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 September 30, 2015
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 October 30, 2015, there were 532,045,252 shares of the registrant’s Common Stock, par value $.01 per share, outstanding.
________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________


TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
i
Capital One Financial Corporation (COF)

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

 
ii
Capital One Financial Corporation (COF)

INDEX OF MD&A AND SUPPLEMENTAL TABLES
 
 
 
MD&A Tables:
Page
1
2
3
4
5
6
7
7.1
7.2
8
9
10
11
12
13
14
15
16
17
18
Commercial Loans by Industry
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
 
 
 
Supplemental Table:
 
A

 
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Capital One Financial Corporation (COF)

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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 2014 Annual Report on Form 10-K (“2014 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 September 30, 2015 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 2014 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 September 30, 2015, our principal subsidiaries included:
•
Capital One Bank (USA), National Association (“COBNA”), which offers credit and debit card products, other lending products and deposit products; and
•
Capital One, National Association (“CONA”), which offers a broad spectrum of banking products and financial services to consumers, small businesses and commercial clients.
The Company is hereafter collectively referred to as “we,” “us” or “our.” COBNA and CONA are collectively referred to as the “Banks.” Certain business terms used in this document are defined in the “Glossary and Acronyms” section 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.
•
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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Capital One Financial Corporation (COF)

Table of Contents

Recent Acquisitions and Dispositions
We regularly explore and evaluate opportunities to acquire financial services companies 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 assets, branches, partnership agreements or lines of business. We may issue equity or debt in connection with acquisitions, including public offerings, to fund such acquisitions. We did not have any significant acquisitions or dispositions in 2014 or the first nine months of 2015.
On August 11, 2015, we announced the signing of a definitive agreement with General Electric Capital Corporation (“GE”) to acquire approximately $8.5 billion of healthcare-related loans and its Healthcare Financial Services business. We expect to complete the acquisition in the fourth quarter of 2015, subject to customary closing conditions.
SUMMARY OF SELECTED FINANCIAL DATA
The following table presents selected consolidated financial data from our results of operations for the third quarter and first nine months of 2015 and 2014, and selected comparative balance sheet data as of September 30, 2015 and December 31, 2014. We also provide selected key metrics we use in evaluating our performance. Certain prior period amounts have been recast to conform to the current period presentation.
Table 1: Consolidated Financial Highlights (Unaudited)(1)  
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Dollars in millions, except per share data and as noted)
 
2015
 
2014
 
Change
 
2015
 
2014
 
Change
Income statement
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
$
4,760

 
$
4,497

 
6%

 
$
13,873

 
$
13,162

 
5%

Non-interest income
 
1,140

 
1,142

 
—

 
3,346

 
3,315

 
1

Total net revenue
 
5,900

 
5,639

 
5

 
17,219

 
16,477

 
5

Provision for credit losses
 
1,092

 
993

 
10

 
3,156

 
2,432

 
30

Non-interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
Marketing
 
418

 
392

 
7

 
1,180

 
1,052

 
12

Amortization of intangibles
 
106

 
130

 
(18
)
 
327

 
409

 
(20
)
Operating expenses
 
2,636

 
2,463

 
7

 
8,009

 
7,435

 
8

Total non-interest expense
 
3,160

 
2,985

 
6

 
9,516

 
8,896

 
7

Income from continuing operations before income taxes
 
1,648

 
1,661

 
(1
)
 
4,547

 
5,149

 
(12
)
Income tax provision
 
530

 
536

 
(1
)
 
1,443

 
1,696

 
(15
)
Income from continuing operations, net of tax
 
1,118

 
1,125

 
(1
)
 
3,104

 
3,453

 
(10
)
(Loss) income from discontinued operations, net of tax
 
(4
)
 
(44
)
 
(91)
 
26

 
(24
)
 
**

Net income
 
1,114

 
1,081

 
3

 
3,130

 
3,429

 
(9
)
Dividends and undistributed earnings allocated to participating securities
 
(6
)
 
(5
)
 
20

 
(16
)
 
(14
)
 
