Average deposits
 
$
174,254

 
$
169,593

 
3%

Average deposit interest rate
 
0.54%

 
0.57
%
 
(3
)bps
Core deposit intangible amortization
 
$
15

 
$
22

 
(32)%

Net charge-offs
 
183

 
159

 
15

Net charge-off rate
 
1.04%

 
0.89%

 
15
bps
Net charge-off rate (excluding PCI loans)(3)
 
1.40

 
1.30

 
10

Auto loan originations
 
$
5,844

 
$
5,185

 
13%

 
 
 
 
 
 
 

 
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(Dollars in millions)
 
March 31, 2016
 
December 31, 2015
 
Change
Selected period-end data:
 
 
 
 
 
 
Loans held for investment:(1)
 
 
 
 
 
 
Auto
 
$
42,714

 
$
41,549

 
3%

Home loan
 
24,343

 
25,227

 
(4
)
Retail banking
 
3,534

 
3,596

 
(2
)
Total consumer banking
 
$
70,591

 
$
70,372

 

30+ day performing delinquency rate
 
3.19%

 
4.05%

 
(86
)bps
30+ day performing delinquency rate (excluding PCI loans)(3)
 
4.25

 
5.50

 
(125
)
30+ day delinquency rate
 
3.67

 
4.67

 
(100
)
30+ day delinquency rate (excluding PCI loans)(3)
 
4.89

 
6.34

 
(145
)
Nonperforming loan rate
 
0.66

 
0.79

 
(13
)
Nonperforming loan rate (excluding PCI loans)(3)
 
0.89

 
1.08

 
(19
)
Nonperforming asset rate(4)
 
0.95

 
1.10

 
(15
)
Nonperforming asset rate (excluding PCI loans)(3)(4)
 
1.27

 
1.50

 
(23
)
Allowance for loan and lease losses
 
$
914

 
$
868

 
5%

Allowance coverage ratio(5)(6)
 
1.29%

 
1.23%

 
6
bps
Deposits
 
$
177,803

 
$
172,702

 
3%

Loans serviced for others
 
7,703

 
7,530

 
2

__________
(1) 
The period-end consumer banking loans held for investment includes purchased credit-impaired loans (“PCI loans”) with carrying values of $17.6 billion and $18.6 billion as of March 31, 2016 and December 31, 2015, respectively. The average balance of consumer banking loans held for investment includes PCI loans of $18.0 billion and $22.6 billion in the first quarters of 2016 and 2015, respectively. See “MD&A—Glossary and Acronyms” for the definition of “PCI loans.”
(2) 
Calculated by dividing annualized interest income for the period by average loans held for investment during the period. Interest income excludes various allocations including funds transfer pricing that assigns certain balance sheet assets, deposits and other liabilities and their related revenue and expenses attributable to each business segment.
(3) 
See “MD&A—Credit Risk Profile” and “Note 1—Summary of Significant Accounting Policies” in our 2015 Form 10-K for additional information on the impact of PCI loans on our credit quality metrics.
(4) 
Nonperforming assets consist of nonperforming loans, real estate owned (“REO”) and other foreclosed assets. The nonperforming asset rate is calculated based on nonperforming assets as of the end of the period divided by the sum of period-end loans held for investment, foreclosed properties and other foreclosed assets, and is adjusted to exclude the impact of acquired REOs.
(5) 
Calculated by dividing the allowance for loan and lease losses as of the end of the period by period-end loans held for investment.
(6) 
Excluding the impact of PCI home loans, the coverage ratios for our home loan portfolio and total consumer banking were 0.45% and 1.66%, respectively, as of March 31, 2016, compared to 0.50% and 1.60%, respectively, as of December 31, 2015.
Key factors affecting the results of our Consumer Banking business for the first quarter of 2016, compared to the first quarter of 2015, and changes in financial condition and credit performance between March 31, 2016 and December 31, 2015 include the following:
Net Interest Income: Net interest income remained flat at $1.4 billion in the first quarter of 2016 compared to the first quarter of 2015, as lower net interest income from our home loan portfolio attributable to the planned run-off of the acquired portfolio and margin compression in auto loans was largely offset by growth in our auto loan portfolio.
Consumer Banking loan yield decreased by 8 basis points to 6.2% in the first quarter of 2016, the decrease was primarily driven by declining yield in our auto loan portfolio, partially offset by changes in the product mix in Consumer Banking as a result of the planned run-off of the acquired home loan portfolio and growth in our auto loan portfolio. Average yield on auto loans decreased by 51 basis points to 7.7% in the first quarter of 2016. This decrease was primarily attributable to two factors: (i) a higher proportion of prime auto loans since the first quarter of 2015; and (ii) continued competition across the auto business. The average yield on the home loan portfolio decreased by 11 basis points to 3.7% in the first quarter of 2016, as a result of lower yield on our acquired home loan portfolio.

 
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Non-Interest Income: Non-interest income increased by $33 million to $191 million in the first quarter of 2016, primarily due to a customer rewards liability release within the retail banking business related to the discontinuation of certain debit card and deposit products.
Provision for Credit Losses: The provision for credit losses increased by $24 million to $230 million in the first quarter of 2016, primarily driven by higher charge-offs on auto loans.
Non-Interest Expense: Non-interest expense increased by $20 million to $990 million in the first quarter of 2016, largely due to increased marketing expenses in our retail banking business and higher operating expenses driven by growth in our auto loan portfolio.
Loans Held for Investment: Period-end loans held for investment were substantially flat, increasing by $219 million, or 0.3%, to $70.6 billion as of March 31, 2016 from December 31, 2015. Average loans held for investment decreased by $1.1 billion to $70.3 billion in the first quarter of 2016 compared to the first quarter of 2015 primarily due to the planned run-off of our acquired home loan portfolio, partially offset by growth in our auto loan portfolio.
Deposits: Period-end deposits increased by $5.1 billion to $177.8 billion as of March 31, 2016 from December 31, 2015, as a result of our continued focus on deposit relationships with existing customers and our ongoing success of marketing strategies to attract online direct banking customers.
Net Charge-off and Delinquency Statistics: The net charge-off rate increased by 15 basis points to 1.04% in the first quarter of 2016 compared to the first quarter of 2015. The increase in the net charge-off rate reflects the greater proportion of auto loans in our total consumer banking loan portfolio, which have higher charge-off rates than other products within this portfolio, as well as a modest increase in the auto charge-off rate. The 30+ day delinquency rate decreased by 100 basis points to 3.67% as of March 31, 2016 from December 31, 2015, primarily attributable to seasonally lower auto delinquency inventories.
Commercial Banking Business
The primary sources of revenue for our Commercial Banking business are net interest income from loans and deposits and non-interest income from customer fees and other transactions. Because we have some investments that generate tax-exempt income or tax credits, we make certain reclassifications to our Commercial Banking business results to present revenues on a taxable-equivalent basis. Expenses primarily consist of the provision for credit losses, operating costs, such as salaries and associate benefits, occupancy, equipment, professional services and communications and data processing expenses, as well as marketing expenses.
Our Commercial Banking business generated net income from continuing operations of $67 million and $155 million in the first quarters of 2016 and 2015, respectively. Table 9 summarizes the financial results of our Commercial Banking business and displays selected key metrics for the periods indicated.

 
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Table 9: Commercial Banking Business Results
 
 
Three Months Ended March 31,
(Dollars in millions)
 
2016
 
2015
 
Change
Selected income statement data:
 
 
 
 
 
 
Net interest income
 
$
537

 
$
461

 
16%

Non-interest income
 
118

 
114

 
4

Total net revenue(1)
 
655

 
575

 
14

Provision (benefit) for credit losses(2)
 
228

 
60

 
280

Non-interest expense
 
322

 
272

 
18

Income (loss) from continuing operations before income taxes
 
105

 
243

 
(57
)
Income tax provision (benefit)
 
38

 
88

 
(57
)
Income (loss) from continuing operations, net of tax
 
$
67

 
$
155

 
(57
)
Selected performance metrics:
 
 
 
 
 
 
Average loans held for investment:(3)
 
 
 
 
 
 
Commercial and multifamily real estate
 
$
25,015

 
$
23,120

 
8

Commercial and industrial
 
37,762

 
27,190

 
39

Total commercial lending
 
62,777

 
50,310

 
25

Small-ticket commercial real estate
 
598

 
760

 
(21
)
Total commercial banking
 
$
63,375

 
$
51,070

 
24

Average yield on loans held for investment(1)(4)
 
3.38%

 
3.22
%
 
16
bps
Average deposits
 
$
34,076

 
$
32,845

 
4%

Average deposit interest rate
 
0.27%

 
0.24%

 
3
bps
Core deposit intangible amortization
 
$
3

 
$
4

 
(25)%

Net charge-offs
 
46

 
3

 
**

Net charge-off rate
 
0.29%

 
0.02%

 
27
bps
 
 
 
 
 
 
 
(Dollars in millions)
 
March 31, 2016
 
December 31, 2015
 
Change
Selected period-end data:
 
 
 
 
 
 
Loans held for investment:(3)
 
 
 
 
 
 
Commercial and multifamily real estate
 
$
25,559

 
$
25,518

 

Commercial and industrial
 
38,102

 
37,135

 
3%

Total commercial lending
 
63,661

 
62,653

 
2

Small-ticket commercial real estate
 
580

 
613

 
(5
)
Total commercial banking
 
$
64,241

 
$
63,266

 
2

Nonperforming loan rate
 
1.63%

 
0.87%

 
76
bps
Nonperforming asset rate(5)
 
1.64

 
0.87

 
77

Allowance for loan and lease losses(2)
 
$
714

 
$
604

 
18%

Allowance coverage ratio(6)
 
1.11%

 
0.95%

 
16
bps
Deposits
 
$
33,383

 
$
34,257

 
(3)%

Loans serviced for others(7)
 
18,250

 
17,643

 
3

__________
**
Change is not meaningful.
(1) 
Some of our tax-related commercial investments generate tax-exempt income or tax credits. Accordingly, we make certain reclassifications within our Commercial Banking business results to present revenues and yields on a taxable-equivalent basis, calculated assuming an effective tax rate approximately equal to our federal statutory tax rate of 35% with offsetting reclassifications to the Other category.
(2) 
The provision for losses on unfunded lending commitments is included in the provision for credit losses in our consolidated statements of income and the related reserve for unfunded lending commitments is included in other liabilities on our consolidated balance sheets. Our reserve for unfunded lending commitments totaled $218 million and $161 million as of March 31, 2016 and December 31, 2015, respectively.
(3) 
The period-end commercial banking loans held for investment include PCI loans with carrying value of $933 million and $958 million as of March 31, 2016 and December 31, 2015, respectively. The average balance of commercial banking loans held for investment includes PCI loans of $926 million and $171 million in the first quarters of 2016 and 2015, respectively. See “MD&A—Glossary and Acronyms” for the definition of “PCI loans.”

 
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(4) 
Calculated by dividing annualized interest income for the period by average loans held for investment during the period. Interest income excludes various allocations including funds transfer pricing that assigns certain balance sheet assets, deposits and other liabilities and their related revenue and expenses attributable to each business segment.
(5) 
Nonperforming assets consist of nonperforming loans, REO and other foreclosed assets. The nonperforming asset rate is calculated based on nonperforming assets as of the end of the period divided by the sum of period-end loans held for investment, foreclosed properties and other foreclosed assets, and is adjusted to exclude the impact of acquired REOs.
(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.
(7) 
Represents our portfolio of loans serviced for third parties related to our multifamily finance business.
Key factors affecting the results of our Commercial Banking business for the first quarter of 2016, compared to the first quarter of 2015, and changes in financial condition and credit performance between March 31, 2016 and December 31, 2015 include the following:
Net Interest Income: Net interest income increased by $76 million to $537 million in the first quarter of 2016, primarily driven by loan growth, including loans acquired in the HFS acquisition, partially offset by spread compression.
Non-Interest Income: Non-interest income remained relatively flat at $118 million in the first quarter of 2016, compared to $114 million in the first quarter of 2015.
Provision for Credit Losses: The provision for credit losses increased by $168 million to $228 million in the first quarter of 2016. The increase was primarily driven by a larger build in both the allowance for loan and lease losses and the reserve for unfunded lending commitments as a result of continued adverse industry conditions impacting our oil and gas portfolio. See “MD&A—Table 18—Commercial Loans by Industry” for additional information about the composition of our commercial banking loan portfolio, and “Note 4—Loans” for additional information about credit metrics for our commercial banking loan portfolio.
Non-Interest Expense: Non-interest expense increased by $50 million to $322 million in the first quarter of 2016, driven by higher operating expenses due to costs associated with the HFS acquisition and continued growth in our Commercial Banking business.
Loans Held for Investment: Period-end loans held for investment increased by $975 million to $64.2 billion as of March 31, 2016 from December 31, 2015 driven by growth across our commercial loan portfolios. Average loans held for investment increased by $12.3 billion to $63.4 billion in the first quarter of 2016 compared to the first quarter of 2015 primarily driven by the HFS acquisition as well as growth across our commercial loan portfolios.
Deposits: Period-end deposits decreased by $874 million to $33.4 billion as of March 31, 2016 from December 31, 2015, primarily driven by seasonal commercial customer withdrawals.
Net Charge-off and Nonperforming Statistics: The net charge-off rate increased by 27 basis points to 0.29% in the first quarter of 2016 compared to the first quarter of 2015, and the nonperforming loan rate increased by 76 basis points to 1.63% as of March 31, 2016 from December 31, 2015. The increases in these rates reflect rising losses and credit risk rating downgrades in our oil and gas and taxi medallion lending portfolios.
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, and certain capital management activities. Other also includes foreign exchange-rate fluctuations on foreign currency-denominated balances; unallocated corporate expenses that do not directly support the operations of the business segments or for which the business segments are not considered financially accountable in evaluating their performance, such as certain acquisition and restructuring charges; a portion of the net provision (benefit) for representation and warranty losses related to continuing operations; and offsets related to certain line-item reclassifications.

 
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Table 10 summarizes the financial results of our Other category for the periods indicated.
Table 10: Other Category Results
 
 
Three Months Ended March 31,
(Dollars in millions)
 
2016
 
2015
 
Change
Selected income statement data:
 
 
 
 
 
 
Net interest income
 
$
66

 
$
15

 
**

Non-interest income
 
8

 
(17
)
 
**

Total net revenue (loss)(1)
 
74

 
(2
)
 
**

Provision (benefit) for credit losses
 
(2
)
 

 
**

Non-interest expense
 
48

 
31

 
55%

Income (loss) from continuing operations before income taxes
 
28

 
(33
)
 
**

Income tax provision (benefit)
 
(65
)
 
(78
)
 
(17
)
Income (loss) from continuing operations, net of tax
 
$
93

 
$
45

 
107

__________
**
Change is not meaningful.
(1) 
Some of our tax-related commercial investments generate tax-exempt income or tax credits. Accordingly, we make certain reclassifications within our Commercial Banking business results to present revenues and yields on a taxable-equivalent basis, calculated assuming an effective tax rate approximately equal to our federal statutory tax rate of 35% with offsetting reclassifications to the Other category.
Net income from continuing operations recorded in the Other category was $93 million in the first quarter of 2016, compared to $45 million in the first quarter of 2015. The increase in net income in 2016 was primarily driven by higher net interest income due to the impact of rates and balance sheet growth on treasury income, partially offset by (i) bank optimization charges; and (ii) a reduced income tax benefit as a result of higher income before taxes, partially offset by higher discrete tax benefits and net tax credits.
CONSOLIDATED BALANCE SHEETS ANALYSIS
Total assets decreased by $3.7 billion to $330.3 billion as of March 31, 2016 from December 31, 2015 primarily attributable to (i) a decrease of $2.2 billion in loans held for investment driven by seasonal paydowns in our credit card loan portfolio and the planned run-off of our acquired home loan portfolio, partially offset by growth in our auto and commercial loan portfolios; and (ii) a decrease of $2.8 billion in cash and cash equivalents, partially offset by increase in investment securities due to purchases outpacing sales, maturities and paydowns. Total liabilities decreased by $4.1 billion to $282.6 billion as of March 31, 2016, primarily driven by reductions in our Federal Home Loan Banks (“FHLB”) advances outstanding and maturities of securitized debt, partially offset by an increase in deposits generated by our Consumer Banking businesses. Stockholders’ equity increased by $423 million to $47.7 billion as of March 31, 2016, primarily due to our net income of $1.0 billion in the first quarter of 2016 and $575 million of other comprehensive income, partially offset by $970 million of share repurchases under our 2015 Stock Repurchase Program, including completion of the previously announced incremental $300 million in share repurchases.
The following is a discussion of material changes in the major components of our assets and liabilities during the first quarter of 2016. Period-end balance sheet amounts may vary from average balance sheet amounts due to liquidity and balance sheet management activities that are intended to ensure the adequacy of capital while managing 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 securities; U.S. government-sponsored enterprise or agency (“Agency”) and non-agency residential mortgage-backed securities (“RMBS”) and commercial mortgage-backed securities (“CMBS”); other asset-backed securities (“ABS”); and other securities. The carrying value of our investments in U.S. Treasury and Agency securities represented 91% and 90% of our total investment securities portfolio as of March 31, 2016 and December 31, 2015, respectively.
The fair value of our securities available for sale portfolio was $40.1 billion as of March 31, 2016, an increase of $1.0 billion from December 31, 2015. The increase was primarily due to growth in this portfolio as purchases outpaced sales, maturities and

 
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paydowns, as well as a decrease in interest rates. The fair value of our securities held to maturity portfolio was $26.5 billion as of March 31, 2016, an increase of $1.2 billion from $25.3 billion as of December 31, 2015. The increase was primarily due to lower interest rates and growth in this portfolio as purchases outpaced maturities and paydowns.
Gross unrealized gains on our available for sale portfolio increased to $682 million as of March 31, 2016 compared to $578 million as of December 31, 2015 and gross unrealized losses on this portfolio decreased to $129 million as of March 31, 2016 compared to $321 million as of December 31, 2015, both of which were primarily driven by a decrease in interest rates. Of the $129 million as of March 31, 2016, $85 million was related to securities that had been in a loss position for 12 months or longer. We provide information on OTTI recognized in earnings on our investment securities above in “Consolidated Results of OperationsNon-Interest Income.”
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, 2016 and December 31, 2015.
Table 11: Investment Securities
 
 
March 31, 2016
 
December 31, 2015
(Dollars in millions)
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Investment securities available for sale:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
4,934

 
$
4,966

 
$
4,664

 
$
4,660

RMBS:
 
 
 
 
 
 
 
 
Agency(1)
 
25,187

 
25,367

 
24,332

 
24,285

Non-agency
 
2,613

 
2,901

 
2,680

 
3,026

Total RMBS
 
27,800

 
28,268

 
27,012

 
27,311

CMBS:
 
 
 
 
 
 
 
 
Agency(1)
 
3,732

 
3,755

 
3,690

 
3,664

Non-agency
 
1,719

 
1,749

 
1,723

 
1,715

Total CMBS
 
5,451

 
5,504

 
5,413

 
5,379

Other ABS(2)
 
1,037

 
1,038

 
1,345

 
1,340

Other securities(3)
 
317

 
316

 
370

 
371

Total investment securities available for sale
 
$
39,539

 
$
40,092

 
$
38,804

 
$
39,061

 
 
 
 
 
 
 
 
 
(Dollars in millions)
 
Carrying Value
 
Fair
Value
 
Carrying Value
 
Fair
Value
Investment securities held to maturity:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
199

 
$
200

 
$
199

 
$
198

Agency RMBS
 
21,828

 
23,038

 
21,513

 
22,133

Agency CMBS
 
3,053

 
3,216

 
2,907

 
2,986

Total investment securities held to maturity
 
$
25,080

 
$
26,454

 
$
24,619

 
$
25,317

__________
(1) 
Includes Federal National Mortgage Association (“Fannie Mae”), Federal Home Loan Mortgage Corporation (“Freddie Mac”) and Government National Mortgage Association (“Ginnie Mae”).
(2) 
ABS collateralized by credit card loans constituted approximately 65% and 71% of the other ABS portfolio as of March 31, 2016 and December 31, 2015, respectively, and ABS collateralized by auto dealer floor plan inventory loans and leases constituted approximately 16% and 11% of the other ABS portfolio as of March 31, 2016 and December 31, 2015, respectively.
(3) 
Includes foreign government bonds and equity investments.
Credit Ratings
Our portfolio of investment securities continues to be concentrated in securities that generally have high credit ratings and low credit risk, such as securities issued and guaranteed by the U.S. Treasury and Agencies. Approximately 95% of our total investment securities portfolio was rated AA+ or its equivalent, or better, as of both March 31, 2016 and December 31, 2015, while approximately 4% and 5% was below investment grade as of March 31, 2016 and December 31, 2015, respectively. We categorize

 
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the credit ratings of our investment securities based on the lowest credit rating as issued by the following rating agencies: Standard & Poor’s Ratings Services, 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 ABS and other securities in our portfolio as of March 31, 2016 and December 31, 2015.
Table 12: Non-Agency Investment Securities Credit Ratings
 
 
March 31, 2016
 
December 31, 2015
(Dollars in millions)
 
Fair Value
 
AAA
 
Other
Investment
Grade
 
Below
Investment
Grade(1)
 
Fair Value
 
AAA
 
Other
Investment
Grade
 
Below
Investment
Grade
(1)
Non-agency RMBS
 
$
2,901

 
 
3%
 
97%
 
$
3,026

 
 
3%
 
97%
Non-agency CMBS
 
1,749

 
100%
 
 
 
1,715

 
100%
 
 
Other ABS
 
1,038

 
99
 
1
 
 
1,340

 
99
 
1
 
Other securities
 
316

 
9
 
59
 
32
 
371

 
8
 
64
 
28
__________
(1)  
Includes investment securities that were not rated.
For additional information on our investment securities, see “Note 3—Investment Securities.”
Loans Held for Investment
Total loans held for investment (“HFI”) consists of both unrestricted loans and loans held in our consolidated trusts. Table 13 summarizes our portfolio of loans held for investment by portfolio segment, net of the allowance for loan and lease losses, as of March 31, 2016 and December 31, 2015.
Table 13: Loans Held for Investment
 
 
March 31, 2016
 
December 31, 2015
(Dollars in millions)
 
Loans
 
Allowance
 
Net Loans
 
Loans
 
Allowance
 
Net Loans
Credit Card
 
$
92,699

 
$
3,785

 
$
88,914

 
$
96,125

 
$
3,654

 
$
92,471

Consumer Banking
 
70,591

 
914

 
69,677

 
70,372

 
868

 
69,504

Commercial Banking
 
64,241

 
714

 
63,527

 
63,266

 
604

 
62,662

Other
 
82

 
3

 
79

 
88

 
4

 
84

Total
 
$
227,613

 
$
5,416

 
$
222,197

 
$
229,851

 
$
5,130

 
$
224,721

Period-end loans held for investment decreased by $2.2 billion to $227.6 billion as of March 31, 2016 from December 31, 2015, driven by seasonal paydowns in our credit card loan portfolio and the planned run-off of our acquired home loan portfolio, partially offset by growth in our auto and commercial loan portfolios.
We provide additional information on the composition of our loan portfolio and credit quality below in “Credit Risk Profile,” “MD&A—Consolidated Results of Operations” and “Note 4—Loans.”
Loans Held for Sale
Loans held for sale, which are carried at lower of cost or fair value, increased by $347 million to $1.3 billion as of March 31, 2016 from December 31, 2015. The increase was primarily driven by the transfer of certain commercial loans from loans held for investment to loans held for sale, partially offset by the sale of certain domestic credit card loan portfolios.
Deposits
Our deposits represent our largest source of funding for our operations, providing a consistent source of low-cost funds. Total deposits increased by $4.1 billion to $221.8 billion as of March 31, 2016 from December 31, 2015. The increase in deposits was primarily driven by growth in our Consumer Banking businesses as a result of our continued focus on deposit relationships with existing customers and our ongoing success of marketing strategies to attract online direct banking customers. We provide information on the composition of our deposits, average outstanding balances, interest expense and yield below in “Liquidity Risk Profile.”

 
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Securitized Debt Obligations
Securitized debt obligations decreased by $1.3 billion to $14.9 billion as of March 31, 2016 from December 31, 2015, driven by maturities during the first quarter of 2016. We provide additional information on our borrowings below in “Liquidity Risk Profile.”
Other Debt
Other debt, which consists primarily of federal funds purchased and securities loaned or sold under agreements to repurchase, senior and subordinated notes, and FHLB advances, totaled $35.6 billion as of March 31, 2016, of which $34.7 billion represented long-term debt and the remainder represented short-term borrowings. Other debt totaled $42.9 billion as of December 31, 2015, of which $42.0 billion represented long-term debt and the remainder represented short-term borrowings.
The decrease in other debt of $7.4 billion in the first quarter of 2016 was primarily attributable to a $7.2 billion reduction in our FHLB advances outstanding. We provide additional information on our borrowings below in “Liquidity Risk Profile” and in “Note 8—Deposits and Borrowings.”
Mortgage Representation and Warranty Reserve
We acquired three subsidiaries that originated residential mortgage loans and sold these loans to various purchasers, including purchasers who created securitization trusts. These subsidiaries are Capital One Home Loans, LLC, which was acquired in February 2005; GreenPoint, which was acquired in December 2006 as part of the North Fork Bancorporation, Inc. (“North Fork”) acquisition; and CCB, which was acquired in February 2009 and subsequently merged into CONA.
We have established representation and warranty reserves for losses associated with the mortgage loans sold by each subsidiary that we consider to be both probable and reasonably estimable, including both litigation and non-litigation liabilities. These reserves are reported on our consolidated balance sheets as a component of other liabilities. The reserve setting process relies heavily on estimates, which are inherently uncertain, and requires judgment. We evaluate these estimates on a quarterly basis. We build our representation and warranty reserves through the provision for mortgage representation and warranty losses, which we report in our consolidated statements of income as a component of non-interest income for loans originated and sold by CCB and Capital One Home Loans, LLC and as a component of discontinued operations for loans originated and sold by GreenPoint. The aggregate reserve for all three entities totaled $613 million as of March 31, 2016, compared to $610 million as of December 31, 2015.
The table below summarizes changes in our representation and warranty reserve in the first quarters of 2016 and 2015.
Table 14: Changes in Representation and Warranty Reserve
 
 
Three Months Ended March 31,
(Dollars in millions)
 
2016
 
2015
Representation and warranty reserve, beginning of period
 
$
610

 
$
731

Provision (benefit) for mortgage representation and warranty losses:
 
 
 
 
Recorded in continuing operations
 
(1
)
 
1

Recorded in discontinued operations
 
3

 
(19
)
Total provision (benefit) for mortgage representation and warranty losses
 
2

 
(18
)
Net realized recoveries (losses)
 
1

 
(40
)
Representation and warranty reserve, end of period
 
$
613

 
$
673

As part of our business planning processes, we have considered various outcomes relating to the future representation and warranty liabilities of our subsidiaries that are possible but do not rise to the level of being both probable and reasonably estimable outcomes justifying an incremental reserve under applicable accounting standards. Our current best estimate of reasonably possible future losses from representation and warranty claims beyond what was in our reserve as of March 31, 2016, is approximately $1.5 billion, a decline from our estimate of $1.6 billion as of December 31, 2015. The decrease in this estimate was primarily driven by favorable rulings in representation and warranty-related litigation.
We provide additional information related to the representation and warranty reserve, including factors that may impact the adequacy of the reserve and the ultimate amount of losses incurred by our subsidiaries, in “Note 14—Commitments, Contingencies, Guarantees and Others.”

 
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OFF-BALANCE SHEET ARRANGEMENTS AND VARIABLE INTEREST ENTITIES
In the ordinary course of business, we are involved in various types of arrangements with limited liability companies, partnerships or trusts that often involve special purpose entities and variable interest entities (“VIEs”). Some of these arrangements are not recorded on our consolidated balance sheets or may be recorded in amounts different from the full contract or notional amount of the arrangements, depending on the nature or structure of, and the accounting standards required to be applied to, the arrangement. These arrangements may expose us to potential losses in excess of the amounts recorded on our 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 home loan securitization trusts and affordable housing entities. 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 capital are determined by multiple factors, including our consolidated regulatory capital requirements and internal risk-based capital assessments such as internal stress testing and economic capital. The level and composition of our capital may also be influenced by rating agency guidelines, subsidiary capital requirements, the business environment, conditions in the financial markets and assessments of potential future losses due to adverse changes in our business and market environments.
Capital Standards and Prompt Corrective Action
We are subject to capital adequacy standards adopted by the Federal Reserve, Office of the Comptroller of the Currency (“OCC”) and Federal Deposit Insurance Corporation (“FDIC”) (collectively, the “Federal Banking Agencies”), including the capital rules that implemented the Basel III capital framework (“Final Basel III Capital Rule”) developed by the Basel Committee on Banking Supervision (“Basel Committee”). Moreover, the Banks, as insured depository institutions, are subject to Prompt Corrective Action (“PCA”) capital regulations.
In July 2013, the Federal Banking Agencies adopted the Final Basel III Capital Rule, which, in addition to implementing the Basel III capital framework, also implemented certain Dodd-Frank Act and other capital provisions, and updated the PCA capital framework to reflect the new regulatory capital minimums. The Final Basel III Capital Rule amended both the Basel I and Basel II Advanced Approaches frameworks, established a new common equity Tier 1 capital requirement and set higher minimum capital ratio requirements. We refer to the amended Basel I framework as the “Basel III Standardized Approach,” and the amended Advanced Approaches framework as the “Basel III Advanced Approaches.”
At the end of 2012, we met one of the two independent eligibility criteria set by banking regulators for becoming subject to the Advanced Approaches capital rules. As a result, we have undertaken a multi-year process of implementing the Advanced Approaches regime for calculating risk-weighted assets and regulatory capital levels. We entered parallel run under Advanced Approaches on January 1, 2015, during which we will calculate capital ratios under both the Basel III Standardized Approach and the Basel III Advanced Approaches, though we will continue to use the Standardized Approach for purposes of meeting regulatory capital requirements.
Separately, we also disclose a non-GAAP TCE 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—Table AReconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures.”
Table 15 provides a comparison of our regulatory capital ratios under the Basel III Standardized Approach subject to transition provisions, the regulatory minimum capital adequacy ratios and the PCA well-capitalized targets as of March 31, 2016 and December 31, 2015.

 
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Table 15: Capital Ratios Under Basel III (1)(2)
 
 
March 31, 2016
 
December 31, 2015
 
 
Capital
Ratio
 
Minimum
Capital
Adequacy
 
Well-
Capitalized
 
Capital
Ratio
 
Minimum
Capital
Adequacy
 
Well-
Capitalized
Capital One Financial Corp:
 
 
 
 
 
 
 
 
 
 
 
 
Common equity Tier 1 capital(3)
 
11.1
%
 
4.5%

 
N/A
 
11.1%
 
4.5%
 
N/A

Tier 1 capital(4)
 
12.4

 
6.0

 
6.0%
 
12.4
 
6.0
 
6.0%

Total capital(5) 
 
14.6

 
8.0

 
10.0
 
14.6
 
8.0
 
10.0

Tier 1 leverage(6)
 
10.2

 
4.0

 
N/A
 
10.6
 
4.0
 
N/A

Supplementary leverage ratio(7)
 
8.9

 
N/A

 
N/A
 
9.2
 
N/A
 
N/A

Capital One Bank (USA), N.A.:
 


 
 
 
 
 
 
 
 
 
 
Common equity Tier 1 capital(3)
 
12.6%

 
4.5%

 
6.5%
 
12.2%
 
4.5%
 
6.5
%
Tier 1 capital(4)
 
12.6

 
6.0

 
8.0
 
12.2
 
6.0
 
8.0

Total capital(5) 
 
15.6

 
8.0

 
10.0
 
15.2
 
8.0
 
10.0

Tier 1 leverage(6)
 
10.7

 
4.0

 
5.0
 
10.8
 
4.0
 
5.0

Supplementary leverage ratio(7)
 
8.9

 
N/A

 
N/A
 
9.0
 
N/A
 
N/A

Capital One, N.A.:
 


 
 
 
 
 
 
 
 
 
 
Common equity Tier 1 capital(3)
 
11.6%

 
4.5
%
 
6.5%
 
11.8%
 
4.5%
 
6.5
%
Tier 1 capital(4)
 
11.6

 
6.0

 
8.0
 
11.8
 
6.0
 
8.0

Total capital(5) 
 
12.9

 
8.0

 
10.0
 
12.9
 
8.0
 
10.0

Tier 1 leverage(6)
 
8.3

 
4.0

 
5.0
 
8.8
 
4.0
 
5.0

Supplementary leverage ratio(7)
 
7.5

 
N/A

 
N/A
 
7.9
 
N/A
 
N/A

__________
(1) 
Capital ratios are calculated based on the Basel III Standardized Approach framework, subject to applicable transition provisions, such as the inclusion of the unrealized gains and losses on securities available for sale included in accumulated other comprehensive income (“AOCI”) and adjustments related to intangible assets other than goodwill. The inclusion of AOCI and the adjustments related to intangible assets are phased-in at 40% for 2015, 60% for 2016, 80% for 2017 and 100% for 2018.
(2) 
Ratios as of March 31, 2016 are preliminary. As we continue to validate our data the calculations are subject to change until we file our March 31, 2016 Form FR Y-9C—Consolidated Financial Statements for Holding Companies and Call Reports.
(3) 
Common equity Tier 1 capital ratio is a regulatory capital measure calculated based on common equity Tier 1 capital divided by risk-weighted assets.
(4) 
Tier 1 capital ratio is a regulatory capital measure calculated based on Tier 1 capital divided by risk-weighted assets.
(5) 
Total capital ratio is a regulatory capital measure calculated based on total capital divided by risk-weighted assets.
(6) 
Tier 1 leverage ratio is a regulatory capital measure calculated based on Tier 1 capital divided by average assets, after certain adjustments.
(7) 
Supplementary leverage ratio is a regulatory capital measure calculated based on Tier 1 capital divided by total leverage exposure.
The Company exceeded the minimum capital requirements and each of the Banks exceeded the minimum regulatory requirements and were “well-capitalized” under PCA requirements as of both March 31, 2016 and December 31, 2015.
The Final Basel III Capital Rule requires banks to maintain a capital conservation buffer of common equity Tier 1 capital of 2.5% above the regulatory minimum ratio and an incremental countercyclical capital buffer of up to 2.5% of common equity Tier 1 capital to be set at the discretion of the U.S. banking regulators (currently 0 percent as of March 31, 2016). Both the capital conservation buffer and the countercyclical capital buffer (if applicable) will be phased-in over a transition period of four years commencing on January 1, 2016.
A common equity Tier 1 capital ratio below the regulatory minimum ratio and the combined capital conservation buffer and the countercyclical buffer (if applicable) might restrict a bank’s ability to distribute capital and make discretionary bonus payments. As of March 31, 2016, the Company, COBNA and CONA are all above the combined threshold.
Additionally, banks designated as Globally Systemically Important Banks (“GSIBs”) are subject to an additional regulatory capital surcharge above the conservation and countercyclical buffers established by the Final Basel III Capital Rule. We are currently not designated as a GSIB and therefore not subject to this surcharge.

 
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The following table compares our common equity Tier 1 capital and risk-weighted assets as of March 31, 2016, calculated based on the Final Basel III Capital Rule, subject to applicable transition provisions, to our estimated common equity Tier 1 capital and risk-weighted assets as of March 31, 2016, calculated under the Basel III Standardized Approach, as it applies when fully phased-in for Advanced Approaches banks like us that have not yet exited parallel run. Our estimated common equity Tier 1 capital ratio under the fully phased-in Basel III Standardized Approach is based on our interpretations, expectations and assumptions of relevant regulations, as well as interpretations provided by our regulators, and is subject to change based on changes to future regulations and interpretations. As we continue to engage with our regulators during our parallel run, there could be further changes to the calculation.
Table 16: Estimated Common Equity Tier 1 Capital Ratio under Fully Phased-In Basel III Standardized Approach(1)
(Dollars in millions)
 
March 31, 2016
Common equity Tier 1 capital under Basel III Standardized
 
$
29,231

Adjustments related to AOCI(2)
 
(158
)
Adjustments related to intangibles(2)
 
(355
)
Other adjustments(2)
 
(1
)
Estimated common equity Tier 1 capital under fully phased-in Basel III Standardized
 
$
28,717

Risk-weighted assets under Basel III Standardized
 
$
262,368

Adjustments for fully phased-in Basel III Standardized(3)
 
174

Estimated risk-weighted assets under fully phased-in Basel III Standardized
 
$
262,542

Estimated common equity Tier 1 capital ratio under fully phased-in Basel III Standardized(4)
 
10.9%

__________
(1) 
Estimated common equity Tier 1 capital ratio under the fully phased-in Basel III Standardized Approach is a non-GAAP financial measure.
(2) 
Assumes adjustments are fully phased-in.
(3) 
Adjustments include higher risk weights for items that are included in capital based on the threshold deduction approach, such as mortgage servicing assets and deferred tax assets. The adjustments also include removal of risk weights for items that are deducted from common equity Tier 1 capital.
(4) 
Calculated by dividing estimated common equity Tier 1 capital by estimated risk-weighted assets, which are both calculated under the Basel III Standardized Approach, as it applies when fully phased-in for Advanced Approaches banks that have not yet exited parallel run.
Under the Final Basel III Capital Rule, when we complete our parallel run for the Advanced Approaches, our minimum risk-based capital requirement will be the greater of the Basel III Standardized Approach and the Basel III Advanced Approaches. See “Part I—Item 1. Business—Supervision and Regulation” in our 2015 Form10-K for additional information. Once we exit parallel run, based on clarification of the Final Basel III Capital Rule from our regulators, any difference between the Final Basel III Capital Rule definitions of expected credit losses and our eligible credit reserves will be deducted from our Basel III Standardized Approach numerator, subject to transition provisions. Inclusive of this impact, based on current rules and our business mix, we estimate that our Basel III Advanced Approaches ratios will be lower than our Standardized Approach ratios.
Capital Planning and Regulatory Stress Testing
On April 5, 2016 we submitted our capital plan to the Federal Reserve as part of the 2016 CCAR cycle. The stress testing results are expected to be released by the Federal Reserve before June 30, 2016. On February 17, 2016, we announced that our Board of Directors had authorized the repurchase of up to an additional $300 million of shares of common stock through the end of the second quarter of 2016 under the 2015 Stock Repurchase Program. For the description of the regulatory capital planning rules we are subject to, see “Part I—Item 1. Business—Supervision and Regulation” in our 2015 Form 10-K.

 
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Dividend Policy and Stock Purchases
We paid common stock dividends of $0.40 per share in the first quarter of 2016. We paid preferred stock dividends of $15.00 per share on the outstanding shares of our Series B Preferred Stock; $15.625 per share on the outstanding shares of our Series C Preferred Stock; $16.75 per share on the outstanding shares of our Series D Preferred Stock and $15.50 per share on the outstanding shares of our Series F Preferred Stock during the first quarter of 2016. We did not pay dividends on our Series E Preferred Stock in the first quarter of 2016.
The declaration and payment of dividends to our stockholders, as well as the amount thereof, are subject to the discretion of our Board of Directors and depend upon our results of operations, financial condition, capital levels, cash requirements, future prospects and other factors deemed relevant by the Board of Directors. As a bank holding company (“BHC”), our ability to pay dividends is largely dependent upon the receipt of dividends or other payments from our subsidiaries. Regulatory restrictions exist that limit the ability of the Banks to transfer funds to our BHC. As of March 31, 2016, funds available for dividend payments from COBNA and CONA were $2.9 billion and $1.6 billion, respectively. There can be no assurance that we will declare and pay any dividends to stockholders.
Consistent with our 2015 capital plan, our Board of Directors has authorized the repurchase of up to $3.125 billion of shares of common stock beginning in the second quarter of 2015 through the end of the second quarter of 2016. On February 17, 2016, we announced that our Board of Directors had authorized the repurchase of up to an additional $300 million of shares of common stock through the end of the second quarter of 2016 under the 2015 Stock Repurchase Program. We notified the Federal Reserve of our intention to engage in additional share repurchases and the Federal Reserve did not object. Through the end of the first quarter of 2016, we repurchased approximately $2.8 billion of common stock as part of the 2015 Stock Repurchase Program, including completion of the previously announced incremental $300 million in share repurchases.
The timing and exact amount of any future common stock repurchases will depend on various factors, including market conditions, opportunities for growth, our capital position and amount of retained earnings. Our stock repurchase program does not include specific price targets, may be executed through open market purchases or privately negotiated transactions, including utilizing Rule 10b5-1 programs, and may be suspended at any time. For additional information on dividends and stock repurchases, see “Part I—Item 1. Business—Supervision and Regulation—Dividends, Stock Repurchases and Transfer of Funds” in our 2015 Form 10-K.

