Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________
FORM 10-Q
____________________________________
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 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 July 22, 2016, there were 506,076,567 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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Capital One Financial Corporation (COF)

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

 
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Capital One Financial Corporation (COF)

INDEX OF MD&A AND SUPPLEMENTAL TABLES
MD&A Tables:
Page
1
Consolidated Financial Highlights
2
Business Segment Results
3
Average Balances, Net Interest Income and Net Interest Margin
4
Rate/Volume Analysis of Net Interest Income
5
Non-Interest Income
6
Non-Interest Expense
7
Credit Card Business Results
7.1
Domestic Card Business Results
7.2
International Card Business Results
8
Consumer Banking Business Results
9
Commercial Banking Business Results
10
Other Category Results
11
Investment Securities
12
Non-Agency Investment Securities Credit Ratings
13
Loans Held for Investment
14
Changes in Representation and Warranty Reserve
15
Capital Ratios under Basel III
16
Estimated Common Equity Tier 1 Capital Ratio under Fully Phased-In Basel III Standardized Approach
17
Loans Held for Investment Portfolio Composition
18
Commercial Loans by Industry
19
Home Loans—Risk Profile by Lien Priority
20
Sensitivity Analysis—PCI Home Loans
21
Credit Score Distribution
22
30+ Day Delinquencies
23
Aging and Geography of 30+ Day Delinquent Loans
24
90+ Day Delinquent Loans Accruing Interest
25
Nonperforming Loans and Other Nonperforming Assets
26
Net Charge-Offs (Recoveries)
27
Troubled Debt Restructurings
28
Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments Activity
29
Allowance Coverage Ratios
30
Liquidity Reserves
31
Deposit Composition and Average Deposit Rates
32
Contractual Maturity Profile of Outstanding Long-Term Debt
33
Senior Unsecured Debt Credit Ratings
34
Interest Rate Sensitivity Analysis
 
 
 
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 “MD&A—Forward-Looking Statements” for more information on the forward-looking statements in this Quarterly Report on Form 10-Q (“this Report”). Our actual results may differ materially from those included in these forward-looking statements due to a variety of factors including, but not limited to, those described in “Part II—Item 1A. Risk Factors” in this Report and in “Part I—Item 1A. Risk Factors” in our 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 June 30, 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 June 30, 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, 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, national deposit gathering, auto lending and consumer home loan lending and servicing activities.
•
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.

 
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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”). During the second quarter of 2016, we finalized purchase accounting for the HFS acquisition, and recognized approximately $9.2 billion in assets, including $8.2 billion of loans. See “Note 1—Summary of Significant Accounting Policies” of this Report and “Note 2—Business Developments” in our 2015 Form 10-K for additional information.
We had no significant acquisitions or dispositions in the first six months 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 second quarter and first six months of 2016 and 2015 and selected comparative balance sheet data as of June 30, 2016 and December 31, 2015. We also provide selected key metrics we use in evaluating our performance including certain metrics that are computed using non-GAAP measures. We believe these non-GAAP metrics provide useful insight to investors and users of our financial information in assessing the results of the Company.
Table 1: Consolidated Financial Highlights
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Dollars in millions, except per share data and as noted)
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
Income statement
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
$
5,093

 
$
4,537

 
12%

 
$
10,149

 
$
9,113

 
11%

Non-interest income
 
1,161

 
1,135

 
2

 
2,325

 
2,206

 
5

Total net revenue
 
6,254

 
5,672

 
10

 
12,474

 
11,319

 
10

Provision for credit losses
 
1,592

 
1,129

 
41

 
3,119

 
2,064

 
51

Non-interest expense:
 
 
 
 
 


 
 
 
 
 


Marketing
 
415

 
387

 
7

 
843

 
762

 
11

Amortization of intangibles
 
95

 
111

 
(14
)
 
196

 
221

 
(11
)
Operating expenses
 
2,785

 
2,809

 
(1
)
 
5,479

 
5,373

 
2

Total non-interest expense
 
3,295

 
3,307

 
—

 
6,518

 
6,356

 
3

Income from continuing operations before income taxes
 
1,367

 
1,236

 
11

 
2,837

 
2,899

 
(2
)
Income tax provision
 
424

 
384

 
10

 
876

 
913

 
(4
)
Income from continuing operations, net of tax
 
943

 
852

 
11

 
1,961

 
1,986

 
(1
)
Income (loss) from discontinued operations, net of tax
 
(1
)
 
11

 
**

 
(6
)
 
30

 
**

Net income
 
942

 
863

 
9

 
1,955

 
2,016

 
(3
)
Dividends and undistributed earnings allocated to participating securities
 
(6
)
 
(4
)
 
50

 
(12
)
 
(10
)
 
20

Preferred stock dividends
 
(65
)
 
(29
)
 