14

Preferred stock dividends
 
(29
)
 
(20
)
 
45

 
(90
)
 
(46
)
 
96

Net income available to common stockholders
 
$
1,079

 
$
1,056

 
2

 
$
3,024

 
$
3,369

 
(10
)
Common share statistics
 
 

 
 

 
 

 
 
 
 
 
 

Basic earnings per common share:
 
 
 
 
 
 
 
 
 
 
 
 
Net income from continuing operations
 
$
2.01

 
$
1.97

 
2%

 
$
5.49

 
$
5.99

 
(8)%

(Loss) income from discontinued operations
 
(0.01
)
 
(0.08
)
 
(88
)
 
0.05

 
(0.04
)
 
**

Net income per basic common share
 
$
2.00

 
$
1.89

 
6

 
$
5.54

 
$
5.95

 
(7
)
Diluted earnings per common share:
 
 
 
 
 
 
 
 
 
 
 
 
Net income from continuing operations
 
$
1.99

 
$
1.94

 
3

 
$
5.43

 
$
5.90

 
(8
)
(Loss) income from discontinued operations
 
(0.01
)
 
(0.08
)
 
(88
)
 
0.05

 
(0.04
)
 
**

Net income per diluted common share
 
$
1.98

 
$
1.86

 
6

 
$
5.48

 
$
5.86

 
(6
)
Weighted-average common shares outstanding (in millions):
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
540.6

 
559.9

 
(3
)
 
545.5

 
566.1

 
(4
)
Diluted
 
546.3

 
567.9

 
(4
)
 
551.9

 
575.2

 
(4
)
Common shares outstanding (period end, in millions)
 
534.9

 
558.5

 
(4
)
 
534.9

 
558.5

 
(4
)
Dividends paid per common share
 
$
0.40

 
$
0.30

 
33

 
$
1.10

 
$
0.90

 
22

Tangible book value per common share (period end)
 
54.66

 
48.72

 
12

 
54.66

 
48.72

 
12


 
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Capital One Financial Corporation (COF)

Table of Contents

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Dollars in millions, except per share data and as noted)
 
2015
 
2014
 
Change
 
2015
 
2014
 
Change
Balance sheet (average balances)
 
 
 
 
 
 
 
 
 
 
 
 
Loans held for investment
 
$
211,227

 
$
199,422

 
6%

 
$
207,608

 
$
196,068

 
6%

Interest-earning assets
 
283,082

 
268,890

 
5

 
279,388

 
265,065

 
5

Total assets
 
313,822

 
298,913

 
5

 
310,146

 
295,506

 
5

Interest-bearing deposits
 
185,800

 
179,928

 
3

 
184,258

 
181,587

 
1

Total deposits
 
210,974

 
205,199

 
3

 
209,334

 
205,783

 
2

Borrowings
 
45,070

 
40,314

 
12

 
44,264

 
37,332

 
19

Common equity
 
45,407

 
43,489

 
4

 
44,956

 
42,772

 
5

Total stockholders’ equity
 
48,456

 
44,827

 
8

 
47,376

 
43,828

 
8

Selected performance metrics
 
 

 
 

 
 

 
 
 
 
 
 

Purchase volume(2)
 
$
69,875

 
$
57,474

 
22%

 
$
195,817

 
$
161,266

 
21%

Total net revenue margin(3)
 
8.34%

 
8.39%

 
(5
)bps
 
8.22%

 
8.29%

 
(7
)bps
Net interest margin(4)
 
6.73

 
6.69

 
4

 
6.62

 
6.62

 
—

Return on average assets
 
1.43

 
1.51

 
(8
)
 
1.33

 
1.56

 
(23
)
Return on average tangible assets(5)
 
1.50

 
1.59

 
(9
)
 
1.40

 
1.64

 
(24
)
Return on average common equity(6)
 
9.54

 
10.12

 
(58
)
 
8.89

 
10.58

 
(169
)
Return on average tangible common equity(7)
 
14.33

 
15.73

 
(140
)
 