 
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RISK MANAGEMENT
Overview
We use a risk framework to provide an overall enterprise-wide approach for effectively managing risk. We execute against our risk framework with the “Three Lines of Defense” risk management model to demonstrate and structure the roles, responsibilities and accountabilities in the organization for taking and managing risk.
The “First Line of Defense” is comprised of the business areas that through their day-to-day business activities take risk on our behalf. As the business owner, the first line is responsible for identifying, assessing, managing and controlling that risk, and for mitigating our overall risk exposure. The first line formulates strategy and operates within the risk appetite and framework. The “Second Line of Defense” provides oversight of first line risk taking and management, and is comprised primarily of our Risk Management organization. The second line assists in determining risk capacity, risk appetite, and the strategies, policies and structure for managing risks. The second line owns the risk framework. The second line is both an ‘expert advisor’ to the first line and an ‘effective challenger’ of first line risk activities. The “Third Line of Defense” is comprised of our Internal Audit and Credit Review functions. The third line provides independent and objective assurance to senior management and to the Board of Directors that first and second line risk management and internal control systems and its governance processes are well-designed and working as intended.
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 2015 Form 10-K.
CREDIT RISK PROFILE
Our loan portfolio accounts for the substantial majority of our credit risk exposure. Our lending activities are governed under our credit policy and are subject to independent review and approval. Below we provide information about the composition of our loan portfolio, key concentrations and credit performance metrics.
We also engage in certain non-lending activities that may give rise to credit and counterparty settlement risk, including the purchase of securities for our investment securities portfolio, entering into derivative transactions to manage our market risk exposure and to accommodate customers, short-term advances on syndication activity (including bridge financing transactions we have underwritten), certain operational cash balances in other financial institutions, foreign exchange transactions and customer overdrafts. We provide additional information on credit risk related to our investment securities portfolio under “Consolidated Balance Sheets Analysis—Investment Securities” and credit risk related to derivative transactions in “Note 9—Derivative Instruments and Hedging Activities.”

 
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Loans Held for Investment Portfolio Composition
We provide a variety of lending products. Our primary products include credit cards, auto loans, home loans and commercial lending products. 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 2015 Form 10-K.
Our loan portfolio consists of loans held for investment, including loans held in our consolidated trusts, and loans held for sale. Table 17 presents the composition of our portfolio of loans held for investment, including PCI loans, by portfolio segment as of March 31, 2016 and December 31, 2015. Table 17 and the credit metrics presented in this section exclude loans held for sale, which are carried at lower of cost or fair value and totaled $1.3 billion and $904 million as of March 31, 2016 and December 31, 2015, respectively.
Table 17: Loans Held for Investment Portfolio Composition
 
 
March 31, 2016
 
December 31, 2015
(Dollars in millions)
 
Loans
 
% of Total
 
Loans
 
% of Total
Credit Card:
 
 
 
 
 
 
 
 
Domestic credit card(1)
 
$
84,561

 
37.2%
 
$
87,939

 
38.2%
International credit card
 
8,138

 
3.6
 
8,186

 
3.6
Total credit card
 
92,699

 
40.8
 
96,125

 
41.8
Consumer Banking:
 
 
 
 
 
 
 
 
Auto
 
42,714

 
18.8
 
41,549

 
18.1
Home loan
 
24,343

 
10.7
 
25,227

 
11.0
Retail banking
 
3,534

 
1.5
 
3,596

 
1.5
Total consumer banking
 
70,591

 
31.0
 
70,372

 
30.6
Commercial Banking:
 
 
 
 
 
 
 
 
Commercial and multifamily real estate
 
25,559

 
11.2
 
25,518

 
11.1
Commercial and industrial
 
38,102

 
16.7
 
37,135

 
16.2
Total commercial lending
 
63,661

 
27.9
 
62,653

 
27.3
Small-ticket commercial real estate
 
580

 
0.3
 
613

 
0.3
Total commercial banking
 
64,241

 
28.2
 
63,266

 
27.6
Other loans
 
82

 
 
88

 
Total loans held for investment
 
$
227,613

 
100.0%
 
$
229,851

 
100.0%
__________
(1) 
Includes installment loans of $13 million and $16 million as of March 31, 2016 and December 31, 2015, respectively.

 
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Commercial Loans
For purposes of portfolio risk management, we aggregate our commercial loan portfolio according to market segmentation primarily based on standard industry codes. Table 18 summarizes our commercial loans held for investment portfolio by industry classification as of March 31, 2016 and December 31, 2015.
Table 18: Commercial Loans by Industry(1)
(Percentage of portfolio)
 
March 31,
2016
 
December 31,
2015
Real estate
 
39%
 
39%
Healthcare
 
15
 
15
Finance and insurance
 
12
 
12
Oil and gas(2)
 
5
 
5
Business services
 
5
 
4
Public administration
 
4
 
4
Construction and land
 
4
 
4
Educational services
 
4
 
4
Retail trade
 
3
 
3
Transportation(3)
 
2
 
3
Other
 
7
 
7
Total
 
100%
 
100%
__________
(1) 
Industry categories are based on our interpretation of the North American Industry Classification System codes as they pertain to each individual loan.
(2) 
In addition to loans outstanding, we also have unfunded lending commitments of approximately $2.7 billion and $3.4 billion to oil and gas companies as of March 31, 2016 and December 31, 2015, respectively. See Unfunded Lending Commitments in “Note 4—Loans” for information on our total unfunded lending commitments to extend credit.
(3) 
Includes our taxi medallion lending portfolio among other portfolios.
Purchased Credit-Impaired Loans
Our portfolio of loans includes certain of our consumer and commercial loans acquired in business acquisitions that were recorded at fair value at acquisition and subsequently accounted for using the guidance for accounting for PCI loans and debt securities, which is based upon cash flows expected to be collected. These PCI loans totaled $18.6 billion as of March 31, 2016 compared to $19.5 billion as of December 31, 2015. See “MD&A—Glossary and Acronyms” for the definition of “PCI loans.”
The difference between the fair value at acquisition and expected cash flows represents the accretable yield, which is recognized in interest income over the life of the loans. The difference between the contractual payments on the loans and expected cash flows represents the nonaccretable difference or the amount of principal and interest not considered collectible, which incorporates future expected credit losses over the life of the loans. We regularly update our estimate of expected principal and interest to be collected from these loans and evaluate the results for each accounting pool that was established at acquisition based on loans with common risk characteristics. Probable decreases in expected cash flows would trigger the recognition of an allowance for loan and lease losses through our provision for credit losses. Probable and significant increases in expected cash flows would first reverse any previously recorded allowance for loan and lease losses established subsequent to acquisition, with any remaining increase in expected cash flows recognized prospectively in interest income over the remaining estimated life of the underlying loans. See “Note 1—Summary of Significant Accounting Policies” in our 2015 Form 10-K for additional information on PCI loans.
Home Loans
The majority of our home loan portfolio are PCI loans acquired from the ING Direct and CCB acquisitions, representing 72% and 73% of our total home loan portfolio as of March 31, 2016 and December 31, 2015, respectively. See “MD&A—Glossary and Acronyms” for the definition of ING Direct and CCB acquisitions. The expected cash flows for the PCI loans in our home loan portfolio are significantly impacted by future expectations of home prices and interest rates. Decreases in expected cash flows that result from declining conditions, particularly associated with these variables, could result in an increase in the allowance for loan and lease losses and reduction in accretable yield. Charge-offs on these loans are not recorded until the expected credit losses within the nonaccretable difference are depleted. In addition, PCI loans are not classified as delinquent or nonperforming as we

 
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expect to collect our net investment in these loans and the nonaccretable difference is expected to absorb the majority of the losses associated with these loans.
Table 19 presents our total home loan portfolio and the break out of the PCI loans and remaining loans within our home loan portfolio by lien priority.
Table 19: Home LoansRisk Profile by Lien Priority
 
 
March 31, 2016
 
 
Home Loans
 
PCI Loans
 
Total Home Loans
(Dollars in millions)
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
Lien type:
 
 
 
 
 
 
 
 
 
 
 
 
1st lien
 
$
5,747

 
23.6%
 
$
17,294

 
71.1%
 
$
23,041

 
94.7%
2nd lien
 
992

 
4.1
 
310

 
1.2
 
1,302

 
5.3
Total
 
$
6,739

 
27.7%
 
$
17,604

 
72.3%
 
$
24,343

 
100.0%
 
 
December 31, 2015
 
 
Home Loans
 
PCI Loans
 
Total Home Loans
(Dollars in millions)
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
Lien type:
 
 
 
 
 
 
 
 
 
 
 
 
1st lien
 
$
5,705

 
22.6%
 
$
18,207

 
72.2%
 
$
23,912

 
94.8%
2nd lien
 
995

 
4.0
 
320

 
1.2
 
1,315

 
5.2
Total
 
$
6,700

 
26.6%
 
$
18,527

 
73.4%
 
$
25,227

 
100.0%
See “Note 4—Loans” in this Report for additional credit quality information. See “Note 1—Summary of Significant Accounting Policies” in our 2015 Form 10-K for information on our accounting policies for PCI loans, delinquent loans, nonperforming loans, net charge-offs and troubled debt restructurings (“TDRs”) for each of our loan categories.
Table 20 provides a sensitivity analysis of PCI loans in our home loan portfolio as of March 31, 2016. The analysis reflects a hypothetical decline of 10% in the home price index and its impact on lifetime future cash flow expectations, accretable yield and allowance for loan and lease losses. Any significant economic events or variables not considered could impact results that are presented below.
Table 20: Sensitivity Analysis—PCI Home Loans(1)
(Dollars in millions)
 
March 31, 2016
 
Estimated Impact
Increase (Decrease)
Expected cash flows
 
$
20,909

 
$
(74
)
Accretable yield
 
3,339

 
70

Allowance for loan and lease losses
 
34

 
144

__________
(1) 
Changes in the accretable yield would be recognized in interest income in our consolidated statements of income over the life of the loans. Changes in the allowance for loan and lease losses would be recognized immediately in the provision for credit losses in the consolidated statements of income.
Credit Risk Measurement
We closely monitor economic conditions and loan performance trends to assess and manage our exposure to credit risk. Key metrics we track in evaluating the credit quality of our loan portfolio include delinquency and nonperforming asset rates, as well as net charge-off rates and our internal risk ratings of larger balance commercial loans. Trends in delinquency rates are a primary indicator of credit risk within our consumer loan portfolios, as changes in delinquency rates provide an early warning of changes in credit quality. The primary indicator of credit risk in our commercial loan portfolios is our internal risk ratings. Because we generally classify loans that have been delinquent for an extended period of time and other loans with significant risk of loss as nonperforming, the level of nonperforming assets represents another indicator of the potential for future credit losses. In addition to delinquency

 
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rates, the geographic distribution of our loans provides insight as to the credit quality of the portfolio based on regional economic conditions.
We underwrite most consumer loans using proprietary models, which are typically based on credit bureau data, including borrower credit scores, along with application information and, where applicable, collateral and deal structure data. We continuously adjust our management of credit lines and collection strategies based on customer behavior and risk profile changes. We also use borrower credit scores for subprime classification, for competitive benchmarking and, in some cases, to drive product segmentation decisions. 
The following table provides details on the credit scores of our domestic credit card and auto loan portfolios as of March 31, 2016, December 31, 2015 and March 31, 2015.
Table 21: Credit Score Distribution
(Percentage of portfolio)
 
March 31,
2016
 
December 31,
2015
 
March 31,
2015
Domestic credit card - Refreshed FICO scores:(1)
 
 
 
 
 
 
Greater than 660
 
65%
 
66%
 
66%
660 or below
 
35
 
34
 
34
Total
 
100%
 
100%
 
100%
Auto - At origination FICO scores:(2)
 
 
 
 
 
 
Greater than 660
 
51%
 
51%
 
48%
621 - 660
 
17
 
17
 
17
620 or below
 
32
 
32
 
35
Total
 
100%
 
100%
 
100%
__________
(1) 
Credit scores generally represent Fair Isaac Corporation (“FICO”) scores. These scores are obtained from one of the major credit bureaus at origination and are refreshed monthly thereafter. We approximate non-FICO credit scores to comparable FICO scores for consistency purposes. Balances for which no credit score is available or the credit score is invalid are included in the 660 or below category.
(2) 
Credit scores represent FICO scores. These scores are obtained from three credit bureaus at the time of application and are not refreshed thereafter. The FICO score distribution is based on the average scores. Balances for which no credit score is available or the credit score is invalid are included in the 620 or below category.
We present information in the section below on the credit performance of our loan portfolio, including the key metrics we use in tracking changes in the credit quality of our loan portfolio.
See “Note 4—Loans” in this Report for additional credit quality information. Also, see “Note 1—Summary of Significant Accounting Policies” in our 2015 Form 10-K for information on our accounting policies for delinquent and nonperforming loans, net charge-offs and TDRs for each of our loan categories.
Delinquency Rates
We consider the entire balance of an account to be delinquent if the minimum required payment is not received by the customer’s due date, measured at the reporting date. Our 30+ day delinquency metrics include all loans held for investment that are 30 or more days past due, whereas our 30+ day performing delinquency metrics include loans that are 30 or more days past due but are currently classified as performing and accruing interest. The 30+ day delinquency and 30+ day performing delinquency metrics are the same for domestic credit card loans, as we continue to classify the substantial majority of domestic 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 2015 Form 10-K for information on our policies for classifying loans as nonperforming for each of our loan categories. We provide additional information on our credit quality metrics above under “Business Segment Financial Performance.”

 
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Table 22 presents our 30+ day performing delinquency rates and 30+ day delinquency rates of our portfolio of loans held for investment, including PCI loans, by portfolio segment, as of March 31, 2016 and December 31, 2015.
Table 22: 30+ Day Delinquencies
 
 
March 31, 2016
 
December 31, 2015
 
 
30+ Day Performing Delinquencies
 
30+ Day Delinquencies
 
30+ Day Performing Delinquencies
 
30+ Day Delinquencies
(Dollars in millions)
 
Amount
 
Rate(1)
 
Amount
 
Rate(1)
 
Amount
 
Rate(1)
 
Amount
 
Rate(1)
Credit Card:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Domestic credit card
 
$
2,615

 
3.09%
 
$
2,615

 
3.09%
 
$
2,985

 
3.39%
 
$
2,985

 
3.39%
International credit card
 
270

 
3.32
 
306

 
3.76
 
244

 
2.98
 
283

 
3.46
Total credit card
 
2,885

 
3.11
 
2,921

 
3.15
 
3,229

 
3.36
 
3,268

 
3.40
Consumer Banking:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Auto
 
2,195

 
5.14
 
2,328

 
5.45
 
2,781

 
6.69
 
3,000

 
7.22
Home loan(2)
 
34

 
0.14
 
218

 
0.90
 
40

 
0.16
 
235

 
0.93
Retail banking
 
21

 
0.61
 
44

 
1.25
 
28

 
0.76
 
49

 
1.36
Total consumer banking(2)
 
2,250

 
3.19
 
2,590

 
3.67
 
2,849

 
4.05
 
3,284

 
4.67
Commercial Banking:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and multifamily real estate
 
22

 
0.09
 
30

 
0.12
 
34

 
0.13
 
38

 
0.15
Commercial and industrial
 
143

 
0.38
 
457

 
1.20
 
66

 
0.18
 
288

 
0.78
Total commercial lending
 
165

 
0.26
 
487

 
0.76
 
100

 
0.16
 
326

 
0.52
Small-ticket commercial real estate
 
2

 
0.35
 
8

 
1.33
 
2

 
0.37
 
6

 
1.04
Total commercial banking
 
167

 
0.26
 
495

 
0.77
 
102

 
0.16
 
332

 
0.52
Other loans
 
3

 
3.17
 
9

 
11.20
 
3

 
3.61
 
11

 
11.98
Total
 
$
5,305

 
2.33
 
$
6,015

 
2.64
 
$
6,183

 
2.69
 
$
6,895

 
3.00
__________
(1) 
Calculated by loan category by dividing 30+ day delinquent loans as of the end of the period by period-end loans held for investment for the specified loan category, including PCI loans as applicable.
(2)  
Excluding the impact of PCI loans, the 30+ day performing delinquency rate for our home loan and total consumer banking portfolios was 0.50% and 4.25%, respectively, as of March 31, 2016, and 0.60% and 5.50%, respectively, as of December 31, 2015. Excluding the impact of PCI loans, the 30+ day delinquency rate for our home loan and total consumer banking portfolios was 3.23% and 4.89%, respectively, as of March 31, 2016, and 3.50% and 6.34%, respectively, as of December 31, 2015.
Table 23 presents an aging of 30+ day delinquent loans included in the above table.
Table 23: Aging and Geography of 30+ Day Delinquent Loans
 
 
March 31, 2016
 
December 31, 2015
(Dollars in millions)
 
Amount
 
% of
Total Loans(1)
 
Amount
 
% of
Total Loans(1)
Total loans held for investment
 
$
227,613

 
100.00%
 
$
229,851

 
100.00%
Delinquency status:
 
 
 
 
 
 
 
 
30 – 59 days
 
$
2,581

 
1.13%
 
$
3,069

 
1.33%
60 – 89 days
 
1,371

 
0.60
 
1,668

 
0.73
90 + days
 
2,063

 
0.91
 
2,158

 
0.94
Total
 
$
6,015

 
2.64%
 
$
6,895

 
3.00%
Geographic region:
 
 
 
 
 
 
 
 
Domestic
 
$
5,709

 
2.51%
 
$
6,612

 
2.88%
International
 
306

 
0.13
 
283

 
0.12
Total
 
$
6,015

 
2.64%
 
$
6,895

 
3.00%
__________
(1) 
Calculated by dividing loans in each delinquency status category or geographic region as of the end of the period by the total loans held for investment, including PCI loans.

 
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Table 24 summarizes loans that were 90+ days delinquent as to interest or principal and still accruing interest as of March 31, 2016 and December 31, 2015. These loans consist primarily of credit card accounts between 90 days and 179 days past due. As permitted by regulatory guidance issued by the Federal Financial Institutions Examination Council (“FFIEC”), we continue to accrue interest and fees on domestic credit card loans through the date of charge-off, which is typically in the period the account becomes 180 days past due. While domestic credit card loans typically remain on accrual status until the loan is charged off, we reduce the balance of our credit card receivables by the amount of finance charges and fees billed but not expected to be collected and exclude this amount from revenue.
Table 24: 90+ Day Delinquent Loans Accruing Interest
 
 
March 31, 2016
 
December 31, 2015
(Dollars in millions)
 
Amount
 
% of
Total Loans
(1)
 
Amount
 
% of
Total Loans
(1)
Loan category:
 
 
 
 
 
 
 
 
Credit card
 
$
1,395

 
1.51%
 
$
1,500

 
1.56%
Consumer banking
 
1

 
0.00
 

 
0.00
Commercial banking
 
11

 
0.02
 
5

 
0.01
Total
 
$
1,407

 
0.62
 
$
1,505

 
0.65
Geographic region:
 
 
 
 
 
 
 
 
Domestic
 
$
1,315

 
0.60%
 
$
1,426

 
0.64%
International
 
92

 
1.13
 
79

 
0.96
Total
 
$
1,407

 
0.62
 
$
1,505

 
0.65
__________
(1) 
Delinquency rates are calculated for each loan category by dividing 90+ day delinquent loans accruing interest by period-end loans held for investment for the specified loan category.
Nonperforming Loans and Nonperforming Assets
Nonperforming assets consist of nonperforming loans, foreclosed property and repossessed assets and the net realizable value of auto loans that have been charged off as a result of a bankruptcy. Nonperforming loans include loans that have been placed on nonaccrual status. See “Note 1—Summary of Significant Accounting Policies” in our 2015 Form 10-K for information on our policies for classifying loans as nonperforming for each of our loan categories.
Table 25 presents comparative information on nonperforming loans, by portfolio segment, and other nonperforming assets as of March 31, 2016 and December 31, 2015. We do not classify loans held for sale as nonperforming, as they are recorded at the lower of cost or fair value. We provide additional information on our credit quality metrics above under “Business Segment Financial Performance.”

 
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Table 25: Nonperforming Loans and Other Nonperforming Assets(1)
 
 
March 31, 2016
 
December 31, 2015
(Dollars in millions)
 
Amount
 
% of Total Loans HFI
 
Amount
 
% of Total Loans HFI
Nonperforming loans held for investment:
 
 
 
 
 
 
 
 
Credit Card:
 
 
 
 
 
 
 
 
International credit card
 
$
48

 
0.59%
 
$
53

 
0.65%
Total credit card
 
48

 
0.05
 
53

 
0.06
Consumer Banking:
 
 
 
 
 
 
 
 
Auto
 
133

 
0.31
 
219

 
0.53
Home loan(2)
 
307

 
1.26
 
311

 
1.23
Retail banking
 
30

 
0.83
 
28

 
0.77
Total consumer banking(2)
 
470

 
0.66
 
558

 
0.79
Commercial Banking:
 
 
 
 
 
 
 
 
Commercial and multifamily real estate
 
30

 
0.12
 
7

 
0.03
Commercial and industrial
 
1,014

 
2.66
 
538

 
1.45
Total commercial lending
 
1,044

 
1.64
 
545

 
0.87
Small-ticket commercial real estate
 
6

 
1.11
 
5

 
0.83
Total commercial banking
 
1,050

 
1.63
 
550

 
0.87
Other loans
 
10

 
12.57
 
9

 
9.42
Total nonperforming loans held for investment(3)
 
$
1,578

 
0.69
 
$
1,170

 
0.51
Other nonperforming assets:(4)
 
 
 
 
 
 
 
 
Foreclosed property(5)
 
$
117

 
0.05
 
$
126

 
0.05
Other assets(6)
 
188

 
0.09
 
198

 
0.09
Total other nonperforming assets
 
305

 
0.14
 
324

 
0.14
Total nonperforming assets
 
$
1,883

 
0.83
 
$
1,494

 
0.65
__________
(1) 
We recognized interest income for loans classified as nonperforming of $5 million and $3 million in the first quarters of 2016 and 2015, respectively. Interest income forgone related to nonperforming loans was $19 million and $15 million in the first quarters of 2016 and 2015, respectively. Forgone interest income represents the amount of interest income that would have been recorded during the period for nonperforming loans as of the end of the period had the loans performed according to their contractual terms.
(2) 
Excluding the impact of PCI loans, the nonperforming loan rate for our home loan and total consumer banking portfolios was 4.55% and 0.89%, respectively, as of March 31, 2016, compared to 4.68% and 1.08%, respectively, as of December 31, 2015.
(3) 
Excluding the impact of domestic credit card loans, nonperforming loans as a percentage of total loans held for investment was 1.10% and 0.83% as of March 31, 2016 and December 31, 2015, respectively.
(4) 
The denominator used in calculating the nonperforming asset ratios consists of total loans held for investment and total other nonperforming assets.
(5) 
Includes acquired REOs of $94 million and $101 million as of March 31, 2016 and December 31, 2015, respectively.
(6) 
Includes the net realizable value of auto loans that have been charged off as a result of a bankruptcy and repossessed assets obtained in satisfaction of auto loans.

 
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Net Charge-Offs
Net charge-offs consist of the unpaid principal balance of loans held for investment that we determine to be uncollectible, net of recovered amounts. We charge off loans as a reduction to the allowance for loan and lease losses when we determine the loan is uncollectible and record subsequent recoveries of previously charged off amounts as increases to the allowance for loan and lease losses. We exclude accrued and unpaid finance charges and fees and certain fraud losses from charge-offs. Generally costs to recover charged-off loans are recorded as collection expenses and included in our consolidated statements of income as a component of other non-interest expense as incurred. Our charge-off policy for loans varies based on the loan type. See “Note 1—Summary of Significant Accounting Policies” in our 2015 Form 10-K for information on our charge-off policy for each of our loan categories.
Table 26 presents our net charge-off amounts and rates, by portfolio segment, in the first quarters of 2016 and 2015.
Table 26: Net Charge-Offs (Recoveries)
 
 
Three Months Ended March 31,
 
 
2016
 
2015
(Dollars in millions)
 
Amount
 
Rate(1)
 
Amount
 
Rate(1)
Credit Card:
 
 
 
 
 
 
 
 
Domestic credit card
 
$
887

 
4.16%

 
$
664

 
3.55%

International credit card
 
63

 
3.24

 
55

 
2.80

Total credit card
 
950

 
4.09

 
719

 
3.48

Consumer Banking:
 
 
 
 
 
 
 
 
Auto
 
168

 
1.60

 
148

 
1.55

Home loan(2)
 
3

 
0.05

 
2

 
0.03

Retail banking
 
12

 
1.36

 
9

 
0.96

Total consumer banking(2)
 
183

 
1.04

 
159

 
0.89

Commercial Banking:
 
 
 
 
 
 
 
 
Commercial and multifamily real estate
 
(1
)
 
(0.01
)
 
(2
)
 
(0.03
)
Commercial and industrial
 
47

 
0.49

 
4

 
0.05

Total commercial lending
 
46

 
0.29

 
2

 
0.01

Small-ticket commercial real estate
 
0

 
0.13

 
1

 
0.47

Total commercial banking
 
46

 
0.29

 
3

 
0.02

Other loans
 
(1
)
 
(3.82
)
 
0

 
1.56

Total net charge-offs
 
$
1,178

 
2.08

 
$
881

 
1.72

Average loans held for investment
 
$
226,736

 
 
 
$
205,194

 
 
__________
(1) 
Calculated for each loan category by dividing annualized net charge-offs by average loans held for investment for the period.
(2) 
Excluding the impact of PCI loans, the net charge-off rate for our home loan and total consumer banking portfolios was 0.17% and 1.40%, respectively, for the three months ended March 31, 2016, compared to 0.11% and 1.30%, respectively, for the three months ended March 31, 2015.
For information regarding management’s expectations of net charge-offs, see “MD&A—Business Segment Expectations.”

 
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Troubled Debt Restructurings
As part of our loss mitigation efforts, we may provide short-term (three to twelve months) or long-term (greater than twelve months) modifications to a borrower experiencing financial difficulty to improve long-term collectability of the loan and to avoid the need for foreclosure or repossession of collateral.
Table 27 presents our recorded investment of loans modified in TDRs as of March 31, 2016 and December 31, 2015. It excludes loan modifications that do not meet the definition of a TDR and PCI loans, which we track and report separately.
Table 27: Troubled Debt Restructurings
 
 
March 31, 2016
 
December 31, 2015
(Dollars in millions)
 
Amount
 
% of Total Modifications
 
Amount
 
% of Total Modifications
Credit card
 
$
658

 
35.6%
 
$
666

 
36.7%

Consumer banking:
 
 
 
 
 
 
 
 
Auto
 
494

 
26.7
 
488

 
26.8

Home loan
 
233

 
12.6
 
229

 
12.6

Retail banking
 
40

 
2.1
 
42

 
2.3

Total consumer banking
 
767

 
41.4
 
759

 
41.7

Commercial banking
 
425

 
23.0
 
392

 
21.6

Total
 
$
1,850

 
100.0%
 
$
1,817

 
100.0%

Status of TDRs:
 
 
 
 
 
 
 
 
Performing
 
$
1,345

 
72.7%
 
$
1,367

 
75.2
%
Nonperforming
 
505

 
27.3
 
450

 
24.8

Total
 
$
1,850

 
100.0%
 
$
1,817

 
100.0%

In the Credit Card business, the majority of our credit card TDRs involve reducing the interest rate on the account and placing the customer on a fixed payment plan not exceeding 60 months. The interest rate in effect immediately prior to the loan modification is used as the effective interest rate for purposes of measuring impairment using the present value of expected cash flows. In some cases, the interest rate on a credit card account is automatically increased due to non-payment, late payment or similar events. In all cases, we cancel the customer’s available line of credit on the credit card. If the customer does not comply with the modified payment terms, then the credit card loan agreement may revert to its original payment terms, likely resulting in any loan outstanding reflected in the appropriate delinquency category, and charged off in accordance with our standard charge-off policy.
In the Consumer Banking business, the majority of our loans modified in TDRs receive an extension, an interest rate reduction or principal reduction, or a combination of both. In addition, TDRs also occur in connection with bankruptcy of the borrower. In certain bankruptcy discharges, the loan is written down to the collateral value and the charged off amount is reported as principal reduction. Their impairment is determined using the present value of expected cash flows or a collateral evaluation for certain auto and home loans where the collateral value is lower than the recorded investment. In the Commercial Banking business, the majority of loans modified in TDRs receive an extension, with a portion of these loans receiving an interest rate reduction. The impairment on modified commercial loans is generally determined based on the underlying collateral value. We provide additional information on modified loans accounted for as TDRs, including the performance of those loans subsequent to modification, in “Note 4—Loans.”
Impaired Loans
A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due from the borrower in accordance with the original contractual terms of the loan. Generally, we report loans as impaired based on the method for measuring impairment in accordance with applicable accounting guidance. Loans defined as individually impaired include larger balance commercial nonperforming loans and TDRs. Loans held for sale are not reported as impaired, as these loans are recorded at lower of cost or fair value. Impaired loans also exclude PCI loans accounted for based on expected cash flows because this accounting methodology takes into consideration future credit losses expected to be incurred.
Impaired loans, including TDRs, totaled $2.9 billion and $2.5 billion as of March 31, 2016 and December 31, 2015, respectively. Loans modified in TDRs accounted for $1.9 billion and $1.8 billion of impaired loans as of March 31, 2016 and December 31,

 
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2015, respectively. We provide additional information on our impaired loans, including the allowance for loan and lease losses established for these loans, in “Note 4—Loans” and “Note 5—Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments.”
Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments
Our allowance for loan and lease losses represents management’s best estimate of incurred loan and lease credit losses inherent in our held for investment portfolio as of each balance sheet date. The allowance for loan and lease losses is increased through the provision for credit losses and reduced by net charge-offs. We provide additional information on the methodologies and key assumptions used in determining our allowance for loan and lease losses under “Note 1—Summary of Significant Accounting Policies” in our 2015 Form 10-K.
Our allowance for loan and lease losses increased by $286 million to $5.4 billion as of March 31, 2016 from December 31, 2015. The allowance coverage ratio increased by 15 basis points to 2.38% as of March 31, 2016 from December 31, 2015. The increase in the allowance for loan and lease losses was primarily driven by continued adverse industry conditions impacting our oil and gas portfolio in our Commercial Banking business as well as continued domestic credit card loan growth and portfolio seasoning.
Table 28 presents changes in our allowance for loan and lease losses and reserve for unfunded lending commitments for the first quarters of 2016 and 2015, and details by portfolio segment the provision for credit losses, charge-offs and recoveries recognized in our consolidated statements of income.

 
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Table 28: Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments Activity
 
 
 
 
Consumer Banking
 
 
 
 
 
 
(Dollars in millions)
 
Credit Card
 
Auto
 
Home
Loan
 
Retail
Banking
 
Total
Consumer
Banking
 
Commercial Banking
 
Other Loans
 
Total
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2015
 
$
3,654

 
$
726

 
$
70

 
$
72

 
$
868

 
$
604

 
$
4

 
$
5,130

Provision (benefit) for loan and lease losses
 
1,071

 
214

 
(3
)
 
18

 
229

 
171

 
(2
)
 
1,469

Charge-offs
 
(1,222
)
 
(269
)
 
(5
)
 
(17
)
 
(291
)
 
(48
)
 
(1
)
 
(1,562
)
Recoveries
 
272

 
101

 
2

 
5

 
108

 
2

 
2

 
384

Net charge-offs
 
(950
)
 
(168
)
 
(3
)
 
(12
)
 
(183
)
 
(46
)
 
1

 
(1,178
)
Other changes(1)
 
10

 

 

 

 

 
(15
)
 

 
(5
)
Balance as of March 31, 2016
 
3,785

 
772

 
64

 
78

 
914

 
714

 
3

 
5,416

Reserve for unfunded lending commitments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2015
 

 

 

 
7

 
7

 
161

 

 
168

Provision for losses on unfunded lending commitments
 

 

 

 
1

 
1

 
57

 

 
58

Balance as of March 31, 2016
 

 

 

 
8

 
8

 
218

 

 
226

Combined allowance and reserve as of
March 31, 2016
 
$
3,785

 
$
772

 
$
64

 
$
86

 
$
922

 
$
932

 
$
3

 
$
5,642

 
 
 
 
Consumer Banking
 
 
 
 
 
 
(Dollars in millions)
 
Credit Card
 
Auto
 
Home
Loan
 
Retail
Banking
 
Total
Consumer
Banking
 
Commercial Banking
 
Other Loans
 
Total
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2014
 
$
3,204

 
$
661

 
$
62

 
$
56

 
$
779

 
$
395

 
$
5

 
$
4,383

Provision (benefit) for loan and lease losses
 
669

 
184

 
8

 
14

 
206

 
52

 

 
927

Charge-offs
 
(1,022
)
 
(233
)
 
(4
)
 
(13
)
 
(250
)
 
(9
)
 
(3
)
 
(1,284
)
Recoveries
 
303

 
85

 
2

 
4

 
91

 
6

 
3

 
403

Net charge-offs
 
(719
)
 
(148
)
 
(2
)
 
(9
)
 
(159
)
 
(3
)
 

 
(881
)
Other changes(1)
 
(24
)
 

 

 

 

 

 

 
(24
)
Balance as of March 31, 2015
 
3,130

 
697

 
68

 
61

 
826

 
444

 
5

 
4,405

Reserve for unfunded lending commitments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2014
 

 

 

 
7

 
7

 
106

 

 
113

Provision for losses on unfunded lending commitments
 

 

 

 

 

 
8

 

 
8

Balance as of March 31, 2015
 

 

 

 
7

 
7

 
114

 

 
121

Combined allowance and reserve as of
March 31, 2015
 
$
3,130

 
$
697

 
$
68

 
$
68

 
$
833

 
$
558

 
$
5

 
$
4,526

__________
(1) 
Represents foreign currency translation adjustments and the net impact of loan transfers and sales.

 
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Table 29 presents the allowance coverage ratios as of March 31, 2016 and December 31, 2015.

Table 29: Allowance Coverage Ratios
 
 
March 31, 2016
 
December 31, 2015
Total allowance coverage ratios:
 
 
 
 
Allowance for loan and lease losses as a % of loans held for investment
 
2.38%
 
2.23%
Allowance for loan and lease losses as a % of nonperforming loans(1)
 
343.30
 
438.70
Allowance coverage ratios by loan category:(2)
 
 
 
 
Credit card (30+ day delinquent loans)
 
129.55
 
111.81
Consumer banking (30+ day delinquent loans)
 
35.30
 
26.42
Commercial banking (nonperforming loans)
 
67.98
 
109.76
__________
(1) 
The allowance for loan and lease losses for both of nonperforming and performing loans as a percentage of nonperforming loans, excluding the allowance for loan and lease losses related to our domestic credit card loans, was 125.26% and 151.80% as of March 31, 2016 and December 31, 2015, respectively.
(2) 
Calculated based on the total allowance for loan and lease losses divided by the outstanding balance of loans held for investment within the specified loan category.
LIQUIDITY RISK PROFILE
We have established liquidity practices that are intended to ensure that we have sufficient asset-based liquidity to withstand the potential impact of deposit attrition or diminished liquidity in the funding markets. Our practices are intended to maintain adequate liquidity reserves to cover our funding requirements as well as any potential deposit run-off and maintain access to diversified funding sources to avoid over-dependence on volatile, less reliable funding markets. Our liquidity reserves consist of readily-marketable or pledgable assets which can be used as a source of liquidity, if needed.
Table 30 below presents the composition of our liquidity reserves as of March 31, 2016 and December 31, 2015.
Table 30: Liquidity Reserves
(Dollars in millions)
 
March 31, 2016
 
December 31, 2015
Cash and cash equivalents
 
$
5,235

 
$
8,023

Investment securities available for sale, at fair value
 
40,092

 
39,061

Investment securities held to maturity, at fair value
 
26,454

 
25,317

Total investment securities portfolio(1)(2)
 
66,546

 
64,378

FHLB borrowing capacity secured by loans
 
29,318

 
30,661

Outstanding FHLB advances and letters of credit secured by loans
 
(13,342
)
 
(20,514
)
Investment securities encumbered for Public Funds and others
 
(10,581
)
 
(10,602
)
Total liquidity reserves
 
$
77,176

 
$
71,946

__________
(1) 
The weighted-average life of our securities was approximately 5.4 years and 5.8 years as of March 31, 2016 and December 31, 2015, respectively.
(2) 
As part of our liquidity management strategy, we pledge securities to secure borrowings from counterparties and to secure trust and public deposits and other purposes as required or permitted by law. We pledged securities available for sale with a fair value of $1.6 billion and $1.7 billion as of March 31, 2016 and December 31, 2015, respectively. We also pledged securities held to maturity with a carrying value of $8.5 billion and $8.7 billion as of March 31, 2016 and December 31, 2015, respectively.
Our liquidity reserves increased by $5.2 billion to $77.2 billion as of March 31, 2016 from December 31, 2015. This increase was primarily attributable to an increase in the fair value of our investment securities portfolio and a reduction in our FHLB advances. See “MD&A—Risk Management” in our 2015 Form 10-K for additional information on our management of liquidity risk.
We are subject to the Final Liquidity Coverage Rules (“Final LCR Rule”) issued by the Federal Banking Agencies. The Final LCR Rule came into effect in January 2015 and requires us to calculate the LCR as of the last business day of each month from January 2015 until July 2016, and then on a daily basis thereafter. The minimum LCR standard is phased in as follows: 90% by January 1, 2016; and 100% by January 1, 2017 and thereafter. At March 31, 2016, we exceeded the fully phased-in LCR requirement. The

 
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calculation and the underlying components are based on our interpretations, expectations and assumptions of relevant regulations, as well as interpretations provided by our regulators, and are subject to change based on changes to future regulations and interpretations.
Borrowing Capacity
We filed a new shelf registration statement with the U.S. Securities and Exchange Commision (“SEC”) on March 31, 2015, which expires in March 2018. Under this shelf registration, we may periodically offer and sell an indeterminate aggregate amount of senior or subordinated debt securities, preferred stock, depositary shares, common stock, purchase contracts, warrants and units. There is no limit under this shelf registration to the amount or number of such securities that we may offer and sell, subject to market conditions. We also filed a new shelf registration statement with the SEC on July 30, 2015, which does not expire and allows us to periodically offer and sell up to $20 billion of securitized debt obligations.
In addition to our issuance capacity under the shelf registration statements, we also have access to FHLB advances with a maximum borrowing capacity of $29.3 billion as of March 31, 2016, of which $16.0 billion was still available to us to borrow as of March 31, 2016. We pledged loan collateral with an outstanding balance of $35.6 billion to secure this borrowing capacity. The ability to draw down funding is based on membership status and the amount is dependent upon the Banks’ ability to post collateral. Our FHLB membership is secured by our investment in FHLB stock of $578 million and $884 million as of March 31, 2016 and December 31, 2015, respectively, which was determined in part based on our outstanding advances. We also have access to the Federal Reserve Discount Window through which we had a borrowing capacity of $12.0 billion as of March 31, 2016. Although available, we do not view this borrowing capacity as a primary source of liquidity and did not utilize it during 2015 or the first quarter of 2016.
Funding
The Company’s primary source of funding comes from deposits, which provide us with a stable and relatively low cost of funds. In addition to deposits, the Company raises funding through the issuance of senior and subordinated notes, FHLB advances secured by certain portions of our loan and securities portfolios, the issuance of securitized debt obligations, the issuance of brokered deposits, the purchase of federal funds and other borrowings. A key objective in our use of these markets is to maintain access to a diversified mix of wholesale funding sources.
Deposits
Table 31 provides the composition of end of period deposits as of March 31, 2016 and December 31, 2015, as well as a comparison of average balances, interest expense and average deposit rates for the three months ended March 31, 2016 and 2015.
Table 31: Deposit Composition and Average Deposit Rates
(Dollars in millions)
 
March 31, 2016
 
December 31, 2015
Non-interest bearing accounts
 
$
25,182

 
$
25,847

Interest-bearing checking accounts(1)
 
46,626

 
44,720

Saving deposits(2)
 
136,415

 
134,075

Time deposits less than $100,000
 
10,489

 
10,347

Total core deposits
 
218,712

 
214,989

Time deposits of $100,000 or more
 
2,428

 
1,889

Foreign time deposits(3)
 
639

 
843

Total deposits
 
$
221,779

 
$
217,721


 
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Three Months Ended March 31,
 
 
2016
 
2015
(Dollars in millions)
 
Average
Balance
 
Interest
Expense
 
Average
Deposit
Rate
 
Average
Balance
 
Interest
Expense
 
Average
Deposit
Rate
Interest-bearing checking accounts(1)
 
$
45,978

 
$
55

 
0.48%
 
$
42,309

 
$
51

 
0.48%
Saving deposits(2)
 
134,677

 
191

 
0.57
 
131,580

 
191

 
0.58
Time deposits less than $100,000
 
10,554

 
29

 
1.08
 
5,885

 
17

 
1.12
Total core deposits
 
191,209

 
275

 
0.51
 
179,774

 
259

 
0.51
Time deposits of $100,000 or more
 
2,212

 
7

 
1.39
 
2,211

 
11

 
1.96
Foreign time deposits(3)
 
704

 
1

 
0.34
 
1,013

 
1

 
0.34
Total interest-bearing deposits
 
$
194,125

 
$
283

 
0.52
 
$
182,998

 
$
271

 
0.52
__________
(1) 
Includes Negotiable Order of Withdrawal (“NOW”) accounts.
(2) 
Includes Money Market Deposit Accounts (“MMDA”).
(3) 
Substantially all of our foreign time deposits were greater than $100,000 as of both March 31, 2016 and December 31, 2015.
Our deposits include brokered deposits, which we obtained through the use of third-party intermediaries. Those brokered deposits are reported as interest-bearing checking, saving deposits and time deposits in the above table and totaled $11.9 billion and $12.0 billion as of March 31, 2016 and December 31, 2015, respectively.
The FDIC limits the acceptance of brokered deposits by “well-capitalized” insured depository institutions and, with a waiver from the FDIC, by “adequately capitalized” institutions. COBNA and CONA were “well-capitalized,” as defined under the federal banking regulatory guidelines, as of both March 31, 2016 and December 31, 2015. See “Part I—Item 1. Business—Supervision and Regulation” for additional information.
Short-Term Borrowings and Long-Term Debt
We access the capital markets to meet our funding needs through the issuance of senior and subordinated notes, securitized debt obligations, and federal funds purchased and securities loaned or sold under agreements to repurchase. In addition, we may utilize short-term and long-term FHLB advances secured by our investment securities, residential home loans, multifamily real estate loans, commercial real estate loans and home equity lines of credit. A portion of our long-term FHLB advances are structured with either a one-month or a three-month call option at our discretion.
Our short-term borrowings include those borrowings with an original contractual maturity of one year or less and do not include the current portion of long-term debt. The short-term borrowings, which consist of federal funds purchased and securities loaned or sold under agreements to repurchase, and short-term FHLB advances, decreased by $64 million to $917 million as of March 31, 2016 from December 31, 2015.
Our long-term debt, which primarily consists of securitized debt obligations, senior and subordinated notes, and long-term FHLB advances, decreased by $8.6 billion to $49.6 billion as of March 31, 2016 from December 31, 2015. The decrease was primarily attributable to a net decrease of $7.2 billion in long-term callable FHLB advances and a net decrease of $1.3 billion in securitized debt obligations.