124

 
(102
)
 
(61
)
 
67

Net income available to common stockholders
 
$
871

 
$
830

 
5

 
$
1,841

 
$
1,945

 
(5
)
Common share statistics
 
 

 
 

 
 

 
 
 
 
 
 

Basic earnings per common share:
 
 
 
 
 
 
 
 
 
 
 
 
Net income from continuing operations
 
$
1.70

 
$
1.50

 
13%

 
$
3.57

 
$
3.49

 
2%

Income (loss) from discontinued operations
 
—

 
0.02

 
**

 
(0.01
)
 
0.06

 
**

Net income per basic common share
 
$
1.70

 
$
1.52

 
12

 
$
3.56

 
$
3.55

 
—

Diluted earnings per common share:
 
 
 
 
 


 
 
 
 
 


Net income from continuing operations
 
$
1.69

 
$
1.48

 
14

 
$
3.53

 
$
3.45

 
2

Income (loss) from discontinued operations
 
—

 
0.02

 
**

 
(0.01
)
 
0.06

 
**

Net income per diluted common share
 
$
1.69

 
$
1.50

 
13

 
$
3.52

 
$
3.51

 
—

Weighted-average common shares outstanding (in millions):
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
511.7

 
545.6

 
(6)%

 
517.6

 
548.0

 
(6)%

Diluted
 
516.5

 
552.0

 
(6
)
 
522.3

 
554.7

 
(6
)
Common shares outstanding (period end, in millions)
 
505.9

 
542.5

 
(7
)
 
505.9

 
542.5

 
(7
)
Dividends paid per common share
 
$
0.40

 
$
0.40

 
—

 
$
0.80

 
$
0.70

 
14

Tangible book value per common share (period end)(1)
 
57.84

 
52.74

 
10

 
57.84

 
52.74

 
10

Balance sheet (average balances)
 
 
 
 
 
 
 
 
 
 
 
 
Loans held for investment
 
$
230,379

 
$
206,337

 
12%

 
$
228,557

 
$
205,768

 
11%

Interest-earning assets
 
302,764

 
276,585

 
9

 
301,106

 
277,501

 
9

Total assets
 
334,479

 
307,206

 
9

 
333,197

 
308,295

 
8

Interest-bearing deposits
 
195,641

 
183,946

 
6

 
194,883

 
183,475

 
6

Total deposits
 
221,146

 
209,143

 
6

 
220,163

 
208,501

 
6

Borrowings
 
54,359

 
41,650

 
31

 
54,060

 
43,854

 
23

Common equity
 
45,640

 
44,878

 
2

 
45,711

 
44,727

 
2

Total stockholders’ equity
 
48,934

 
47,255

 
4

 
49,007

 
46,828

 
5


 
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Three Months Ended June 30,
 
Six Months Ended June 30,
(Dollars in millions, except per share data and as noted)
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
Selected performance metrics
 
 

 
 

 
 

 
 
 
 
 
 

Purchase volume(2)
 
$
78,019

 
$
68,559

 
14%

 
$
146,208

 
$
125,942

 
16%

Total net revenue margin(3)
 
8.26%

 
8.20%

 
6
bps
 
8.29%

 
8.16%

 
13
bps
Net interest margin(4)
 
6.73

 
6.56

 
17

 
6.74

 
6.57

 
17

Return on average assets
 
1.13

 
1.11

 
2

 
1.18

 
1.29

 
(11
)
Return on average tangible assets(5)
 
1.18

 
1.17

 
1

 
1.24

 
1.36

 
(12
)
Return on average common equity(6)
 
7.64

 
7.30

 
34

 
8.08

 
8.56

 
(48
)
Return on average tangible common equity (“TCE”)(7)
 
11.61

 
11.06

 
55

 
12.28

 
13.01

 
(73
)
Equity-to-assets ratio(8)
 
14.63

 
15.38

 
(75
)
 
14.71

 
15.19

 
(48
)
Non-interest expense as a percentage of average loans held for investment(9)
 
5.72

 
6.41

 
(69
)
 
5.70

 
6.18

 
(48
)
Efficiency ratio(10)
 
52.69

 
58.30

 
(561
)
 
52.25

 
56.15

 
(390
)
Effective income tax rate from continuing operations
 
31.0

 
31.1

 
(10
)
 
30.9

 
31.5

 
(60
)
Net charge-offs
 
$
1,155

 
$
846

 
37%

 
$
2,333

 
$
1,727

 
35%

Net charge-off rate(11)
 
2.01%

 
1.64%

 
37
bps
 
2.04%

 
1.68%

 
36
bps
(Dollars in millions, except as noted)

June 30,
2016
 
December 31,
2015
 
Change
Balance sheet (period end)
 
 
 
 
 