13.46

 
16.66

 
(320
)
Equity-to-assets ratio
 
15.44

 
15.00

 
44

 
15.28

 
14.83

 
45

Non-interest expense as a percentage of average loans held for investment(8)
 
5.98

 
5.99

 
(1
)
 
6.11

 
6.05

 
6

Efficiency ratio(9)
 
53.56

 
52.93

 
63

 
55.26

 
53.99

 
127

Effective income tax rate from continuing operations
 
32.2

 
32.3

 
(10
)
 
31.7

 
32.9

 
(120
)
Net charge-offs
 
$
890

 
$
756

 
18%

 
$
2,617

 
$
2,499

 
5%

Net charge-off rate(10)
 
1.69%

 
1.52%

 
17
bps
 
1.68%

 
1.70%

 
(2
)bps
Net charge-off rate (excluding Acquired Loans)(11)
 
1.86

 
1.73

 
13

 
1.87

 
1.96

 
(9
)
(Dollars in millions, except as noted)

September 30,
2015
 
December 31, 2014
 
Change
Balance sheet (period end)
 
 
 
 
 
 
Loans held for investment
 
$
213,329

 
$
208,316

 
2%

Interest-earning assets
 
283,073

 
277,849

 
2

Total assets
 
313,700

 
308,167

 
2

Interest-bearing deposits
 
187,848

 
180,467

 
4

Total deposits
 
212,903

 
205,548

 
4

Borrowings
 
42,778

 
48,457

 
(12
)
Common equity
 
44,391

 
43,231

 
3

Total stockholders’ equity
 
47,685

 
45,053

 
6

Credit quality metrics (period end)
 
 
 
 
 
 
Allowance for loan and lease losses
 
$
4,847

 
$
4,383

 
11%

Allowance as a percentage of loans held for investment (“allowance coverage ratio”)
 
2.27%

 
2.10%

 
17
bps
Allowance as a percentage of loans held for investment (excluding Acquired Loans)(11)
 
2.49

 
2.36

 
13

30+ day performing delinquency rate
 
2.63

 
2.62

 
1

30+ day performing delinquency rate (excluding Acquired Loans)(11)
 
2.90

 
2.95

 
(5
)
30+ day delinquency rate
 
2.95

 
2.91

 
4

30+ day delinquency rate (excluding Acquired Loans)(11)
 
3.25

 
3.28

 
(3
)
Capital ratios
 
 

 
 
 
 
Common equity Tier 1 capital ratio
 
12.1%

 
12.5%

 
(40
)bps
Tier 1 risk-based capital ratio
 
13.4

 
13.2

 
20

Total risk-based capital ratio
 
15.1

 
15.1

 
—

Tier 1 leverage ratio
 
11.1

 
10.8

 
30

Tangible common equity ratio(12)
 
9.8

 
9.5

 
30

Supplementary leverage ratio(13)
 
9.6

 
N/A

 
**
Other
 
 
 
 
 