 
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Table 32 displays the maturity profile, based on contractual maturities, of our short-term borrowings and long-term debt including securitized debt obligations, senior and subordinated notes and other borrowings as of March 31, 2016, and the outstanding balances as of December 31, 2015.
Table 32: Contractual Maturity Profile of Outstanding Debt
 
 
March 31, 2016
 
 
(Dollars in millions)
 
Up to
1 Year
 
> 1 Year
to 2 Years
 
> 2 Years
to 3 Years
 
> 3 Years
to 4 Years
 
> 4 Years
to 5 Years
 
> 5 Years
 
Total
 
December 31, 2015
Short-term borrowings:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Federal funds purchased and securities loaned or sold under agreements to repurchase
 
$
917

 
$

 
$

 
$

 
$

 
$

 
$
917

 
$
981

Total short-term borrowings
 
917

 

 

 

 

 

 
917

 
981

Long-term debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securitized debt obligations
 
5,479

 
5,215

 
1,716

 
549

 
1,592

 
362

 
14,913

 
16,166

Senior and subordinated notes:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unsecured senior debt
 
2,132

 
4,454

 
3,127

 
2,553

 

 
5,270

 
17,536

 
17,757

Unsecured subordinated debt
 
1,019

 

 

 
323

 

 
2,858

 
4,200

 
4,080

Total senior and subordinated notes
 
3,151

 
4,454

 
3,127

 
2,876

 

 
8,128

 
21,736

 
21,837

Other long-term borrowings:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FHLB advances
 
18

 
23

 
5

 
1

 
250

 
12,601

 
12,898

 
20,098

Capital lease obligations
 
1

 
1

 
1

 
1

 
1

 
28

 
33

 
33

Total other long-term borrowings
 
19

 
24

 
6

 
2

 
251

 
12,629

 
12,931

 
20,131

Total long-term debt(1)
 
8,649

 
9,693

 
4,849

 
3,427

 
1,843

 
21,119

 
49,580

 
58,134

Total short-term borrowings and long-term debt
 
$
9,566

 
$
9,693

 
$
4,849

 
$
3,427

 
$
1,843

 
$
21,119

 
$
50,497

 
$
59,115

Percentage of total
 
19%

 
19%

 
9%

 
7%

 
4%

 
42%

 
100%

 
100%

__________
(1) 
Includes unamortized discounts, premiums and other cost basis adjustments, which together result in a net addition of $68 million and a net reduction of $224 million as of March 31, 2016 and December 31, 2015, respectively.
We provide additional information on our short-term borrowings and long-term debt under “Consolidated Balance Sheets Analysis—Securitized Debt Obligations,” “Consolidated Balance Sheets Analysis—Other Debt” and in “Note 8—Deposits and Borrowings.”
Credit Ratings
Our credit ratings impact our ability to access capital markets and our non-deposit borrowing costs. Rating agencies base their ratings on numerous factors, including liquidity, capital adequacy, asset quality, quality of earnings and the probability of systemic support. Significant changes in these factors could result in different ratings. Such ratings help to support our cost effective unsecured funding as part of our overall financing programs. Table 33 provides a summary of the credit ratings for the senior unsecured debt of Capital One Financial Corporation, COBNA and CONA as of March 31, 2016 and December 31, 2015.
Table 33: Senior Unsecured Debt Credit Ratings
 
 
March 31, 2016
 
December 31, 2015
 
  
Capital One
Financial
Corporation
  
Capital One
Bank (USA),
N.A.
  
Capital One,
N.A.
  
Capital One
Financial
Corporation
 
Capital One
Bank (USA),
N.A.
  
Capital One,
N.A.
Moody’s
  
Baa1
  
Baa1
  
Baa1
  
Baa1
  
Baa1
  
Baa1
S&P
 
BBB
 
BBB+
 
BBB+
 
BBB
 
BBB+
 
BBB+
Fitch
 
A-
 
A-
 
A-
 
A-
 
A-
 
A-
As of May 2, 2016, Moody’s, S&P and Fitch have us on a stable outlook.

 
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MARKET RISK PROFILE
Market risk is inherent in the financial instruments associated with our operations and activities, including loans, deposits, securities, short-term borrowings, long-term debt and derivatives. Below we provide additional information about our primary sources of market risk, our market risk management strategies and the measures we use to evaluate our market risk exposure.
Primary Market Risk Exposures
Our primary source of market risk is interest rate risk. We also have exposure to foreign exchange risk.
Interest Rate Risk
Interest rate risk, which represents exposure to instruments whose yield or price varies with the volatility of interest rates, is our most significant source of market risk exposure. Banks are inevitably exposed to interest rate risk due to differences in the timing between the maturities or re-pricing of assets and liabilities.
Foreign Exchange Risk
Foreign exchange risk represents exposure to changes in the values of current holdings and future cash flows denominated in other currencies. Our primary exposure is related to the funding of our non-dollar net investments in our International Card business in the U.K. and Canada. Changes in foreign exchange rates affect the value of non-dollar-denominated equity invested in our foreign operations and impact our AOCI and related capital ratios. Our intercompany funding exposes our consolidated statements of income to foreign exchange transaction risk, while our equity investments in our foreign operations results in translation risk in AOCI. We manage our transaction risk by entering into forward foreign currency derivative contracts to hedge our exposure to variability in cash flows related to foreign currency-denominated intercompany borrowings. In the third quarter of 2014, we began entering into net investment hedges to manage our AOCI exposure. We apply hedge accounting to both intercompany funding hedges and net investment hedges.
We measure our total exposure by regularly tracking the equity value of our net equity invested in our U.K. and Canadian operations as well as their funding requirements. We apply a 30% U.S. dollar appreciation shock against each of our Great British pound (“GBP”) and Canadian dollar (“CAD”) net investment exposures, which we believe approximates a significant adverse foreign exchange movement over a one-year time horizon. Our gross equity exposures were 1.4 billion GBP as of both March 31, 2016 and December 31, 2015, and 704 million CAD and 686 million CAD as of March 31, 2016 and December 31, 2015, respectively. As a result of our derivative management activities, we believe our net exposure to foreign exchange risk is minimal.
Market Risk Management
We employ several techniques to manage our interest rate and foreign exchange risk, which include, but are not limited to, altering the duration and re-pricing characteristics of our various assets and liabilities through interest rate derivatives or mitigating the foreign exchange exposure of certain non-dollar-denominated equity or transactions through derivatives. Derivatives are one of the primary tools we use in managing interest rate and foreign exchange risk. Our current market risk management policies include the use of derivatives. We execute our derivative contracts in both over-the-counter and exchange-traded derivative markets. Although the majority of our derivatives are interest rate swaps, we also use a variety of other derivative instruments, including caps, floors, options, futures and forward contracts, to manage both our interest rate and foreign currency risk. The outstanding notional amount of our derivative contracts totaled $114.0 billion as of March 31, 2016, compared to $105.9 billion as of December 31, 2015, driven by an increase in our hedging activities.

 
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Market Risk Measurement
We have risk management policies and limits established by our market risk management policies and approved by the Board of Directors. Our objective is to manage our asset and liability risk position and exposure to market risk in accordance with these policies and prescribed limits based on prevailing market conditions and long-term expectations. Because no single measure can reflect all aspects of market risk, we use various industry standard market risk measurement techniques and analysis to measure, assess and manage the impact of changes in interest rates on our net interest income and our economic value of equity and foreign exchange rates on our non-dollar-denominated earnings and non-dollar equity investments in foreign operations. We provide additional information below in “Economic Value of Equity.”
We consider the impact on both net interest income and economic value of equity in measuring and managing our interest rate risk. Because the federal funds rate was lowered to near zero in December 2008, the rate remained in a target range of 0% to 0.25% until December 2015, and then increased to a range of 0.25% to 0.50%, we use a 50 basis points decrease as our declining interest rate scenario, since a scenario where interest rates would decline by 200 basis points is unlikely. In scenarios where a 50 basis points decline would result in a rate less than 0%, we assume a rate of 0%. Below we discuss the assumptions used in calculating each of these measures.
Net Interest Income Sensitivity
This sensitivity measure estimates the impact on our projected 12-month base-line interest rate sensitive revenue resulting from movements in interest rates. Interest rate sensitive revenue consists of net interest income and certain components of other non-interest income significantly impacted by movements in interest rates, including changes in the fair value of mortgage servicing rights and free-standing interest rate swaps. Adjusted net interest income consists of net interest income and changes in the fair value of mortgage servicing rights, including related derivative hedging activity, and changes in the fair value of free-standing interest rate swaps. In addition to our existing assets and liabilities, we incorporate expected future business growth assumptions, such as loan and deposit growth and pricing, and plans for projected changes in our funding mix in our baseline forecast. In measuring the sensitivity of interest rate movements on our projected interest rate sensitive revenue, we assume a hypothetical instantaneous parallel shift in the level of interest rates of +200 basis points, +100 basis points, +50 basis points and -50 basis points to spot rates, with the lower rate scenario limited to zero as described above.
Economic Value of Equity
Our economic value of equity sensitivity measure estimates the impact on the net present value of our assets and liabilities, including derivative hedging activity, resulting from movements in interest rates. Our economic value of equity sensitivity measures are calculated based on our existing assets and liabilities, including derivatives, and do not incorporate business growth assumptions or projected plans for funding mix changes. In measuring the sensitivity of interest rate movements on our economic value of equity, we assume a hypothetical instantaneous parallel shift in the level of interest rates of +200 basis points, +100 basis points, +50 basis points and -50 basis points to spot rates, with the lower rate scenario limited to zero as described above.

 
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Table 34 shows the estimated percentage impact on our projected base-line net interest income and economic value of equity, calculated under the methodology described above, as of March 31, 2016 and December 31, 2015.
Table 34: Interest Rate Sensitivity Analysis(1)
 
 
March 31,
2016
 
December 31, 2015
Estimated impact on projected base-line net interest income
 
 
 
 
+200 basis points
 
3.5%

 
2.6%

+100 basis points
 
2.2

 
1.6

+50 basis points
 
1.4

 
0.9

–50 basis points
 
(2.1
)
 
(1.6
)
Estimated impact on economic value of equity
 
 
 
 
+200 basis points
 
(2.6
)
 
(5.2
)
+100 basis points
 
0.2

 
(1.5
)
+50 basis points
 
0.6

 
(0.4
)
–50 basis points
 
(1.7
)
 
(0.6
)
__________
(1) 
We are in the process of updating our projected deposit re-pricing assumptions as part of our regular evaluation and assessment of the assumptions and models used to measure our interest rate sensitivity and expect this update to be complete by the end of the second quarter of 2016. If approved, we anticipate that this update would result in less asset sensitivity in the projected base-line net interest income measures.
Our projected net interest income and economic value of equity sensitivity measures were within our policy limits as of March 31, 2016 and December 31, 2015. In addition to these industry standard measures, we will continue to factor into our internal interest rate risk management decisions the potential impact of alternative interest rate scenarios, such as stressed rate shocks as well as steepening and flattening yield curve scenarios.
Limitations of Market Risk Measures
The interest rate risk models that we use in deriving these measures incorporate contractual information, internally-developed assumptions and proprietary modeling methodologies, which project borrower and depositor behavior patterns in certain interest rate environments. Other market inputs, such as interest rates, market prices and interest rate volatility, are also critical components of our interest rate risk measures. We regularly evaluate, update and enhance these assumptions, models and analytical tools as we believe appropriate to reflect our best assessment of the market environment and the expected behavior patterns of our existing assets and liabilities.
There are inherent limitations in any methodology used to estimate the exposure to changes in market interest rates. The sensitivity analysis described above contemplates only certain movements in interest rates and is performed at a particular point in time based on the existing balance sheet and, in some cases, expected future business growth and funding mix assumptions. The strategic actions that management may take to manage our balance sheet may differ significantly from our projections, which could cause our actual earnings and economic value of equity sensitivities to differ substantially from the above sensitivity analysis.
SUPERVISION AND REGULATION
On March 15, 2016, the FDIC issued a final rule implementing Section 334(e) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). Section 334(e) mandates that the FDIC offset the effect of increasing the Deposit Insurance Fund (“DIF”) reserve ratio from 1.15% to 1.35% on insured depository institutions with total consolidated assets of less than $10 billion. The final rule imposes a new quarterly deposit insurance surcharge assessment, with an annual rate of 4.5 basis points, on all insured depository institutions with assets of $10 billion or more (including the Banks), in addition to the regular quarterly deposit insurance assessments applicable to all insured depository institutions. The surcharge will begin the quarter after the DIF reserve ratio first reaches or exceeds 1.15% (projected by the FDIC as likely to occur during the second quarter of 2016) and will continue until the reserve ratio first reaches or exceeds 1.35%. The FDIC estimates the reserve ratio will reach 1.35% by June 2018; however, if the reserve ratio does not reach 1.35% by December 31, 2018, the FDIC will impose a one-time shortfall assessment on depository institutions subject to the surcharge, including the Banks, on March 31, 2019. The surcharge is expected to be partially offset by lower FDIC assessment rates, which will be in effect once the DIF reserve ratio reaches 1.15%.

 
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We provide additional information on our Supervision and Regulation in our 2015 Form 10-K under “Part I—Item 1. Business—Supervision and Regulation.”
FORWARD-LOOKING STATEMENTS
From time to time, we have made and will make forward-looking statements, including those that discuss, among other things, strategies, goals, outlook or other non-historical matters; projections, revenues, income, returns, expenses, capital measures, accruals for claims in litigation and for other claims against us; earnings per share or other financial measures for us; future financial and operating results; our plans, objectives, expectations and intentions; and the assumptions that underlie these matters.
To the extent that any such information is forward-looking, it is intended to fit within the safe harbor for forward-looking information provided by the Private Securities Litigation Reform Act of 1995.
Numerous factors could cause our actual results to differ materially from those described in such forward-looking statements, including, among other things:
general economic and business conditions in the U.S., the U.K., Canada or our local markets, including conditions affecting employment levels, interest rates, collateral values, consumer income, credit worthiness and confidence, spending and savings that may affect consumer bankruptcies, defaults, charge-offs and deposit activity;
an increase or decrease in credit losses, including increases due to a worsening of general economic conditions in the credit environment and the impact of inaccurate estimates or inadequate reserves;
financial, legal, regulatory, tax or accounting changes or actions, including the impact of the Dodd-Frank Act and the regulations promulgated thereunder, and other regulatory reforms and regulations governing bank capital and liquidity standards, including Basel-related initiatives and potential changes to financial accounting and reporting standards;
developments, changes or actions relating to any litigation, governmental investigation or regulatory enforcement action or matter involving us;
the inability to sustain revenue and earnings growth;
increases or decreases in interest rates;
our ability to access the capital markets at attractive rates and terms to capitalize and fund our operations and future growth;
the success of our marketing efforts in attracting and retaining customers;
increases or decreases in our aggregate loan balances or the number of customers and the growth rate and composition thereof, including increases or decreases resulting from factors such as shifting product mix, amount of actual marketing expenses we incur and attrition of loan balances;
the level of future repurchase or indemnification requests we may receive, the actual future performance of mortgage loans relating to such requests, the success rates of claimants against us, any developments in litigation and the actual recoveries we may make on any collateral relating to claims against us;
the amount and rate of deposit growth;
changes in the reputation of, or expectations regarding, the financial services industry or us with respect to practices, products or financial condition;
changes in retail distribution strategies and channels, including in the behavior and expectations of our customers,
any significant disruption in our operations or technology platform, including security failures or breaches on our business;
our ability to maintain a compliance and technology infrastructure suitable for the nature of our business;

 
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our ability to develop digital technology that addresses the needs of our customers, including the challenges relating to rapid significant technological changes;
our ability to control costs;
the effectiveness of our risk management strategies;
the amount of, and rate of growth in, our expenses as our business develops or changes or as it expands into new market areas;
our ability to execute on our strategic and operational plans;
the extensive use of models in our business, including those to aggregate and assess various risk exposures and estimate certain financial values;
any significant disruption of, or loss of public confidence in, the United States mail service affecting our response rates and consumer payments;
any significant disruption of, or loss of public confidence in, the internet affecting the ability of our customers to access their accounts and conduct banking transactions;
our ability to recruit and retain talented and experienced personnel;
changes in the labor and employment markets;
fraud or misconduct by our customers, employees or business partners;
competition from providers of products and services that compete with our businesses; and
other risk factors listed from time to time in reports that we file with the SEC.
Any forward-looking statements made by us or on our behalf speak only as of the date they are made or as of the date indicated, and we do not undertake any obligation to update forward-looking statements as a result of new information, future events or otherwise. You should carefully consider the factors discussed above in evaluating these forward-looking statements. For additional information on factors that could materially influence forward-looking statements included in this Report, see the risk factors set forth under “Part I—Item 1A. Risk Factors” in our 2015 Form 10-K.

 
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SUPPLEMENTAL TABLE
Table A—Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures
(Dollars in millions)
 
March 31, 2016
 
December 31, 2015
Period End Tangible Common Equity
 
 
 
 
Period end stockholders’ equity
 
$
47,707

 
$
47,284

Goodwill and intangible assets(1)
 
(15,629
)
 
(15,701
)
Noncumulative perpetual preferred stock(2)
 
(3,296
)
 
(3,294
)
Tangible common equity
 
$
28,782

 
$
28,289

Quarterly Average Tangible Common Equity
 
 
 
 
Average stockholders' equity
 
$
49,078

 
$
48,712

Average goodwill and intangible assets(1)
 
(15,654
)
 
(15,316
)
Average noncumulative perpetual preferred stock(2)
 
(3,296
)
 
(3,294
)
Average tangible common equity
 
$
30,128

 
$
30,102

Period End Tangible Assets
 
 
 
 
Period end assets
 
$
330,346

 
$
334,048

Goodwill and intangible assets(1)
 
(15,629
)
 
(15,701
)
Tangible assets
 
$
314,717

 
$
318,347

Quarterly Average Tangible Assets
 
 
 
 
Average assets
 
$
331,919

 
$
323,354

Average goodwill and intangible assets(1)
 
(15,654
)
 
(15,316
)
Average tangible assets
 
$
316,265

 
$
308,038

Non-GAAP Ratio
 
 
 
 
TCE ratio(3)
 
9.1%

 
8.9%

Capital Ratios
 
 
 
 
Common equity Tier 1 capital ratio(4)
 
11.1
%
 
11.1%

Tier 1 capital ratio(5)
 
12.4

 
12.4

Total capital ratio(6)
 
14.6

 
14.6

Tier 1 leverage ratio(7)
 
10.2

 
10.6

Supplementary leverage ratio(8)
 
8.9

 
9.2

Risk-weighted assets
 
$
262,368

 
$
265,739

Average assets for Tier 1 leverage ratio
 
317,403

 
309,037

Total leverage exposure for supplementary leverage ratio
 
366,301

 
357,794


 
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(Dollars in millions)
 
March 31, 2016
 
December 31, 2015
Regulatory Capital Under Basel III Standardized Approach
 
 
 
 
Common equity excluding AOCI
 
$
44,452

 
$
44,606

Adjustments:
 
 
 
 
AOCI(9)(10)
 
117

 
(254
)
Goodwill(1)
 
(14,301
)
 
(14,296
)
Intangible Assets(1)(10)
 
(532
)
 
(393
)
Other
 
(505
)
 
(119
)
Common equity Tier 1 capital
 
29,231

 
29,544

Tier 1 capital instruments(2)
 
3,294

 
3,294

Additional Tier 1 capital adjustments
 

 

Tier 1 capital
 
32,525

 
32,838

Tier 2 capital instruments
 
2,566

 
2,654

Qualifying allowance for loan and lease losses
 
3,308

 
3,346

Tier 2 capital
 
5,874

 
6,000

Total capital(11)
 
$
38,399

 
$
38,838

__________
(1) 
Includes impact of related deferred taxes.
(2) 
Includes related surplus.
(3) 
Tangible common equity ratio is a non-GAAP measure calculated based on TCE divided by tangible assets.
(4) 
Common equity Tier 1 capital ratio is a regulatory capital measure calculated based on common equity Tier 1 capital divided by risk-weighted assets.
(5) 
Tier 1 capital ratio is a regulatory capital measure calculated based on Tier 1 capital divided by risk-weighted assets.
(6) 
Total capital ratio is a regulatory capital measure calculated based on total capital divided by risk-weighted assets.
(7) 
Tier 1 leverage ratio is a regulatory capital measure calculated based on Tier 1 capital divided by average assets, after certain adjustments.
(8) 
Supplementary leverage ratio is a regulatory capital measure calculated based on Tier 1 capital divided by total leverage exposure. See “MD&A—Capital Management” for additional information.
(9) 
Amounts presented are net of tax.
(10) 
Amounts based on transition provisions for regulatory capital deductions and adjustments of 40% for 2015 and 60% for 2016.
(11) 
Total capital equals the sum of Tier 1 capital and Tier 2 capital.
 
 
 
 
 
 
 


 
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Glossary and Acronyms
2015 Stock Repurchase Program: On March 11, 2015, we announced that our Board of Directors had authorized the repurchase of up to $3.125 billion of shares of our common stock beginning in the second quarter of 2015 through the end of the second quarter of 2016. On February 17, 2016 we announced that our Board of Directors had authorized the repurchase of up to an additional $300 million of shares of common stock through the end of the second quarter of 2016.
Annual Report: References to our “2015 Form 10-K” or “2015 Annual Report” are to our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.
Banks: Refers to COBNA and CONA.
Basel Committee: The Basel Committee on Banking Supervision.
Basel III Advanced Approaches: The Basel III Advanced Approaches is mandatory for those institutions with consolidated total assets of $250 billion or more or consolidated total on-balance sheet foreign exposure of $10 billion or more. The Final Basel III Capital Rule modified the Advanced Approaches version of Basel II to create the Basel III Advanced Approaches.
Basel III Standardized Approach: The Final Basel III Capital Rule modified Basel I to create the Basel III Standardized Approach, which requires for Basel III Advanced Approaches banking organizations that have yet to exit parallel run to use the Basel III Standardized Approach to calculate regulatory capital, including capital ratios, subject to transition provisions.
Benefit Obligation and Projected Benefit Obligation: Benefit Obligation refers to the total of the projected benefit obligation for pension plans and the accumulated postretirement benefit obligations. Projected Benefit Obligation represents the actuarial present value of all benefits accrued on employee service rendered prior to the calculation date, including allowance for future salary increases if the pension benefit is based on future compensation levels.
BHC Act: The Bank Holding Company Act of 1956, as amended (12 U.S.C. § 1842).
Capital One: Capital One Financial Corporation and its subsidiaries.
Carrying value (with respect to loans): The amount at which a loan is recorded on the consolidated balance sheets. For loans recorded at amortized cost, carrying value is the unpaid principal balance net of unamortized deferred loan origination fees and costs, and unamortized purchase premium or discount. For loans that are or have been on nonaccrual status, the carrying value is also reduced by any net charge-offs that have been recorded and the amount of interest payments applied as a reduction of principal under the cost recovery method. For credit card loans, the carrying value also includes interest that has been billed to the customer. For loans classified as held for sale, carrying value is the lower of carrying value as described in the sentences above, or fair value. For PCI loans, the carrying value equals fair value upon acquisition adjusted for subsequent cash collections and yield accreted to date.
CCB: Chevy Chase Bank, F.S.B., which was acquired by the Company in 2009.
COBNA: Capital One Bank (USA), National Association, one of our fully owned subsidiaries, which offers credit and debit card products, other lending products and deposit products.
Collective trusts: An investment fund formed from the pooling of investments by investors.
Common equity Tier 1 capital: Common equity, related surplus and retained earnings less accumulated other comprehensive income net of applicable phase-ins, less goodwill and intangibles net of associated deferred tax liabilities and applicable phase-ins, less other deductions, as defined by regulators.
Company: Capital One Financial Corporation and its subsidiaries.
CONA: Capital One, National Association, one of our fully owned subsidiaries, which offers a broad spectrum of banking products and financial services to consumers, small businesses and commercial clients.
Credit risk: The risk of loss from an obligor’s failure to meet the terms of any contract or otherwise fail to perform as agreed.
Derivative: A contract or agreement whose value is derived from changes in interest rates, foreign exchange rates, prices of securities or commodities, credit worthiness for credit default swaps or financial or commodity indices.

 
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Discontinued operations: The operating results of a component of an entity, as defined by Accounting Standards Codification (“ASC”) 205, that are removed from continuing operations when that component has been disposed of or it is management’s intention to sell the component.
Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”): Regulatory reform legislation signed into law on July 21, 2010. This law broadly affects the financial services industry and contains numerous provisions aimed at strengthening the sound operation of the financial services sector.
Exchange Act: The Securities Exchange Act of 1934.
eXtensible Business Reporting Language (“XBRL”): A language for the electronic communication of business and financial data.
Federal Banking Agencies: The Federal Reserve, Office of the Comptroller of the Currency and Federal Deposit Insurance Corporation.
Federal Reserve: Board of Governors of the Federal Reserve System.
FICO score: A measure of consumer credit risk provided by credit bureaus, typically produced from statistical modeling software created by Fair Isaac Corporation utilizing data collected by the credit bureaus.
Final Basel III Capital Rule: The Federal Baking Agencies issued a rule in July 2013 implementing the Basel III capital framework developed by the Basel Committee as well as certain Dodd-Frank Act and other capital provisions.
Final LCR Rule: In September 2014, the Federal Banking Agencies issued final rules implementing the Basel III Liquidity Coverage Ratio in the United States. The Final LCR Rule applies to institutions with $250 billion or more in total consolidated assets or $10 billion or more in total consolidated on-balance sheet foreign exposure, and their respective consolidated subsidiary depository institutions with $10 billion or more in total consolidated assets. The LCR is calculated by dividing the amount of an institution’s high quality, unencumbered liquid assets by its estimated net cash outflow, as defined and calculated in accordance with Final LCR Rule.
Foreign currency derivative contracts: An agreement to exchange contractual amounts of one currency for another currency at one or more future dates.
Foreign exchange contracts: Contracts that provide for the future receipt or delivery of foreign currency at previously agreed-upon terms.
GreenPoint: Refers to our wholesale mortgage banking unit, GreenPoint Mortgage Funding, Inc., which was closed in 2007.
GSE or Agency: A government-sponsored enterprise or agency is a financial services corporation created by the United States Congress. Examples of U.S. government agencies include Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac), Government National Mortgage Association (Ginnie Mae) and the Federal Home Loan Banks (FHLB).
HFS acquisition: On December 1, 2015, we acquired the Healthcare Financial Services business of General Electric Capital Corporation, which provides financing to companies in various healthcare sectors, including hospitals, senior housing, medical offices, pharmaceuticals, medical devices and healthcare technology.
Impaired loans: A loan is considered impaired when, based on current information and events, it is probable that we will not be able to collect all amounts due from the borrower in accordance with the original contractual terms of the loan.
Inactive Insured Securitizations: Securitizations as to which the monoline bond insurers have not made repurchase-related requests or loan file requests to one of our subsidiaries.
ING Direct acquisition: On February 17, 2012, we completed the acquisition of substantially all of the ING Direct business in the United States (“ING Direct”) from ING Groep N.V., ING Bank N.V., ING Direct N.V. and ING Direct Bancorp.
Insured securitizations: Securitizations supported by bond insurance.
Interest rate sensitivity: The exposure to interest rate movements.
Interest rate swaps: Contracts in which a series of interest rate flows in a single currency are exchanged over a prescribed period. Interest rate swaps are the most common type of derivative contract that we use in our asset/liability management activities.

 
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Investment grade: Represents Moody’s long-term rating of Baa3 or better; and/or a Standard & Poor’s, Fitch or DBRS long-term rating of BBB- or better; or if unrated, an equivalent rating using our internal risk ratings. Instruments that fall below these levels are considered to be non-investment grade.
Investments in qualified affordable housing projects: Capital One invests in private investment funds that make equity investments in multifamily affordable housing properties that provide affordable housing tax credits for these investments. The activities of these entities are financed with a combination of invested equity capital and debt.
Investor entities: Entities that invest in community development entities (“CDE”) that provide debt financing to businesses and non-profit entities in low-income and rural communities.
Leverage ratio: Tier 1 capital divided by average assets after certain adjustments, as defined by the regulators.
Liquidity risk: The risk that the Company will not be able to meet its future financial obligations as they come due, or invest in future asset growth because of an inability to obtain funds at a reasonable price within a reasonable time period.
Loan-to-value (“LTV”) ratio: The relationship expressed as a percentage, between the principal amount of a loan and the appraised value of the collateral (i.e., residential real estate, autos, etc.) securing the loan.
Managed presentation: A non-GAAP presentation of financial results that includes reclassifications to present revenue on a fully taxable-equivalent basis. Management uses this non-GAAP financial measure at the segment level, because it believes this provides information to enable investors to understand the underlying operational performance and trends of the particular business segment and facilitates a comparison of the business segment with the performance of competitors.
Market risk: The risk that an institution’s earnings or the economic value of equity could be adversely impacted by changes in interest rates, foreign exchange rates or other market factors.
Master netting agreement: An agreement between two counterparties that have multiple contracts with each other that provides for the net settlement of all contracts through a single payment in the event of default or termination of any one contract.
Mortgage-backed security (“MBS”): An asset-backed security whose cash flows are backed by the principal and interest payments of a set of mortgage loans.
Mortgage servicing rights (“MSR”): The right to service a mortgage loan when the underlying loan is sold or securitized. Servicing includes collections for principal, interest and escrow payments from borrowers and accounting for and remitting principal and interest payments to investors.
Net interest margin: The result of dividing net interest income by average interest-earning assets.
Nonperforming loans and leases: Loans and leases that have been placed on non-accrual status.
North Fork: North Fork Bancorporation, Inc., which was acquired by the Company in 2006.
Operational risk: The risk of loss, capital impairment, adverse customer experience or reputational impact resulting from failure to comply with policies and procedures, failed internal processes or systems, or from external events.
Option-ARM loans: The option-ARM real estate loan product is an adjustable-rate mortgage loan that initially provides the borrower with the monthly option to make a fully-amortizing, interest-only or minimum fixed payment. After the initial payment option period, usually five years, the recalculated minimum payment represents a fully-amortizing principal and interest payment that would effectively repay the loan by the end of its contractual term.
Other-than-temporary impairment (“OTTI”): An impairment charge taken on a security whose fair value has fallen below the carrying value on the balance sheet and its value is not expected to recover through the holding period of the security.
Patriot Act: The USA PATRIOT Act of 2001 (Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism).
PCI loans: Refers to the loans acquired in a business combination that were recorded at fair value at acquisition and subsequently accounted for based on cash flows expected to be collected in accordance with ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (formerly known as “Statement of Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer,” commonly referred to as “SOP 03-3”). Acquired loans are considered PCI loans if they have a discount attributable, at least in part, to credit deterioration and they are not specifically scoped out of this guidance. Our PCI loans include a limited portion of commercial loans acquired in the fourth quarter of 2015 in the HFS acquisition and the substantial majority of consumer and commercial loans acquired in the ING Direct and Chevy Chase acquisitions.

 
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The excess of cash flows expected to be collected over the estimated fair value of purchased loans represents the accretable yield, which is recognized into interest income over the life of the loans. The difference between total contractual payments on the loans and all expected cash flows represents the nonaccretable difference or the amount of principal and interest not considered collectible, which incorporates future expected credit losses over the life of the loans. Decreases in expected cash flows from credit deterioration subsequent to acquisition will generally result in an impairment charge recognized in our provision for credit losses and an increase in the allowance for loan and lease losses. Charge-offs are not recorded until the expected credit losses within the nonaccretable difference are depleted. PCI loans are not classified as delinquent or nonperforming as we expect to collect our net investment in these loans and the nonaccretable difference will absorb the majority of the losses associated with these loans. In addition, PCI loans are excluded from impaired loans because the applicable accounting methodology takes into consideration expected future credit losses.
Public Fund deposits: Deposits that are derived from a variety of political subdivisions such as school districts and municipalities.
Purchase volume: Dollar amount of customer purchases, net of returns.
Rating agency: An independent agency that assesses the credit quality and likelihood of default of an issue or issuer and assigns a rating to that issue or issuer.
Recorded investment: The amount of the investment in a loan which includes any direct write-down of the investment.
Repurchase agreement: An instrument used to raise short-term funds whereby securities are sold with an agreement for the seller to buy back the securities at a later date.
Restructuring charges: Charges typically from the consolidation or relocation of operations, and reductions in work force.
Return on average assets: Calculated based on income from continuing operations, net of tax, for the period divided by average total assets for the period.
Return on average common equity: Calculated based on the sum of (i) income from continuing operations, net of tax; (ii) less dividends and undistributed earnings allocated to participating securities; (iii) less preferred stock dividends, for the period, divided by average common equity. Our calculation of return on average common equity may not be comparable to similarly titled measures reported by other companies.
Return on average tangible common equity: Calculated based on the sum of (i) income from continuing operations, net of tax; (ii) less dividends and undistributed earnings allocated to participating securities; and (iii) less preferred stock dividends, for the period, divided by average tangible common equity. Our calculation of return on average tangible common equity may not be comparable to similarly titled measures reported by other companies.
Risk-weighted assets: Consist of on- and off-balance sheet assets that are assigned to one of several broad risk categories and weighted by factors representing their risk and potential for default.
Securitized debt obligations: A type of asset-backed security and structured credit product constructed from a portfolio of fixed-income assets.
Small-ticket commercial real estate: Our small-ticket commercial real estate portfolio is predominantly low- or no-documentation loans with balances generally less than $2 million. This portfolio was originated on a national basis through a broker network and is in a run-off mode.
Subprime: For purposes of lending in our Credit Card business we generally consider FICO scores of 660 or below, or other equivalent risk scores, to be subprime. For purposes of auto lending in our Consumer Banking business we generally consider FICO scores of 620 or below to be subprime.
Tangible common equity (“TCE”): Common equity less goodwill and intangible assets adjusted for deferred tax liabilities associated with non-tax deductible intangible assets and tax deductible goodwill.
Troubled debt restructuring (“TDR”): A TDR is deemed to occur when the Company modifies the contractual terms of a loan agreement by granting a concession to a borrower that is experiencing financial difficulty.
U.K. PPI Reserve: U.K. payment protection insurance customer refund reserve.
U.S. GAAP: Accounting principles generally accepted in the United States of America. Accounting rules and conventions defining acceptable practices in preparing financial statements in the U.S.
Unfunded commitments: Legally binding agreements to provide a defined level of financing until a specified future date.