 
Loans held for investment
 
$
234,603

 
$
229,851

 
2%

Interest-earning assets
 
307,163

 
302,007

 
2

Total assets
 
339,117

 
334,048

 
2

Interest-bearing deposits
 
195,635

 
191,874

 
2

Total deposits
 
221,059

 
217,721

 
2

Borrowings
 
59,181

 
59,115

 
—

Common equity
 
44,813

 
43,990

 
2

Total stockholders’ equity
 
48,108

 
47,284

 
2

Credit quality metrics (period end)
 
 
 
 
 


Allowance for loan and lease losses
 
$
5,881

 
$
5,130

 
15%

Allowance as a percentage of loans held for investment (“allowance coverage ratio”)
 
2.51%

 
2.23%

 
28
bps
30+ day performing delinquency rate
 
2.47

 
2.69

 
(22
)
30+ day delinquency rate
 
2.79

 
3.00

 
(21
)
Capital ratios
 
 

 
 
 


Common equity Tier 1 capital
 
10.9%

 
11.1%

 
(20
)bps
Tier 1 capital
 
12.2

 
12.4

 
(20
)
Total capital
 
14.4

 
14.6

 
(20
)
Tier 1 leverage
 
10.2

 
10.6

 
(40
)
Tangible common equity(12)
 
9.0

 
8.9

 
10

Supplementary leverage(13)
 
8.9

 
9.2

 
(30
)
Other
 
 
 
 
 


Employees (in thousands), period end
 
46.1

 
45.4

 
2%

__________
(1) 
Tangible book value per common share is a non-GAAP measure calculated based on tangible common equity divided by common shares outstanding. See “MD&A—Table A — Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures” for additional information on non-GAAP measures.
(2) 
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.
(3) 
Calculated based on annualized total net revenue for the period divided by average interest-earning assets for the period.
(4) 
Calculated based on annualized net interest income for the period divided by average interest-earning assets for the period.
(5) 
Return on average tangible assets is a non-GAAP measure calculated based on annualized income from continuing operations, net of tax, for the period divided by average tangible assets for the period. See “MD&A—Table A—Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures” for additional information on non-GAAP measures.
(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 common equity. Our calculation of return on average common equity may not be comparable to similarly titled measures reported by other companies.

 
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(7) 
Return on average tangible common equity is a non-GAAP measure 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 on non-GAAP measures.
(8) 
Calculated based on average stockholders’ equity for the period divided by average total assets for the period.
(9) 
Calculated based on annualized non-interest expense for the period divided by average loans held for investment for the period.
(10) 
Calculated based on non-interest expense for the period divided by total net revenue for the period.
(11) 
Calculated based on annualized net charge-offs for the period divided by average loans held for investment for the period.
(12) 
Tangible common equity ratio is a non-GAAP measure calculated based on TCE divided by tangible assets. See “MD&A—Table A—Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures” for the calculation of this measure and reconciliation to the comparative U.S. GAAP measure.
(13) 
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.
**
Change is not meaningful.

 
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EXECUTIVE SUMMARY AND BUSINESS OUTLOOK
We reported net income of $942 million ($1.69 per diluted common share) on total net revenue of $6.3 billion and net income of $2.0 billion ($3.52 per diluted common share) on total net revenue of $12.5 billion for the second quarter and first six months of 2016, respectively. In comparison, we reported net income of $863 million ($1.50 per diluted common share) on total net revenue of $5.7 billion and net income of $2.0 billion ($3.51 per diluted common share) on total net revenue of $11.3 billion for the second quarter and first six months of 2015, respectively.
Our common equity Tier 1 capital ratio as calculated under the Basel III Standardized Approach including transition provisions was 10.9% and 11.1% as of June 30, 2016 and December 31, 2015, respectively. 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 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 completed the 2015 Stock Repurchase Program in the second quarter of 2016. Additionally, on June 29, 2016, we announced that our Board of Directors authorized the repurchase of up to $2.5 billion of shares of our common stock (“2016 Stock Repurchase Program”) from the third quarter of 2016 through the end of the second quarter of 2017. See “MD&A—Capital Management” below for additional information.
Below are additional highlights of our performance in the second quarter and first six months of 2016. These highlights are generally based on a comparison between the results of the second quarter and first six months 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 June 30, 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 increased by $79 million to $942 million in the second quarter of 2016, compared to the second quarter of 2015, and decreased by $61 million to $2.0 billion in the first six months of 2016, compared to the first six months of 2015. The increase in net income in the second quarter of 2016 was primarily due to (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) higher non-interest income primarily attributable to higher net interchange fees driven by higher purchase volume, partially offset by lower service charges and other customer-related fees primarily due to the exit of our legacy payment protection products in our Domestic Card business during the first quarter of 2016. These increases were partially offset by a higher provision for credit losses in the second quarter of 2016 compared to the second quarter of 2015 due to higher charge-offs and a larger allowance build in our credit card and auto loan portfolios due to continued loan growth and portfolio seasoning, as well as higher charge-offs in our commercial loan portfolio as a result of continued adverse industry conditions impacting our oil and gas portfolio. The decrease in net income in the first six months of 2016 was primarily due to (i) an increase in the provision for credit losses in the first six months of 2016 compared to the first six months of 2015 due to higher charge-offs and a larger allowance build in our credit card and auto loan portfolios due to continued loan growth and portfolio seasoning, as well as a larger allowance build and higher charge-offs in our commercial loan portfolio as a result of continued adverse industry conditions impacting our oil and gas and taxi medallion lending portfolios; and (ii) higher non-interest expense primarily due to higher marketing and operating expenses associated with loan growth and continued investments in technology and infrastructure. These decreases were partially offset by (i) higher interest income due to growth in our credit card and commercial loan portfolios; and (ii) higher non-interest income primarily attributable to higher net interchange fees driven by higher purchase volume, partially offset by lower service charges and other customer-related fees primarily due to the exit of our legacy payment protection products in our Domestic Card business during the first quarter of 2016.
•
Loans Held for Investment: Loans held for investment increased by $4.8 billion to $234.6 billion as of June 30, 2016 from December 31, 2015 primarily driven by growth in our auto, commercial and credit card loan portfolios, partially offset by the planned run-off of our acquired home loan portfolio and seasonal paydowns in our credit card loan portfolio. Average loans held for investment increased by $24.0 billion to $230.4 billion in the second quarter of 2016 compared to the second quarter of 2015, and increased by $22.8 billion to $228.6 billion in the first six months of 2016 compared to the first six