 
Employees (in thousands), period end
 
46.9

 
46.0

 
2%

__________
**
Change is not meaningful.

 
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(1) 
As of January 1, 2015, we changed our accounting principle to move from a gross basis of presentation to a net basis, for presenting qualifying derivative assets and liabilities, as well as the related right to reclaim cash collateral or obligation to return cash collateral. See “Note 1—Summary of Significant Accounting Policies” for additional information. Prior period results, excluding regulatory ratios, have been recast to conform to this presentation.
(2) 
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.
(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) 
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.
(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.
(7) 
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 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.
(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) 
Calculation of ratio adjusted to exclude Acquired Loans. See “MD&A—Glossary and Acronyms” for the definition of Acquired Loans.
(12) 
The tangible common equity (“TCE”) 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 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.
EXECUTIVE SUMMARY AND BUSINESS OUTLOOK
We reported net income of $1.1 billion ($1.98 per diluted common share) on total net revenue of $5.9 billion and net income of $3.1 billion ($5.48 per diluted common share) on total net revenue of $17.2 billion for the third quarter and first nine months of 2015, respectively. In comparison, we reported net income of $1.1 billion ($1.86 per diluted common share) on total net revenue of $5.6 billion and net income of $3.4 billion ($5.86 per diluted common share) on total net revenue of $16.5 billion for the third quarter and first nine months of 2014, respectively.
Our common equity Tier 1 capital ratio, as calculated under the Basel III Standardized Approach, including transition provisions, was 12.1% and 12.5% as of September 30, 2015 and December 31, 2014, respectively. We formally entered parallel run for Basel III Advanced Approaches on January 1, 2015. See “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 (the “2015 Stock Repurchase Program”). Through the end of the third quarter of 2015, we repurchased approximately $1.3 billion of common stock as part of this program and expect to complete the 2015 Stock Repurchase Program by the end of the second quarter of 2016. See “Capital Management” below for additional information.
Below are additional highlights of our performance in the third quarter and first nine months of 2015. These highlights are generally based on a comparison between the results of the third quarter and first nine months of 2015 and 2014, 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 September 30, 2015, compared to our financial condition and credit performance as of December 31, 2014. 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 $33 million to $1.1 billion in the third quarter of 2015, compared to the third quarter of 2014, and decreased by $299 million to $3.1 billion in the first nine months of 2015, compared to the first nine months of 2014. The decrease in net income from continuing operations in the first nine months of 2015 was driven by (i) an increase in the provision for credit losses due to an allowance build in our credit card loan portfolio in 2015 as a result of continued loan growth and higher loss expectations on recent loan originations compared to an allowance release in the first nine months of 2014; 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. We recorded a build in the U.K. Payment Protection Insurance customer refund reserve (“U.K. PPI Reserve”) of $69 million in the third quarter of 2015 and $78

 
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million in the second quarter of 2015, reflecting recent U.K. regulatory developments and our updated estimate of future complaint levels. In the second quarter of 2015, we also recorded restructuring charges of $157 million for severance and related benefits pursuant to our ongoing benefit programs, which included $147 million as a result of the realignment of our workforce. These drivers were partially offset by (i) higher interest income due to growth in our credit card, auto 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 customer-related fees primarily due to the continued run-off of our payment protection products in our Domestic Card business and the build in our U.K. PPI Reserve in our International Card business. The increase in net income from discontinued operations in the first nine months of 2015 was primarily driven by a reduction in our mortgage representation and warranty reserve in the second quarter of 2015 resulting from favorable industry legal developments.
•
Loans Held for Investment: Period-end loans held for investment increased by $5.0 billion to $213.3 billion as of September 30, 2015 from December 31, 2014. Average loans held for investment increased by $11.8 billion to $211.2 billion in the third quarter of 2015, compared to the third quarter of 2014, and increased by $11.5 billion to $207.6 billion in the first nine months of 2015. The increases were primarily driven by continued loan growth in our credit card, auto and commercial loan portfolios, partially offset by the planned run-off of our acquired home loan portfolio.
•
Net Charge-off and Delinquency Statistics: Our net charge-off rate increased by 17 basis points to 1.69% in the third quarter of 2015, compared to the third quarter of 2014, primarily driven by rising losses due to the seasoning of recent credit card loan originations. Our net charge-off rate decreased by 2 basis points to 1.68%, in the first nine months of 2015, compared to the first nine months of 2014, primarily due to higher average loan balances in 2015. Net charge-off rates remained low compared to our historical trends due to continued economic improvement and the seasoned nature of our overall credit card loan portfolio. Our 30+ day delinquency rate increased by 4 basis points to 2.95% as of September 30, 2015, from 2.91% as of December 31, 2014, primarily attributable to higher delinquencies due to the seasoning of recent credit card loan originations. 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 $464 million to $4.8 billion as of September 30, 2015 from December 31, 2014. The increase in the allowance for loan and lease losses was primarily driven by continued loan growth, coupled with our expectations for rising charge-off rates in our domestic credit card portfolio, as well as adverse market conditions impacting our oil and gas portfolios and the taxi-lending component of our transportation loan portfolio within our Commercial Banking business. These factors also contributed to a higher allowance coverage ratio, which increased by 17 basis points to 2.27% as of September 30, 2015 from December 31, 2014.
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 third quarter and first nine months of 2015 and 2014. We provide information on the allocation methodologies used to derive our business segment results under “Note 19—Business Segments” in our 2014 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 September 30,
 