 
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Variable Interest Entity (“VIE”): An entity that: (i) lacks enough equity investment at risk to permit the entity to finance its activities without additional financial support from other parties; (ii) has equity owners that lack the right to make significant decisions affecting the entity’s operations; and/or (iii) has equity owners that do not have an obligation to absorb or the right to receive the entity’s losses or return.
Volcker Rule: A final rule implementing Section 619 of the Dodd-Frank Act that contains prohibitions on proprietary trading and certain investments in, and relationships with, covered funds (hedge funds, private equity funds and similar funds).
Acronyms
ABS: Asset-backed security
AOCI: Accumulated other comprehensive income
ARM: Adjustable rate mortgage
ASC: Accounting Standards Codification
BHC: Bank holding company
bps: Basis points
CAD: Canadian dollar
CCAR: Comprehensive Capital Analysis and Review
CDE: Community development entities
CFPB: Consumer Financial Protection Bureau
CFTC: Commodity Futures Trading Commission
CMBS: Commercial mortgage-backed securities
COEP: Capital One (Europe) plc
COF: Capital One Financial Corporation
COSO: Committee of Sponsoring Organizations of the Treadway Commission
CRA: Community Reinvestment Act
DIF: Deposit Insurance Fund
DUS: Delegated Underwriting and Servicing
Fannie Mae: Federal National Mortgage Association
FASB: Financial Accounting Standards Board
FCA: Financial Conduct Authority
FDIC: Federal Deposit Insurance Corporation
FDICIA: The Federal Deposit Insurance Corporation Improvement Act of 1991
FFIEC: Federal Financial Institutions Examination Council
FHA: Federal Housing Administration
FHLB: Federal Home Loan Banks
FICO: Fair Isaac Corporation (credit rating)
FIRREA: Financial Institutions Reform, Recovery and Enforcement Act
Fitch: Fitch Ratings
Freddie Mac: Federal Home Loan Mortgage Corporation
FVC: Fair Value Committee
GBP: Great British pound
GDP: Gross domestic product
Ginnie Mae: Government National Mortgage Association
GLBA: Gramm-Leach-Bliley Act
GSE or Agency: Government-sponsored enterprise

 
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HELOCs: Home equity lines of credit
HFI: Held for investment
LCR: Liquidity coverage ratio
LIBOR: London Interbank Offered Rate
Moody’s: Moody’s Investors Service
MSR: Mortgage servicing rights
NOW: Negotiable order of withdrawal
NSFR: Net stable funding ratio
OCC: Office of the Comptroller of the Currency
OTC: Over-the-counter
PCA: Prompt corrective action
PCI: Purchased credit-impaired
PCCR: Purchased credit card relationship
RMBS: Residential mortgage-backed securities
S&P: Standard & Poor’s
SCRA: Servicemembers Civil Relief Act
SEC: U.S. Securities and Exchange Commission
SLR: Supplementary leverage ratio
TARP: Troubled Asset Relief Program
TAV: Trade Analytics and Valuation team
TCE: Tangible common equity
TDR: Troubled debt restructuring
TILA: Truth in Lending Act
U.K.: United Kingdom
U.S.: United States of America
UCL: Unfair Competition Law
VAC: Valuations Advisory Committee

 
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Item 1. Financial Statements and Notes
 
Page
Note  5—Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments


 
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CAPITAL ONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 
 
Three Months Ended March 31,
(Dollars in millions, except per share-related data)
 
2016
 
2015
Interest income:
 
 
 
 
Loans, including loans held for sale
 
$
5,085

 
$
4,540

Investment securities
 
415

 
406

Other
 
17

 
28

Total interest income
 
5,517

 
4,974

Interest expense:
 
 
 
 
Deposits
 
283

 
271

Securitized debt obligations
 
48

 
33

Senior and subordinated notes
 
106

 
79

Other borrowings
 
24

 
15

Total interest expense
 
461

 
398

Net interest income
 
5,056

 
4,576

Provision for credit losses
 
1,527

 
935

Net interest income after provision for credit losses
 
3,529

 
3,641

Non-interest income:
 
 
 
 
Service charges and other customer-related fees
 
404

 
437

Interchange fees, net
 
596

 
496

Total other-than-temporary impairment
 
(11
)
 
(9
)
Less: Portion of other-than-temporary impairment recorded in AOCI
 
3

 
(6
)
Net other-than-temporary impairment recognized in earnings
 
(8
)
 
(15
)
Other
 
172

 
153

Total non-interest income
 
1,164

 
1,071

Non-interest expense:
 
 
 
 
Salaries and associate benefits
 
1,270

 
1,211

Occupancy and equipment
 
458

 
435

Marketing
 
428

 
375

Professional services
 
278

 
296

Communications and data processing
 
243

 
202

Amortization of intangibles
 
101

 
110

Other
 
445

 
420

Total non-interest expense
 
3,223

 
3,049

Income from continuing operations before income taxes
 
1,470

 
1,663

Income tax provision
 
452

 
529

Income from continuing operations, net of tax
 
1,018

 
1,134

Income (loss) from discontinued operations, net of tax
 
(5
)
 
19

Net income
 
1,013

 
1,153

Dividends and undistributed earnings allocated to participating securities
 
(6
)
 
(6
)
Preferred stock dividends
 
(37
)
 
(32
)
Net income available to common stockholders
 
$
970

 
$
1,115

Basic earnings per common share:
 
 
 
 
Net income from continuing operations
 
$
1.86

 
$
2.00

Income (loss) from discontinued operations
 
(0.01
)
 
0.03

Net income per basic common share
 
$
1.85

 
$
2.03

Diluted earnings per common share:
 
 
 
 
Net income from continuing operations
 
$
1.85

 
$
1.97

Income (loss) from discontinued operations
 
(0.01
)
 
0.03

Net income per diluted common share
 
$
1.84

 
$
2.00

Dividends paid per common share
 
$
0.40

 
$
0.30

See Notes to Consolidated Financial Statements.

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

 
 
Three Months Ended March 31,
(Dollars in millions)
 
2016
 
2015
Net income
 
$
1,013

 
$
1,153

Other comprehensive income (loss), net of tax:
 
 
 
 
Net unrealized gains on securities available for sale
 
187

 
122

Net changes in securities held to maturity
 
21

 
20

Net unrealized gains on cash flow hedges
 
377

 
162

Foreign currency translation adjustments
 
1

 
(84
)
Other
 
(11
)
 
(2
)
Other comprehensive income (loss), net of tax
 
575

 
218

Comprehensive income
 
$
1,588

 
$
1,371





















See Notes to Consolidated Financial Statements.

 
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CAPITAL ONE FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)



(Dollars in millions, except per share data)
 
March 31,
2016
 
December 31,
2015
Assets:
 
 
 
 
Cash and cash equivalents:
 
 
 
 
Cash and due from banks
 
$
3,241

 
$
3,407

Interest-bearing deposits with banks
 
1,909

 
4,577

Federal funds sold and securities purchased under agreements to resell
 
85

 
39

Total cash and cash equivalents
 
5,235

 
8,023

Restricted cash for securitization investors
 
960

 
1,017

Securities available for sale, at fair value
 
40,092

 
39,061

Securities held to maturity, at carrying value
 
25,080

 
24,619

Loans held for investment:
 
 
 
 
Unsecuritized loans held for investment
 
195,705

 
196,068

Loans held in consolidated trusts
 
31,908

 
33,783

Total loans held for investment
 
227,613

 
229,851

Allowance for loan and lease losses
 
(5,416
)
 
(5,130
)
Net loans held for investment
 
222,197

 
224,721

Loans held for sale, at lower of cost or fair value
 
1,251

 
904

Premises and equipment, net
 
3,542

 
3,584

Interest receivable
 
1,221

 
1,189

Goodwill
 
14,492

 
14,480

Other assets
 
16,276

 
16,450

Total assets
 
$
330,346

 
$
334,048

 
 
 
 
 
Liabilities:
 
 
 
 
Interest payable
 
$
217

 
$
299

Deposits:
 
 
 
 
Non-interest bearing deposits
 
25,182

 
25,847

Interest-bearing deposits
 
196,597

 
191,874

Total deposits
 
221,779

 
217,721

Securitized debt obligations
 
14,913

 
16,166

Other debt:
 
 
 
 
Federal funds purchased and securities loaned or sold under agreements to repurchase
 
917

 
981

Senior and subordinated notes
 
21,736

 
21,837

Other borrowings
 
12,931

 
20,131

Total other debt
 
35,584

 
42,949

Other liabilities
 
10,146

 
9,629

Total liabilities
 
282,639

 
286,764

Commitments, contingencies and guarantees (see Note 14)
 

 

Stockholders’ equity:
 
 
 
 
Preferred stock (par value $.01 per share; 50,000,000 shares authorized; 3,375,000 shares issued and outstanding as of both March 31, 2016 and December 31, 2015)
 
0

 
0

Common stock (par value $.01 per share; 1,000,000,000 shares authorized; 650,153,064 and 648,317,395 shares issued as of March 31, 2016 and December 31,2015, respectively, and 514,479,243 and 527,259,920 shares outstanding as of March 31, 2016 and December 31,2015, respectively)
 
7

 
6

Additional paid-in capital, net
 
29,709

 
29,655

Retained earnings
 
27,808

 
27,045

Accumulated other comprehensive loss
 
(41
)
 
(616
)
Treasury stock, at cost (par value $.01 per share; 135,673,821 and 121,057,475 shares as of March 31, 2016 and December 31, 2015, respectively)
 
(9,776
)
 
(8,806
)
Total stockholders’ equity
 
47,707

 
47,284

Total liabilities and stockholders’ equity
 
$
330,346

 
$
334,048

See Notes to Consolidated Financial Statements.

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

(Dollars in millions)
 
Preferred Stock
 
Common Stock
 
Additional
Paid-In
Capital
 
Retained Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Treasury
Stock
 
Total
Stockholders’
Equity
Shares
 
Amount
 
Shares
 
Amount
 
Balance as of December 31, 2015
 
3,375,000

 
$
0

 
648,317,395

 
$
6

 
$
29,655

 
$
27,045

 
$
(616
)
 
$
(8,806
)
 
$
47,284

Comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
1,013

 
575

 
 
 
1,588

Dividends—common stock
 
 
 
 
 
33,871

 
0
 
2

 
(213
)
 
 
 
 
 
(211
)
Dividends—preferred stock
 
 
 
 
 
 
 
 
 
 
 
(37
)
 
 
 
 
 
(37
)
Purchases of treasury stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(970
)
 
(970
)
Issuances of common stock and restricted stock, net of forfeitures
 
 
 
 
 
1,785,298

 
1
 
29

 
 
 
 
 
 
 
30

Exercise of stock options, tax effects of exercises and restricted stock vesting
 
 
 
 
 
16,500

 
0
 
(11
)
 
 
 
 
 
 
 
(11
)
Compensation expense for restricted stock awards, restricted stock units and stock options
 
 
 
 
 
 
 
 
 
34

 
 
 
 
 
 
 
34

Balance as of March 31, 2016
 
3,375,000

 
$
0

 
650,153,064

 
$
7

 
$
29,709

 
$
27,808

 
$
(41
)
 
$
(9,776
)
 
$
47,707






































See Notes to Consolidated Financial Statements.

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

 
 
Three Months Ended March 31,
(Dollars in millions)
 
2016
 
2015
Operating activities:
 
 
 
 
Income from continuing operations, net of tax
 
$
1,018

 
$
1,134

Income (loss) from discontinued operations, net of tax
 
(5
)
 
19

Net income
 
1,013

 
1,153

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
 
Provision for credit losses
 
1,527

 
935

Depreciation and amortization, net
 
591

 
483

Net (gain) loss on sales of securities available for sale
 
0

 
(2
)
Impairment losses on securities available for sale
 
8

 
15

(Gain) loss on sales of loans held for sale
 
(45
)
 
(34
)
Stock plan compensation expense
 
44

 
50

Loans held for sale:
 
 
 
 
Originations and purchases
 
(1,611
)
 
(1,916
)
Proceeds from sales and paydowns
 
1,573

 
1,234

Changes in operating assets and liabilities:
 
 
 
 
Changes in interest receivable
 
(33
)
 
1

Changes in other assets
 
801

 
187

Changes in interest payable
 
(82
)
 
(59
)
Changes in other liabilities
 
303

 
(8
)
Net cash from discontinued operations
 
13

 
(46
)
Net cash from operating activities
 
4,102

 
1,993

Investing activities:
 
 
 
 
Securities available for sale:
 
 
 
 
Purchases
 
(4,592
)
 
(2,883
)
Proceeds from paydowns and maturities
 
1,902

 
1,891

Proceeds from sales
 
1,923

 
1,342

Securities held to maturity:
 
 
 
 
Purchases
 
(917
)
 
(1,193
)
Proceeds from paydowns and maturities
 
456

 
453

Loans:
 
 
 
 
Net changes in loans held for investment
 
271

 
3,143

Principal recoveries of loans previously charged off
 
384

 
403

Purchases of premises and equipment
 
(134
)
 
(153
)
Net cash from other investing activities
 
(21
)
 
68

Net cash from investing activities
 
(728
)
 
3,071

Financing activities:
 
 
 
 
Deposits and borrowings:
 
 
 
 
Changes in restricted cash for securitization investors
 
57

 
0

Changes in deposits
 
4,055

 
4,890

Issuance of securitized debt obligations
 
0

 
1,247

Maturities and paydowns of securitized debt obligations
 
(1,325
)
 
(175
)
Issuance of senior and subordinated notes and long-term FHLB advances
 
6,350

 
2,988

Maturities and paydowns of senior and subordinated notes and long-term FHLB advances
 
(14,050
)
 
(1,250
)
Changes in other short-term borrowings
 
(64
)
 
(10,396
)
 
Common stock:
 
 
 
 
Net proceeds from issuances
 
$
30

 
$
24

Dividends paid
 
(211
)
 
(167
)
Preferred stock:
 
 
 
 
Dividends paid
 
(37
)
 
(32
)
Purchases of treasury stock
 
(970
)
 
(563
)
Proceeds from share-based payment activities
 
3

 
19

Net cash from financing activities
 
(6,162
)
 
(3,415
)
Changes in cash and cash equivalents
 
(2,788
)
 
1,649

Cash and cash equivalents at beginning of the period
 
8,023

 
7,242

Cash and cash equivalents at end of the period
 
$
5,235

 
$
8,891

Supplemental cash flow information:
 
 
 
 
Non-cash items:
 
 
 
 
Net transfers from loans held for investment to loans held for sale
 
$
510

 
$
3

Interest paid
 
543

 
457

Income tax paid
 
55

 
87
































See Notes to Consolidated Financial Statements.

 
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NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Capital One Financial Corporation, a Delaware Corporation established in 1994 and headquartered in McLean, Virginia, is a diversified financial services holding company with banking and non-banking subsidiaries. Capital One Financial Corporation and its subsidiaries (the “Company”) offer a broad array of financial products and services to consumers, small businesses and commercial clients through branches, the internet and other distribution channels. As of March 31, 2016, our principal subsidiaries included:
Capital One Bank (USA), National Association (“COBNA”), which offers credit and debit card products, other lending products and deposit products; and
Capital One, National Association (“CONA”), which offers a broad spectrum of banking products and financial services to consumers, small businesses and commercial clients.
The Company and its subsidiaries are hereafter collectively referred to as “we,” “us” or “our.” COBNA and CONA are collectively referred to as the “Banks.”
We also offer products outside of the United States of America (“U.S.”) principally through Capital One (Europe) plc (“COEP”), an indirect subsidiary of COBNA organized and located in the United Kingdom (“U.K.”) and through a branch of COBNA in Canada. COEP has authority, among other things, to provide credit card loans. Our branch of COBNA in Canada also has the authority to provide credit card loans.
Our principal operations are currently organized for management reporting purposes into three major business segments, which are defined based on the products and services provided or the type of customer served: Credit Card, Consumer Banking and Commercial Banking. We provide details on our business segments, the integration of recent acquisitions into our business segments and the allocation methodologies and accounting policies used to derive our business segment results in “Note 13—Business Segments.”
On December 1, 2015, we completed the acquisition of the Healthcare Financial Services business of General Electric Capital Corporation (“HFS acquisition”). During the first quarter of 2016, we recorded measurement period adjustments which modestly reduced the value of certain identifiable assets acquired, with a corresponding increase to goodwill. Including post-closing purchase price adjustments during the first quarter of 2016, total cash consideration for the acquisition was $9.0 billion, including $180 million of cash acquired, and we recognized approximately $9.2 billion in assets, including $8.2 billion of loans, $134 million of intangible assets and $514 million in goodwill. We continue to expect to finalize the accounting for assets acquired and liabilities assumed in the HFS acquisition by June 30, 2016.
Basis of Presentation and Use of Estimates
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the U.S. (“U.S. GAAP”). The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and in the related disclosures. These estimates are based on information available as of the date of the consolidated financial statements. While management makes its best judgment, actual amounts or results could differ from these estimates. In the opinion of management, all normal, recurring adjustments have been included for a fair statement of this interim financial information. Certain prior period amounts have been reclassified to conform to the current period presentation.
Principles of Consolidation
The consolidated financial statements include the accounts of Capital One Financial Corporation and all other entities in which we have a controlling financial interest. We determine whether we have a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity (“VIE”). All significant intercompany account balances and transactions have been eliminated.
New Accounting Standards Adopted
Consolidation: Amendments to the Consolidation Analysis
In February 2015, the Financial Accounting Standards Board (“FASB”) issued revised guidance for evaluating whether organizations should consolidate certain legal entities such as limited partnerships, limited liability corporations and securitization structures. The guidance also removed the indefinite deferral of specialized guidance for certain investment funds. We adopted the guidance effective in the first quarter of 2016 on a modified retrospective basis. Our adoption of this guidance did not have an impact on our financial condition, results of operations or liquidity. See “Note 6—Variable Interest Entities and Securitizations”for information regarding our involvement with VIEs.
Recently Issued but Not Yet Adopted Accounting Standards
Improvements to Employee Share-Based Accounting
In March 2016, the FASB issued revised guidance for accounting for employee share-based payments, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. The guidance is effective beginning on January 1, 2017, with early adoption permitted. We do not believe the impact of this guidance will be material to our consolidated financial statements.
Leases
In February 2016, the FASB issued revised guidance for leases. The guidance requires lessees to recognize right of use assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements for all leases, with certain practical expedients. This will be effective for us on January 1, 2019, with early adoption permitted. We are currently assessing the potential impact on our consolidated financial statements.
Revenue from Contracts with Customers
In May 2014, the FASB issued revised guidance for the recognition, measurement and disclosure of revenue from contracts with customers. The guidance is applicable to all entities and, once effective, will replace significant portions of existing industry and transaction-specific revenue recognition rules with a more principles-based recognition model. Most revenue associated with financial instruments, including interest and loan origination fees, is outside the scope of the guidance. Gains and losses on investment securities, derivatives and sales of financial instruments are similarly excluded from the scope. Subsequent to issuance of the revenue recognition guidance, the FASB has issued several updates that (i) deferred by one year the effective date for revenue recognition guidance to January 1, 2018, with early adoption permitted effective January 1, 2017; (ii) clarified its guidance for performing the principle-versus-agent analysis; and (iii) clarified guidance for identifying performance obligations allowing entities to ignore immaterial promised goods and services in the context of a contract with a customer. Entities can elect to adopt the guidance either on a full or modified retrospective basis. Full retrospective adoption will require a cumulative effect adjustment to retained earnings as of the beginning of the earliest comparative period presented. Modified retrospective adoption will require a cumulative effect adjustment to retained earnings as of the beginning of the reporting period in which the entity first applies the new guidance. We do not plan to early adopt the guidance. We are currently assessing the potential impact of this new guidance on our consolidated financial statements and which transition method we plan to elect.

 
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NOTE 2—DISCONTINUED OPERATIONS
Shutdown of Mortgage Origination Operations of our Wholesale Mortgage Banking Unit
In the third quarter of 2007, we closed the mortgage origination operations of our wholesale mortgage banking unit, GreenPoint Mortgage Funding Inc. (“GreenPoint”), which we acquired in December 2006 as part of the North Fork Bancorporation, Inc. (“North Fork”) acquisition. The results of the wholesale banking unit have been accounted for as a discontinued operation and are therefore not included in our results from continuing operations for the three months ended March 31, 2016 and 2015. We have no significant continuing involvement in these operations.
The following table summarizes the results from discontinued operations related to the closure of the mortgage origination operations of our wholesale mortgage banking unit:
Table 2.1: Results of Discontinued Operations
 
 
Three Months Ended March 31,
(Dollars in millions)
 
2016
 
2015
Non-interest income (expense), net
 
$
(8
)
 
$
30

Income (loss) from discontinued operations before income taxes
 
(8
)
 
30

Income tax provision (benefit)
 
(3
)
 
11

Income (loss) from discontinued operations, net of tax
 
$
(5
)
 
$
19

The discontinued mortgage origination operations of our wholesale mortgage banking unit had remaining assets which primarily consisted of a deferred tax asset related to the reserve for representations and warranties on loans previously sold to third parties. See “Note 14—Commitments, Contingencies, Guarantees and Others” for information related to reserves we have established for our mortgage representation and warranty exposure.


 
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NOTE 3—INVESTMENT SECURITIES
Our investment portfolio consists primarily of the following: U.S. Treasury securities; U.S. government-sponsored enterprise or agency (“Agency”) and non-agency residential mortgage-backed securities (“RMBS”) and commercial mortgage-backed securities (“CMBS”); other asset-backed securities (“ABS”); and other securities. The carrying value of our investments in U.S. Treasury and Agency securities represented 91% and 90% of our total investment securities as of March 31, 2016 and December 31, 2015, respectively.
Our investment portfolio includes securities available for sale and 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.
The table below presents the overview of our investment securities portfolio as of March 31, 2016 and December 31, 2015.
Table 3.1: Overview of Investment Securities Portfolio
(Dollars in millions)
 
March 31, 2016
 
December 31, 2015
Securities available for sale, at fair value
 
$
40,092

 
$
39,061

Securities held to maturity, at carrying value
 
25,080

 
24,619

Total investment securities
 
$
65,172

 
$
63,680

The table below presents the amortized cost, gross unrealized gains and losses, and fair value of securities available for sale as of March 31, 2016 and December 31, 2015.
Table 3.2: Investment Securities Available for Sale
 
 
March 31, 2016
(Dollars in millions)
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses(1)
 
Fair
Value
Investment securities available for sale:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
4,934

 
$
32

 
$
0

 
$
4,966

RMBS:
 
 
 
 
 
 
 
 
Agency(2)
 
25,187

 
248

 
(68
)
 
25,367

Non-agency
 
2,613

 
314

 
(26
)
 
2,901

Total RMBS
 
27,800

 
562

 
(94
)
 
28,268

CMBS:
 
 
 
 
 
 
 
 
Agency(2)
 
3,732

 
48

 
(25
)
 
3,755

Non-agency
 
1,719

 
35

 
(5
)
 
1,749

Total CMBS
 
5,451

 
83

 
(30
)
 
5,504

Other ABS(3)
 
1,037

 
2

 
(1
)
 
1,038

Other securities(4)
 
317

 
3

 
(4
)
 
316

Total investment securities available for sale
 
$
39,539

 
$
682

 
$
(129
)
 
$
40,092


 
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December 31, 2015
(Dollars in millions)
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses(1)
 
Fair
Value
Investment securities available for sale:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
4,664

 
$
5

 
$
(9
)
 
$
4,660

RMBS:
 
 
 
 
 
 
 
 
Agency(2)
 
24,332

 
165

 
(212
)
 
24,285

Non-agency
 
2,680

 
368

 
(22
)
 
3,026

Total RMBS
 
27,012

 
533

 
(234
)
 
27,311

CMBS:
 
 
 
 
 
 
 
 
Agency(2)
 
3,690

 
21

 
(47
)
 
3,664

Non-agency
 
1,723

 
16

 
(24
)
 
1,715

Total CMBS
 
5,413

 
37

 
(71
)
 
5,379

Other ABS(3)
 
1,345

 
1

 
(6
)
 
1,340

Other securities(4)
 
370

 
2

 
(1
)
 
371

Total investment securities available for sale
 
$
38,804

 
$
578

 
$
(321
)
 
$
39,061

__________
(1) 
Includes non-credit-related OTTI that is recorded in accumulated other comprehensive income (“AOCI”) of $25 million and $22 million as of March 31, 2016 and December 31, 2015, respectively. All of this amount is related to non-agency RMBS.
(2) 
Includes Federal National Mortgage Corporation (“Fannie Mae”), Federal Home Loan Mortgage Corporation (“Freddie Mac”) and Government National Mortgage Association (“Ginnie Mae”).
(3) 
ABS collateralized by credit card loans constituted approximately 65% and 71% of the other ABS portfolio as of March 31, 2016 and December 31, 2015, respectively, and ABS collateralized by auto dealer floor plan inventory loans and leases constituted approximately 16% and 11% of the other ABS portfolio as of March 31, 2016 and December 31, 2015, respectively.
(4) 
Includes foreign government bonds and equity investments.
The table below presents the amortized cost, carrying value, gross unrealized gains and losses, and fair value of securities held to maturity as of March 31, 2016 and December 31, 2015.
Table 3.3: Investment Securities Held to Maturity
 
 
March 31, 2016
(Dollars in millions)
 
Amortized
Cost
 
Unrealized Losses Recorded in AOCI(1)
 
Carrying Value
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
U.S. Treasury securities
 
$
199

 
$
0

 
$
199

 
$
1

 
$
0

 
$
200

Agency RMBS
 
22,846

 
(1,018
)
 
21,828

 
1,216

 
(6
)
 
23,038

Agency CMBS
 
3,155

 
(102
)
 
3,053

 
164

 
(1
)
 
3,216

Total investment securities held to maturity
 
$
26,200

 
$
(1,120
)
 
$
25,080

 
$
1,381

 
$
(7
)
 
$
26,454

 
 
December 31, 2015
(Dollars in millions)
 
Amortized
Cost
 
Unrealized
Losses Recorded in AOCI(1)
 
Carrying Value
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
U.S. Treasury securities
 
$
199

 
$
0

 
$
199

 
$
0

 
$
(1
)
 
$
198

Agency RMBS
 
22,561

 
(1,048
)
 
21,513

 
692

 
(72
)
 
22,133

Agency CMBS
 
3,012

 
(105
)
 
2,907

 
87

 
(8
)
 
2,986

Total investment securities held to maturity
 
$
25,772

 
$
(1,153
)
 
$
24,619

 
$
779

 
$
(81
)
 
$
25,317

__________
(1) 
Represents the unrealized holding gain or loss at the date of transfer from available for sale to held to maturity, net of any subsequent accretion. Any bonds purchased into the securities held for maturity portfolio rather than transferred, will not have unrealized losses recognized in AOCI.

 
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Investment Securities in a Gross Unrealized Loss Position
The table below provides, by major security type, information about our securities available for sale in a gross unrealized loss position and the length of time that individual securities have been in a continuous unrealized loss position as of March 31, 2016 and December 31, 2015.
Table 3.4: Securities in an Unrealized Loss Position
 
 
March 31, 2016
 
 
Less than 12 Months
 
12 Months or Longer
 
Total
(Dollars in millions)
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
Investment securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
0

 
$
0

 
$
1

 
$
0

 
$
1

 
$
0

RMBS:
 
 
 
 
 
 
 
 
 
 
 
 
Agency
 
4,679

 
(22
)
 
4,019

 
(46
)
 
8,698

 
(68
)
Non-agency
 
437

 
(13
)
 
162

 
(13
)
 
599

 
(26
)
Total RMBS
 
5,116

 
(35
)
 
4,181

 
(59
)
 
9,297

 
(94
)
CMBS:
 
 
 
 
 
 
 
 
 
 
 
 
Agency
 
590

 
(3
)
 
927

 
(22
)
 
1,517

 
(25
)
Non-agency
 
341

 
(2
)
 
229

 
(3
)
 
570

 
(5
)
Total CMBS
 
931

 
(5
)
 
1,156

 
(25
)
 
2,087

 
(30
)
Other ABS
 
368

 
(1
)
 
177

 
0

 
545

 
(1
)
Other securities
 
210

 
(3
)
 
19

 
(1
)
 
229

 
(4
)
Total investment securities available for sale in a gross unrealized loss position
 
$
6,625

 
$
(44
)
 
$
5,534

 
$
(85
)
 
$
12,159

 
$
(129
)
 
 
December 31, 2015
 
 
Less than 12 Months
 
12 Months or Longer
 
Total
(Dollars in millions)
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
Investment securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
3,096

 
$
(9
)
 
$
1

 
$
0

 
$
3,097

 
$
(9
)
RMBS:
 
 
 
 
 
 
 
 
 
 
 
 
Agency
 
12,025

 
(110
)
 
4,420

 
(102
)
 
16,445

 
(212
)
Non-agency
 
355

 
(10
)
 
155

 
(12
)
 
510

 
(22
)
Total RMBS
 
12,380

 
(120
)
 
4,575

 
(114
)
 
16,955

 
(234
)
CMBS:
 
 
 
 
 
 
 
 
 
 
 
 
Agency
 
1,352

 
(9
)
 
1,148

 
(38
)
 
2,500

 
(47
)
Non-agency
 
739

 
(13
)
 
330

 
(11
)
 
1,069

 
(24
)
Total CMBS
 
2,091

 
(22
)
 
1,478

 
(49
)
 
3,569

 
(71
)
Other ABS
 
825

 
(5
)
 
255

 
(1
)
 
1,080

 
(6
)
Other securities
 
250

 
0

 
19

 
(1
)
 
269

 
(1
)
Total investment securities available for sale in a gross unrealized loss position
 
$
18,642

 
$
(156
)
 
$
6,328

 
$
(165
)
 
$
24,970

 
$
(321
)
As of March 31, 2016, the amortized cost of approximately 600 securities available for sale exceeded their fair value by $129 million, of which $85 million related to securities that had been in a loss position for 12 months or longer. As of March 31, 2016, our investments in non-agency RMBS and CMBS, other ABS and other securities accounted for $36 million, or 28%, of total

 
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gross unrealized losses on securities available for sale. As of March 31, 2016, the carrying value of approximately 30 securities classified as held to maturity exceeded their fair value by $7 million.
Gross unrealized losses on our investment securities have decreased since December 31, 2015. The unrealized losses related to investment securities for which we have not recognized credit impairment were primarily attributable to changes in market interest rates. As discussed in more detail below, we conduct periodic reviews of all investment securities with unrealized losses to assess whether impairment is other-than-temporary.
Maturities and Yields of Investment Securities
The following tables summarize the remaining scheduled contractual maturities, assuming no prepayments, of our investment securities as of March 31, 2016.
Table 3.5: Contractual Maturities of Securities Available for Sale

 
March 31, 2016
 (Dollars in millions)
 
Amortized Cost
 
Fair Value
Due in 1 year or less
 
$
505

 
$
505

Due after 1 year through 5 years
 
5,545

 
5,584

Due after 5 years through 10 years
 
2,194

 
2,234

Due after 10 years(1)
 
31,295

 
31,769

Total
 
$
39,539

 
$
40,092

__________
(1) 
Investments with no stated maturities, which consist of equity securities, are included with contractual maturities due after 10 years.
Table 3.6: Contractual Maturities of Securities Held to Maturity
 
 
March 31, 2016
 (Dollars in millions)
 
Carrying Value
 
Fair Value
Due after 1 year through 5 years
 
$
199

 
$
200

Due after 5 years through 10 years
 
1,251

 
1,355

Due after 10 years
 
23,630

 
24,899

Total
 
$
25,080

 
$
26,454

Because borrowers may have the right to call or prepay certain obligations, the expected maturities of our securities are likely to differ from the scheduled contractual maturities presented above. 

 
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The table below summarizes, by major security type, the expected maturities and weighted-average yields of our investment securities as of March 31, 2016.
Table 3.7: Expected Maturities and Weighted-Average Yields of Securities
 
 
March 31, 2016
(Dollars in millions)
 
Due in
1 Year or Less
 
Due > 1 Year
through
5 Years
 
Due > 5 Years
through
10 Years
 
Due > 10 Years
 
Total
Fair value of securities available for sale:
U.S. Treasury securities
 
$
214

 
$
4,233

 
$
519

 
$
0

 
$
4,966

RMBS:
 
 
 
 
 
 
 
 
 
 
Agency
 
323

 
17,587

 
7,457

 
0

 
25,367

Non-agency
 
14

 
851

 
1,535

 
501

 
2,901

Total RMBS
 
337

 
18,438

 
8,992

 
501

 
28,268

CMBS:
 
 
 
 
 
 
 
 
 
 
Agency
 
55

 
1,846

 
1,854

 
0

 
3,755

Non-agency
 
117

 
516

 
1,116

 
0

 
1,749

Total CMBS
 
172

 
2,362

 
2,970

 
0

 
5,504

Other ABS
 
110

 
846

 
82

 
0

 
1,038

Other securities
 
210

 
5

 
0

 
101

 
316

Total securities available for sale
 
$
1,043

 
$
25,884

 
$
12,563

 
$
602

 
$
40,092

Amortized cost of securities available for sale
 
$
1,048

 
$
25,625

 
$
12,295

 
$
571

 
$
39,539

Weighted-average yield for securities available for sale(1)
 
1.03
%
 
2.01
%
 
3.19
%
 
7.40
%
 
2.43
%
Carrying value of securities held to maturity:
U.S. Treasury securities
 
$
0

 
$
199

 
$
0

 
$
0

 
$
199

Agency RMBS
 
7

 
3,705

 
14,583

 
3,533

 
21,828

Agency CMBS
 
0

 
133

 
2,464

 
456

 
3,053

Total securities held to maturity
 
$
7

 
$
4,037

 
$
17,047

 
$
3,989

 
$
25,080

Fair value of securities held to maturity
 
$
7

 
$
4,183

 
$
17,996

 
$
4,268

 
$
26,454

Weighted-average yield for securities held to maturity(1)
 
7.13
%
 
2.71
%
 
2.57
%
 
3.36
%
 
2.72
%
__________
(1) 
The weighted-average yield represents the effective yield for the investment securities and is calculated based on the amortized cost of each security.
Other-Than-Temporary Impairment
We evaluate all securities in an unrealized loss position at least on a quarterly basis, and more often as market conditions require, to assess whether the impairment is other-than-temporary. Our OTTI assessment is based on a discounted cash flow analysis which requires careful use of judgments and assumptions. A number of qualitative and quantitative criteria may be considered in our assessment as applicable, including the size and the nature of the portfolio; historical and projected performance such as prepayment, default and loss severity for the RMBS portfolio; recent credit events specific to the issuer and/or industry to which the issuer belongs; the payment structure of the security; external credit ratings of the issuer and any failure or delay of the issuer to make scheduled interest or principal payments; the value of underlying collateral; our intent and ability to hold the security; and current and projected market and macro-economic conditions.
If we intend to sell a security in an unrealized loss position or it is more likely than not that we will be required to sell the security prior to recovery of its amortized cost basis, the entire difference between the amortized cost basis of the security and its fair value is recognized in earnings. As of March 31, 2016, for any securities with unrealized losses recorded in AOCI, we do not intend to sell nor believe that we will be required to sell these securities prior to recovery of their amortized cost.
For those securities that we do not intend to sell nor expect to be required to sell, an analysis is performed to determine if any of the impairment is due to credit-related factors or whether it is due to other factors, such as interest rates. Credit-related impairment

 
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is recognized in earnings, with the remaining unrealized non-credit-related impairment recorded in AOCI. We determine the credit component based on the difference between the security’s amortized cost basis and the present value of its expected cash flows, discounted based on the effective yield.
The table below presents a rollforward of the credit-related OTTI recognized in earnings for the three months ended March 31, 2016 and 2015 on investment securities for which we had no intent to sell.
Table 3.8: Credit Impairment Rollforward
 
 
Three Months Ended March 31,
(Dollars in millions)
 
2016
 
2015
Credit loss component, beginning of period
 
$
199

 
$
175

Additions:
 
 
 
 
Initial credit impairment
 
0

 
5

Subsequent credit impairment
 
6

 
10

Total additions
 
6

 
15

Reductions due to payoffs, disposals, transfers and other
 
(1
)
 
0

Credit loss component, end of period
 
$
204

 
$
190

Realized Gains and Losses on Securities and OTTI Recognized in Earnings
The following table presents the gross realized gains and losses on the sale and redemption of securities available for sale, and the OTTI losses recognized in earnings for the three months ended March 31, 2016 and 2015. We also present the proceeds from the sale of securities available for sale for the periods presented. We did not sell any investment securities that are classified as held to maturity.
Table 3.9: Realized Gains and Losses and OTTI Recognized in Earnings
 
 
Three Months Ended March 31,
(Dollars in millions)
 
2016
 
2015
Realized gains (losses):
 
 
 
 
Gross realized gains
 
$
3

 
$
9

Gross realized losses
 
(3
)
 
(7
)
Net realized gains (losses)
 
0

 
2

OTTI recognized in earnings:
 
 
 
 
Credit-related OTTI
 
(6
)
 
(15
)
Intent-to-sell OTTI
 
(2
)
 
0

Total OTTI recognized in earnings
 
(8
)
 
(15
)
Net securities gains (losses)
 
$
(8
)
 
$
(13
)
Total proceeds from sales
 
$
1,923

 
$
1,342

Securities Pledged and Received
As part of our liquidity management strategy, we pledge securities to secure borrowings from counterparties including the Federal Home Loan Banks (“FHLB”) and the Federal Reserve. We also pledge securities to secure trust and public deposits and for other purposes as required or permitted by law. We pledged securities available for sale with a fair value of $1.6 billion and $1.7 billion as of March 31, 2016 and December 31, 2015, respectively. We also pledged securities held to maturity with a carrying value of $8.5 billion and $8.7 billion as of March 31, 2016 and December 31, 2015, respectively. Of the total securities pledged as collateral, we have encumbered $10.6 billion as of both March 31, 2016 and December 31, 2015, primarily related to Public Fund deposits. We accepted pledges of securities with a fair value of $7 million and $172 million as of March 31, 2016 and December 31, 2015, respectively, primarily related to our derivative transactions.