 
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months 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.
•
Net Charge-off and Delinquency Metrics: Our net charge-off rate increased by 37 basis points to 2.01% in the second quarter of 2016 compared to the second quarter of 2015, and increased by 36 basis points to 2.04% in the first six months of 2016 compared to the first six months of 2015, primarily due to growth and 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 21 basis points to 2.79% as of June 30, 2016 from December 31, 2015 primarily due to seasonally lower delinquency inventories in our domestic card and auto loan portfolios. We provide additional information on our credit quality metrics below under “MD&A—Business Segment Financial Performance” and “MD&A —Credit Risk Profile.”
•
Allowance for Loan and Lease Losses: Our allowance for loan and lease losses increased by $751 million to $5.9 billion as of June 30, 2016 from December 31, 2015. The increase in the allowance for loan and lease losses was primarily driven by continued domestic card and auto loan growth and the effects of growth leading to an increasing overall loss rate, and continued adverse industry conditions impacting our oil and gas and taxi medallion lending portfolios in our Commercial Banking business. These factors also contributed to a higher allowance coverage ratio, which increased by 28 basis points to 2.51% as of June 30, 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 second quarter and first six months 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 June 30,
 
 
2016
 
2015
 
 
Total Net
Revenue (Loss)(1)
 
Net Income (Loss)(2)
 
Total Net
Revenue (Loss)(1)
 
Net Income (Loss)(2)
(Dollars in millions)
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
Credit Card
 
$
3,904

 
62%
 
$
484

 
51%
 
$
3,478

 
61%

 
$
463

 
55%

Consumer Banking
 
1,614

 
26
 
257

 
27
 
1,640

 
29

 
291

 
34

Commercial Banking(3)
 
688

 
11
 
138

 
15
 
589

 
11

 
172

 
20

Other(4)
 
48

 
1
 
64

 
7
 
(35
)
 
(1
)
 
(74
)
 
(9
)
Total from continuing operations
 
$
6,254

 
100%
 
$
943

 
100%
 
$
5,672

 
100%

 
$
852

 
100%


 
 
Six Months Ended June 30,
 
 
2016
 
2015
 
 
Total Net
Revenue (Loss)(1)
 
Net Income (Loss)(2)
 
Total Net
Revenue (Loss)(1)
 
Net Income (Loss)(2)
(Dollars in millions)
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
Credit Card
 
$
7,784

 
62%
 
$
1,093

 
56%
 
$
6,960

 
61%

 
$
1,131

 
57%

Consumer Banking
 
3,225

 
26
 
506

 
26
 
3,232

 
29

 
557

 
28

Commercial Banking(3)
 
1,343

 
11
 
205

 
10
 
1,164

 
10

 
327

 
16

Other(4)
 
122

 
1
 
157

 
8
 
(37
)
 
—

 
(29
)
 
(1
)
Total from continuing operations
 
$
12,474

 
100%
 
$
1,961

 
100%
 
$
11,319

 
100%

 
$
1,986

 
100%

__________
(1) 
Total net revenue (loss) consists of net interest income and non-interest income.
(2) 
Net income (loss) for our business segments and the Other category is based on income (loss) from continuing operations, net of tax.