 
2015
 
2014
 
 
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
 
$
3,724

 
63%

 
$
670

 
60%
 
$
3,473

 
62%
 
$
624

 
55%
Consumer Banking
 
1,617

 
27

 
273

 
25
 
1,604

 
28
 
289

 
26
Commercial Banking(3)
 
562

 
10

 
137

 
12
 
561

 
10
 
182

 
16
Other(4)
 
(3
)
 
—

 
38

 
3
 
1

 
—
 
30

 
3
Total from continuing operations
 
$
5,900

 
100
 %
 
$
1,118

 
100%
 
$
5,639

 
100%
 
$
1,125

 
100%


 
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Nine Months Ended September 30,
 
 
2015
 
2014
 
 
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
 
$
10,684

 
62
 %
 
$
1,801

 
58
%
 
$
10,083

 
61
%
 
$
1,960

 
57
%
Consumer Banking
 
4,849

 
28

 
830

 
27

 
4,788

 
29

 
953

 
28

Commercial Banking(3)
 
1,726

 
10

 
464

 
15

 
1,614

 
10

 
490

 
14

Other(4) 
 
(40
)
 
—

 
9

 
—

 
(8
)
 
—

 
50

 
1

Total from continuing operations
 
$
17,219

 
100
 %
 
$
3,104

 
100
%
 
$
16,477

 
100
%
 
$
3,453

 
100
%
__________
(1) 
Total net revenue (loss) consists of net interest income (expense) and non-interest income.
(2) 
Net income for our business segments and the Other category is based on income 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 within 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 19—Business Segments” in our 2014 Form 10-K.
Credit Card: Our Credit Card business generated net income from continuing operations of $670 million and $1.8 billion in the third quarter and first nine months of 2015, respectively, compared to net income from continuing operations of $624 million and $2.0 billion in the third quarter and first nine months of 2014, respectively. The decrease in net income in the first nine months of 2015 was due to (i) higher provision for credit losses driven by an allowance build as a result of continued loan growth, coupled with our expectations for rising charge-off rates in our Domestic Card business, compared to an allowance release in the first nine months of 2014; and (ii) higher non-interest expense due to higher operating and marketing expenses associated with loan growth and a build in our U.K. PPI Reserve. 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 customer-related fees primarily due to the continued run-off of our payment protection products in our Domestic Card business and a build in our U.K. PPI Reserve. Period-end loans held for investment increased by $4.3 billion to $90.1 billion as of September 30, 2015 from December 31, 2014, primarily due to loan growth in the Domestic Card business.
Consumer Banking: Our Consumer Banking business generated net income from continuing operations of $273 million and $830 million in the third quarter and first nine months of 2015, respectively, compared to net income from continuing operations of $289 million and $953 million in the third quarter and first nine months of 2014, respectively. The decrease in net income in the first nine months of 2015 was primarily attributable to a higher provision for credit losses due to a higher allowance build and higher net charge-offs in our auto loan portfolio, as well as higher non-interest expense largely driven by increases in technology and infrastructure spending in our retail banking business and operating expenses due to growth in our auto loan portfolio. The decrease was partially offset by higher revenue generated by growth in our auto loan portfolio, which was partially offset by the planned run-off of the acquired home loan portfolio and margin compression in auto loans. Period-end loans held for investment decreased by $449 million to $71.0 billion as of September 30, 2015 from December 31, 2014, primarily due to the planned run-off of our acquired home loan portfolio, partially offset by the growth in the auto loan portfolio.
Commercial Banking: Our Commercial Banking business generated net income from continuing operations of $137 million and $464 million in the third quarter and first nine months of 2015, respectively, compared to net income from continuing operations of $182 million and $490 million in the third quarter and first nine months of 2014, respectively. The decrease in net income in the first nine months of 2015 was primarily attributable to a higher provision for credit losses due to a larger build in both the allowance and reserve for unfunded lending commitments, and higher net charge-offs resulting from adverse market conditions impacting our oil and gas portfolios and the taxi-lending component of our transportation loan portfolio, as well as higher non-interest expense largely driven by higher operating expenses associated with continued growth in our Commercial Banking business. This was partially offset by higher net interest income driven by an increase in our average commercial loan portfolio and increased non-interest income driven by increased revenue from fee-based services and products related to our multifamily finance business. Period-end