 
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Acquired Credit-Impaired Debt Securities
The table below presents the outstanding balance and carrying value of the acquired credit-impaired debt securities as of March 31, 2016 and December 31, 2015.
Table 3.10: Outstanding Balance and Carrying Value of Acquired Credit-Impaired Debt Securities
(Dollars in millions)
 
March 31, 2016
 
December 31, 2015
Outstanding balance
 
$
3,190

 
$
3,285

Carrying value
 
2,386

 
2,480

Changes in Accretable Yield of Acquired Credit-Impaired Debt Securities
The following table presents changes in the accretable yield related to the acquired credit-impaired debt securities for the three months ended March 31, 2016.
Table 3.11: Changes in the Accretable Yield of Acquired Credit-Impaired Debt Securities
(Dollars in millions)
 
Three Months Ended March 31, 2016
Accretable yield, beginning of period
 
$
1,237

Accretion recognized in earnings
 
(54
)
Net reclassifications from nonaccretable difference
 
62

Accretable yield, end of period
 
$
1,245


 
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NOTE 4—LOANS
Loan Portfolio Composition
Our loan portfolio consists of loans held for investment, including loans underlying our consolidated securitization trusts, and loans held for sale, and is divided into three portfolio segments: credit card, consumer banking and commercial banking. Credit card loans consist of domestic and international credit card loans. Consumer banking loans consist of auto, home and retail banking loans. Commercial banking loans consist of commercial and multifamily real estate, commercial and industrial, and small-ticket commercial real estate loans.
Our portfolio of loans held for investment also includes certain of our consumer and commercial loans acquired through business combinations that were recorded at fair value at acquisition and subsequently accounted for based on cash flows expected to be collected, which were referred to as “purchased credit-impaired loans” or “PCI loans.” See “Note 1—Summary of Significant Accounting Policies” in our 2015 Form 10-K for additional information on the accounting guidance for these loans.
Credit Quality
We closely monitor economic conditions and loan performance trends to manage and evaluate our exposure to credit risk. Trends in delinquency rates are an indicator, among other considerations, of credit risk within our loan portfolio. The level of nonperforming loans represents another indicator of the potential for future credit losses. Accordingly, key metrics we track and use in evaluating the credit quality of our loan portfolio include delinquency and nonperforming loan rates, as well as net charge-off rates and our internal risk ratings of larger balance commercial loans. The table below presents the composition and an aging analysis of our loans held for investment portfolio, which includes loans underlying our consolidated securitization trusts, as of March 31, 2016 and December 31, 2015. The delinquency aging includes all past due loans, both performing and nonperforming.
Table 4.1: Loan Portfolio Composition and Aging Analysis
 
 
March 31, 2016
(Dollars in millions)
 
Current
 
30-59
Days
 
60-89
Days
 
> 90
Days
 
Total
Delinquent
Loans
 
PCI
Loans
 
Total
Loans
Credit Card:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Domestic credit card(1)
 
$
81,946

 
$
757

 
$
555

 
$
1,303

 
$
2,615

 
$
0

 
$
84,561

International credit card
 
7,832

 
116

 
72

 
118

 
306

 
0

 
8,138

Total credit card
 
89,778

 
873

 
627

 
1,421

 
2,921

 
0

 
92,699

Consumer Banking:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Auto
 
40,386

 
1,576

 
619

 
133

 
2,328

 
0

 
42,714

Home loan
 
6,521

 
37

 
15

 
166

 
218

 
17,604

 
24,343

Retail banking
 
3,459

 
19

 
7

 
18

 
44

 
31

 
3,534

Total consumer banking
 
50,366

 
1,632

 
641

 
317

 
2,590

 
17,635

 
70,591

Commercial Banking:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and multifamily real estate
 
25,497

 
19

 
2

 
9

 
30

 
32

 
25,559

Commercial and industrial
 
36,744

 
52

 
98

 
307

 
457

 
901

 
38,102

Total commercial lending
 
62,241

 
71

 
100

 
316

 
487

 
933

 
63,661

Small-ticket commercial real estate
 
572

 
3

 
2

 
3

 
8

 
0

 
580

Total commercial banking
 
62,813

 
74

 
102

 
319

 
495

 
933

 
64,241

Other loans
 
73

 
2

 
1

 
6

 
9

 
0

 
82

Total loans(2)
 
$
203,030

 
$
2,581


$
1,371


$
2,063

 
$
6,015

 
$
18,568

 
$
227,613

% of Total loans
 
89.20%

 
1.13%

 
0.60%

 
0.91%

 
2.64
%
 
8.16%

 
100.00
%
  

 
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December 31, 2015
(Dollars in millions)
 
Current
 
30-59
Days
 
60-89
Days
 
> 90
Days
 
Total
Delinquent
Loans
 
PCI Loans
 
Total
Loans
Credit Card:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Domestic credit card(1)
 
$
84,954

 
$
906

 
$
658

 
$
1,421

 
$
2,985

 
$
0

 
$
87,939

International credit card
 
7,903

 
110

 
67

 
106

 
283

 
0

 
8,186

Total credit card
 
92,857

 
1,016

 
725

 
1,527

 
3,268

 
0

 
96,125

Consumer Banking:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Auto
 
38,549

 
1,901

 
880

 
219

 
3,000

 
0

 
41,549

Home loan
 
6,465

 
41

 
18

 
176

 
235

 
18,527

 
25,227

Retail banking
 
3,514

 
21

 
8

 
20

 
49

 
33

 
3,596

Total consumer banking
 
48,528

 
1,963

 
906

 
415

 
3,284

 
18,560

 
70,372

Commercial Banking:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and multifamily real estate
 
25,449

 
34

 
0

 
4

 
38

 
31

 
25,518

Commercial and industrial
 
35,920

 
51

 
34

 
203

 
288

 
927

 
37,135

Total commercial lending
 
61,369

 
85

 
34

 
207

 
326

 
958

 
62,653

Small-ticket commercial real estate
 
607

 
3

 
1

 
2

 
6

 
0

 
613

Total commercial banking
 
61,976

 
88

 
35

 
209

 
332

 
958

 
63,266

Other loans
 
77

 
2

 
2

 
7

 
11

 
0

 
88

Total loans(2)
 
$
203,438

 
$
3,069

 
$
1,668

 
$
2,158

 
$
6,895

 
$
19,518

 
$
229,851

% of Total loans
 
88.51%

 
1.33%

 
0.73%

 
0.94%

 
3.00
%
 
8.49%

 
100.00
%
__________
(1) 
Includes installment loans of $13 million and $16 million as of March 31, 2016 and December 31, 2015, respectively.
(2) 
Loans are presented net of unearned income, unamortized premiums and discounts, and unamortized deferred fees and costs totaling $948 million and $989 million as of March 31, 2016 and December 31, 2015, respectively.
We pledge loan collateral at the FHLB to secure borrowing capacity. The outstanding balances of the pledged loans totaled $35.6 billion as of March 31, 2016, and $36.9 billion as of December 31, 2015.
Table 4.2 presents the outstanding balance of loans 90 days or more past due that continue to accrue interest and loans classified as nonperforming as of March 31, 2016 and December 31, 2015.
Table 4.2: 90+ Day Delinquent Loans Accruing Interest and Nonperforming Loans(1) 
 
 
March 31, 2016
 
December 31, 2015
(Dollars in millions)
 
> 90 Days and Accruing
 
Nonperforming
Loans
 
> 90 Days and Accruing
 
Nonperforming
Loans
Credit Card:
 
 
 
 
 
 
 
 
Domestic credit card
 
$
1,303

 
$
0

 
$
1,421

 
$
0

International credit card
 
92

 
48

 
79

 
53

Total credit card
 
1,395

 
48

 
1,500

 
53

Consumer Banking:
 
 
 
 
 
 
 
 
Auto
 
0

 
133

 
0

 
219

Home loan
 
0

 
307

 
0

 
311

Retail banking
 
1

 
30

 
0

 
28

Total consumer banking
 
1

 
470

 
0

 
558


 
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March 31, 2016
 
December 31, 2015
(Dollars in millions)
 
> 90 Days and Accruing
 
Nonperforming
Loans
 
> 90 Days and Accruing
 
Nonperforming
Loans
Commercial Banking:
 
 
 
 
 
 
 
 
Commercial and multifamily real estate
 
$
1

 
$
30

 
$
0

 
$
7

Commercial and industrial
 
10

 
1,014

 
5

 
538

Total commercial lending
 
11

 
1,044

 
5

 
545

Small-ticket commercial real estate
 
0

 
6

 
0

 
5

Total commercial banking
 
11

 
1,050

 
5

 
550

Other loans
 
0

 
10

 
0

 
9

Total
 
$
1,407

 
$
1,578

 
$
1,505

 
$
1,170

% of Total loans
 
0.62%

 
0.69%

 
0.65%

 
0.51%

__________
(1) 
Nonperforming loans generally include loans that have been placed on nonaccrual status. PCI loans are excluded from loans reported as 90 days and accruing interest as well as nonperforming loans. See “Note 1—Summary of Significant Accounting Policiesin our 2015 Form 10-K for additional information on our policies for nonperforming loans.
Credit Card
Our credit card loan portfolio is highly diversified across millions of accounts and numerous geographies without significant individual exposure. We therefore generally manage credit risk on a portfolio basis. The risk in our credit card loan portfolio correlates to broad economic trends, such as unemployment rates and home values, as well as customer liquidity, all of which can have a material effect on credit performance. The primary factors we assess in monitoring the credit quality and risk of our credit card portfolio are delinquency and charge-off trends, including an analysis of the migration of loans between delinquency categories over time.
The table below displays the geographic profile of our credit card loan portfolio as of March 31, 2016 and December 31, 2015. We also present net charge-offs for the three months ended March 31, 2016 and 2015.
Table 4.3: Credit Card: Risk Profile by Geographic Region
 
 
March 31, 2016
 
December 31, 2015
(Dollars in millions)
 
Amount
 
% of
Total(1)
 
Amount
 
% of
Total(1)
Domestic credit card:
 
 
 
 
 
 
 
 
California
 
$
9,752

 
10.5%
 
$
10,029

 
10.5%

Texas
 
6,182

 
6.7
 
6,344

 
6.6

New York
 
6,163

 
6.6
 
6,446

 
6.7

Florida
 
5,574

 
6.0
 
5,712

 
5.9

Illinois
 
3,922

 
4.2
 
4,121

 
4.3

Pennsylvania
 
3,575

 
3.9
 
3,764

 
3.9

Ohio
 
3,180

 
3.4
 
3,371

 
3.5

New Jersey
 
3,061

 
3.3
 
3,210

 
3.3

Michigan
 
2,762

 
3.0
 
2,922

 
3.0

Other
 
40,390

 
43.6
 
42,020

 
43.8

Total domestic credit card
 
84,561

 
91.2
 
87,939

 
91.5

International credit card:
 
 
 
 
 
 
 
 
Canada
 
4,963

 
5.4
 
4,889

 
5.1

United Kingdom
 
3,175

 
3.4
 
3,297

 
3.4

Total international credit card
 
8,138

 
8.8
 
8,186

 
8.5

Total credit card
 
$
92,699

 
100.0%
 
$
96,125

 
100.0
%
__________
(1) 
Percentages by geographic region are calculated based on period-end amounts.

 
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Table 4.4: Credit Card: Net Charge-Offs
 
 
Three Months Ended March 31,
 
 
2016
 
2015
(Dollars in millions)
 
Amount
 
Rate
 
Amount
 
Rate
Net charge-offs:(1)
 
 
 
 
 
 
 
 
Domestic credit card
 
$
887

 
4.16%
 
$
664

 
3.55%
International credit card
 
63

 
3.24
 
55

 
2.80
Total credit card
 
$
950

 
4.09
 
$
719

 
3.48
__________
(1) 
Net charge-offs consist of the unpaid principal balance that we determine to be uncollectible, net of recovered amounts. The net charge-off rate is calculated for each loan category by dividing annualized net charge-offs by average loans held for investment for the period. Net charge-offs and the net charge-off rate are impacted periodically by fluctuations in recoveries, including debt sales.
Consumer Banking
Our consumer banking loan portfolio consists of auto, home and retail banking loans. Similar to our credit card loan portfolio, the risk in our consumer banking loan portfolio correlates to broad economic trends, such as unemployment rates, gross domestic product (“GDP”) and home values, as well as customer liquidity, all of which can have a material effect on credit performance. Delinquency, nonperforming loans and charge-off trends are key factors we assess in monitoring the credit quality and risk of our consumer banking loan portfolio.
The table below displays the geographic profile of our consumer banking loan portfolio, including PCI loans. We also present the delinquency and nonperforming loan rates of our consumer banking loan portfolio as of March 31, 2016 and December 31, 2015, as well as net charge-offs for the three months ended March 31, 2016 and 2015.
Table 4.5: Consumer Banking: Risk Profile by Geographic Region
 
 
March 31, 2016
 
December 31, 2015
(Dollars in millions)
 
Amount
 
% of Total(1)
 
Amount
 
% of
Total(1)
Auto:
 
 
 
 
 
 
 
 
Texas
 
$
5,597

 
7.9%

 
$
5,463

 
7.8%

California
 
4,812

 
6.8

 
4,611

 
6.5

Florida
 
3,485

 
4.9

 
3,315

 
4.7

Georgia
 
2,291

 
3.3

 
2,245

 
3.2

Louisiana
 
1,931

 
2.7

 
1,882

 
2.7

Illinois
 
1,891

 
2.7

 
1,859

 
2.6

Ohio
 
1,778

 
2.5

 
1,738

 
2.5

Other
 
20,929

 
29.7

 
20,436

 
29.0

Total auto
 
42,714

 
60.5

 
41,549

 
59.0

Home loan:
 
 
 
 
 
 
 
 
California
 
5,652

 
8.0

 
5,884

 
8.4

New York
 
2,119

 
3.0

 
2,171

 
3.1

Maryland
 
1,517

 
2.1

 
1,539

 
2.2

Illinois
 
1,433

 
2.0

 
1,490

 
2.1

Virginia
 
1,320

 
1.9

 
1,354

 
1.9

New Jersey
 
1,246

 
1.8

 
1,293

 
1.8

Florida
 
1,090

 
1.6

 
1,146

 
1.6

Other
 
9,966

 
14.1

 
10,350

 
14.8

Total home loan
 
24,343

 
34.5

 
25,227

 
35.9


 
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March 31, 2016
 
December 31, 2015
(Dollars in millions)
 
Amount
 
% of Total(1)
 
Amount
 
% of
Total(1)
Retail banking:
 
 
 
 
 
 
 
 
Louisiana
 
$
1,054

 
1.5
%
 
$
1,071

 
1.5
%
New York
 
919

 
1.3

 
921

 
1.3

Texas
 
757

 
1.1

 
757

 
1.1

New Jersey
 
247

 
0.3

 
259

 
0.4

Maryland
 
187

 
0.3

 
180

 
0.3

Virginia
 
150

 
0.2

 
151

 
0.2

Other
 
220

 
0.3

 
257

 
0.3

Total retail banking
 
3,534

 
5.0

 
3,596

 
5.1

Total consumer banking
 
$
70,591

 
100.0%

 
$
70,372

 
100.0%

__________
(1) 
Percentages by geographic region are calculated based on period-end amounts.
Table 4.6: Consumer Banking: Net Charge-Offs and Nonperforming Loans
 
 
Three Months Ended March 31,
 
 
2016
 
2015
(Dollars in millions)
 
Amount
 
Rate(1)
 
Amount
 
Rate(1)
Net charge-offs:
 
 
 
 
 
 
 
 
Auto
 
$
168

 
1.60%
 
$
148

 
1.55%
Home loan(2)
 
3

 
0.05
 
2

 
0.03
Retail banking
 
12

 
1.36
 
9

 
0.96
Total consumer banking(2)
 
$
183

 
1.04
 
$
159

 
0.89
 
 
March 31, 2016
 
December 31, 2015
(Dollars in millions)
 
Amount
 
Rate(3)
 
Amount
 
Rate(3)
Nonperforming loans:
 
 
 
 
 
 
 
 
Auto
 
$
133

  
0.31%
 
$
219

  
0.53
%
Home loan(4)
 
307

 
1.26
 
311

 
1.23

Retail banking
 
30

 
0.83
 
28

 
0.77

Total consumer banking(4)
 
$
470

 
0.66
 
$
558

 
0.79

__________
(1) 
Calculated for each loan category by dividing annualized net charge-offs by average loans held for investment for the period.
(2) 
Excluding the impact of PCI loans, the net charge-off rates for our home loan and total consumer banking portfolios were 0.17% and 1.40%, respectively, for the three months ended March 31, 2016, compared to 0.11% and 1.30%, respectively, for the three months ended March 31, 2015.
(3) 
Calculated for each loan category by dividing nonperforming loans by period-end loans held for investment.
(4) 
Excluding the impact of PCI loans, the nonperforming loan rates for our home loan and total consumer banking portfolios were 4.55% and 0.89%, respectively, as of March 31, 2016, compared to 4.68% and 1.08%, respectively, as of December 31, 2015.

 
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Home Loan
Our home loan portfolio consists of both first-lien and second-lien residential mortgage loans. In evaluating the credit quality and risk of our home loan portfolio, we continually monitor a variety of mortgage loan characteristics that may affect the default experience on this loan portfolio, such as vintage, geographic concentrations, lien priority and product type. Certain loan concentrations have experienced higher delinquency rates as a result of the significant decline in home prices after the peak in 2006 and subsequent rise in unemployment. These loan concentrations include loans originated between 2006 and 2008 in an environment of decreasing home sales, broadly declining home prices and more relaxed underwriting standards.
The following table presents the distribution of our home loan portfolio as of March 31, 2016 and December 31, 2015, based on selected key risk characteristics.
Table 4.7: Home Loan: Risk Profile by Vintage, Geography, Lien Priority and Interest Rate Type
 
 
March 31, 2016
 
 
Loans
 
PCI Loans
 
Total Home Loans
(Dollars in millions)
 
Amount
 
% of
Total(1)
 
Amount
 
% of
Total(1)
 
Amount
 
% of
Total(1)
Origination year:(2)
 
 
 
 
 
 
 
 
 
 
 
 
< = 2007
 
$
2,449

 
10.1%
 
$
8,613

 
35.3%
 
$
11,062

 
45.4%

2008
 
151

 
0.6
 
2,743

 
11.3
 
2,894

 
11.9

2009
 
94

 
0.4
 
1,405

 
5.8
 
1,499

 
6.2

2010
 
95

 
0.4
 
2,054

 
8.4
 
2,149

 
8.8

2011
 
168

 
0.7
 
2,291

 
9.4
 
2,459

 
10.1

2012
 
1,219

 
5.0
 
362

 
1.5
 
1,581

 
6.5

2013
 
538

 
2.2
 
70

 
0.3
 
608

 
2.5

2014
 
663

 
2.7
 
30

 
0.1
 
693

 
2.8

2015
 
1,121

 
4.6
 
32

 
0.2
 
1,153

 
4.8

2016
 
241

 
1.0
 
4

 
0.0
 
245

 
1.0

Total
 
$
6,739

 
27.7%
 
$
17,604

 
72.3%
 
$
24,343

 
100.0%

Geographic concentration:(3)
 
 
 
 
 
 
 
 
 
 
 
 
California
 
$
876

 
3.6%
 
$
4,776

 
19.6%
 
$
5,652

 
23.2%

New York
 
1,288

 
5.3
 
831

 
3.4
 
2,119

 
8.7

Maryland
 
530

 
2.2
 
987

 
4.0
 
1,517

 
6.2

Illinois
 
90

 
0.4
 
1,343

 
5.5
 
1,433

 
5.9

Virginia
 
439

 
1.8
 
881

 
3.6
 
1,320

 
5.4

New Jersey
 
354

 
1.4
 
892

 
3.7
 
1,246

 
5.1

Florida
 
153

 
0.6
 
937

 
3.9
 
1,090

 
4.5

Louisiana
 
1,043

 
4.3
 
26

 
0.1
 
1,069

 
4.4

Arizona
 
83

 
0.3
 
958

 
4.0
 
1,041

 
4.3

Washington
 
115

 
0.5
 
753

 
3.1
 
868

 
3.6

Other
 
1,768

 
7.3
 
5,220

 
21.4
 
6,988

 
28.7

Total
 
$
6,739

 
27.7%
 
$
17,604

 
72.3%
 
$
24,343

 
100.0
%
Lien type:
 
 
 
 
 
 
 
 
 
 
 
 
1st lien
 
$
5,747

 
23.6%
 
$
17,294

 
71.1%
 
$
23,041

 
94.7%

2nd lien
 
992

 
4.1
 
310

 
1.2
 
1,302

 
5.3

Total
 
$
6,739

 
27.7%
 
$
17,604

 
72.3%
 
$
24,343

 
100.0%

Interest rate type:
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate
 
$
2,835

 
11.7%
 
$
2,153

 
8.8%
 
$
4,988

 
20.5%

Adjustable rate
 
3,904

 
16.0
 
15,451

 
63.5
 
19,355

 
79.5

Total
 
$
6,739

 
27.7%
 
$
17,604

 
72.3%
 
$
24,343

 
100.0%


 
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December 31, 2015
 
 
Loans
 
PCI Loans
 
Total Home Loans
(Dollars in millions)
 
Amount
 
% of
Total(1)
 
Amount
 
% of
Total(1)
 
Amount
 
% of
Total(1)
Origination year:(2)
 

 









< = 2007
 
$
2,559

 
10.1%
 
$
8,956

 
35.5%
 
$
11,515

 
45.6%

2008
 
157

 
0.6
 
2,866

 
11.4
 
3,023

 
12.0

2009
 
97

 
0.4
 
1,498

 
5.9
 
1,595

 
6.3

2010
 
97

 
0.4
 
2,208

 
8.8
 
2,305

 
9.2

2011
 
176

 
0.7
 
2,476

 
9.8
 
2,652

 
10.5

2012
 
1,276

 
5.1
 
389

 
1.5
 
1,665

 
6.6

2013
 
557

 
2.2
 
71

 
0.3
 
628

 
2.5

2014
 
680

 
2.7
 
31

 
0.1
 
711

 
2.8

2015
 
1,101

 
4.4
 
32

 
0.1
 
1,133

 
4.5

Total
 
$
6,700

 
26.6%
 
$
18,527

 
73.4%
 
$
25,227

 
100.0%

Geographic concentration:(3)
 
 
 
 
 
 
 
 
 
 
 
 
California
 
$
871

 
3.5%
 
$
5,013

 
19.9%
 
$
5,884

 
23.4%

New York
 
1,295

 
5.1
 
876

 
3.5
 
2,171

 
8.6

Maryland
 
511

 
2.0
 
1,028

 
4.1
 
1,539

 
6.1

Illinois
 
89

 
0.4
 
1,401

 
5.5
 
1,490

 
5.9

Virginia
 
428

 
1.7
 
926

 
3.7
 
1,354

 
5.4

New Jersey
 
353

 
1.4
 
940

 
3.7
 
1,293

 
5.1

Florida
 
157

 
0.6
 
989

 
3.9
 
1,146

 
4.5

Louisiana
 
1,069

 
4.2
 
27

 
0.1
 
1,096

 
4.3

Arizona
 
81

 
0.4
 
995

 
3.9
 
1,076

 
4.3

Washington
 
113

 
0.4
 
806

 
3.2
 
919

 
3.6

Other
 
1,733

 
6.9
 
5,526

 
21.9
 
7,259

 
28.8

Total
 
$
6,700

 
26.6%
 
$
18,527

 
73.4%
 
$
25,227

 
100.0
%
Lien type:
 
 
 
 
 
 
 
 
 
 
 
 
1st lien
 
$
5,705

 
22.6%
 
$
18,207

 
72.2%
 
$
23,912

 
94.8%

2nd lien
 
995

 
4.0
 
320

 
1.2
 
1,315

 
5.2

Total
 
$
6,700

 
26.6%
 
$
18,527

 
73.4%
 
$
25,227

 
100.0%

Interest rate type:
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate
 
$
2,751

 
10.9%
 
$
2,264

 
9.0%
 
$
5,015

 
19.9%

Adjustable rate
 
3,949

 
15.7
 
16,263

 
64.4
 
20,212

 
80.1

Total
 
$
6,700

 
26.6%
 
$
18,527

 
73.4%
 
$
25,227

 
100.0%

__________
(1) 
Percentages within each risk category are calculated based on period-end amounts.
(2) 
The PCI loans balances with an origination date in the years subsequent to 2012 are related to refinancing of previously acquired home loans.
(3) 
States listed represents those which have the highest individual concentration of home loans.
Our recorded investment in home loans that are in process of foreclosure was $451 million as of March 31, 2016. We commence the foreclosure process on home loans when a borrower becomes at least 120 days delinquent in accordance with Consumer Financial Protection Bureau regulations. Foreclosure procedures and time lines vary according to state law. As of March 31, 2016 and December 31, 2015, the carrying value of the foreclosed residential real estate properties we hold and report as other assets on our consolidated balance sheet totaled $111 million and $123 million, respectively.

 
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Commercial Banking
We evaluate the credit risk of commercial loans individually and use a risk-rating system to determine credit quality. We assign internal risk ratings to loans based on relevant information about the ability of borrowers to service their debt. In determining the risk rating of a particular loan, some of the factors considered are the borrower’s current financial condition, historical and projected future credit performance, prospects for support from financially responsible guarantors, the estimated realizable value of any collateral and current economic trends. The scale based on our internal risk rating system is as follows:
Noncriticized: Loans that have not been designated as criticized, frequently referred to as “pass” loans.
Criticized performing: Loans in which the financial condition of the obligor is stressed, affecting earnings, cash flows or collateral values. The borrower currently has adequate capacity to meet near-term obligations; however, the stress, left unabated, may result in deterioration of the repayment prospects at some future date.
Criticized nonperforming: Loans that are not adequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, if any. Loans classified as criticized nonperforming have a well-defined weakness, or weaknesses, which jeopardize the full repayment of the debt. These loans are characterized by the distinct possibility that we will sustain a credit loss if the deficiencies are not corrected and are generally placed on nonaccrual status.
We use our internal risk rating system for regulatory reporting, determining the frequency of credit exposure reviews, and evaluating and determining the allowance for loan and lease losses for commercial loans. Loans of $1 million or more that are designated as criticized performing and criticized nonperforming are reviewed quarterly by management to determine if they are appropriately classified/rated and whether any impairment exists. Noncriticized loans greater than $1 million are specifically reviewed, at least annually, to determine the appropriate risk rating. In addition, we evaluate the risk rating during the renewal process of any loan or if a loan becomes past due.
The following table presents the geographic distribution and internal risk ratings of our commercial loan portfolio as of March 31, 2016 and December 31, 2015.
Table 4.8: Commercial Banking: Risk Profile by Geographic Region and Internal Risk Rating
 
 
March 31, 2016
(Dollars in millions)
 
Commercial
and
Multifamily
Real Estate
 
% of
Total(1)
 
Commercial
and
Industrial
 
% of
Total(1)
 
Small-ticket
Commercial
Real Estate
 
% of
Total(1) 
 
Total
Commercial Banking
 
% of
Total(1) 
Geographic concentration:(2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Northeast
 
$
15,312

 
59.8%
 
$
8,724

 
22.9%

 
$
358

 
61.6%
 
$
24,394

 
38.0%
Mid-Atlantic
 
3,032

 
11.9
 
3,255

 
8.5

 
23

 
4.0
 
6,310

 
9.8
South
 
4,054

 
15.9
 
15,303

 
40.2

 
37

 
6.4
 
19,394

 
30.2
Other
 
3,161

 
12.4
 
10,820

 
28.4

 
162

 
28.0
 
14,143

 
22.0
Total
 
$
25,559

 
100.0%
 
$
38,102

 
100.0%

 
$
580

 
100.0%
 
$
64,241

 
100.0%
Internal risk rating:(3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Noncriticized
 
$
25,219

 
98.7%
 
$
33,872

 
88.9%

 
$
572

 
98.5%
 
$
59,663

 
92.9%
Criticized performing
 
278

 
1.1
 
2,315

 
6.0

 
2

 
0.4
 
2,595

 
4.0
Criticized nonperforming
 
30

 
0.1
 
1,014

 
2.7

 
6

 
1.1
 
1,050

 
1.6
PCI loans(4)
 
32

 
0.1
 
901

 
2.4

 
0

 
0.0
 
933

 
1.5
Total
 
$
25,559

 
100.0%
 
$
38,102

 
100.0
%
 
$
580

 
100.0%
 
$
64,241

 
100.0%

 
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Table of Contents

 


 
 
December 31, 2015
(Dollars in millions)
 
Commercial
and
Multifamily
Real Estate
 
% of
Total(1)
 
Commercial
and
Industrial
 
% of
Total(1)
 
Small-ticket
Commercial
Real Estate
 
% of
Total(1) 
 
Total
Commercial Banking
 
% of
Total(1) 
Geographic concentration:(2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Northeast
 
$
15,949

 
62.5%
 
$
8,074

 
21.8%
 
$
376

 
61.3%
 
$
24,399

 
38.6%
Mid-Atlantic
 
2,797

 
11.0
 
3,010

 
8.1
 
25

 
4.1
 
5,832

 
9.2
South
 
4,070

 
15.9
 
15,240

 
41.0
 
40

 
6.5
 
19,350

 
30.6
Other
 
2,702

 
10.6
 
10,811

 
29.1
 
172

 
28.1
 
13,685

 
21.6
Total
 
$
25,518

 
100.0%
 
$
37,135

 
100.0%
 
$
613

 
100.0%
 
$
63,266

 
100.0%
Internal risk rating:(3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Noncriticized
 
$
25,130

 
98.5%
 
$
34,008

 
91.6%
 
$
605

 
98.7%
 
$
59,743

 
94.4%
Criticized performing
 
350

 
1.4
 
1,662

 
4.5
 
3

 
0.5
 
2,015

 
3.2
Criticized nonperforming
 
7

 
0.0
 
538

 
1.4
 
5

 
0.8
 
550

 
0.9
PCI loans(4)
 
31

 
0.1
 
927

 
2.5
 
0

 
0.0
 
958

 
1.5
Total
 
$
25,518

 
100.0%
 
$
37,135

 
100.0%
 
$
613

 
100.0%
 
$
63,266

 
100.0%
__________
(1) 
Percentages calculated based on total loans held for investment in each respective loan category using period-end amounts.
(2) 
Geographic concentration is generally determined by the location of the borrower’s business or the location of the collateral associated with the loan. Northeast consists of CT, MA, ME, NH, NJ, NY, PA and VT. Mid-Atlantic consists of DC, DE, MD, VA and WV. South consists of AL, AR, FL, GA, KY, LA, MO, MS, NC, SC, TN and TX.
(3) 
Criticized exposures correspond to the “Special Mention,” “Substandard” and “Doubtful” asset categories defined by banking regulatory authorities.
(4) 
We evaluate PCI loans based on their actual risk ratings. Were these PCI loans to be classified based on their risk ratings, $204 million and $128 million would be classified as Noncriticized, $694 million and $793 million as Criticized performing, and $35 million and $37 million as Criticized nonperforming as of March 31, 2016 and December 31, 2015, respectively.
Impaired Loans
The following table presents information about our impaired loans, excluding PCI loans, which is reported separately as of March 31, 2016 and December 31, 2015, and for the three months ended March 31, 2016 and 2015:
Table 4.9: Impaired Loans(1) 
 
 
March 31, 2016
(Dollars in millions)
 
With an
Allowance
 
Without
an
Allowance
 
Total
Recorded
Investment
 
Related
Allowance
 
Net
Recorded
Investment
 
Unpaid
Principal
Balance
Credit Card:
 
 
 
 
 
 
 
 
 
 
 
 
Domestic credit card
 
$
525

 
$
0

 
$
525

 
$
147

 
$
378

 
$
511

International credit card
 
133

 
0

 
133

 
66

 
67

 
129

Total credit card(2)
 
658

 
0

 
658

 
213

 
445

 
640

Consumer Banking:
 
 
 
 
 
 
 
 
 
 
 
 
Auto(3)
 
283

 
211

 
494

 
22

 
472

 
778

Home loan
 
233

 
133

 
366

 
15

 
351

 
458

Retail banking
 
50

 
10

 
60

 
14

 
46

 
61

Total consumer banking
 
566

 
354

 
920

 
51

 
869

 
1,297

Commercial Banking:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and multifamily real estate
 
106

 
27

 
133

 
10

 
123

 
136

Commercial and industrial
 
1,091

 
123

 
1,214

 
183

 
1,031

 
1,319

Total commercial lending
 
1,197

 
150

 
1,347

 
193

 
1,154

 
1,455

Small-ticket commercial real estate
 
0

 
7

 
7

 
0

 
7

 
8

Total commercial banking
 
1,197

 
157

 
1,354

 
193

 
1,161

 
1,463

Total
 
$
2,421

 
$
511

 
$
2,932

 
$
457

 
$
2,475

 
$
3,400


 
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December 31, 2015
(Dollars in millions)
 
With an
Allowance
 
Without
an
Allowance
 
Total
Recorded
Investment
 
Related
Allowance
 
Net
Recorded
Investment
 
Unpaid
Principal
Balance
Credit Card:
 
 
 
 
 
 
 
 
 
 
 
 
Domestic credit card
 
$
541

 
$
0

 
$
541

 
$
150

 
$
391

 
$
526

International credit card
 
125

 
0

 
125

 
59

 
66

 
121

Total credit card(2)
 
666

 
0

 
666

 
209

 
457

 
647

Consumer Banking:
 
 
 
 
 
 
 
 
 
 
 
 
Auto(3)
 
273

 
215

 
488

 
22

 
466

 
772

Home loan
 
229

 
136

 
365

 
18

 
347

 
456

Retail banking
 
51

 
10

 
61

 
14

 
47

 
62

Total consumer banking
 
553

 
361

 
914

 
54

 
860

 
1,290

Commercial Banking:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and multifamily real estate
 
82

 
3

 
85

 
11

 
74

 
88

Commercial and industrial
 
515

 
278

 
793

 
75

 
718

 
862

Total commercial lending
 
597

 
281

 
878

 
86

 
792

 
950

Small-ticket commercial real estate
 
6

 
0

 
6

 
0

 
6

 
7

Total commercial banking
 
603

 
281

 
884

 
86

 
798

 
957

Total
 
$
1,822

 
$
642

 
$
2,464

 
$
349

 
$
2,115

 
$
2,894

 
 
Three Months Ended March 31,
 
 
2016
 
2015
(Dollars in millions)
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
Credit Card:
 
 
 
 
 
 
 
 
Domestic credit card
 
$
533

 
$
14

 
$
542

 
$
14

International credit card
 
129

 
3

 
141

 
2

Total credit card(2)
 
662

 
17

 
683

 
16

Consumer Banking:
 
 
 
 
 
 
 
 
Auto(3)
 
491

 
22

 
444

 
21

Home loan
 
366

 
1

 
366

 
1

Retail banking
 
60

 
0

 
52

 
0

Total consumer banking
 
917

 
23

 
862

 
22

Commercial Banking:
 
 
 
 
 
 
 
 
Commercial and multifamily real estate
 
109

 
1

 
133

 
1

Commercial and industrial
 
1,004

 
2

 
213

 
1

Total commercial lending
 
1,113

 
3

 
346

 
2

Small-ticket commercial real estate
 
6

 
0

 
10

 
0

Total commercial banking
 
1,119

 
3

 
356

 
2

Total
 
$
2,698

 
$
43

 
$
1,901

 
$
40

__________
(1) 
Impaired loans include loans modified in troubled debt restructuring (“TDRs”), all nonperforming commercial loans and nonperforming home loans with a specific impairment. Impaired loans without an allowance generally represent loans that have been charged down to the fair value of the underlying collateral for which we believe no additional losses have been incurred, or where the fair value of the underlying collateral meets or exceeds the loan’s amortized cost.
(2) 
The average recorded investment of credit card loans includes finance charges and fees.
(3) 
Although auto loans from loan recovery inventory are not reported in our loans held for investment, they are included as impaired loans above since they are reported as TDRs.

 
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The total recorded investment of loans modified in TDRs represents $1.9 billion and $1.8 billion of the impaired loans presented above as of March 31, 2016 and December 31, 2015, respectively. Consumer TDRs classified as performing totaled $1.0 billion as of both March 31, 2016 and December 31, 2015. Commercial TDRs classified as performing totaled $305 million and $334 million as of March 31, 2016 and December 31, 2015, respectively.
As part of our loan modification programs to borrowers experiencing financial difficulty, we may provide multiple concessions to minimize our economic loss and improve long-term loan performance and collectability. The following tables present the major modification types, recorded investment amounts and financial effects of loans modified in TDRs during the three months ended March 31, 2016 and 2015:
Table 4.10: Troubled Debt Restructurings
 
 
Total Loans
Modified
(1)(2)
 
Three Months Ended March 31, 2016
 
 
Reduced Interest Rate
 
Term Extension
 
Balance Reduction
(Dollars in millions)
 
% of
TDR
Activity
(3)(4)
 
Average
Rate
Reduction
(5)
 
% of
TDR
Activity
(4)(6)
 
Average
Term
Extension
(Months)
(7)
 
% of
TDR
Activity
(4)(8)
 
Gross
Balance
Reduction
(9)
Credit Card:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Domestic credit card
 
$
62

 
100%
 
12.85%
 
0%
 
0
 
0
%
 
$
0

International credit card
 
36

 
100
 
25.66
 
0
 
0
 
0

 
0

Total credit card
 
98

 
100
 
17.52
 
0
 
0
 
0

 
0

Consumer Banking:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Auto
 
86

 
42
 
3.93
 
73
 
7
 
27

 
21

Home loan
 
13

 
62
 
2.63
 
75
 
249
 
1

 
0

Retail banking
 
3

 
21
 
6.30
 
87
 
11
 
0

 
0

Total consumer banking
 
102

 
44
 
3.72
 
74
 
39
 
23

 
21

Commercial Banking:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and multifamily real estate
 
25

 
0
 
0.00
 
100
 
8
 
0

 
0

Commercial and industrial
 
47

 
0
 
0.00
 
30
 
12
 
0

 
0

Total commercial lending
 
72

 
0
 
0.00
 
54
 
10
 
0

 
0

Small-ticket commercial real estate
 
0

 
0
 
0.00
 
0
 
0
 
0

 
0

Total commercial banking
 
72

 
0
 
0.00
 
54
 
10
 
0

 
0

Total
 
$
272

 
52
 
13.21
 
42
 
29
 
8

 
$
21




 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
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Total Loans
Modified
(1)(2)
 
Three Months Ended March 31, 2015
 
Reduced Interest Rate
 
Term Extension
 
Balance Reduction
(Dollars in millions)
% of
TDR
Activity
(3)(4)
 
Average
Rate
Reduction
(5)
 
% of
TDR
Activity
(4)(6)
 
Average
Term
Extension
(Months)
(7)
 
% of
TDR
Activity
(4)(8)
 
Gross
Balance
Reduction
(9)
Credit Card:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Domestic credit card
 
$
72

 
100%
 
12.13%
 
0
%
 
0
 
0%
 
$
0

International credit card
 
32

 
100
 
25.79
 
0

 
0
 
0
 
0

Total credit card
 
104

 
100
 
16.39
 
0

 
0
 
0
 
0

Consumer Banking:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Auto
 
88

 
41
 
1.71
 
71

 
9
 
28
 
22

Home loan
 
7

 
67
 
2.85
 
66

 
171
 
0
 
0

Retail banking
 
5

 
61
 
9.36
 
91

 
4
 
0
 
0

Total consumer banking
 
100

 
44
 
2.36
 
72

 
20
 
24
 
22

Commercial Banking:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and multifamily real estate
 
3

 
0
 
0.00
 
100

 
35
 
77
 
1

Commercial and industrial
 
21

 
0
 
2.02
 
3

 
7
 
0
 
0

Total commercial lending
 
24

 
0
 
2.02
 
13

 
29
 
8
 
1

Small-ticket commercial real estate
 
0

 
0
 
0.00
 
0

 
0
 
0
 
0

Total commercial banking
 
24

 
0
 
2.02
 
13

 
29
 
8
 
1

Total
 
$
228

 
65
 
12.19
 
33

 
20
 
12
 
$
23

__________
(1) 
Represents total loans modified and accounted for as TDRs during the period. Paydowns, net charge-offs and any other changes subsequent to the TDR date are not reflected in the recorded investment amount
(2) 
We present the modification types utilized most prevalently across our loan portfolios. As not every modification type is included in the table above, the total % of TDR activity may not add up to 100%. 
(3) 
Represents percentage of loans modified and accounted for as TDRs during the period that were granted a reduced interest rate.
(4) 
Due to multiple concessions granted to some troubled borrowers, percentages may total more than 100% for certain loan types.
(5) 
Represents weighted average interest rate reduction for those loans that received an interest rate concession.
(6) 
Represents percentage of loans modified and accounted for as TDRs during the period that were granted a maturity date extension.
(7) 
Represents weighted average change in maturity date for those loans that received a maturity date extension.
(8) 
Represents percentage of loans modified and accounted for as TDRs during the period that were granted forgiveness or forbearance of a portion of their balance.
(9) 
Total amount represents the gross balance forgiven. For loans modified in bankruptcy, the gross balance reduction represents collateral value write-downs associated with the discharge of the borrower’s obligations.
TDR—Subsequent Defaults of Completed TDR Modifications
The following table presents the type, number and recorded investment amount of loans modified in TDRs that experienced a default during the period and had completed a modification event in the twelve months prior to the default. A default occurs if the loan is either 90 days or more delinquent, has been charged off as of the end of the period presented or has been reclassified from accrual to nonaccrual status.

 
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Table 4.11: TDRSubsequent Defaults
 
 
Three Months Ended March 31,
 
 
2016
 
2015
(Dollars in millions)
 
Number of
Contracts
 
Amount
 
Number of
Contracts
 
Amount
Credit Card:
 
 
 
 
 
 
 
 
Domestic credit card
 
10,594

 
$
18

 
9,667
 
$
16

International credit card(1)
 
8,813

 
20

 
8,548
 
20

Total credit card
 
19,407

 
38

 
18,215
 
36

Consumer Banking:
 
 
 
 
 
 
 
 
Auto
 
1,852

 
21

 
1,747
 
20

Home loan
 
10

 
1

 
5
 
0

Retail banking
 
15

 
2

 
10
 
1

Total consumer banking
 
1,877

 
24

 
1,762
 
21

Commercial Banking:
 
 
 
 
 
 
 
 
Commercial and multifamily real estate
 
0

 
0

 
0
 
0

Commercial and industrial
 
17

 
23

 
0
 
0

Total commercial lending
 
17

 
23

 
0
 
0

Small-ticket commercial real estate
 
0

 
0

 
0
 
0

Total commercial banking
 
17

 
23

 
0
 
0

Total
 
21,301

 
$
85

 
19,977
 
$
57

__________
(1) 
In the U.K., regulators require the acceptance of payment plan proposals in which the modified payments may be less than the contractual minimum amount. As a result, loans entering long-term TDR payment programs in the U.K. typically continue to age and ultimately charge off even when fully in compliance with the TDR program terms.
 
 
 
 
 
 
 
 
 
PCI Loans
Outstanding Balance and Carrying Value of PCI Loans
The table below presents the outstanding balance and the carrying value of PCI loans as of March 31, 2016 and December 31, 2015. The table also displays loans which would have otherwise been considered impaired at acquisition based on our applicable accounting policies. See “Note 1—Summary of Significant Accounting Policies” in our 2015 Form 10-K for information related to our accounting policies for impaired loans.
Table 4.12: PCI Loans
 
 
March 31, 2016
 
December 31, 2015
(Dollars in millions)
 
Total
 
Impaired
Loans
 
Non-Impaired
Loans
 
Total
 
Impaired
Loans
 
Non-Impaired
Loans
Outstanding balance
 
$
20,179

 
$
3,704

 
$
16,475

 
$
21,151

 
$
3,840

 
$
17,311

Carrying value(1)
 
18,580

 
2,537

 
16,043

 
19,516

 
2,629

 
16,887

__________
(1) 
Includes $35 million and $37 million of allowance for loan and lease losses for these loans as of March 31, 2016 and December 31, 2015, respectively. We recorded a $2 million release and $7 million provision of the allowance for credit losses for the three months ended March 31, 2016 and 2015, respectively, for PCI loans.