 
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(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 $484 million and $1.1 billion in the second quarter and first six months of 2016, respectively, compared to net income from continuing operations of $463 million and $1.1 billion in the second quarter and first six months of 2015, respectively. The increase in net income in the second quarter of 2016 was primarily attributable to (i) higher net interest income primarily driven by loan growth; and (ii) higher non-interest income attributable to an increase in net interchange fees driven by higher purchase volume, partially offset by a decline in service charges and other customer-related fees primarily due to the exit of our legacy payment protection products in our Domestic Card business during the first quarter of 2016. These increases were partially offset by (i) higher provision for credit losses driven by higher charge-offs and a larger allowance build, both due to continued loan growth and portfolio seasoning; and (ii) higher non-interest expense due to higher operating and marketing expenses associated with loan growth as well as continuing digital investments. Net income in the first six months of 2016 was substantially flat as a result of (i) higher provision for credit losses driven by higher charge-offs and a larger allowance build, both due to continued loan growth and portfolio seasoning; and (ii) higher non-interest expense due to higher operating and marketing expenses associated with loan growth as well as continuing digital investments; 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 driven by higher purchase volume, partially offset by a decline in service charges and other customer-related fees primarily due to the exit of our legacy payment protection products in our Domestic Card business during the first quarter of 2016. Period-end loans held for investment increased by $779 million to $96.9 billion as of June 30, 2016 from December 31, 2015, primarily due to continued loan growth in our Domestic Card business, net of expected seasonal paydowns.
Consumer Banking: Our Consumer Banking business generated net income from continuing operations of $257 million and $506 million in the second quarter and first six months of 2016, respectively, compared to net income from continuing operations of $291 million and $557 million in the second quarter and first six months of 2015, respectively. The decreases in net income were primarily attributable to (i) higher provision for credit losses primarily driven by higher charge-offs in our auto loan portfolio due to continued loan growth, portfolio seasoning and our expectation that used car auction prices will decline from current levels; (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; and (iii) lower revenue primarily attributable to the planned run-off of our acquired home loan portfolio. Period-end loans held for investment increased by $1.0 billion to $71.4 billion as of June 30, 2016 from December 31, 2015, driven by growth in our auto loan portfolio, partially offset by the planned run-off of our acquired home loan portfolio.
Commercial Banking: Our Commercial Banking business generated net income from continuing operations of $138 million and $205 million in the second quarter and first six months of 2016, respectively, compared to net income from continuing operations of $172 million and $327 million in the second quarter and first six months of 2015, respectively. The decreases in net income were primarily attributable to (i) higher provision for credit losses due to higher charge-offs as a result of continued adverse industry conditions impacting our oil and gas portfolio, as well as a larger allowance build in the first six months of 2016 compared to the first six months of 2015 as a result of continued adverse industry conditions impacting our oil and gas and taxi medallion lending portfolios; 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. Period-end loans held for investment increased by $2.9 billion to $66.2 billion as of June 30, 2016 from December 31, 2015, driven by growth across our commercial loan portfolios.

 
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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 “MD&A” 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 “MD&A—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 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. Year-to-date, we have recognized approximately $45 million of the $160 million in expected costs for 2016. These costs appear in the “Other” category rather than in the Consumer Banking business results.
In addition to these expected bank optimization costs, we also expect the net impact of Federal Deposit Insurance Corporation (“FDIC”) surcharges and premium changes to add to quarterly operating expenses beginning in the second half 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 2016 capital plan, our board has authorized repurchases of up to $2.5 billion of common stock through the end of the second quarter of 2017. As we completed the 2015 Stock Repurchase Program, we reduced our net share count by 8.6 million shares in the second quarter of 2016. Additionally, on June 29, 2016, we announced the 2016 Stock Repurchase Program. The timing and exact amount of any common stock repurchases will depend on various factors, including market conditions, opportunities for growth, utilizing Rule 10b5-1 programs, and may be suspended at any time. See “MD&A—Capital Management—Dividend Policy and Stock Purchases” for more information.
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.

 
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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 second quarter and first six months of 2016 and 2015. Following this section, we provide a discussion of our business segment results. You should read this section together with our “MD&A—Executive Summary and Business Outlook,” where we discuss trends and other factors that we expect will affect our future results of operations.
Net Interest Income
Net interest income represents the difference between the interest income, including certain fees, earned on our interest-earning assets and the interest expense on our interest-bearing liabilities. Interest-earning assets include loans, investment securities and other interest-earning assets 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 second quarter and first six months of 2016 and 2015.
Table 3: Average Balances, Net Interest Income and Net Interest Margin
 
 
Three Months Ended June 30,
 
 
2016
 
2015
(Dollars in millions)
 
Average
Balance
 
Interest
Income/
Expense(1)(2)
 
Average Yield/
Rate(2)
 
Average
Balance
 
Interest
Income/
Expense(1)(2)
 
Average Yield/
Rate(2)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
 
Credit card:
 
 
 
 
 
 
 
 
 
 
 
 
Domestic credit card
 
$
85,974

 
$
3,095

 
14.40%
 
$
76,088

 
$
2,648

 
13.92%

International credit card
 
8,400

 
325

 
15.48
 
7,977

 
285

 
14.29

Total credit card
 
94,374

 
3,420

 
14.50
 
84,065

 
2,933

 
13.96

Consumer banking
 
71,170

 
1,116

 
6.27
 
71,618

 
1,122

 
6.27

Commercial banking(3)
 
65,872

 
567

 
3.44
 
51,549

 
419

 
3.25

Other
 
80

 
45

 
225.00
 
103

 
57

 
221.36

Total loans, including loans held for sale
 
231,496

 
5,148

 
8.90
 
207,335

 
4,531

 
8.74

Investment securities
 
65,754

 
405

 
2.46
 
63,771

 
382

 
2.40

Cash equivalents and other interest-earning assets
 
5,514

 
18

 
1.31
 
5,479

 
24

 
1.75

Total interest-earning assets
 
302,764

 
5,571

 
7.36
 
276,585

 
4,937

 
7.14

Cash and due from banks
 
3,129

 
 
 
 
 
2,839

 
 
 
 
Allowance for loan and lease losses
 
(5,425
)
 
 
 
 
 
(4,412
)
 
 
 
 
Premises and equipment, net
 
3,645

 
 
 
 
 
3,714

 
 
 
 
Other assets
 
30,366

 
 
 
 
 
28,480

 
 
 
 
Total assets
 
$
334,479

 
 
 
 
 
$
307,206

 
 
 
 
Liabilities and stockholders’ equity:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
$
195,641

 
$
292

 
0.60
 
$
183,946

 
$
272

 
0.59

Securitized debt obligations
 
15,226

 
47

 
1.23
 
13,219

 
36

 
1.09

Senior and subordinated notes
 
21,717

 
111

 
2.04
 
20,336

 
80

 
1.57

Other borrowings and liabilities
 
18,255

 
28

 
0.61
 
8,857

 
12

 
0.54

Total interest-bearing liabilities
 
250,839

 
478

 
0.76
 
226,358

 
400

 
0.71

Non-interest-bearing deposits
 
25,505

 
 
 
 
 
25,197

 
 
 
 
Other liabilities
 
9,201

 
 
 
 
 
8,396

 
 
 
 
Total liabilities
 
285,545

 
 
 
 
 
259,951

 
 
 
 
Stockholders’ equity
 
48,934

 
 
 
 
 
47,255

 
 
 
 
Total liabilities and stockholders’ equity
 
$
334,479

 
 
 
 
 
$
307,206

 
 
 
 
Net interest income/spread
 
 
 
$
5,093

 
6.60
 
 
 
$
4,537

 
6.43

Impact of non-interest-bearing funding
 
 
 
 
 
0.13
 
 
 
 
 
0.13

Net interest margin
 
 
 
 
 
6.73%
 
 
 
 
 
6.56
%

 
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Six Months Ended June 30,
 
 
2016
 
2015
(Dollars in millions)
 
Average
Balance
 
Interest
Income/
Expense(1)(2)
 
Average Yield/
Rate(2)
 
Average
Balance
 
Interest
Income/
Expense(1)(2)
 
Average Yield/
Rate(2)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
 
Credit card:
 
 
 
 
 
 
 
 
 
 
 
 
Domestic credit card
 
$
85,646

 
$
6,166

 
14.40%
 
$
75,484

 
$
5,308

 
14.06%

International credit card
 
8,120

 
647

 
15.94
 
7,895

 
576

 
14.59

Total credit card
 
93,766

 
6,813

 
14.53
 
83,379

 
5,884

 
14.11

Consumer banking
 
70,805

 
2,204

 
6.23
 
71,607

 
2,241

 
6.26

Commercial banking(3)
 
64,878

 
1,107

 
3.41
 
51,505

 
834

 
3.24

Other
 
85

 
109

 
256.47
 
107

 
112

 
209.35

Total loans, including loans held for sale
 
229,534

 
10,233

 
8.92
 
206,598

 
9,071

 
8.78

Investment securities
 
65,455

 
820

 
2.51
 
63,477

 
788

 
2.48

Cash equivalents and other interest-earning assets
 
6,117

 
35

 
1.14
 
7,426

 
52

 
1.40

Total interest-earning assets
 
301,106

 
11,088

 
7.36
 
277,501

 
9,911

 
7.14

Cash and due from banks
 
3,244

 
 