 
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Changes in Accretable Yield
The following table presents changes in the accretable yield on the PCI loans:
Table 4.13: Changes in Accretable Yield on PCI Loans
(Dollars in millions)
 
Total
PCI Loans
 
Impaired
Loans
 
Non-Impaired
Loans
Accretable yield as of December 31, 2015
 
$
3,483

 
$
1,244

 
$
2,239

Accretion recognized in earnings
 
(184
)
 
(61
)
 
(123
)
Reclassifications from (to) nonaccretable difference for loans with changing cash flows(1)
 
5

 
2

 
3

Changes in accretable yield for non-credit related changes in expected cash flows(2)
 
194

 
16

 
178

Accretable yield as of March 31, 2016
 
$
3,498

 
$
1,201

 
$
2,297

__________
(1) 
Represents changes in accretable yield for those loans in pools that are driven primarily by credit performance.
(2) 
Represents changes in accretable yield for those loans in pools that are driven primarily by actual prepayments and changes in estimated prepayments.
Unfunded Lending Commitments
We manage the potential risk of unfunded lending commitments by limiting the total amount of arrangements, both by individual customer and in total, by monitoring the size and maturity structure of these portfolios and by applying the same credit standards for all of our credit activities. Unused credit card lines available to our customers totaled $311.1 billion and $308.3 billion as of March 31, 2016 and December 31, 2015, respectively. While these amounts represented the total available unused credit card lines, we have not experienced and do not anticipate that all of our customers will access their entire available line at any given point in time.
In addition to available unused credit card lines, we enter into commitments to extend credit that are legally binding conditional agreements having fixed expirations or termination dates and specified interest rates and purposes. These commitments generally require customers to maintain certain credit standards. Collateral requirements and loan-to-value (“LTV”) ratios are the same as those for funded transactions and are established based on management’s credit assessment of the customer. These commitments may expire without being drawn upon; therefore, the total commitment amount does not necessarily represent future funding requirements. The outstanding unfunded commitments to extend credit, other than credit card lines, were approximately $26.4 billion and $27.9 billion, which included $1.1 billion and $1.0 billion of advised lines of credit as of March 31, 2016 and December 31, 2015, respectively. Advised lines of credit are not considered legally binding commitments as funding is subject to our satisfactory evaluation of the customer at the time credit is requested.
 
 



 
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NOTE 5—ALLOWANCE FOR LOAN AND LEASE LOSSES AND RESERVE FOR UNFUNDED LENDING COMMITMENTS
Our allowance for loan and lease losses represents management’s best estimate of incurred loan and lease losses inherent in our loans held for investment portfolio as of each balance sheet date. In addition to the allowance for loan and lease losses, we also estimate probable losses related to unfunded lending commitments, such as letters of credit, financial guarantees and binding unfunded loan commitments. The provision for losses on unfunded lending commitments is included in the provision for credit losses in our consolidated statements of income and the related reserve for unfunded lending commitments is included in other liabilities on our consolidated balance sheets. See “Note 1—Summary of Significant Accounting Policies” of our 2015 Form 10-K for further discussion on the methodology and policy for determining our allowance for loan and lease losses for each of our loan portfolio segments, as well as information on our reserve for unfunded lending commitments.
Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments Activity
The table below summarizes changes in the allowance for loan and lease losses and reserve for unfunded lending commitments by portfolio segment for the three months ended March 31, 2016 and 2015.
Table 5.1: Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments
(Dollars in millions)
 
Credit
Card
 
Consumer
Banking
 
Commercial Banking
 
Other(1)
 
Total
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2015
 
$
3,654

 
$
868

 
$
604

 
$
4

 
$
5,130

Provision (benefit) for loan and lease losses
 
1,071

 
229

 
171

 
(2
)
 
1,469

Charge-offs
 
(1,222
)
 
(291
)
 
(48
)
 
(1
)
 
(1,562
)
Recoveries
 
272

 
108

 
2

 
2

 
384

Net charge-offs
 
(950
)
 
(183
)
 
(46
)
 
1

 
(1,178
)
Other changes(2)
 
10

 
0

 
(15
)
 
0

 
(5
)
Balance as of March 31, 2016
 
3,785

 
914

 
714

 
3

 
5,416

Reserve for unfunded lending commitments:
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2015
 
0

 
7

 
161

 
0

 
168

Provision for losses on unfunded lending commitments
 
0

 
1

 
57

 
0

 
58

Balance as of March 31, 2016
 
0

 
8

 
218

 
0

 
226

Combined allowance and reserve as of March 31, 2016
 
$
3,785

 
$
922

 
$
932

 
$
3

 
$
5,642

(Dollars in millions)
 
Credit Card
 
Consumer
Banking
 
Commercial Banking
 
Other(1)
 
Total
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2014
 
$
3,204

 
$
779

 
$
395

 
$
5

 
$
4,383

Provision (benefit) for loan and lease losses
 
669

 
206

 
52

 
0

 
927

Charge-offs
 
(1,022
)
 
(250
)
 
(9
)
 
(3
)
 
(1,284
)
Recoveries
 
303

 
91

 
6

 
3

 
403

Net charge-offs
 
(719
)
 
(159
)
 
(3
)
 
0

 
(881
)
Other changes(2)
 
(24
)
 
0

 
0

 
0

 
(24
)
Balance as of March 31, 2015
 
3,130

 
826

 
444

 
5

 
4,405

Reserve for unfunded lending commitments:
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2014
 
0

 
7

 
106

 
0

 
113

Provision for losses on unfunded lending commitments
 
0

 
0

 
8

 
0

 
8

Balance as of March 31, 2015
 
0

 
7

 
114

 
0

 
121

Combined allowance and reserve as of March 31, 2015
 
$
3,130

 
$
833

 
$
558

 
$
5

 
$
4,526

__________
(1)     Primarily consists of the legacy loan portfolio of our discontinued GreenPoint mortgage operations.
(2)  
Represents foreign currency translation adjustments and the net impact of loan transfers and sales.

 
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Components of Allowance for Loan and Lease Losses by Impairment Methodology
The table below presents the components of our allowance for loan and lease losses by portfolio segment and impairment methodology with the recorded investment of the related loans as of March 31, 2016 and December 31, 2015.
Table 5.2: Components of Allowance for Loan and Lease Losses by Impairment Methodology
 
 
March 31, 2016
(Dollars in millions)
 
Credit
Card
 
Consumer Banking
 
Commercial Banking
 
Other
 
Total
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
Collectively evaluated(1)
 
$
3,572

 
$
829

 
$
520

 
$
3

 
$
4,924

Asset-specific(2)
 
213

 
51

 
193

 
0

 
457

PCI loans(3)
 
0

 
34

 
1

 
0

 
35

Total allowance for loan and lease losses
 
$
3,785

 
$
914

 
$
714

 
$
3

 
$
5,416

Loans held for investment:
 
 
 
 
 
 
 
 
 
 
Collectively evaluated(1)
 
$
92,041

 
$
52,247

 
$
61,954

 
$
82

 
$
206,324

Asset-specific(2)
 
658

 
709

 
1,354

 
0

 
2,721

PCI loans(3)
 
0

 
17,635

 
933

 
0

 
18,568

Total loans held for investment
 
$
92,699

 
$
70,591

 
$
64,241

 
$
82

 
$
227,613

Allowance as a percentage of period-end loans held for investment
 
4.08%

 
1.29%

 
1.11%

 
4.15%

 
2.38%

 
 
December 31, 2015
(Dollars in millions)
 
Credit
Card
 
Consumer Banking
 
Commercial Banking
 
Other
 
Total
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
Collectively evaluated(1)
 
$
3,445

 
$
778

 
$
517

 
$
4

 
$
4,744

Asset-specific(2)
 
209

 
54

 
86

 
0

 
349

PCI loans(3)
 
0

 
36

 
1

 
0

 
37

Total allowance for loan and lease losses
 
$
3,654

 
$
868

 
$
604

 
$
4

 
$
5,130

Loans held for investment:
 
 
 
 
 
 
 
 
 
 
Collectively evaluated(1)
 
$
95,459

 
$
51,113

 
$
61,424

 
$
88

 
$
208,084

Asset-specific(2)
 
666

 
699

 
884

 
0

 
2,249

PCI loans(3)
 
0

 
18,560

 
958

 
0

 
19,518

Total loans held for investment
 
$
96,125

 
$
70,372

 
$
63,266

 
$
88

 
$
229,851

Allowance as a percentage of period-end loans held for investment
 
3.80%

 
1.23%

 
0.95%

 
4.94%

 
2.23%

__________
(1) 
The component of the allowance for loan and lease losses for credit card and other consumer loans that we collectively evaluate for impairment is based on a statistical calculation supplemented by management judgment and interpretation. The component of the allowance for loan and lease losses for commercial loans that we collectively evaluate for impairment is based on historical loss experience for loans with similar characteristics and consideration of credit quality supplemented by management judgment and interpretation.
(2) 
The asset-specific component of the allowance for loan and lease losses for smaller-balance impaired loans is calculated on a pool basis using historical loss experience for the respective class of assets. The asset-specific component of the allowance for loan and lease losses for larger-balance commercial loans is individually calculated for each loan.
(3) 
The PCI loans component of the allowance for loan and lease losses is accounted for based on expected cash flows. See “Note 1—Summary of Significant Accounting Policies” in our 2015 Form 10-K for details on these loans.


 
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We have certain credit card partnership arrangements in which our partner agrees to share in a portion of the credit losses associated with the partnership. The loss sharing amounts due from these partners result in reductions to reported net charge-offs and provision for credit losses. The table below summarizes these impacts for the three months ended March 31, 2016 and 2015.
Table 5.3: Summary of Loss Sharing Arrangements Impact
 
 
Three Months Ended March 31,
(Dollars in millions)
 
2016
 
2015
Reduction in net charge-offs
 
$
52

 
$
44

Reduction in provision for credit losses
 
55

 
57

The expected reimbursement from these partners, which is netted against our allowance for loan and lease losses, was approximately $197 million and $194 million as of March 31, 2016 and December 31, 2015, respectively. See “Note 1—Summary of Significant Accounting Policies” of our 2015 Form 10-K for further discussion on our credit card partnership agreements.

 
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NOTE 6—VARIABLE INTEREST ENTITIES AND SECURITIZATIONS
In the normal course of business, we enter into various types of transactions with entities that are considered to be VIEs. Our primary involvement with VIEs has been related to our securitization transactions in which we transferred assets from our balance sheet to securitization trusts. We have primarily securitized credit card loans and home loans, which have provided a source of funding for us and enabled us to transfer a certain portion of the economic risk of the loans or debt securities to third parties.
The entity that has a controlling financial interest in a VIE is referred to as the primary beneficiary and is required to consolidate the VIE. The majority of the VIEs in which we are involved have been consolidated in our financial statements.
Summary of Consolidated and Unconsolidated VIEs
The table below presents a summary of VIEs, aggregated based on VIEs with similar characteristics, in which we had continuing involvement or held a variable interest as of March 31, 2016 and December 31, 2015. We separately present information for consolidated and unconsolidated VIEs.
For consolidated VIEs, we present the carrying amount of assets and liabilities reflected on our consolidated balance sheets. The assets of consolidated VIEs primarily consist of cash and loans, which we report on our consolidated balance sheets under restricted cash and loans held in consolidated trusts, respectively. The assets of a particular VIE are the primary source of funds to settle its obligations. The creditors of the VIEs typically do not have recourse to the general credit of the Company. The liabilities primarily consist of debt securities issued by the VIEs, which we report under securitized debt obligations. For unconsolidated VIEs, we present the carrying amount of assets and liabilities reflected on our consolidated balance sheets and our maximum exposure to loss. Our maximum exposure to loss is estimated based on the unlikely event that all of the assets in the VIEs become worthless and we are required to meet our maximum remaining funding obligations.
Table 6.1: Carrying Amount of Consolidated and Unconsolidated VIEs
 
 
March 31, 2016
 
 
Consolidated
 
Unconsolidated
(Dollars in millions)
 
Carrying
Amount
of Assets
 
Carrying
Amount of
Liabilities
 
Carrying
Amount
of Assets
 
Carrying
Amount of
Liabilities
 
Maximum 
Exposure to
Loss
Securitization-Related VIEs:
 
 
 
 
 
 
 
 
 
 
Credit card loan securitizations(1)
 
$
32,869

 
$
15,600

 
$
0

 
$
0

 
$
0

Home loan securitizations(2)
 
0

 
0

 
201

 
26

 
863

Total securitization-related VIEs
 
32,869

 
15,600

 
201

 
26

 
863

Other VIEs:
 
 
 
 
 
 
 
 
 
 
Affordable housing entities
 
115

 
0

 
3,804

 
528

 
3,804

Entities that provide capital to low-income and rural communities
 
687

 
126

 
71

 
0

 
71

Other
 
0

 
0

 
116

 
0

 
116

Total other VIEs
 
802

 
126

 
3,991

 
528

 
3,991

Total VIEs
 
$
33,671

 
$
15,726

 
$
4,192

 
$
554

 
$
4,854




 
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December 31, 2015
 
 
Consolidated
 
Unconsolidated
(Dollars in millions)
 
Carrying
Amount
of Assets
 
Carrying
Amount of
Liabilities
 
Carrying
Amount
of Assets
 
Carrying
Amount of
Liabilities
 
Maximum
Exposure to
Loss
Securitization-Related VIEs:
 
 
 
 
 
 
 
 
 
 
Credit card loan securitizations(1)
 
$
34,800

 
$
16,925

 
$
0

 
$
0

 
$
0

Home loan securitizations(2)
 
0

 
0

 
211

 
27

 
873

Total securitization-related VIEs
 
34,800

 
16,925

 
211

 
27

 
873

Other VIEs:
 
 
 
 
 
 
 
 
 
 
Affordable housing entities
 
0

 
0

 
3,852

 
555

 
3,852

Entities that provide capital to low-income and rural communities
 
352

 
101

 
0

 
0

 
0

Other
 
0

 
0

 
57

 
0

 
57

Total other VIEs
 
352

 
101

 
3,909

 
555

 
3,909

Total VIEs
 
$
35,152

 
$
17,026

 
$
4,120

 
$
582

 
$
4,782

__________
(1) 
Represents the gross amount of assets and liabilities owned by the VIE, which includes the seller’s interest and repurchased notes held by other related parties.
(2) 
The carrying amount of assets of unconsolidated securitization-related VIEs consists of retained interests associated with the securitization of option-adjustable rate mortgage (“option-ARM”) loans and letters of credit related to manufactured housing securitizations. These are reported on our consolidated balance sheets within other assets. The carrying amount of liabilities of unconsolidated securitization-related VIEs is comprised of obligations on certain swap agreements associated with the securitization of manufactured housing loans and other obligations. These are reported on our consolidated balance sheets within other liabilities.
Securitization-Related VIEs
In a securitization transaction, assets from our balance sheet are transferred to a trust we establish, which typically meets the definition of a VIE. Our continuing involvement in the majority of our securitization transactions consists primarily of holding certain retained interests and acting as the primary servicer on certain transactions. We also may have exposure associated with contractual obligations to repurchase previously transferred loans due to breaches of representations and warranties. See “Note 14—Commitments, Contingencies, Guarantees and Others” for information related to reserves we have established for our mortgage representation and warranty exposure.

 
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The table below presents the securitization-related VIEs in which we had continuing involvement as of March 31, 2016 and December 31, 2015.
Table 6.2: Continuing Involvement in Securitization-Related VIEs
 
 
 
 
Mortgage
 
(Dollars in millions)
 
Credit
Card
 
Option-
ARM
 
GreenPoint
HELOCs
 
GreenPoint
Manufactured
Housing
 
March 31, 2016:
 
 
 
 
 
 
 
 
 
Securities held by third-party investors
 
$
14,913

 
$
1,692

 
$
69

 
$
765

 
Receivables in the trust
 
31,908

 
1,749

 
63

 
771

 
Cash balance of spread or reserve accounts
 
0

 
8

 
N/A

 
136

 
Retained interests
 
Yes

 
Yes

 
Yes

 
Yes

 
Servicing retained
 
Yes

 
Yes

(1) 
No

 
No

(2) 
Amortization event(3)
 
No

 
No

 
No

 
No

 
December 31, 2015:
 
 
 
 
 
 
 
 
 
Securities held by third-party investors
 
$
16,166

 
$
1,754

 
$
74

 
$
789

 
Receivables in the trust
 
33,783

 
1,814

 
68

 
794

 
Cash balance of spread or reserve accounts
 
0

 
8

 
N/A

 
134

 
Retained interests
 
Yes

 
Yes

 
Yes

 
Yes

 
Servicing retained
 
Yes

 
Yes

(1) 
No

 
No

(2) 
Amortization event(3)
 
No

 
No

 
No

 
No

 
__________
(1) 
We continue to service only certain option-ARM securitizations.
(2) 
The core servicing activities for the manufactured housing securitizations are completed by a third party.
(3) 
Amortization events vary according to each specific trust agreement but generally are triggered by declines in performance or credit metrics of the underlying assets, such as net charge-off rates or delinquency rates, beyond certain predetermined thresholds. Generally, the occurrence of an amortization event changes the sequencing and amount of trust-related cash flows to the benefit of more senior interest holders.
Credit Card Loan Securitizations
We hold certain retained interests in our credit card loan securitizations and continue to service the receivables in these trusts. As of March 31, 2016 and December 31, 2015, we were deemed to be the primary beneficiary, and accordingly, all of these trusts have been consolidated in our financial statements.
Mortgage Securitizations
Option-ARM Loans
We had previously securitized option-ARM loans by transferring these loans to securitization trusts that had issued mortgage-backed securities to investors. The outstanding balance of debt securities held by third-party investors related to these mortgage loan securitization trusts was $1.7 billion and $1.8 billion as of March 31, 2016 and December 31, 2015, respectively.
We continue to service a portion of the remaining mortgage loans in these securitizations. We also retain rights to future cash flows arising from these securitizations, the most significant being certificated interest-only bonds issued by the trusts. We generally estimate the fair value of these retained interests based on the estimated present value of expected future cash flows, using our best estimates of the key assumptions which include credit losses, prepayment speeds and discount rates commensurate with the risks involved. For the mortgage loans that we continue to service, we do not consolidate the related trusts because we do not have the right to receive benefits nor the obligation to absorb losses that could potentially be significant to the trusts. For the remaining trusts, for which we no longer service the underlying mortgage loans, we do not consolidate these entities since we do not have the power to direct the activities that most significantly impact the economic performance of the trusts.
In connection with the securitization of certain option-ARM loans, a third party is obligated to advance a portion of any “negative amortization” resulting from monthly payments that are less than the interest accrued for that payment period. We have an agreement

 
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in place with the third party that mirrors this advance requirement. The amount advanced is tracked through mortgage-backed securities retained as part of the securitization transaction. As advances occur, we record an asset in the form of negative amortization bonds, which are held at fair value in other assets on our consolidated balance sheets. Our maximum exposure is affected by rate caps and monthly payment change caps, but the funding obligation cannot exceed the difference between the original loan balance multiplied by a preset negative amortization cap and the current unpaid principal balance.
We have also entered into certain derivative contracts related to the securitization activities. These are classified as free-standing derivatives, with fair value adjustments recorded in non-interest income in our consolidated statements of income. See “Note 9—Derivative Instruments and Hedging Activities” for further details on these derivatives.
GreenPoint Mortgage Home Equity Lines of Credit (“HELOCs”)
Our discontinued wholesale mortgage banking unit, GreenPoint, previously sold HELOCs in whole loan sales and subsequently acquired residual interests in certain trusts which securitized some of those loans. We do not consolidate these trusts because we either lack the power to direct the activities that most significantly impact the economic performance of the trusts or because we do not have the right to receive benefits or the obligation to absorb losses that could potentially be significant to the trusts. As the residual interest holder, GreenPoint is required to fund advances on the HELOCs when certain performance triggers are met due to deterioration in asset performance. On behalf of GreenPoint, we have funded cumulative advances of $30 million as of both March 31, 2016 and December 31, 2015. These advances are generally expensed as funded due to the low likelihood of recovery. We also have unfunded commitments of $6 million related to those interests for our non-consolidated VIEs as of both March 31, 2016 and December 31, 2015.
GreenPoint Credit Manufactured Housing
We retain the primary obligation for certain provisions of corporate guarantees, recourse sales and clean-up calls related to the discontinued manufactured housing operations of GreenPoint Credit, LLC, which was a subsidiary of GreenPoint and was sold to a third party in 2004. Although we are the primary obligor, recourse obligations related to aforementioned whole loan sales, commitments to exercise mandatory clean-up calls on certain securitization transactions and servicing were transferred to a third party in the sale transaction. We do not consolidate the trusts used for the securitization of manufactured housing loans because we do not have the power to direct the activities that most significantly impact the economic performance of the trusts since we no longer service the loans.
We were required to fund letters of credit in 2004 to cover losses and are obligated to fund future amounts under swap agreements for certain transactions. We have the right to receive any funds remaining in the letters of credit after the securities are released.
The unpaid principal balance of manufactured housing securitization transactions where we are the residual interest holder was $771 million and $794 million as of March 31, 2016 and December 31, 2015, respectively. In the event the third-party servicer does not fulfill its obligation to exercise the clean-up calls on certain transactions, the obligation reverts to us and we would assume approximately $420 million of loans receivable upon our execution of the clean-up call with the requirement to absorb any losses on the loans receivable. We monitor the underlying assets for trends in delinquencies and related losses, and these factors are considered in assessing the adequacy of the liabilities established for these obligations and the valuations of the assets.
We also have credit exposure on agreements that we entered into to absorb a portion of the risk of loss on certain manufactured housing securitizations issued by GreenPoint Credit, LLC in 2000. Our maximum credit exposure related to the agreements totaled $13 million as of both March 31, 2016 and December 31, 2015. These agreements are recorded on our consolidated balance sheets as a component of other liabilities and our obligation under these agreements was $7 million and $8 million as of March 31, 2016 and December 31, 2015, respectively.
Other VIEs
Affordable Housing Entities
As part of our community reinvestment initiatives, we invest in private investment funds that make equity investments in multi-family affordable housing properties. We receive affordable housing tax credits for these investments. The activities of these entities are financed with a combination of invested equity capital and debt.

 
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We account for certain of our investments in qualified affordable housing projects using the proportional amortization method if certain criteria are met. The proportional amortization method amortizes the cost of the investment over the period in which the investor expects to receive tax credits and other tax benefits, and the resulting amortization is recognized as a component of income tax expense attributable to continuing operations. For the three months ended March 31, 2016 and 2015, we recognized amortization of $98 million and $86 million, respectively, and tax credits of $113 million and $102 million, respectively, associated with these investments within income tax provision. The carrying value of our investments in these qualified affordable housing projects was $3.6 billion and $3.5 billion as of March 31, 2016 and December 31, 2015, respectively. We are periodically required to provide additional financial or other support during the period of the investments. We had a recorded liability of $1.3 billion for these unfunded commitments as of March 31, 2016, which is expected to be paid from 2016 to 2019.
For those investment funds considered to be VIEs, we are not required to consolidate them if we do not have the power to direct the activities that most significantly impact the economic performance of those entities. We record our interests in these unconsolidated VIEs in loans held for investment, other assets and other liabilities on our consolidated balance sheets. Our interests consisted of assets of approximately $3.8 billion and $3.9 billion as of March 31, 2016 and December 31, 2015, respectively. Our maximum exposure to these entities is limited to our variable interests in the entities of $3.8 billion and $3.9 billion as of March 31, 2016 and December 31, 2015, respectively. The creditors of the VIEs have no recourse to our general credit and we do not provide additional financial or other support other than during the period that we are contractually required to provide it. The total assets of the unconsolidated VIE investment funds were $11.3 billion and $11.4 billion as of March 31, 2016 and December 31, 2015, respectively.
Entities that Provide Capital to Low-Income and Rural Communities
We hold variable interests in entities (“Investor Entities”) that invest in community development entities (“CDEs”) that provide debt financing to businesses and non-profit entities in low-income and rural communities. Variable interests in the CDEs held by the consolidated Investor Entities are also our variable interests. The activities of the Investor Entities are financed with a combination of invested equity capital and debt. The activities of the CDEs are financed solely with invested equity capital. We receive federal and state tax credits for these investments. We consolidate the VIEs in which we have the power to direct the activities that most significantly impact the VIE’s economic performance and where we have the obligation to absorb losses or right to receive benefits that could be potentially significant to the VIE. We have also consolidated other investments and CDEs that are not considered to be VIEs, but where we hold a controlling financial interest. The assets of the VIEs that we consolidated, which totaled approximately $687 million and $352 million as of March 31, 2016 and December 31, 2015, respectively, are reflected on our consolidated balance sheets in cash, loans held for investment, interest receivable and other assets. The liabilities are reflected in other liabilities. The creditors of the VIEs have no recourse to our general credit. We have not provided additional financial or other support other than during the period that we are contractually required to provide it.
Other
Other VIEs include variable interests that we hold in a trust that has a royalty interest in certain oil and gas properties, alternative energy project companies that promote renewable energy sources and other equity method investments. We were not required to consolidate these entities because we do not have the power to direct the activities that most significantly impact their economic performance. Our maximum exposure to these entities is limited to the investment on our consolidated balance sheet of $116 million and $57 million as of March 31, 2016 and December 31, 2015, respectively. The creditors of the other VIEs have no recourse to our general credit. We have not provided additional financial or other support other than during the period that we are contractually required to provide it.

 
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NOTE 7—GOODWILL AND INTANGIBLE ASSETS
The table below displays the components of goodwill, intangible assets and mortgage servicing rights (“MSRs”) as of March 31, 2016 and December 31, 2015. Goodwill is presented separately on our consolidated balance sheets. Intangible assets and MSRs are included in other assets on our consolidated balance sheets.
Table 7.1: Components of Goodwill, Intangible Assets and MSRs
 
 
March 31, 2016
(Dollars in millions)
 
Carrying
Amount of
Assets
(1)
 
Accumulated Amortization(1)
 
Net
Carrying
Amount
Goodwill
 
$
14,492

 
N/A

 
$
14,492

Intangible assets:
 
 
 
 
 
 
Purchased credit card relationship (“PCCR”) intangibles
 
2,147

 
$
(1,529
)
 
618

Core deposit intangibles
 
1,391

 
(1,301
)
 
90

Other(2)
 
375

 
(146
)
 
229

Total intangible assets
 
3,913

 
(2,976
)
 
937

Total goodwill and intangible assets
 
$
18,405

 
$
(2,976
)
 
$
15,429

MSRs:
 
 
 
 
 
 
        Consumer MSRs(3)
 
$
59

 
N/A

 
$
59

        Commercial MSRs(4)
 
222

 
$
(58
)
 
164

Total MSRs
 
$
281

 
$
(58
)
 
$
223

 
 
 
 
 
 
 
 
 
December 31, 2015
(Dollars in millions)
 
Carrying
Amount of
Assets
(1)
 
Accumulated Amortization(1)
 
Net
Carrying
Amount
Goodwill
 
$
14,480

 
N/A

 
$
14,480

Intangible assets:
 
 
 
 
 
 
PCCR intangibles
 
2,156

 
$
(1,467
)
 
689

Core deposit intangibles
 
1,771

 
(1,662
)
 
109

Other(2)
 
378

 
(135
)
 
243

Total intangible assets
 
4,305

 
(3,264
)
 
1,041

Total goodwill and intangible assets
 
$
18,785

 
$
(3,264
)
 
$
15,521

MSRs:
 
 
 
 
 
 
        Consumer MSRs(3)
 
$
68

 
N/A

 
$
68

        Commercial MSRs(4)
 
212

 
$
(51
)
 
161

Total MSRs
 
$
280

 
$
(51
)
 
$
229

__________
(1) 
Certain intangible assets that were fully amortized in prior periods were removed from our consolidated balance sheets.
(2) 
Primarily consists of intangibles for sponsorship relationships, brokerage relationship intangibles, partnership and other contract intangibles and trade name intangibles.
(3) 
Represents MSRs related to our Consumer Banking business that are carried at fair value on our consolidated balance sheets.
(4) 
Represents MSRs related to our Commercial Banking business that are subsequently accounted for under the amortization method and periodically assessed for impairment.
Amortization expense for amortizable intangible assets, which is presented separately in our consolidated statements of income, totaled $101 million and $110 million for the three months ended March 31, 2016 and 2015, respectively.

 
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Goodwill
The following table presents goodwill attributable to each of our business segments as of March 31, 2016 and December 31, 2015.
Table 7.2: Goodwill Attributable to Business Segments
(Dollars in millions)
 
Credit
Card
 
Consumer
Banking
 
Commercial Banking
 
Total
Balance as of December 31, 2015
 
$
4,997

 
$
4,600

 
$
4,883

 
$
14,480

Acquisitions
 
0

 
0

 
14

 
14

Other adjustments
 
(2
)
 
0

 
0

 
(2
)
Balance as of March 31, 2016
 
$
4,995

 
$
4,600

 
$
4,897

 
$
14,492



 
 
 
 
 
 
 

 
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NOTE 8—DEPOSITS AND BORROWINGS
Deposits
Our deposits, which are our largest source of funding for our asset and operations, consist of non-interest bearing and interest-bearing deposits, which include checking accounts, money market deposit accounts, negotiable order of withdrawals, savings deposits and time deposits.
 
Securitized and Unsecured Debt Obligations
In addition to our deposits, which serve as our primary funding source, we use a variety of other funding sources including short-term borrowings, the issuance of senior and subordinated notes and other borrowings, and securitization transactions. In addition, we utilize FHLB advances, which are secured by certain portions of our loan and investment securities portfolios, for our funding needs. The securitized debt obligations are separately presented on our consolidated balance sheets as they represent obligations of consolidated securitization trusts, while federal funds purchased and securities loaned or sold under agreements to repurchase, senior and subordinated notes and other borrowings, including FHLB advances, are included in other debt on our consolidated balance sheets.
Securitized Debt Obligations
Our outstanding borrowings due to securitization investors decreased to $14.9 billion as of March 31, 2016, from $16.2 billion as of December 31, 2015, primarily driven by $1.3 billion of maturities.
Senior and Subordinated Notes
As of March 31, 2016, we had $21.7 billion of senior and subordinated notes outstanding, inclusive of fair value hedging adjustments of $237 million. As of December 31, 2015, we had $21.8 billion of senior and subordinated notes outstanding, inclusive of fair value hedging adjustments of $134 million. During the first quarter of 2016, $500 million of outstanding unsecured notes were retired. See “Note 9—Derivative Instruments and Hedging Activities” for information about our fair value hedging activities.
FHLB Advances and Other
In addition to the issuance capacity under the registration statement, we also have access to funding through the FHLB system and the Federal Reserve Discount Window. Our FHLB and Federal Reserve memberships require us to hold FHLB and Federal Reserve stock which totaled $1.8 billion and $2.1 billion as of March 31, 2016 and December 31, 2015, respectively, and are included in other assets on our consolidated balance sheets.
Our FHLB advances and lines of credit are secured by our investment securities, residential home loans, multifamily real estate loans, commercial real estate loans and HELOCs. The outstanding FHLB advances totaled $12.9 billion and $20.1 billion as of March 31, 2016 and December 31, 2015, respectively, substantially all of which represented long-term advances generally callable on either a one-month or a three-month basis. We did not access the Federal Reserve Discount Window for funding during 2015 or the first quarter of 2016.
Composition of Deposits, Short-Term Borrowings and Long-Term Debt
The table below summarizes the components of our deposits, short-term borrowings and long-term debt as of March 31, 2016 and December 31, 2015. Our total short-term borrowings consist of federal funds purchased and securities loaned or sold under agreements to repurchase and other short-term borrowings with an original contractual maturity of one year or less. Our long-term debt consists of borrowings with an original contractual maturity of greater than one year. The amounts presented for outstanding borrowings include unamortized debt premiums and discounts, net of debt issuance costs and fair value hedge accounting adjustments.

 
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Table 8.1: Components of Deposits, Short-Term Borrowings and Long-Term Debt
(Dollars in millions)
 
March 31,
2016
 
December 31,
2015
Deposits:
 
 
 
 
Non-interest bearing deposits
 
$
25,182

 
$
25,847

Interest-bearing deposits
 
196,597

 
191,874

Total deposits
 
$
221,779

 
$
217,721

Short-term borrowings:
 
 
 
 
Federal funds purchased and securities loaned or sold under agreements to repurchase
 
$
917

 
$
981

Total short-term borrowings
 
$
917

 
$
981

 
 
March 31, 2016
 
 
(Dollars in millions)
 
Maturity
Dates
 
Interest Rates
 
Weighted-
Average
Interest Rate
 
 Outstanding Amount
 
December 31,
2015
Long-term debt:
 
 
 
 
 
 
 
 
 
 
Securitized debt obligations(1)
 
2016 - 2025
 
0.48 - 5.75%
 
1.48%
 
$
14,913

 
$
16,166

Senior and subordinated notes:(1)
 
 
 
 
 
 
 
 
 
 
Fixed unsecured senior debt
 
2016 - 2025
 
1.15 - 6.75
 
2.72
 
16,837

 
16,559

Floating unsecured senior debt
 
2018 - 2018
 
1.30 - 1.77
 
1.50
 
699

 
1,198

Total unsecured senior debt
 
2.67
 
17,536

 
17,757

Fixed unsecured subordinated debt
 
2016 - 2025
 
3.38 - 8.80
 
4.70
 
4,200

 
4,080

Total senior and subordinated notes
 
21,736

 
21,837

Other long-term borrowings:
 
 
 
 
 
 
 
 
 
 
FHLB advances
 
2016 - 2025
 
0.39 - 6.41
 
0.50
 
12,898

 
20,098

Capital lease obligations
 
2016 - 2035
 
3.09 - 12.86
 
4.17
 
33

 
33

Total other long-term borrowings
 
12,931

 
20,131

Total long-term debt
 
$
49,580

 
$
58,134

Total short-term borrowings and long-term debt
 
$
50,497

 
$
59,115

___________
(1) 
Outstanding amount includes any fair value hedge accounting adjustments.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Components of Interest Expense
The following table displays interest expense attributable to short-term borrowings and long-term debt for the three months ended March 31, 2016 and 2015:

 
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Table 8.2: Components of Interest Expense on Short-Term Borrowings and Long-Term Debt
 
 
Three Months Ended March 31,
(Dollars in millions)
 
2016
 
2015
Short-term borrowings:
 
 
 
 
Federal funds purchased and securities loaned or sold under agreements to repurchase
 
$
1

 
$
0

FHLB advances
 
0

 
8

Total short-term borrowings
 
1

 
8

Long-term debt:
 
 
 
 
Securitized debt obligations(1)
 
48

 
33

Senior and subordinated notes(1)
 
106

 
79

Other long-term borrowings
 
23

 
7

Total long-term debt
 
177

 
119

Total interest expense on short-term borrowings and long-term debt
 
$
178

 
$
127

__________
(1) 
Interest expense includes the impact from hedge accounting.

 
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NOTE 9—DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Use of Derivatives
We manage our asset and liability positions and market risk exposure and limits in accordance with our market risk management policies that are approved by our Board of Directors. Our primary market risks stem from the impact on our earnings and economic value of equity from changes in interest rates and, to a lesser extent, changes in foreign exchange rates. We employ several techniques to manage our interest rate sensitivity which include changing the duration and re-pricing characteristics of various assets and liabilities by using interest rate derivatives. Our current policies also include the use of derivatives to hedge exposures denominated in foreign currency so we may limit our earnings and capital ratio exposures to foreign exchange risk. We execute our derivative contracts in both the over-the-counter (“OTC”) and exchange-traded derivative markets, and clear eligible derivative transactions through a central clearinghouse as required under the Dodd-Frank Act. The majority of our derivatives are interest rate swaps. In addition, we may use a variety of other derivative instruments, including caps, floors, options, futures and forward contracts, to manage our interest rate and foreign exchange risks. We offer various interest rate, foreign exchange rate and commodity derivatives as an accommodation to our customers within our Commercial Banking business, and usually offset our exposure through derivative transactions with other counterparties.
Accounting for Derivatives
Our derivatives are designated as either qualifying accounting hedges or free-standing derivatives. Qualifying accounting hedges are designated as fair value hedges, cash flow hedges or net investment hedges. Free-standing derivatives primarily consist of customer-accommodation derivatives and economic hedges that do not qualify for hedge accounting.
Fair Value Hedges: We designate derivatives as fair value hedges when they are used to manage our exposure to changes in the fair value of certain financial assets and liabilities, which fluctuate in value as a result of movements in interest rates. Changes in the fair value of derivatives designated as fair value hedges are recorded in earnings together with offsetting changes in the fair value of the hedged item and any resulting ineffectiveness. Our fair value hedges consist of interest rate swaps that are intended to modify our exposure to interest rate risk on various fixed-rate assets and liabilities.
Cash Flow Hedges: We designate derivatives as cash flow hedges when they are used to manage our exposure to variability in cash flows related to forecasted transactions. Changes in the fair value of derivatives designated as cash flow hedges are recorded as a component of AOCI, to the extent that the hedge relationships are effective, and amounts are reclassified from AOCI to earnings as the forecasted transactions impact earnings. To the extent that any ineffectiveness exists in the hedge relationships, the amounts are recorded in current period earnings. Our cash flow hedges use interest rate swaps and floors that are intended to hedge the variability in interest payments or interest receipts on some of our variable-rate assets or liabilities. We have also entered into forward foreign currency derivative contracts to hedge our exposure to variability in cash flows related to intercompany borrowings denominated in foreign currency.
Net Investment Hedges: We use net investment hedges to manage the foreign currency exposure related to our net investments in foreign operations that have functional currencies other than the U.S. dollar. Changes in the fair value of net investment hedges are recorded in the translation adjustment component of AOCI, offsetting the translation gain or loss from those foreign operations. We execute net investment hedges using foreign exchange forward contracts to hedge the translation exposure of the net investment in our foreign operations.
Free-Standing Derivatives: We use free-standing derivatives to hedge the risk of changes in the fair value of residential MSRs, mortgage loan origination and purchase commitments and other interests held. We also categorize our customer accommodation derivatives and the related offsetting contracts as free-standing derivatives. Changes in the fair value of free-standing derivatives are recorded in earnings as a component of other non-interest income.

 
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Balance Sheet Presentation
The following table summarizes the notional and fair values of our derivative instruments on a gross basis as of March 31, 2016 and December 31, 2015, which are segregated by derivatives that are designated as accounting hedges and those that are not, and are further segregated by type of contract within those two categories. The total derivative assets and liabilities are adjusted on an aggregate basis to take into consideration the effects of legally enforceable master netting agreements and any associated cash collateral received or paid.
Table 9.1: Derivative Assets and Liabilities at Fair Value
 
 
March 31, 2016
 
December 31, 2015
 
 
Notional or
Contractual
Amount
 
Derivative(1)
 
Notional or
Contractual
Amount
 
Derivative(1)
(Dollars in millions)
 
Assets    
 
Liabilities
 
Assets
 
Liabilities
Derivatives designated as accounting hedges:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts:
 
 
 
 
 
 
 
 
 
 
 
 
Fair value hedges
 
$
33,767

 
$
556

 
$
78

 
$
34,417

 
$
550

 
$
146

Cash flow hedges
 
37,535

 
677

 
18

 
30,450

 
167

 
61

Total interest rate contracts
 
71,302

 
1,233

 
96

 
64,867

 
717

 
207

Foreign exchange contracts:
 
 
 
 
 
 
 
 
 
 
 
 
Cash flow hedges
 
5,395

 
42

 
154

 
5,580

 
239

 
2

Net investment hedges
 
2,545

 
50

 
0

 
2,562

 
87

 
0

Total foreign exchange contracts
 
7,940

 
92

 
154

 
8,142

 
326

 
2

Total derivatives designated as accounting hedges
 
79,242

 
1,325

 
250

 
73,009

 
1,043

 
209

Derivatives not designated as accounting hedges:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts covering:
 
 
 
 
 
 
 
 
 
 
 
 
MSRs(2)
 
1,180

 
25

 
13

 
1,665

 
11

 
7

Customer accommodation
 
30,811

 
636

 
511

 
28,841

 
431

 
290

Other interest rate exposures(3)
 
1,873

 
37

 
19

 
1,519

 
33

 
10

Total interest rate contracts
 
33,864

 
698

 
543

 
32,025

 
475

 
307

Other contracts
 
864

 
0

 
2

 
882

 
0

 
4

Total derivatives not designated as accounting hedges
 
34,728

 
698

 
545

 
32,907

 
475

 
311

Total derivatives
 
$
113,970

 
$
2,023

 
$
795

 
$
105,916

 
$
1,518

 
$
520

Less: netting adjustment(4)
 
 
 
(334
)
 
(350
)
 
 
 
(532
)
 
(143
)
Total derivative assets/liabilities
 
 
 
$
1,689

 
$
445

 
 
 
$
986

 
$
377

__________
(1) 
Derivative assets and liabilities include interest accruals.
(2) 
Includes interest rate swaps and to-be-announced contracts.
(3) 
Other interest rate exposures include mortgage-related derivatives.
(4) 
Represents balance sheet netting of derivative assets and liabilities, and related payables and receivables for cash collateral held or placed with the same counterparty. See Table 9.2 for further information.
Offsetting of Financial Assets and Liabilities
We execute the majority of our derivative transactions and repurchase agreements under master netting arrangements. Under our existing enforceable master netting arrangements, we generally have the right to offset exposure with the same counterparty. In addition, either counterparty can generally request the net settlement of all contracts through a single payment upon default on, or termination of, any one contract. The Company offsets derivative assets and liabilities for purposes of balance sheet presentation where a right of setoff exists. As of March 31, 2016 and December 31, 2015, derivative contracts that are executed bilaterally with a counterparty in the OTC market and then novated to and cleared through a central clearinghouse are not subject to offsetting due to the uncertainty existing around an end-user’s ability to setoff derivative contracts that have been novated to a clearinghouse. 