 
 
 
2,965

 
 
 
 
Allowance for loan and lease losses
 
(5,278
)
 
 
 
 
 
(4,391
)
 
 
 
 
Premises and equipment, net
 
3,643

 
 
 
 
 
3,708

 
 
 
 
Other assets
 
30,482

 
 
 
 
 
28,512

 
 
 
 
Total assets
 
$
333,197

 
 
 
 
 
$
308,295

 
 
 
 
Liabilities and stockholders’ equity:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
$
194,883

 
$
575

 
0.59
 
$
183,475

 
$
543

 
0.59

Securitized debt obligations
 
15,293

 
95

 
1.24
 
12,396

 
69

 
1.11

Senior and subordinated notes
 
21,855

 
217

 
1.99
 
20,465

 
159

 
1.55

Other borrowings and liabilities
 
17,716

 
52

 
0.59
 
11,771

 
27

 
0.46

Total interest-bearing liabilities
 
249,747

 
939

 
0.75
 
228,107

 
798

 
0.70

Non-interest-bearing deposits
 
25,280

 
 
 
 
 
25,026

 
 
 
 
Other liabilities
 
9,163

 
 
 
 
 
8,334

 
 
 
 
Total liabilities
 
284,190

 
 
 
 
 
261,467

 
 
 
 
Stockholders’ equity
 
49,007

 
 
 
 
 
46,828

 
 
 
 
Total liabilities and stockholders’ equity
 
$
333,197

 
 
 
 
 
$
308,295

 
 
 
 
Net interest income/spread
 
 
 
$
10,149

 
6.61
 
 
 
$
9,113

 
6.44

Impact of non-interest-bearing funding
 
 
 
 
 
0.13
 
 
 
 
 
0.13

Net interest margin
 
 
 
 
 
6.74%
 
 
 
 
 
6.57
%
__________
(1)  
Past due fees included in interest income totaled approximately $354 million and $706 million in the second quarter and first six months of 2016, respectively, and $344 million and $697 million in the second quarter and first six months of 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 $556 million to $5.1 billion in the second quarter of 2016 compared to the second quarter of 2015, and increased by $1.0 billion to $10.1 billion in the first six months of 2016 compared to the first six months of 2015 primarily driven by growth in our credit card and commercial loan portfolios and an additional day in the first six months of 2016. Net interest margin increased by 17 basis points to 6.73% and 6.74% in the second quarter of 2016 and the first six months of 2016, respectively, primarily driven by continued growth in our credit card loan portfolio, the planned run-off of our acquired home loan

 
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portfolio in our Consumer Banking business and an additional day in the first six months of 2016, partially offset by margin compression in our auto loan 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 June 30,
 
Six Months Ended June 30,
 
 
2016 vs. 2015
 
2016 vs. 2015
(Dollars in millions)
 
Total Variance
 
Volume
 
Rate
 
Total Variance
 
Volume
 
Rate
Interest income:
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
 
Credit card
 
$
487

 
$
370

 
$
117

 
$
929

 
$
750

 
$
179

Consumer banking
 
(6
)
 
(7
)
 
1

 
(37
)
 
(25
)
 
(12
)
Commercial banking(2)
 
148

 
122

 
26

 
273

 
226

 
47

Other
 
(12
)
 
(13
)
 
1

 
(3
)
 
(23
)
 
20

Total loans, including loans held for sale
 
617

 
472

 
145

 
1,162

 
928

 
234

Investment securities
 
23

 
12

 
11

 
32

 
24

 
8

Cash equivalents and other interest-earning assets
 
(6
)
 
—

 
(6
)
 
(17
)
 
(8
)
 
(9
)
Total interest income
 
634

 
484

 
150

 
1,177

 
944

 
233

Interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
20

 
17

 
3

 
32

 
34

 
(2
)
Securitized debt obligations
 
11

 
6

 
5

 
26

 
17

 
9

Senior and subordinated notes
 
31

 
6

 
25

 
58

 
11

 
47

Other borrowings and liabilities
 
16

 
14

 
2

 
25

 
16

 
9

Total interest expense
 
78

 
43

 
35

 
141

 
78

 
63

Net interest income
 
$
556

 
$
441

 
$
115

 
$
1,036

 
$
866

 
$
170

__________
(1) 
We calculate the change in interest income and interest expense separately for each item. The portion of interest income or interest expense attributable to both volume and rate is allocated proportionately when the calculation results in a positive value. When the portion of interest income or interest expense attributable to both volume and rate results in a negative value, the total amount is allocated to volume or rate, depending on which amount is positive.
(2) 
Some of our tax-related commercial investments generate tax-exempt income or tax credits. Accordingly, we make certain reclassifications within our Commercial Banking business results to present revenues and yields on a taxable-equivalent basis, calculated assuming an effective tax rate approximately equal to our federal statutory rate of 35% with offsetting reclassifications to the Other category.
Non-Interest Income
Non-interest income primarily consists of interchange fees net of rewards expense, service charges and other customer-related fees and other non-interest income. Other non-interest income includes the pre-tax net benefit (provision) for mortgage representation and warranty losses related to continuing operations, gains and losses 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 second quarter and first six months of 2016 and 2015.
Table 5: Non-Interest Income
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Dollars in millions)
 
2016
 
2015
 
2016
 
2015
Interchange fees, net
 
$
616

 
$
567

 
$
1,212

 
$
1,063

Service charges and other customer-related fees
 
371

 
429

 
775

 
866

Net other-than-temporary impairment recognized in earnings
 
(2
)
 
(7
)
 
(10
)
 
(22
)
Other non-interest income:
 
 
 
 
 
 
 
 
Benefit (provision) for mortgage representation and warranty losses(1)
 
1

 
9

 
2

 
8

Net gains (losses) from the sale of investment securities
 
2

 
(1
)
 
2

 
1

Net fair value gains (losses) on free-standing derivatives
 
22

 
12

 
52

 
22

Other
 
151

 
126

 
292

 
268

Total other non-interest income
 
176

 
146

 
348

 
299

Total non-interest income
 
$
1,161

 
$
1,135

 
$
2,325

 
$
2,206

__________
(1) 
Represents the benefit (provision) for mortgage representation and warranty losses recorded in continuing operations. For the total impact to the net benefit (provision) 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 $26 million to $1.2 billion in the second quarter of 2016 compared to the second quarter of 2015, and increased by $119 million to $2.3 billion in the first six months of 2016 compared to the first six months of 2015, primarily driven by (i) increases in interchange fees driven by higher purchase volume in our Credit Card business; (ii) a customer rewards liability release in the first quarter of 2016 within the retail banking business related to the discontinuation of certain debit card and deposit products; and (iii) a gain recorded in the second quarter of 2016 related to the exchange of our ownership interest in Visa Europe with Visa Inc. as a result of Visa Inc.’s acquisition of Visa Europe. These increases were partially offset by (i) increased rewards expense in our Credit Card business due to higher purchase volume and the continued expansion of our rewards franchise; and (ii) lower service charges and other customer-related fees primarily due to the exit of our legacy payment protection products in our Domestic Card business during the first quarter of 2016.
Provision for Credit Losses
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 $1.6 billion and $3.1 billion in the second quarter and first six months of 2016, respectively, compared to $1.1 billion and $2.1 billion in the second quarter and first six months of 2015, respectively. The provision for credit losses as a percentage of net interest income was 31.3% and 30.7% in the second quarter and first six months of 2016, respectively, compared to 24.9% and 22.6% in the second quarter and first six months of 2015, respectively.
The increase in the provision for credit losses in the second quarter of 2016 compared to the second quarter of 2015 was primarily driven by higher charge-offs and a larger allowance build in our credit card and auto loan portfolios due to continued loan growth and portfolio seasoning, as well as higher charge-offs in our commercial loan portfolio as a result of continued adverse industry conditions impacting our oil and gas portfolio. The increase in provision in the first six months of 2016 compared to the first six months of 2015 was primarily driven by higher charge-offs and a larger allowance build in our credit card and auto loan portfolios due to continued loan growth and portfolio seasoning, as well as higher charge-offs and a larger allowance build in our commercial loan portfolio as a result of continued adverse industry conditions impacting our oil and gas and taxi medallion lending portfolios.
We provide additional information on the provision for credit losses and changes in the allowance for loan and lease losses within “MD&A—Credit Risk Profile—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.

 
15
Capital One Financial Corporation (COF)

Table of Contents

Non-Interest Expense
Non-interest expense consists of ongoing operating expenses, such as salaries and associate benefits, occupancy and equipment costs, professional services, communications and data processing expenses and other non-interest expenses, as well as marketing costs and amortization of intangibles.
Table 6 displays the components of non-interest expense for the second quarter and first six months of 2016 and 2015.
Table 6: Non-Interest Expense
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Dollars in millions)
 
2016
 
2015
 
2016
 
2015
Salaries and associate benefits
 
$
1,279

 
$
1,360

 
$
2,549

 
$
2,571

Occupancy and equipment
 
465

 
439

 
923

 
874

Marketing
 
415

 
387

 
843

 
762

Professional services
 
304

 
334

 
582

 
630

Communications and data processing
 
262

 
208

 
505

 
410

Amortization of intangibles
 
95

 
111

 
196

 
221

Other non-interest expense:
 
 
 
 
 
 
 
 
Collections
 
77

 
86

  
158

 
170

Fraud losses
 
89