 
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The following table presents as of March 31, 2016 and December 31, 2015 the gross and net fair values of our derivative assets and liabilities and repurchase agreements, as well as the related offsetting amounts permitted under U.S. GAAP. The table also includes cash and non-cash collateral received or pledged associated with such arrangements. The collateral amounts shown are limited to the extent of the related net derivative fair values or outstanding balances, thus instances of over-collateralization are not shown.
Table 9.2: Offsetting of Financial Assets and Financial Liabilities
 
 
Gross
Amounts
 
Gross Amounts Offset in the Balance Sheet
 
Net Amounts as Recognized
 
Securities Collateral Held Under Master Netting Agreements
 
 
(Dollars in millions)
 
 
Financial
Instruments
 
Cash Collateral Received
 
 
 
Net
Exposure
As of March 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives assets(1)
 
$
2,023

 
$
(200
)
 
$
(134
)
 
$
1,689

 
$
(5
)
 
$
1,684

As of December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives assets(1)
 
1,518

 
(86
)
 
(446
)
 
986

 
(156
)
 
830

 
 
Gross
Amounts
 
Gross Amounts Offset in the Balance Sheet
 
Net Amounts as Recognized
 
Securities Collateral Pledged Under Master Netting Agreements
 
 
(Dollars in millions)
 
 
Financial
Instruments
 
Cash Collateral Pledged
 
 
 
Net
Exposure
As of March 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives liabilities(1)
 
$
795

 
$
(200
)
 
$
(150
)
 
$
445

 
$
0

 
$
445

Repurchase agreements(2)(3)
 
917

 
0

 
0

 
917

 
(917
)
 
0

As of December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives liabilities(1)
 
520

 
(86
)
 
(57
)
 
377

 
0

 
377

Repurchase agreements(2)
 
969

 
0

 
0

 
969

 
(969
)
 
0

__________
(1) 
The gross balances include derivative assets and derivative liabilities as of March 31, 2016 totaling $1.1 billion and $364 million, respectively, related to the centrally cleared derivative contracts. The comparable amounts as of December 31, 2015 totaled $429 million and $314 million, respectively. These contracts were not subject to offsetting as of March 31, 2016 and December 31, 2015.
(2) 
As of March 31, 2016 and December 31, 2015, the Company only had repurchase obligations outstanding and did not have any reverse repurchase receivables.
(3) 
Represents customer repurchase agreements that mature the next business day. As of March 31, 2016, we pledged collateral with a fair value of $936 million under these customer repurchase agreements, which were primarily agency RMBS securities.
Credit Risk-Related Contingency Features and Collateral
Certain of our derivatives contracts include provisions requiring that our debt maintain a credit rating of investment grade or above by each of the major credit rating agencies. In the event of a downgrade of our debt credit rating below investment grade, some of our derivatives counterparties would have the right to terminate the derivative contract and close out the existing positions, or demand immediate and ongoing full overnight collateralization on derivative instruments in a net liability position. Certain of our derivatives contracts may also allow, in the event of a downgrade of our debt credit rating of any kind, our derivatives counterparties to demand additional collateralization on such derivatives instruments in a net liability position. We posted $215 million and $304 million of cash collateral as of March 31, 2016 and December 31, 2015, respectively. If our debt credit rating had fallen below investment grade, we would have been required to post $60 million and $55 million of additional collateral as of March 31, 2016 and December 31, 2015, respectively. The fair value of derivatives instruments with credit risk-related contingent features in a net liability position was less than $1 million as of both March 31, 2016 and December 31, 2015.
Derivatives Counterparty Credit Risk
Derivatives instruments contain an element of credit risk that arises from the potential failure of a counterparty to perform according to the contractual terms of the contract. Our exposure to derivatives counterparty credit risk, at any point in time, is represented by the fair value of derivatives in a gain position, or derivatives assets position, assuming no recoveries of underlying collateral. To mitigate the risk of counterparty default, we enter into legally enforceable master netting agreements and maintain collateral

 
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agreements with certain derivative counterparties. We generally enter into these agreements on a bilateral basis with our counterparties; however, since June 2013 we have begun to clear eligible OTC derivatives through a central clearinghouse in accordance with the requirements under Title VII of the Dodd-Frank Act. These agreements typically provide for the right to offset exposures and require both parties to maintain collateral in the event the fair values of derivative financial instruments exceed established thresholds. We received cash collateral from derivatives counterparties totaling $502 million and $544 million as of March 31, 2016 and December 31, 2015, respectively. We also received securities from derivatives counterparties with a fair value of $7 million and $172 million as of March 31, 2016 and December 31, 2015, respectively, which we have the ability to re-pledge. 
We record counterparty credit risk valuation adjustments on our derivative assets to properly reflect the credit quality of the counterparty. We consider collateral and legally enforceable master netting agreements that mitigate our credit exposure to each counterparty in determining the counterparty credit risk valuation adjustment, which may be adjusted in future periods due to changes in the fair value of the derivatives contracts, collateral and creditworthiness of the counterparty. The cumulative counterparty credit risk valuation adjustment recorded on our consolidated balance sheets as a reduction to the derivatives asset balance was $5 million and $4 million as of March 31, 2016 and December 31, 2015, respectively. We also adjust the fair value of our derivatives liabilities to reflect the impact of our own credit quality. We calculate this adjustment by comparing the spreads on our credit default swaps to the discount benchmark curve. The cumulative credit risk valuation adjustment related to our credit quality recorded on our consolidated balance sheets as a reduction in the derivative liability balance was less than $1 million as of both March 31, 2016 and December 31, 2015.
Income Statement Presentation and AOCI
The following tables summarize the impact of derivatives and the related hedged items in our consolidated statements of income and AOCI.
Fair Value Hedges and Free-Standing Derivatives
The net gains (losses) recognized in earnings related to derivatives in fair value hedging relationships and free-standing derivatives are presented below for the three months ended March 31, 2016 and 2015.
Table 9.3: Gains and Losses on Fair Value Hedges and Free-Standing Derivatives
 
 
Three Months Ended March 31,
(Dollars in millions)
 
2016
 
2015
Derivatives designated as accounting hedges:(1)
 
 
 
 
Fair value interest rate contracts:
 
 
 
 
Gains (losses) recognized in earnings on derivatives
 
$
208

 
$
153

Gains (losses) recognized in earnings on hedged items
 
(192
)
 
(148
)
Net fair value hedge ineffectiveness gains (losses)
 
16

 
5

Derivatives not designated as accounting hedges:(1)
 
 
 
 
Interest rate contracts covering:
 
 
 
 
MSRs
 
10

 
6

Customer accommodation
 
5

 
4

Other interest rate exposures
 
15

 
2

Total interest rate contracts
 
30

 
12

Other contracts
 
0

 
(2
)
Total gains on derivatives not designated as accounting hedges
 
30

 
10

Net derivative gains (losses) recognized in earnings
 
$
46

 
$
15

__________
(1) 
Amounts are recorded in our consolidated statements of income in other non-interest income.

 
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Cash Flow and Net Investment Hedges
The table below shows the net gains (losses) related to derivatives designated as cash flow hedges and net investment hedges for the three months ended March 31, 2016 and 2015.
Table 9.4: Gains and Losses on Derivatives Designated as Cash Flow Hedges and Net Investment Hedges
 
 
Three Months Ended March 31,
(Dollars in millions)
 
2016
 
2015
Gains (losses) recorded in AOCI:
 
 
 
 
Cash flow hedges:
 
 
 
 
Interest rate contracts
 
$
426

 
$
210

Foreign exchange contracts
 
0

 
(5
)
Subtotal
 
426

 
205

Net investment hedges:
 
 
 
 
Foreign exchange contracts
 
41

 
75

Net derivatives gains (losses) recognized in AOCI
 
$
467

 
$
280

Gains (losses) recorded in earnings:
 
 
 
 
Cash flow hedges:
 
 
 
 
Gains (losses) reclassified from AOCI into earnings:
 
 
 
 
Interest rate contracts(1)
 
$
50

 
$
47

Foreign exchange contracts(2)
 
(1
)
 
(4
)
Subtotal
 
49

 
43

Gains (losses) recognized in earnings due to ineffectiveness:
 
 
 
 
Interest rate contracts(2)
 
3

 
2

Net derivative gains (losses) recognized in earnings
 
$
52

 
$
45

__________
(1) 
Amounts reclassified are recorded in our consolidated statements of income in interest income or interest expense.
(2) 
Amounts are recorded in our consolidated statements of income in other non-interest income or other interest income.
In the next 12 months, we expect to reclassify to earnings net after-tax gains of $173 million currently recorded in AOCI as of March 31, 2016. These amounts will offset the cash flows associated with the hedged forecasted transactions. The maximum length of time over which forecasted transactions were hedged was approximately six years as of March 31, 2016. The amount we expect to reclassify into earnings may change as a result of changes in market conditions and ongoing actions taken as part of our overall risk management strategy.

 
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NOTE 10—STOCKHOLDERS' EQUITY
Preferred Stock
The following table summarizes the Company’s preferred stock issued and outstanding as of March 31, 2016 and December 31, 2015.
Table 10.1: Preferred Stock Issued and Outstanding
 
 
 
 
 
 
Redeemable by Issuer Beginning
 
Per Annum Dividend Rate
 
Dividend Frequency
 
Liquidation Preference per Share
 
 
 
Carrying Value
(in millions)
Series
 
Description
 
Issuance Date
 
 
 
 
 
Total Shares Outstanding
 
March 31, 2016
 
December 31, 2015
Series B(1)
 
6.00%
Non-Cumulative
 
August 20, 2012
 
September 1, 2017
 
6.00%
 
Quarterly
 
$
1,000

 
875,000

 
$
853

 
$
853

Series C(1)
 
6.25%
Non-Cumulative
 
June 12, 2014
 
September 1, 2019
 
6.25
 
Quarterly
 
1,000

 
500,000

 
484

 
484

Series D(1)
 
6.70%
Non-Cumulative
 
October 31, 2014
 
December 1, 2019
 
6.70
 
Quarterly
 
1,000

 
500,000

 
485

 
485

Series E
 
Fixed-to-Floating Rate Non-Cumulative
 
May 14, 2015
 
June 1, 2020
 
5.55% through 5/31/2020;
3-mo. LIBOR+ 380 bps thereafter
 
Semi-Annually through 5/31/2020; Quarterly thereafter
 
1,000

 
1,000,000

 
988

 
988

Series F(1)
 
6.20%
Non-Cumulative
 
August 24, 2015
 
December 1, 2020
 
6.20
 
Quarterly
 
1,000

 
500,000

 
484

 
484

Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
3,294

 
$
3,294

__________
(1)Ownership is held in the form of depositary shares, each representing a 1/40th interest in a share of fixed-rate non-cumulative perpetual preferred stock.
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated Other Comprehensive Income
The following table presents the changes in AOCI by component for the three months ended March 31, 2016 and 2015.
Table 10.2: Accumulated Other Comprehensive Income
(Dollars in millions)
 
Securities
Available
for Sale
 
Securities Held to Maturity(1)
 
Cash Flow
Hedges
 
Foreign
Currency
Translation Adjustments
(2)
 
Other
 
Total
AOCI as of December 31, 2015
 
$
162

 
$
(725
)
 
$
120

 
$
(143
)
 
$
(30
)
 
$
(616
)
Other comprehensive income (loss) before reclassifications
 
182

 
0

 
426

 
1

 
(13
)
 
596

Amounts reclassified from AOCI into earnings
 
5

 
21

 
(49
)
 
0

 
2

 
(21
)
Net other comprehensive income (loss)
 
187

 
21

 
377

 
1

 
(11
)
 
575

AOCI as of March 31, 2016
 
$
349

 
$
(704
)
 
$
497

 
$
(142
)
 
$
(41
)
 
$
(41
)
(Dollars in millions)
 
Securities
Available
for Sale
 
Securities Held to Maturity(1)
 
Cash Flow
Hedges
 
Foreign
Currency
Translation Adjustments
(2)
 
Other
 
Total
AOCI as of December 31, 2014
 
$
410

 
$
(821
)
 
$
10

 
$
(8
)
 
$
(21
)
 
$
(430
)
Other comprehensive income (loss) before reclassifications
 
114

 
0

 
205

 
(84
)
 
(1
)
 
234

Amounts reclassified from AOCI into earnings
 
8

 
20

 
(43
)
 
0

 
(1
)
 
(16
)
Net other comprehensive income (loss)
 
122

 
20

 
162

 
(84
)
 
(2
)
 
218

AOCI as of March 31, 2015
 
$
532

 
$
(801
)
 
$
172

 
$
(92
)
 
$
(23
)
 
$
(212
)

 
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__________
(1) 
The amortization of unrealized holding gains or losses reported in AOCI for securities held to maturity will be offset by the amortization of the premium or discount present at the date of transfer from securities available for sale to securities held to maturity, which occurred at fair value. These unrealized gains or losses will be amortized over the remaining life of the security with no expected impact on future net income.
(2) 
Includes the impact from hedging instruments designated as net investment hedges.
The following table presents the impacts on net income of amounts reclassified from each component of AOCI for the three months ended March 31, 2016 and 2015.
Table 10.3: Reclassifications from AOCI
 
 
 
 
Amount Reclassified from AOCI
(Dollars in millions)
 
 
 
Three Months Ended March 31,
AOCI Components
 
Affected Income Statement Line Item
 
2016
 
2015
Securities available for sale:
 
 
 
 
 
 
 
 
Non-interest income
 
$
0

 
$
2

 
 
Non-interest income - OTTI
 
(8
)
 
(15
)
 
 
Income (loss) from continuing operations before income taxes
 
(8
)
 
(13
)
 
 
Income tax provision (benefit)
 
(3
)
 
(5
)
 
 
Net income (loss)
 
(5
)
 
(8
)
Securities held to maturity:(1)
 
 
 
 
 
 
 
 
Interest income
 
(33
)
 
(33
)
 
 
Income tax provision (benefit)
 
(12
)
 
(13
)
 
 
Net income (loss)
 
(21
)
 
(20
)
Cash flow hedges:
 
 
 
 
 
 
Interest rate contracts:
 
Interest income
 
79

 
75

Foreign exchange contracts:
 
Interest income
 
(1
)
 
0

 
 
Non-interest income
 
(1
)
 
(7
)
 
 
Income (loss) from continuing operations before income taxes
 
77

 
68

 
 
Income tax provision (benefit)
 
28

 
25

 
 
Net income (loss)
 
49

 
43

Other:
 
 
 
 
 
 
 
 
Various (pension and other)
 
(2
)
 
1

 
 
Income tax provision (benefit)
 
0

 
0

 
 
Net income (loss)
 
(2
)
 
1

Total reclassifications
 
$
21

 
$
16

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

 
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The table below summarizes other comprehensive income activity and the related tax impact for the three months ended March 31, 2016 and 2015.

Table 10.4: Other Comprehensive Income (Loss)
 
 
Three Months Ended March 31,
 
 
2016
 
2015
(Dollars in millions)
 
Before
Tax
 
Provision
(Benefit)
 
After
Tax
 
Before
Tax
 
Provision
(Benefit)
 
After
Tax
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
Net unrealized gains on securities available for sale
 
$
296

 
$
109

 
$
187

 
$
190

 
$
68

 
$
122

Net changes in securities held to maturity
 
33

 
12

 
21

 
33

 
13

 
20

Net unrealized gains on cash flow hedges
 
600

 
223

 
377

 
258

 
96

 
162

Foreign currency translation adjustments(1)
 
26

 
25

 
1

 
(41
)
 
43

 
(84
)
Other
 
(17
)
 
(6
)
 
(11
)
 
(4
)
 
(2
)
 
(2
)
Other comprehensive income (loss)
 
$
938

 
$
363

 
$
575

 
$
436

 
$
218

 
$
218

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


 
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NOTE 11—EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per common share:
Table 11.1: Computation of Basic and Diluted Earnings per Common Share
 
 
Three Months Ended March 31,
(Dollars and shares in millions, except per share data)
 
2016
 
2015
Income from continuing operations, net of tax
 
$
1,018

 
$
1,134

Income (loss) from discontinued operations, net of tax
 
(5
)
 
19

Net income
 
1,013

 
1,153

Dividends and undistributed earnings allocated to participating securities(1)
 
(6
)
 
(6
)
Preferred stock dividends
 
(37
)
 
(32
)
Net income available to common stockholders
 
$
970

 
$
1,115

 
 
 
 
 
Total weighted-average basic shares outstanding
 
523.5

 
550.2

Effect of dilutive securities:
 
 
 
 
Stock options
 
1.8

 
2.6

Other contingently issuable shares
 
1.2

 
1.5

Warrants(2)
 
1.5

 
2.9

Total effect of dilutive securities
 
4.5

 
7.0

Total weighted-average diluted shares outstanding
 
528.0

 
557.2

 
 
 
 
 
Basic earnings per common share:
 
 
 
 
Net income from continuing operations
 
$
1.86

 
$
2.00

Income (loss) from discontinued operations
 
(0.01
)
 
0.03

Net income per basic common share
 
$
1.85

 
$
2.03

 
 
 
 
 
Diluted earnings per common share:(3)
 
 
 
 
Net income from continuing operations
 
$
1.85

 
$
1.97

Income (loss) from discontinued operations
 
(0.01
)
 
0.03

Net income per diluted common share
 
$
1.84

 
$
2.00

__________
(1) 
Includes undistributed earnings allocated to participating securities using the two-class method under the accounting guidance for computing earnings per share.
(2) 
Represents warrants issued as part of the U.S. Department of Treasury’s Troubled Assets Relief Program (“TARP”). As of March 31, 2016, there were 4.1 million warrants to purchase common stock outstanding.
(3) 
Excluded from the computation of diluted earnings per share were 2.9 million shares related to options with exercise prices ranging from $63.73 to $88.81 and 2.0 million shares related to options with exercise prices ranging from $70.96 to $88.81 for the three months ended March 31, 2016 and 2015, respectively, because their inclusion would be anti-dilutive.

 
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NOTE 12—FAIR VALUE MEASUREMENT
Fair value is defined as the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date (also referred to as an exit price). The fair value accounting guidance provides a three-level fair value hierarchy for classifying financial instruments. This hierarchy is based on the markets in which the assets or liabilities trade and whether the inputs to the valuation techniques used to measure fair value are observable or unobservable. The fair value measurement of a financial asset or liability is assigned a level based on the lowest level of any input that is significant to the fair value measurement in its entirety. The three levels of the fair value hierarchy are described below:
Level 1:
 
Valuation is based on quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2:
 
Valuation is based on observable market-based inputs, other than quoted prices in active markets for identical assets or liabilities, quoted prices in markets that are not active, or models using inputs that are observable or can be corroborated by observable market data of substantially the full term of the assets or liabilities.
Level 3:
 
Valuation is generated from techniques that use significant assumptions not observable in the market. Valuation techniques include pricing models, discounted cash flow methodologies or similar techniques.
The accounting guidance for fair value measurements requires that we maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value. The accounting guidance provides for the irrevocable option to elect, on a contract-by-contract basis, to measure certain financial assets and liabilities at fair value at inception of the contract and record any subsequent changes in fair value in earnings. We have not made any material fair value option elections as of or for the periods disclosed herein.
For additional information on the valuation techniques used in estimating the fair value of our financial assets and liabilities on a recurring or nonrecurring basis and for estimating the fair value for financial instruments that are not recorded at fair value, see “Note 19—Fair Value Measurement” in our 2015 Form 10-K.
Fair Value Governance and Control
We have a governance framework and a number of key controls that are intended to ensure that our fair value measurements are appropriate and reliable. Our governance framework provides for independent oversight and segregation of duties. Our control processes include review and approval of new transaction types, price verification and review of valuation judgments, methods, models, process controls and results. Groups independent of our trading and investing functions, including our Corporate Valuations Group (“CVG”), Fair Value Committee (“FVC”) and Model Validation Group (“MVG”), participate in the review and validation process. The fair valuation governance process is set up in a manner that allows the Chairperson of the FVC to escalate valuation disputes that cannot be resolved by the FVC to a more senior committee called the Valuations Advisory Committee (“VAC”) for resolution. The VAC is chaired by the Chief Financial Officer and includes other members of senior management. The VAC is only required to convene to review escalated valuation disputes and may meet for a general update on the valuation process.
The CVG performs periodic verification of fair value measurements to determine if assigned fair values are reasonable. For example, in cases where we rely on third-party pricing services to obtain fair value measures, we analyze pricing variances among different pricing sources and validate the final price used by comparing the information to additional sources, including dealer pricing indications in transaction results and other internal sources, where necessary. Additional validation procedures performed by the CVG include reviewing (either directly or indirectly through the reasonableness of assigned fair values) valuation inputs and assumptions and monitoring acceptable variances between recommended prices and validation prices. The CVG and the Trade Analytics and Valuation (“TAV”) team perform due diligence reviews of the third-party pricing services by comparing their prices to those from other sources and periodically reviewing research publications. Additionally, when necessary, the CVG and TAV challenge prices from third-party vendors to ensure reasonableness of prices through a pricing challenge process. This may include a request for transparency of the assumptions used by the third party.
The FVC, which includes representation from our Risk Management and Finance functions, is a forum for discussing fair market valuations, related inputs, assumptions, methodologies, as well as variance thresholds, valuation control environments and material risks or concerns related to fair market valuations. Additionally, the FVC is empowered to resolve valuation disputes between the primary valuation providers and the CVG, and provides guidance and oversight to ensure an appropriate valuation control environment. The FVC regularly reviews and approves our valuation methodologies to ensure that our methodologies and practices

 
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are consistent with industry standards and adhere to regulatory and accounting guidance. The Chief Financial Officer determines when material issues or concerns regarding valuations shall be raised to the Audit Committee or another delegated committee of the Board of Directors.
We have a model policy, established by an independent Model Risk Office, which governs the validation of models and related supporting documentation to ensure the appropriate use of models for pricing. The MVG is part of the Model Risk Office and validates all models and provides ongoing monitoring of their performance, including the validation and monitoring of the performance of all valuation models.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table displays our assets and liabilities measured on our consolidated balance sheets at fair value on a recurring basis as of March 31, 2016 and December 31, 2015:
Table 12.1: Assets and Liabilities Measured at Fair Value on a Recurring Basis
 
 
March 31, 2016
 
 
Fair Value Measurements Using
 
 
(Dollars in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
4,966

 
$
0

 
$
0

 
$
4,966

RMBS
 
0

 
27,763

 
505

 
28,268

CMBS
 
0

 
5,253

 
251

 
5,504

Other ABS
 
0

 
1,008

 
30

 
1,038

Other securities
 
303

 
2

 
11

 
316

Total securities available for sale
 
5,269

 
34,026

 
797

 
40,092

Other assets:
 
 
 
 
 
 
 
 
Consumer MSRs
 
0

 
0

 
59

 
59

Derivative assets(1)(2)
 
2

 
1,950

 
71

 
2,023

Retained interests in securitizations
 
0

 
0

 
201

 
201

Total assets
 
$
5,271

 
$
35,976

 
$
1,128

 
$
42,375

Liabilities:
 
 
 
 
 
 
 
 
Other liabilities:
 
 
 
 
 
 
 
 
Derivative liabilities(1)(2)
 
$
3

 
$
752

 
$
40

 
$
795

Total liabilities
 
$
3

 
$
752

 
$
40

 
$
795


 
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December 31, 2015
 
 
Fair Value Measurements Using
 
 
(Dollars in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
4,660

 
$
0

 
$
0

 
$
4,660

RMBS
 
0

 
26,807

 
504

 
27,311

CMBS
 
0

 
5,282

 
97

 
5,379

Other ABS
 
0

 
1,340

 
0

 
1,340

Other securities
 
355

 
2

 
14

 
371

Total securities available for sale
 
5,015

 
33,431

 
615

 
39,061

Other assets:
 
 
 
 
 
 
 
 
Consumer MSRs
 
0

 
0

 
68

 
68

Derivative assets(1)(2)
 
2

 
1,459

 
57

 
1,518

Retained interests in securitizations
 
0

 
0

 
211

 
211

Total assets
 
$
5,017

 
$
34,890

 
$
951

 
$
40,858

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

 
$
491

 
$
27

 
$
520

Total liabilities
 
$
2

 
$
491

 
$
27

 
$
520

__________
(1) 
The balances represent gross derivative amounts and are not reduced by the impact of legally enforceable master netting agreements that allow us to net positive and negative positions and the related payables and receivables for cash collateral held or placed with the same counterparty. The net derivative assets were $1.7 billion and $986 million, and the net derivative liabilities were $445 million and $377 million as of March 31, 2016 and December 31, 2015, respectively. See “Note 9—Derivative Instruments and Hedging Activities” for further information.
(2) 
Does not reflect $4 million recognized as a net valuation allowance on derivative assets and liabilities for non-performance risk as of both March 31, 2016 and December 31, 2015. Non-performance risk is reflected in other assets and liabilities on the consolidated balance sheets and offset through non-interest income in the consolidated statements of income.
The determination of the classification of financial instruments in the fair value hierarchy is performed at the end of each reporting period. We consider all available information, including observable market data, indications of market liquidity and orderliness, and our understanding of the valuation techniques and significant inputs. Based upon the specific facts and circumstances of each instrument or instrument category, judgments are made regarding the significance of the unobservable inputs to the instruments’ fair value measurement in its entirety. If unobservable inputs are considered significant, the instrument is classified as Level 3. The process for determining fair value using unobservable inputs is generally more subjective and involves a high degree of management judgment and assumptions. During the three months ended March 31, 2016, we had minimal movements between Levels 1 and 2.
Level 3 Recurring Fair Value Rollforward
The table below presents a reconciliation for all assets and liabilities measured and recognized at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2016 and 2015. When assets and liabilities are transferred between levels, we recognize the transfer as of the end of the period.
 
 

 
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Table 12.2: Level 3 Recurring Fair Value Rollforward
 
 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
 
Three Months Ended March 31, 2016
 
 
 
 
Total Gains (Losses)
(Realized/Unrealized)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Unrealized
Gains (Losses)
Included in Net
Income Related to Assets and
Liabilities Still Held as of
March 31, 2016(3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in millions)
 
Balance,
January 1,
2016
 
Included
in Net
Income(1)
 
Included in
OCI
 
Purchases
 
Sales
 
Issuances
 
Settlements
 
Transfers
Into
Level 3(2)
 
Transfers
Out of
Level 3(2)
 
Balance, March 31, 2016
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
RMBS
 
$
504

 
$
6

 
$
(5
)
 
$
0

 
$
0

 
$
0

 
$
(17
)
 
$
127

 
$
(110
)
 
$
505

 
$
6

CMBS
 
97

 
0

 
1

 
93

 
0

 
0

 
(4
)
 
64

 
0

 
251

 
0

Other ABS
 
0

 
0

 
0

 
30

 
0

 
0

 
0

 
0

 
0

 
30

 
0

Other securities
 
14

 
0

 
0

 
0

 
0

 
0

 
(3
)
 
0

 
0

 
11

 
0

Total securities available for sale
 
615

 
6

 
(4
)
 
123

 
0

 
0

 
(24
)
 
191

 
(110
)
 
797

 
6

Other assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer MSRs
 
68

 
(12
)
 
0

 
0

 
0

 
4

 
(1
)
 
0

 
0

 
59

 
(12
)
Derivative assets(4)
 
57

 
19

 
0

 
0

 
0

 
12

 
(11
)
 
0

 
(6
)
 
71

 
19

Retained interest in securitizations
 
211

 
(10
)
 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
201

 
(10
)
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities(4)
 
$
(27
)
 
$
(14
)
 
$
0

 
$
0

 
$
0

 
$
(7
)
 
$
3

 
$
0

 
$
5

 
$
(40
)
 
$
(14
)
 
 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
 
Three Months Ended March 31, 2015
 
 
 
 
Total Gains (Losses)
(Realized/Unrealized)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Unrealized
Gains (Losses)
Included in Net
Income Related to Assets and Liabilities Still Held as of March 31, 2015(3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in millions)
 
Balance,
January 1,
2015
 
Included
in Net
Income(1)
 
Included in
OCI
 
Purchases
 
Sales
 
Issuances
 
Settlements
 
Transfers
Into
Level 3(2)
 
Transfers
Out of
Level 3(2)
 
Balance,
March 31, 2015
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities guaranteed by U.S. government agencies
 
$
333

 
$
(2
)
 
$
5

 
$
0

 
$
(68
)
 
$
0

 
$
(8
)
 
$
0

 
$
(88
)
 
$
172

 
$
0

RMBS
 
561

 
8

 
8

 
0

 
0

 
0

 
(13
)
 
85

 
(94
)
 
555

 
9

CMBS
 
228

 
0

 
1

 
0

 
0

 
0

 
(21
)
 
0

 
(34
)
 
174

 
0

Other ABS
 
65

 
1

 
(2
)
 
0

 
(20
)
 
0

 
0

 
0

 
(37
)
 
7

 
0

Other securities
 
18

 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
18

 
0

Total securities available for sale
 
1,205

 
7

 
12

 
0

 
(88
)
 
0

 
(42
)
 
85

 
(253
)
 
926

 
9

Other assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer MSRs
 
53

 
(3
)
 
0

 
0

 
0

 
4

 
(1
)
 
0

 
0

 
53

 
(3
)
Derivative assets(4)
 
66

 
11

 
0

 
0

 
0

 
9

 
(12
)
 
0

 
(1
)
 
73

 
11

Retained interest in securitization
 
221

 
2

 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
223

 
2

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities(4)
 
$
(43
)
 
$
(10
)
 
$
0

 
$
0

 
$
0

 
$
(7
)
 
$
12

 
$
0

 
$
0

 
$
(48
)
 
$
(10
)
__________
(1) 
Gains (losses) related to Level 3 Consumer MSRs, derivative assets and derivative liabilities, and retained interests in securitizations are reported in other non-interest income, which is a component of non-interest income, in our consolidated statements of income.

 
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(2) 
During the three months ended March 31, 2016 and 2015, the transfers into Level 3 were primarily driven by less consistency among vendor pricing on individual securities, while the transfers out of Level 3 were primarily driven by greater consistency among multiple pricing sources.
(3) 
The amount presented for unrealized gains (losses) for assets still held as of the reporting date primarily represents impairments of securities available for sale, accretion on certain fixed maturity securities, changes in fair value of derivative instruments and mortgage servicing rights transactions. Impairment is reported in total OTTI, which is a component of non-interest income, in our consolidated statements of income.
(4) 
All Level 3 derivative assets and liabilities are presented on a gross basis and are not reduced by the impact of legally enforceable master netting agreements that allow us to net positive and negative positions and the related payables and receivables for cash collateral held or placed with the same counterparty.
Significant Level 3 Fair Value Asset and Liability Input Sensitivity
Changes in unobservable inputs may have a significant impact on fair value. Certain of these unobservable inputs will, in isolation, have a directionally consistent impact on the fair value of the instrument for a given change in that input. Alternatively, the fair value of the instrument may move in an opposite direction for a given change in another input. In general, an increase in the discount rate, default rates, loss severity and credit spreads, in isolation, would result in a decrease in the fair value measurement. In addition, an increase in default rates would generally be accompanied by a decrease in recovery rates, slower prepayment rates and an increase in liquidity spreads.
Techniques and Inputs for Level 3 Fair Value Measurements
The following table presents the significant unobservable inputs relied upon to determine the fair values of our Level 3 financial instruments on a recurring basis. We utilize multiple third-party pricing services to obtain fair value measures for our securities. Several of our third-party pricing services are only able to provide unobservable input information for a limited number of securities due to software licensing restrictions. Other third-party pricing services are able to provide unobservable input information for all securities for which they provide a valuation. As a result, the unobservable input information for the securities available for sale presented below represents a composite summary of all information we are able to obtain for a majority of our securities. The unobservable input information for all other Level 3 financial instruments is based on the assumptions used in our internal valuation models.
Table 12.3: Quantitative Information about Level 3 Fair Value Measurements
 
 
Quantitative Information about Level 3 Fair Value Measurements
(Dollars in millions)
 
Fair Value at March 31,
2016
 
Significant
Valuation
Techniques
 
Significant
Unobservable
Inputs
 
Range
 
Weighted
Average
Assets:
 
 
 
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
 
 
 
RMBS
 
$
505

 
Discounted cash flows (3rd party pricing)
 
Yield
Constant prepayment rate
Default rate
Loss severity
 
0-15%
0-27%
0-11%
9-88%
 
6%
5%
4%
54%
CMBS
 
251

 
Discounted cash flows (3rd party pricing)
 
Yield
Constant prepayment rate
 
1-3%
0-15%
 
2%
2%
Other ABS
 
30

 
Discounted cash flows (3rd party pricing)
 
Yield
Constant prepayment rate
 
1%
3%
 
1%
3%
Other securities
 
11

 
Discounted cash flows
 
Yield
 
1%
 
1%
Other assets:
 
 
 
 
 
 
 
 
 
 
Consumer MSRs
 
59

 
Discounted cash flows
 
Total prepayment rate
Discount rate
Option-adjusted spread rate
Servicing cost ($ per loan)
 
10-20%
15%
435-1,500 bps
$93-$201
 
17%
15%
477 bps
$98
Derivative assets(1)
 
71

 
Discounted cash flows
 
Swap rates
 
2%
 
2%
Retained interests in securitization(2)
 
201

 
Discounted cash flows
 
Life of receivables (months) Constant prepayment rate
Discount rate
Default rate
Loss severity
 
14-83
1-12%
3-11%
1-6%
6-117%
 
N/A
Liabilities:
 
 
 
 
 
 
 
 
 
 
Derivative liabilities(1)
 
$
40

 
Discounted cash flows
 
Swap rates
 
2%
 
2%


 
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Quantitative Information about Level 3 Fair Value Measurements
(Dollars in millions)
 
Fair Value at
December 31,
2015
 
Significant
Valuation
Techniques
 
Significant
Unobservable
Inputs
 
Range
 
Weighted
Average
Assets:
 
 
 
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
 
 
 
RMBS
 
$
504

 
Discounted cash flows (3rd party pricing)
 
Yield
Constant prepayment rate
Default rate
Loss severity
 
0-12%
0-28%
0-8%
16-85%
 
6%
4%
4%
55%
CMBS
 
97

 
Discounted cash flows (3rd party pricing)
 
Yield
Constant prepayment rate
 
2-3%
0-15%
 
3%
9%
Other securities
 
14

 
Discounted cash flows
 
Yield
 
1%
 
1%
Other assets:
 
 
 
 
 
 
 
 
 
 
Consumer MSRs
 
68

 
Discounted cash flows
 
Total prepayment rate
Discount rate
Option-adjusted spread rate
Servicing cost ($ per loan)
 
11-18%
12%
435-1,500 bps
$93-$201
 
16%
12%
474 bps
$98
Derivative assets(1)
 
57

 
Discounted cash flows
 
Swap rates
 
2%
 
2%
Retained interests in securitization(2)
 
211

 
Discounted cash flows
 
Life of receivables (months) Constant prepayment rate
Discount rate
Default rate
Loss severity
 
16-75
1-13%
4-9%
2-6%
15-94%
 
N/A
Liabilities:
 
 
 
 
 
 
 
 
 
 
Derivative liabilities(1)
 
$
27

 
Discounted cash flows
 
Swap rates
 
2%
 
2%
__________
(1) 
All Level 3 derivative assets and liabilities are presented on a gross basis and are not reduced by the impact of legally enforceable master netting agreements that allow us to net positive and negative positions and the related payables and receivables for cash collateral held or placed with the same counterparty.
(2) 
Due to the nature of the various mortgage securitization structures in which we have retained interests, it is not meaningful to present a consolidated weighted average for the significant unobservable inputs.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
We are required to measure and recognize certain other assets at fair value on a nonrecurring basis on the consolidated balance sheets. These assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, from the application of lower of cost or market accounting or when we evaluate for impairment). The following table presents the carrying amount of the assets measured at fair value on a nonrecurring basis and still held as of March 31, 2016 and December 31, 2015, and for which a nonrecurring fair value measurement was recorded during the three and twelve months then ended:
Table 12.4: Nonrecurring Fair Value Measurements Related to Assets Still Held at Period End
 
 
March 31, 2016
  
 
Estimated Fair Value Hierarchy
 
Total
(Dollars in millions)
 
Level 1
 
Level 2
 
Level 3
 
Loans held for investment
 
$
0

 
$
0

 
$
716

 
$
716

Loans held for sale
 
0

 
6

 
0

 
6

Other assets(1)
 
0

 
0

 
39

 
39

Total
 
$
0

 
$
6

 
$
755

 
$
761


 
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December 31, 2015
  
 
Estimated Fair Value Hierarchy
 
Total
(Dollars in millions)
 
Level 1
 
Level 2
 
Level 3
 
Loans held for investment
 
$
0

 
$
0

 
$
362

 
$
362

Loans held for sale
 
0

 
149

 
0

 
149

Other assets(1)
 
0

 
0

 
92

 
92

Total
 
$
0

 
$
149

 
$
454

 
$
603

__________
(1) 
Includes foreclosed property and repossessed assets of $39 million and long-lived assets held for sale of $0 million as of March 31, 2016, compared to foreclosed property and repossessed assets of $54 million and long-lived assets held for sale of $38 million as of December 31, 2015.
In the above table, loans held for investment primarily include nonperforming loans for which specific reserves or charge-offs have been recognized. These loans are classified as Level 3 as they are valued based in part on the estimated fair value of the underlying collateral and the non-recoverable rate, which is considered to be a significant unobservable input. Collateral fair value sources include the appraisal value obtained from independent appraisers, broker pricing opinions or other available market information. The non-recoverable rate ranged from 0% to 78%, with a weighted average of 11%, and from 9% to 73%, with a weighted average of 20%, as of March 31, 2016 and December 31, 2015, respectively. The fair value of the other assets classified as Level 3 is determined based on appraisal value or listing price which involves significant judgment; the significant unobservable inputs and related quantitative information are not meaningful to disclose as they vary significantly across properties and collateral.
The following table presents total nonrecurring fair value measurements for the period, included in earnings, attributable to the change in fair value relating to assets that are still held at March 31, 2016 and 2015:
Table 12.5: Nonrecurring Fair Value Measurements Included in Earnings Related to Assets Still Held at Period End
 
 
Total Gains (Losses)
 
 
Three Months Ended March 31,
(Dollars in millions)
 
2016
 
2015
Loans held for investment
 
$
(71
)
 
$
(5
)
Loans held for sale
 
0

 
0

Other assets(1)
 
(4
)
 
(4
)
Total
 
$
(75
)
 
$
(9
)
__________
(1) 
Includes losses related to foreclosed property and repossessed assets.
Fair Value of Financial Instruments
The following table is a summary of the fair value estimates for our financial instruments, excluding those financial instruments that are recorded at fair value on a recurring basis as they are included within the “Assets and Liabilities Measured at Fair Value on a Recurring Basis” table included earlier in this Note.

 
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Table 12.6: Fair Value of Financial Instruments
 
 
March 31, 2016
 
 
Carrying
Amount
 
Estimated
Fair Value
 
Estimated Fair Value Hierarchy
(Dollars in millions)
 
 
 
Level 1
 
Level 2
 
Level 3
Financial assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
5,235

 
$
5,235

 
$
5,235

 
$
0

 
$
0

Restricted cash for securitization investors
 
960

 
960

 
960

 
0

 
0

Securities held to maturity
 
25,080

 
26,455

 
200

 
26,204

 
51

Net loans held for investment
 
222,197

 
224,489

 
0

 
0

 
224,489

Loans held for sale
 
1,251

 
1,308

 
0

 
1,308

 
0

Interest receivable
 
1,221

 
1,221

 
0

 
1,221

 
0

Other investments(1)
 
1,754

 
1,754

 
0

 
1,754

 
0

Financial liabilities:
 
 
 
 
 
 
 
 
 
 
Non-interest bearing deposits
 
$
25,182

 
$
25,182

 
$
25,182

 
$
0

 
$
0

Interest-bearing deposits
 
196,597

 
192,475

 
0

 
16,336

 
176,139

Securitized debt obligations
 
14,913

 
14,961

 
0

 
14,961

 
0

Senior and subordinated notes
 
21,736

 
21,697

 
0

 
21,697

 
0

Federal funds purchased and securities loaned or sold under agreements to repurchase
 
917

 
917

 
917

 
0

 
0

Other borrowings
 
12,931

 
12,920

 
0

 
12,920

 
0

Interest payable
 
217

 
217

 
0

 
217

 
0

 
 
December 31, 2015
 
 
Carrying
Amount
 
Estimated
Fair Value

 
Estimated Fair Value Hierarchy
(Dollars in millions)
 
 
 
Level 1
 
Level 2
 
Level 3
Financial assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
8,023

 
$
8,023

 
$
8,023

 
$
0

 
$
0

Restricted cash for securitization investors
 
1,017

 
1,017

 
1,017

 
0

 
0

Securities held to maturity
 
24,619

 
25,317

 
198

 
25,068

 
51

Net loans held for investment
 
224,721

 
222,007

 
0

 
0

 
222,007

Loans held for sale
 
904

 
933

 
0

 
860

 
73

Interest receivable
 
1,189

 
1,189

 
0

 
1,189

 
0

Other investments(1)
 
2,060

 
2,060

 
0

 
2,060

 
0

Financial liabilities:
 
 
 
 
 
 
 
 
 
 
Non-interest bearing deposits
 
$
25,847

 
$
25,847

 
$
25,847

 
$
0

 
$
0

Interest-bearing deposits
 
191,874

 
185,075

 
0

 
15,848

 
169,227

Securitized debt obligations
 
16,166

 
16,225

 
0

 
16,225

 
0

Senior and subordinated notes
 
21,837

 
22,062

 
0

 
22,062

 
0

Federal funds purchased and securities loaned or sold under agreements to repurchase
 
981

 
981

 
981

 
0

 
0

Other borrowings
 
20,131

 
20,134

 
0

 
20,134

 
0

Interest payable
 
299

 
299

 
0

 
299

 
0

__________
(1) 
Primarily includes our investments in Federal Home Loan Banks (“FHLB”) and the Board of Governors of the Federal Reserve System (“Federal Reserve”) stock. These investments are included in other assets on our consolidated balance sheets.

 
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NOTE 13—BUSINESS SEGMENTS
Our principal operations are currently organized into three major business segments, which are defined based on the products and services provided or the type of customer served: Credit Card, Consumer Banking and Commercial Banking. The operations of acquired businesses have been integrated into our existing business segments. Certain activities that are not part of a segment, such as management of our corporate investment portfolio and asset/liability management by our centralized Corporate Treasury group, are included in the Other category.
 
 
 
 
 
Basis of Presentation
We report the results of each of our business segments on a continuing operations basis. See “Note 2—Discontinued Operations” for a discussion of our discontinued operations. The results of our individual businesses reflect the manner in which management evaluates performance and makes decisions about funding our operations and allocating resources.
Business Segment Reporting Methodology
The results of our business segments are intended to present each segment as if it were a stand-alone business. Our internal management and reporting process used to derive our segment results employs various allocation methodologies, including funds transfer pricing, to assign certain balance sheet assets, deposits and other liabilities and their related revenue and expenses directly or indirectly attributable to each business segment. Our funds transfer pricing process provides a funds credit for sources of funds, such as deposits generated by our Consumer Banking and Commercial Banking businesses, and a funds charge for the use of funds by each segment. Due to the integrated nature of our business segments, estimates and judgments have been made in allocating certain revenue and expense items. Transactions between segments are based on specific criteria or approximate third-party rates. We regularly assess the assumptions, methodologies and reporting classifications used for segment reporting, which may result in the implementation of refinements or changes in future periods. We provide additional information on the allocation methodologies used to derive our business segment results in “Note 20—Business Segments” in our 2015 Form 10-K
Segment Results and Reconciliation
We may periodically change our business segments or reclassify business segment results based on modifications to our management reporting methodologies and changes in organizational alignment. The following tables present our business segment results for the three months ended March 31, 2016 and 2015, selected balance sheet data as of March 31, 2016 and 2015, and a reconciliation of our total business segment results to our reported consolidated income from continuing operations, assets and deposits. 

 
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Table 13.1: Segment Results and Reconciliation
 
 
Three Months Ended March 31, 2016
(Dollars in millions)
 
Credit
Card
 
Consumer
Banking
 
Commercial
Banking
(1)
 
Other(1)
 
Consolidated
Total
Net interest income
 
$
3,033

 
$
1,420

 
$
537

 
$
66

 
$
5,056

Non-interest income
 
847

 
191

 
118

 
8

 
1,164

Total net revenue (loss)
 
3,880

 
1,611

 
655

 
74

 
6,220

Provision (benefit) for credit losses
 
1,071

 
230

 
228

 
(2
)
 
1,527

Non-interest expense:
 
 
 
 
 
 
 
 
 
 
Amortization of intangibles:
 
 
 
 
 
 
 
 
 
 
PCCR intangible amortization
 
70

 
0

 
0

 
0

 
70

Core deposit intangible amortization
 
0

 
15

 
3

 
0

 
18

Total PCCR and core deposit intangible amortization
 
70

 
15

 
3

 
0

 
88

Other non-interest expense
 
1,793

 
975

 
319

 
48

 
3,135

Total non-interest expense
 
1,863

 
990

 
322

 
48

 
3,223

Income (loss) from continuing operations before income taxes
 
946

 
391

 
105

 
28

 
1,470

Income tax provision (benefit)
 
337

 
142

 
38

 
(65
)
 
452

Income (loss) from continuing operations, net of tax
 
$
609

 
$
249

 
$
67

 
$
93

 
$
1,018

Loans held for investment
 
$
92,699

 
$
70,591

 
$
64,241

 
$
82

 
$
227,613

Deposits
 
0

 
177,803

 
33,383

 
10,593

 
221,779

 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2015
(Dollars in millions)
 
Credit
Card
 
Consumer
Banking
 
Commercial
Banking
(1)
 
Other(1)
 
Consolidated
Total
Net interest income
 
$
2,666

 
$
1,434

 
$
461

 
$
15

 
$
4,576

Non-interest income
 
816

 
158

 
114

 
(17
)
 
1,071

Total net revenue (loss)
 
3,482

 
1,592

 
575

 
(2
)
 
5,647

Provision (benefit) for credit losses
 
669

 
206

 
60

 
0

 
935

Non-interest expense:
 
 
 
 
 
 
 
 
 
 
Amortization of intangibles:
 
 
 
 
 
 
 
 
 
 
PCCR intangible amortization
 
84

 
0

 
0

 
0

 
84

Core deposit intangible amortization
 
0

 
22

 
4

 
0

 
26

Total PCCR and core deposit intangible amortization
 
84

 
22

 
4

 
0

 
110

Other non-interest expense
 
1,692

 
948

 
268

 
31

 
2,939

Total non-interest expense
 
1,776

 
970

 
272

 
31

 
3,049

Income (loss) from continuing operations before income taxes
 
1,037

 
416

 
243

 
(33
)
 
1,663

Income tax provision (benefit)
 
369

 
150

 
88

 
(78
)
 
529

Income (loss) from continuing operations, net of tax
 
$
668

 
$
266

 
$
155

 
$
45

 
$
1,134

Loans held for investment
 
$
81,754

 
$
71,379

 
$
50,741

 
$
104

 
$
203,978

Deposits
 
0

 
172,502

 
32,575

 
5,363

 
210,440

__________
(1) 
Some of our tax-related commercial investments generate tax-exempt income or tax credits. Accordingly, we make certain reclassifications within our Commercial Banking business results to present revenues and yields on a taxable-equivalent basis, calculated assuming an effective tax rate approximately equal to our federal statutory tax rate of 35% with offsetting reclassifications to the Other category.
 
 
 
 
 
 
 
 
 
 
 

 
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NOTE 14—COMMITMENTS, CONTINGENCIES, GUARANTEES AND OTHERS
Letters of Credit and Loss Sharing Agreements
We issue letters of credit (financial standby, performance standby and commercial) to meet the financing needs of our customers. Standby letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party in a borrowing arrangement. Commercial letters of credit are short-term commitments issued primarily to facilitate trade finance activities for customers and are generally collateralized by the goods being shipped to the client. These collateral requirements are similar to those for funded transactions and are established based on management’s credit assessment of the customer. Management conducts regular reviews of all outstanding letters of credit and customer acceptances, and the results of these reviews are considered in assessing the adequacy of our allowance for loan and lease losses.
Within our Commercial Banking business, we originate multifamily commercial real estate loans with the intent to sell them to a government-sponsored enterprise (“GSE”). We enter into loss sharing agreements with the GSE upon the sale of the loans. At inception, we record a liability representing the fair value of our obligation which is subsequently amortized as we are released from risk of payment under the loss sharing agreement. If payment under the loss sharing agreement becomes probable and estimable, an additional liability may be recorded on the consolidated balance sheets and a non-interest expense may be recognized in the consolidated statements of income. The amount of liability recognized on our consolidated balance sheets for our loss sharing agreements was $41 million and $40 million as of March 31, 2016 and December 31, 2015, respectively.
We had standby letters of credit and commercial letters of credit with contractual amounts of $1.9 billion as of both March 31, 2016 and December 31, 2015. The carrying value of outstanding letters of credit, which we include in other liabilities on our consolidated balance sheets was $3 million as of both March 31, 2016 and December 31, 2015. These financial guarantees had expiration dates ranging from 2016 to 2025 as of March 31, 2016.
U.K. Cross Sell
In the U.K., we previously sold payment protection insurance (“PPI”) and other ancillary cross sell products. In response to an elevated level of customer complaints across the industry, heightened media coverage and pressure from consumer advocacy groups, the U.K. Financial Conduct Authority (“FCA”), formerly the Financial Services Authority, investigated and raised concerns about the way the industry has handled complaints related to the sale of these insurance policies. For the past several years, the U.K.’s Financial Ombudsman Service (“FOS”) has been adjudicating customer complaints relating to PPI, escalated to it by consumers who disagree with the rejection of their complaint by firms, leading to customer remediation payments by us and others within the industry. On October 2, 2015, the FCA issued a Statement on PPI (“FCA Proposal”) announcing it has decided to consult, by the end of 2015, on the introduction of a time bar for PPI complaints and on new rules and guidance about how banks should handle PPI complaints covered by s.140A of the Consumer Credit Act of 1974 (“Consumer Credit Act”) in light of the U.K. Supreme Court’s 2014 ruling in Plevin v. Paragon Personal Finance Limited (“Plevin”). The industry consultation period ended in February 2016, and we expect the FCA to issue final rules later this year.
In determining our best estimate of incurred losses for future remediation payments, management considers numerous factors, including: (i) the number of customer complaints we expect in the future; (ii) our expectation of upholding those complaints; (iii) the expected number of complaints customers escalate to the FOS; (iv) our expectation of the FOS upholding such escalated complaints; (v) the number of complaints that fall under the s.140A of the Consumer Credit Act; and (vi) the estimated remediation payout to customers. We monitor these factors each quarter and adjust our reserves to reflect the latest data.
Management’s best estimate of incurred losses related to U.K. cross sell products, including PPI, totaled $150 million and $176 million as of March 31, 2016 and December 31, 2015, respectively. The decrease to the reserve for the three months ended March 31, 2016 was a combination of utilization of the reserve through customer refund payments and foreign exchange movements. Our best estimate of reasonably possible future losses beyond our reserve as of March 31, 2016 is approximately $250 million.

 
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Mortgage Representation and Warranty Liabilities
We acquired three subsidiaries that originated residential mortgage loans and sold these loans to various purchasers, including purchasers who created securitization trusts. These subsidiaries are Capital One Home Loans, LLC, which was acquired in February 2005; GreenPoint, which was acquired in December 2006 as part of the North Fork acquisition; and CCB, which was acquired in February 2009 and subsequently merged into CONA (collectively, the “subsidiaries”).
In connection with their sales of mortgage loans, the subsidiaries entered into agreements containing varying representations and warranties about, among other things, the ownership of the loan, the validity of the lien securing the loan, the loan’s compliance with any applicable loan criteria established by the purchaser, including underwriting guidelines and the existence of mortgage insurance, and the loan’s compliance with applicable federal, state and local laws. The representations and warranties do not address the credit performance of the mortgage loans, but mortgage loan performance often influences whether a claim for breach of representation and warranty will be asserted and has an effect on the amount of any loss in the event of a breach of a representation or warranty.
Each of these subsidiaries may be required to repurchase mortgage loans in the event of certain breaches of these representations and warranties. In the event of a repurchase, the subsidiary is typically required to pay the unpaid principal balance of the loan together with interest and certain expenses (including, in certain cases, legal costs incurred by the purchaser and/or others). The subsidiary then recovers the loan or, if the loan has been foreclosed, the underlying collateral. The subsidiary is exposed to any losses on the repurchased loans, taking into account any recoveries on the collateral. In some instances, rather than repurchase the loans, a subsidiary may agree to make cash payments to make an investor whole on losses or to settle repurchase claims, possibly including claims for attorneys’ fees and interest. In addition, our subsidiaries may be required to indemnify certain purchasers and others against losses they incur as a result of certain breaches of representations and warranties.
These subsidiaries, in total, originated and sold to non-affiliates approximately $111 billion original principal balance of mortgage loans between 2005 and 2008, which are the years (or “vintages”) with respect to which our subsidiaries have received the vast majority of the repurchase-related requests and other related claims.
The following table presents the original principal balance of mortgage loan originations, by vintage for 2005 through 2008, for the three general categories of purchasers of mortgage loans and the estimated unpaid principal balance as of March 31, 2016 and December 31, 2015:
Table 14.1: Unpaid Principal Balance of Mortgage Loans Originated and Sold to Third Parties Based on Category of Purchaser
 
 
Estimated Unpaid Principal Balance
 
Original Principal Balance
(Dollars in billions)
 
March 31,
2016
 
December 31,
2015
 
Total
 
2008
 
2007
 
2006
 
2005
GSEs
 
$
2

 
$
2

 
$
11

 
$
1

 
$
4

 
$
3

 
$
3

Insured Securitizations
 
3

 
4

 
20

 
0

 
2

 
8

 
10

Uninsured Securitizations and Other
 
14

 
14

 
80

 
3

 
15

 
30

 
32

Total
 
$
19

 
$
20

 
$
111

 
$
4

 
$
21

 
$
41

 
$
45

Between 2005 and 2008, our subsidiaries sold an aggregate amount of $11 billion in original principal balance mortgage loans to the GSEs.
Of the $20 billion in original principal balance of mortgage loans sold directly by our subsidiaries to private-label purchasers who placed the loans into securitizations supported by bond insurance (“Insured Securitizations”), approximately 48% of the original principal balance was covered by bond insurance. Further, approximately $16 billion original principal balance was placed in securitizations as to which the monoline bond insurers have made repurchase-related requests or loan file requests to one of our subsidiaries (“Active Insured Securitizations”) and the remaining approximately $4 billion original principal balance was placed in securitizations as to which the monoline bond insurers have not made repurchase-related requests or loan file requests to one of our subsidiaries (“Inactive Insured Securitizations”). Insured Securitizations often allow the monoline bond insurer to act independently of the investors. Bond insurers typically have indemnity agreements directly with both the mortgage originators and the securitizers, and they often have super-majority rights within the trust documentation that allow them to direct trustees to pursue mortgage repurchase-related requests without coordination with other investors.

 
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Because we do not service most of the loans our subsidiaries sold to others, we do not have complete information about the current ownership of a portion of the $80 billion in original principal balance of mortgage loans not sold directly to GSEs or placed in Insured Securitizations. We have determined based on information obtained from third-party databases that about $48 billion original principal balance of these mortgage loans was placed in private-label publicly issued securitizations not supported by bond insurance (“Uninsured Securitizations”). An additional approximately $22 billion original principal balance of mortgage loans were initially sold to private investors as whole loans. Various known and unknown investors purchased the remaining $10 billion original principal balance of mortgage loans.
With respect to the $111 billion in original principal balance of mortgage loans originated and sold to others between 2005 and 2008, we estimate that approximately $19 billion in unpaid principal balance remains outstanding as of March 31, 2016, of which approximately $3 billion in unpaid principal balance is at least 90 days delinquent. Approximately $22 billion in losses have been realized by third parties. Because we do not service most of the loans we sold to others, we do not have complete information about the underlying credit performance levels for some of these mortgage loans. These amounts reflect our best estimates, including extrapolations of underlying credit performance where necessary. These estimates could change as we get additional data or refine our analysis.
The subsidiaries had open repurchase-related requests with regard to approximately $1.4 billion original principal balance of mortgage loans as of March 31, 2016, flat from December 31, 2015. Currently, repurchase-related demands predominantly relate to the 2006 and 2007 vintages. We have received relatively few repurchase-related demands from the 2008 and 2009 vintages, mostly because GreenPoint ceased originating mortgages in August 2007.
The following table presents information on pending repurchase-related requests by counterparty category and timing of initial request. The amounts presented are based on original loan principal balances.
Table 14.2: Open Pipeline All Vintages (All Entities)(1)
(Dollars in millions)
 
GSEs
 
Insured
Securitizations
 
Uninsured
Securitizations
and Other
 
Total
Open claims as of December 31, 2014
 
$
16

 
$
649

 
$
1,847

 
$
2,512

Gross new demands received
 
23

 
0

 
23

 
46

Loans repurchased/made whole
 
(17
)
 
0

 
(1
)
 
(18
)
Demands rescinded
 
(21
)
 
(115
)
 
(1,054
)
 
(1,190
)
Open claims as of December 31, 2015
 
1

 
534

 
815

 
1,350

Gross new demands received
 
8

 
0

 
5

 
13

Loans repurchased/made whole
 
(1
)
 
0

 
0

 
(1
)
Demands rescinded
 
(2
)
 
0

 
0

 
(2
)
Open claims as of March 31, 2016
 
$
6

 
$
534

 
$
820

 
$
1,360

__________
(1) 
The open pipeline includes all timely repurchase-related requests ever received by our subsidiaries where the requesting party has not formally rescinded the repurchase-related request or our subsidiary has not agreed to either repurchase the loan at issue or make the requesting party whole with respect to its losses. The demands rescinded in 2015 reflect the ruling from New York’s highest court in June 2015 that the statute of limitations for repurchase claims begins when the relevant representations and warranties were made, as opposed to some later date during the life of the loan. Finally, the amounts reflected in this chart are the original principal balance amounts of the mortgage loans at issue and do not correspond to the losses our subsidiary would incur upon the repurchase of these loans.

 
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The following table summarizes changes in our representation and warranty reserve for the three months ended March 31, 2016 and 2015:
Table 14.3: Changes in Representation and Warranty Reserve(1)
 
 
Three Months Ended March 31,
(Dollars in millions)
 
2016
 
2015
Representation and warranty reserve, beginning of period
 
$
610

 
$
731

Provision (benefit) for mortgage representation and warranty losses:
 
 
 
 
Recorded in continuing operations
 
(1
)
 
1

Recorded in discontinued operations
 
3

 
(19
)
Total provision (benefit) for mortgage representation and warranty losses
 
2

 
(18
)
Net realized recoveries (losses)
 
1

 
(40
)
Representation and warranty reserve, end of period
 
$
613

 
$
673

__________
(1) 
Reported on our consolidated balance sheets as a component of other liabilities.
The following table summarizes the allocation of our representation and warranty reserve as of March 31, 2016 and 2015:
Table 14.4: Allocation of Representation and Warranty Reserve
 
 
Reserve Liability
 
Loans Sold
2005 to 2008(1)
(Dollars in millions, except for loans sold)
 
March 31,
2016
 
December 31,
2015
 
Selected period-end data:
 
 
 
 
 
 
Active Insured Securitizations and GSEs
 
$
482

 
$
480

 
$
27

Inactive Insured Securitizations and Others
 
131

 
130

 
84

Total(2)
 
$
613

 
$
610

 
$
111

__________
(1) 
Reflects, in billions, the total original principal balance of loans originated by our subsidiaries and sold to third-party investors between 2005 and 2008.
(2) 
The total reserve liability includes an immaterial amount related to loans that were originated after 2008.
We established reserves for the $11 billion original principal balance of GSE loans, based on open claims and historic repurchase rates. We have entered into and completed repurchase or settlement agreements with respect to the majority of our repurchase exposure within this category.
Our reserves could also be impacted by any claims which may be brought by governmental agencies under the Financial Institutions Reform, Recovery and Enforcement Act (“FIRREA”), the False Claims Act or other federal or state statutes. For example, GreenPoint and Capital One have received requests for information and/or subpoenas from various governmental regulators and law enforcement authorities, including members of the RMBS Working Group, relating to the origination of loans for sale to the GSEs and to RMBS participants. We are cooperating with these regulators and other authorities in responding to such requests.
For the $16 billion original principal balance in Active Insured Securitizations, our reserving approach is based upon the expected resolution of litigation with the monoline bond insurers. Accordingly, our representation and warranty reserves for this category are litigation reserves. In establishing litigation reserves for this category, we consider the current and future monoline insurer losses inherent within the securitization and apply legal judgment to the developing factual and legal record to estimate the liability for each securitization. We consider as factors within the analysis our own past monoline settlements in addition to publicly available industry monoline settlements. Our reserves with respect to the U.S. Bank Litigation, referenced below, are contained within the Active Insured Securitization reserve category. Further, to the extent we have litigation reserves with respect to indemnification risks from certain representation and warranty lawsuits brought by monoline bond insurers against third-party securitizations sponsors, where one of our subsidiaries provided some or all of the mortgage collateral within the securitization but is not a defendant in the litigation, such reserves are also contained within this category.

 
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For the $4 billion original principal balance of mortgage loans in the Inactive Insured Securitizations category and the $48 billion original principal balance of mortgage loans in the Uninsured Securitizations category, we establish reserves based on an assessment of probable and estimable legal liability, if any, utilizing both our own experience and publicly available industry settlement information to estimate lifetime liability. In contrast with the bond insurers in the Insured Securitizations, investors in Uninsured Securitizations often face a number of legal and logistical hurdles before they can force a securitization trustee to pursue mortgage repurchases, including the need to coordinate with a certain percentage of investors holding the securities and to indemnify the trustee for any litigation it undertakes. Accordingly, we only reserve for such exposures when a trustee or investor with standing brings claims and it is probable we have incurred a loss. Some Uninsured Securitization investors from this category are currently suing investment banks and securitization sponsors under federal and/or state securities laws. Although we face some indirect indemnity risks from these litigations, we generally have not established reserves with respect to these indemnity risks because we do not consider them to be both probable and reasonably estimable liabilities. In addition, to the extent we have litigation reserves with respect to indemnification risks from certain representation and warranty lawsuits brought by parties who purchased loans from our subsidiaries and subsequently re-sold the loans into securitizations, such reserves are also contained within this category.
For the $22 billion original principal balance of mortgage loans sold to private investors as whole loans, we establish reserves based on open claims and historical repurchase rates.
The aggregate reserve for all three subsidiaries totaled $613 million as of March 31, 2016, compared to $610 million as of December 31, 2015. We recorded a net loss for mortgage representation and warranty losses of $2 million (which includes a benefit of $1 million before taxes in continuing operations and a loss of $3 million before taxes in discontinued operations) in the first quarter of 2016.
As part of our business planning processes, we have considered various outcomes relating to the future representation and warranty liabilities of our subsidiaries that are possible but do not rise to the level of being both probable and reasonably estimable outcomes justifying an incremental accrual under applicable accounting standards. Our current best estimate of reasonably possible future losses from representation and warranty claims beyond our reserves as of March 31, 2016 is approximately $1.5 billion, a decrease from our $1.6 billion estimate at December 31, 2015. The decrease in this estimate was primarily driven by favorable rulings in representation and warranty-related litigation. The estimate as of March 31, 2016 covers all reasonably possible losses relating to representation and warranty claim activity, including those relating to the cases more specifically described below in Mortgage Repurchase Litigation.
In estimating reasonably possible future losses in excess of our current reserves, we assume a portion of the inactive securitizations become active and for all Insured Securitizations, we assume loss rates on the high end of those observed in monoline settlements or court rulings. For our remaining GSE exposures, Uninsured Securitizations and whole loan exposures, our reasonably possible risk estimates assume lifetime loss rates and claims rates at the highest levels of our past experience and also consider the limited instances of observed settlements. We do not assume claim rates or loss rates for these risk categories will be as high as those assumed for the Active Insured Securitizations, however, based on industry precedent. Should the number of claims or the loss rates on these claims increase significantly, our estimate of reasonably possible risk would increase materially. We also assume that repurchase-related requests will be resolved at discounts reflecting the nature of the claims, the vintage of the underlying loans and evolving legal precedents.
Notwithstanding our ongoing attempts to estimate a reasonably possible amount of future losses beyond our current accrual levels based on current information, it is possible that actual future losses will exceed both the current accrual level and our current estimate of the amount of reasonably possible losses. Our reserve and reasonably possible estimates involve considerable judgment and reflect that there is still significant uncertainty regarding numerous factors that may impact the ultimate loss levels, including, but not limited to: litigation outcomes; court rulings; governmental enforcement decisions; future repurchase and indemnification claim levels; securitization trustees pursuing mortgage repurchase litigation unilaterally or in coordination with investors; investors successfully pursuing repurchase litigation independently and without the involvement of the trustee as a party; ultimate repurchase and indemnification rates; future mortgage loan performance levels; actual recoveries on the collateral; and macroeconomic conditions (including unemployment levels and housing prices). In light of the significant uncertainty as to the ultimate liability our subsidiaries may incur from these matters, an adverse outcome in one or more of these matters could be material to our results of operations or cash flows for any particular reporting period.

 
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Litigation
In accordance with the current accounting standards for loss contingencies, we establish reserves for litigation related matters that arise from the ordinary course of our business activities when it is probable that a loss associated with a claim or proceeding has been incurred and the amount of the loss can be reasonably estimated. None of the amounts we currently have recorded individually or in the aggregate are considered to be material to our financial condition. Litigation claims and proceedings of all types are subject to many uncertain factors that generally cannot be predicted with assurance. Below we provide a description of potentially material legal proceedings and claims.
For some of the matters disclosed below, we are able to determine estimates of potential future outcomes that are not probable and reasonably estimable outcomes justifying either the establishment of a reserve or an incremental reserve build, but which are reasonably possible outcomes. For other disclosed matters, such an estimate is not possible at this time. For those matters below where an estimate is possible (excluding the reasonably possible future losses relating to the U.S. Bank Litigation, the FHFA Litigation, and the LXS Trust Litigation, because reasonably possible losses with respect to those litigations are included within the reasonably possible representation and warranty liabilities discussed above) management currently estimates the reasonably possible future losses beyond our reserves as of March 31, 2016 is approximately $200 million. Notwithstanding our attempt to estimate a reasonably possible range of loss beyond our current accrual levels for some litigation matters based on current information, it is possible that actual future losses will exceed both the current accrual level and the range of reasonably possible losses disclosed here. Given the inherent uncertainties involved in these matters, especially those involving governmental actors, and the very large or indeterminate damages sought in some of these matters, there is significant uncertainty as to the ultimate liability we may incur from these litigation matters and an adverse outcome in one or more of these matters could be material to our results of operations or cash flows for any particular reporting period.
Interchange Litigation
In 2005, a number of entities, each purporting to represent a class of retail merchants, filed antitrust lawsuits (“Interchange Lawsuits”) against MasterCard and Visa and several member banks, including our subsidiaries and us, alleging among other things, that the defendants conspired to fix the level of interchange fees. The complaints seek injunctive relief and civil monetary damages, which could be trebled. Separately, a number of large merchants have asserted similar claims against Visa and MasterCard only. In October 2005, the class and merchant Interchange Lawsuits were consolidated before the U.S. District Court for the Eastern District of New York for certain purposes, including discovery. In July 2012, the parties executed and filed with the court a Memorandum of Understanding agreeing to resolve the litigation on certain terms set forth in a settlement agreement attached to the Memorandum. The class settlement provides for, among other things, (i) payments by defendants to the class and individual plaintiffs totaling approximately $6.6 billion; (ii) a distribution to the class merchants of an amount equal to 10 basis points of certain interchange transactions for a period of eight months; and (iii) modifications to certain Visa and MasterCard rules regarding point of sale practices. In December 2013, the court granted final approval of the proposed class settlement, which was appealed to the Second Circuit Court of Appeals in January 2014 and argued before the court on September 28, 2015. Several merchant plaintiffs have also opted out of the class settlement, some of which have sued MasterCard, Visa and various member banks, including Capital One. The opt-out cases were consolidated before the U.S. District Court for the Eastern District of New York for certain purposes, including discovery. These consolidated cases are in their preliminary stages, and Visa and MasterCard have settled a number of individual opt-out cases, requiring non-material payments from all banks. Separate settlement and judgment sharing agreements between Capital One and MasterCard and Visa allocate the liabilities of any judgment or settlement arising from the Interchange Lawsuits and associated opt-out cases. Visa created a litigation escrow account following its IPO of stock in 2008, which funds any settlements for its member banks, and any settlements related to MasterCard allocated losses are reflected in Capital One’s reserves.


 
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Mortgage Repurchase Litigation
In February 2009, GreenPoint was named as a defendant in a lawsuit commenced in the New York County Supreme Court, by U.S. Bank, N. A., Syncora Guarantee Inc. and CIFG Assurance North America, Inc. (“U.S. Bank Litigation”). Plaintiffs allege, among other things, that GreenPoint breached certain representations and warranties in two contracts pursuant to which GreenPoint sold approximately 30,000 mortgage loans having an aggregate original principal balance of approximately $1.8 billion to a purchaser that ultimately transferred most of these mortgage loans to a securitization trust. Some of the securities issued by the trust were insured by Syncora and CIFG. Plaintiffs seek unspecified damages and an order compelling GreenPoint to repurchase the entire portfolio of 30,000 mortgage loans based on alleged breaches of representations and warranties relating to a limited sampling of loans in the portfolio, or, alternatively, the repurchase of specific mortgage loans to which the alleged breaches of representations and warranties relate. In March 2010, the court granted GreenPoint’s motion to dismiss with respect to plaintiffs Syncora and CIFG and denied the motion with respect to U.S. Bank. GreenPoint subsequently answered the complaint with respect to U.S. Bank, denying the allegations, and filed a counterclaim against U.S. Bank alleging breach of covenant of good faith and fair dealing. In February 2012, the court denied plaintiffs’ motion for leave to file an amended complaint and dismissed Syncora and CIFG from the case. Syncora and CIFG appealed their dismissal to the New York Supreme Court, Appellate Division, First Department (“First Department”), which affirmed the dismissal in April 2013. The New York Court of Appeals denied Syncora’s and CIFG’s motion for leave to appeal the First Department’s decision in February 2014. Therefore, the case is now proceeding with U.S. Bank as the sole plaintiff. On May 20, 2015, Lehman Brothers Holding, Inc. (“LBHI”) filed an adversary proceeding in the United States Bankruptcy Court for the Southern District of New York against U.S. Bank, Syncora, and GreenPoint regarding bankruptcy proofs of claims filed by U.S. Bank and Syncora on the same securitization at issue in the U.S. Bank Litigation.
In May, June, and July 2012, FHFA (acting as conservator for Freddie Mac) filed three summonses with notice in the New York state court against GreenPoint, on behalf of the trustees for three RMBS trusts backed by loans originated by GreenPoint with an aggregate original principal balance of $3.4 billion. In January 2013, the plaintiffs filed an amended consolidated complaint in the name of the three trusts, acting by the respective trustees, alleging breaches of contractual representations and warranties regarding compliance with GreenPoint underwriting guidelines relating to certain loans (“FHFA Litigation”). Plaintiffs seek specific performance of the repurchase obligations with respect to the loans for which they have provided notice of alleged breaches as well as all other allegedly breaching loans, rescissory damages, indemnification, costs and interest.
In July 2013, Lehman XS Trust, Series 2006-4N, by its trustee U.S. Bank, N.A. filed a lawsuit in the Southern District of New York against GreenPoint alleging breaches of representations and warranties made in certain loan sale agreements, pursuant to which GreenPoint sold mortgage loans with an original principal balance of $915 million to Lehman Brothers for securitization and sale to investors. The lawsuit (“LXS Trust Litigation”) seeks specific performance of GreenPoint’s obligation to repurchase certain allegedly breaching loans, or in the alternative, the repurchase of all loans in the trust, the award of rescissory damages, costs, fees and interest. In January 2014, the court granted GreenPoint’s motion to dismiss based on the statute of limitations, which the Second Circuit Court of Appeals affirmed in March 2016.
As noted above in the section entitled Mortgage Representation and Warranty Liabilities, the Company’s subsidiaries establish reserves with respect to representation and warranty litigation matters, where appropriate, within the Company’s overall representation and warranty reserves. Please see above for more details.
Anti-Money Laundering
Capital One has received subpoenas and requests for testimony from the New York District Attorney’s Office (“NYDA”) with respect to certain former check casher clients of the Commercial Banking business and Capital One’s anti-money laundering (“AML”) program. In early 2015, we received similar requests from the U.S. Department of Justice (“DOJ”) and the Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Department of Treasury. Capital One is cooperating with all agencies involved in the investigation.

 
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Intellectual Ventures Corp., et al.
In June 2013, Intellectual Ventures I, LLC and Intellectual Ventures II, LLC (collectively “IV”) sued Capital One Financial Corp., Capital One Bank (USA), N.A. and Capital One, N.A. (collectively “Capital One”) for patent infringement in the U.S. District Court for the Eastern District of Virginia. In the Complaint, IV alleged infringement of patents related to various business processes across the Capital One enterprise. IV simultaneously filed patent infringement actions against numerous other financial institutions on the same and other patents in several other federal courts. Capital One filed an answer and counterclaim alleging antitrust violations. In December 2013, the court dismissed Capital One’s counterclaim and decided the parties’ arguments on claim construction. IV agreed to dismiss two patents in suit, and following claim construction, asked for a stipulation of non-infringement for one patent with an opportunity to appeal the court’s decision regarding claim construction. In April 2014, the court granted Capital One’s motion for summary judgment and found that the two remaining patents were either unpatentable or indefinite. In May 2014, IV appealed to the Federal Circuit, which affirmed the district court’s dismissal of all three remaining patents in July 2015.
In January 2014, IV filed a second suit against Capital One for patent infringement in the U.S. District Court for the District of Maryland. In the complaint, IV again alleges infringement of patents related to various business practices across the Capital One enterprise. In March 2015, the court granted Capital One’s motion for leave to add a counterclaim for antitrust violations. IV voluntarily dismissed one of the patents against Capital One and in September 2015, the court granted summary judgment in favor of Capital One on the remaining four patents and dismissed IV’s claims. IV has appealed the dismissal of its claims to the Federal Circuit.
Other Pending and Threatened Litigation
In addition, we are commonly subject to various pending and threatened legal actions relating to the conduct of our normal business activities. In the opinion of management, the ultimate aggregate liability, if any, arising out of all such other pending or threatened legal actions will not be material to our consolidated financial position or our results of operations.

 
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
For a discussion of the quantitative and qualitative disclosures about market risk, see “MD&A—Risk Management—Market Risk Management” and “MD&A—Market Risk Profile.”
Item 4. Controls and Procedures    
Overview
We are required under applicable laws and regulations to maintain controls and procedures, which include disclosure controls and procedures as well as internal control over financial reporting, as further described below.
(a) Disclosure Controls and Procedures
Disclosure controls and procedures refer to controls and other procedures designed to provide reasonable assurance that information required to be disclosed in our financial reports is recorded, processed, summarized and reported within the time periods specified by SEC rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding our required disclosure. In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and we must apply judgment in evaluating and implementing possible controls and procedures.
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15 of the Securities Exchange Act of 1934 (“Exchange Act”), our management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of March 31, 2016, the end of the period covered by this Report on Form 10-Q. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2016, at a reasonable level of assurance, in recording, processing, summarizing and reporting information required to be disclosed within the time periods specified by the SEC rules and forms.
(b) Changes in Internal Control Over Financial Reporting
We regularly review our disclosure controls and procedures and make changes intended to ensure the quality of our financial reporting. There were no changes in internal control over financial reporting that occurred in the first quarter of 2016 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings
The information required by Item 103 of Regulation S-K is included in “Note 14—Commitments, Contingencies, Guarantees and Others.”
Item 1A. Risk Factors
We are not aware of any material changes from the risk factors set forth under “Part I—Item 1A. Risk Factors” in our 2015 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table presents information related to repurchases of shares of our common stock for each calendar month in the first quarter of 2016.
(Dollars in millions, except per share information)
 
Total
Number
of Shares
Purchased(1)
 
Average
Price Paid
per Share(2)
 
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
 
Maximum
Amount That May
Yet be Purchased
Under the Plan
or Program(2)
January
 
1,350

 
$
64.79

 

 
$
1,250

February
 
7,122,601

 
63.51

 
6,667,169

 
1,126

March
 
7,492,395

 
69.04

 
7,257,104

 
625

Total
 
14,616,346

 
66.34

 
13,924,273

 
 
__________
(1) 
Primarily represents repurchases of shares of common stock under the 2015 Stock Repurchase Program. Also includes 1,350 shares, 455,432 shares and 235,291 shares purchased in January, February and March, respectively, related to the withholding of shares to cover taxes on restricted stock awards whose restrictions have lapsed.
(2) 
Amounts exclude commission costs.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
An index to exhibits has been filed as part of this report and is incorporated herein by reference.


 
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SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
 
CAPITAL ONE FINANCIAL CORPORATION
 
 
 
 
 
Date: May 04, 2016
 
By:
 
/s/ STEPHEN S. CRAWFORD
 
 
 
 
Stephen S. Crawford
 
 
 
 
Chief Financial Officer



 
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EXHIBIT INDEX
CAPITAL ONE FINANCIAL CORPORATION
QUARTERLY REPORT ON FORM 10-Q
DATED MARCH 31, 2016
Commission File No. 1-13300
The following exhibits are incorporated by reference or filed herewith. References to the “2003 Form 10-K” are to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, filed on March 5, 2004.
Exhibit No.
  
Description
3.1
 
Restated Certificate of Incorporation of Capital One Financial Corporation, (as restated April 30, 2015) (incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K, filed on May 4, 2015).
3.2
 
Amended and Restated Bylaws of Capital One Financial Corporation, dated October 5, 2015 (incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K, filed on October 5, 2015).
3.3.1
 
Certificate of Designations of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series B, dated August 16, 2012 (incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K, filed on August 20, 2012).
3.3.2
 
Certificate of Designations of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series C, dated June 11, 2014 (incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K, filed June 12, 2014).
3.3.3
 
Certificate of Designations of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series D, dated October 29, 2014 (incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K, filed October 31, 2014).
3.3.4
 
Certificate of Designations of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series E, dated May 12, 2015 (incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K, filed May 14, 2015).
3.3.5
 
Certificate of Designations of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series F, dated August 20, 2015 (incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K, filed August 24, 2015).
4.1.1
 
Specimen certificate representing the common stock of Capital One Financial Corporation (incorporated by reference to Exhibit 4.1 of the 2003 Form 10-K).
4.1.2
 
Warrant Agreement, dated December 3, 2009, between Capital One Financial Corporation and Computershare Trust Company, N.A. (incorporated by reference to the Exhibit 4.1 of the Form 8-A, filed on December 4, 2009).
4.1.3
 
Deposit Agreement, dated August 20, 2012 (incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K, filed on August 20, 2012).
4.2
 
Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, copies of instruments defining the rights of holders of long-term debt are not filed. The Company agrees to furnish a copy thereof to the SEC upon request.
12.1*
 
Computation of Ratio of Earnings to Fixed Charges and Earnings to Combined Fixed Charges and Preferred Stock Dividends.
31.1*
 
Certification of Richard D. Fairbank.
31.2*
 
Certification of Stephen S. Crawford.
32.1*
 
Certification** of Richard D. Fairbank.
32.2*
 
Certification** of Stephen S. Crawford.
101.INS*
 
XBRL Instance Document.
101.SCH*
 
XBRL Taxonomy Extension Schema Document.
101.CAL*
 
XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*
 
XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*
 
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*
 
XBRL Taxonomy Extension Presentation Linkbase Document.
__________
*
Indicates a document being filed with this Form 10-Q.
**
Information in this Form 10-Q furnished herewith shall not be deemed to be “filed” for the purposes of Section 18 of the 1934 Act or otherwise subject to the liabilities of that section.


 
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