loans held for investment increased by $1.2 billion to $52.1 billion as of September 30, 2015 from December 31, 2014, driven by loan growth in the commercial and industrial and commercial and multifamily real estate 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 “Part I—Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2014 Form 10-K. Certain statements are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those in our forward-looking statements. Except as otherwise disclosed, forward-looking statements do not reflect: (i) any change in current dividend or repurchase strategies; (ii) the effect of any acquisitions, divestitures or similar transactions that have not been previously disclosed; or (iii) any changes in laws, regulations or regulatory interpretations, in each case after the date as of which such statements are made. See “Forward-Looking Statements” in this Report for more information on forward-looking statements included in this Report and “Part I—Item 1A. Risk Factors” in our 2014 Form 10-K for factors that could materially influence our results.
Total Company Expectations
We delivered attractive risk-adjusted returns in the third quarter of 2015, highlighted by strong growth in our Domestic Card business. We continue to expect the full-year 2015 efficiency ratio to be around 55%, excluding adjusting items. We expect modest improvement in the full-year 2016 efficiency ratio. We believe we are positioned to deliver attractive shareholder returns over the long term, with growth potential and sustained returns at the higher end of banks, as well as significant capital distribution, subject to regulatory approval.
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. 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 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 quarterly charge-off rate to be in the mid-to-high three percent range in the fourth quarter. In 2016, we expect the full-year charge-off rate to be around four percent, 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: We expect persistently low interest rates will continue to pressure returns in our deposit businesses, even if rates begin to rise in 2016. We expect this pressure, along with other headwinds, including the planned run-off in our acquired home loan portfolio and revenue margin compression in our auto business due to continuing competitive pressure and the shift toward prime loans, to have a negative impact on revenue and the efficiency ratio for the remainder of 2015 and in 2016.
Commercial Banking: Growth in our Commercial Banking business has slowed compared to prior periods because of actions we are taking in response to market conditions. While increasing competition continues to put pressure on loan terms and pricing in our commercial real estate and commercial and industrial loan portfolios, we continue to see good growth opportunities in select specialty industry verticals.
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 2014 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.
We provide additional information on our critical accounting policies and estimates under “MD&A—Critical Accounting Policies and Estimates” in our 2014 Form 10-K.
ACCOUNTING CHANGES AND DEVELOPMENTS
Accounting for Derivative Assets and Liabilities
As of January 1, 2015, we changed our accounting principle to move from a gross basis of presentation to a net basis, for presenting qualifying derivative assets and liabilities, as well as the related fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable), for instruments executed with the same counterparty where a right of setoff exists. This newly adopted policy is preferable as it more accurately reflects the Company’s counterparty credit risk as well as our contractual rights and obligations under these arrangements. Further, this change will align our presentation with that of the majority of our peer institutions. We retrospectively adopted this change in accounting principle and our consolidated balance sheet has been recast for all prior periods presented. See “Note 1—Summary of Significant Accounting Policies” for additional information.
CONSOLIDATED RESULTS OF OPERATIONS
The section below provides a comparative discussion of our consolidated financial performance for the third quarter and first nine months of 2015 and 2014. 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-

 
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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.
Table 3 below presents, for each major category of our interest-earning assets and interest-bearing liabilities, the average outstanding balances, interest income earned, interest expense incurred, average yield and rate for the third quarter and first nine months of 2015 and 2014.
Table 3: Average Balances, Net Interest Income and Net Interest Margin(1) 
 
 
Three Months Ended September 30,
 
 
2015
 
2014
(Dollars in millions)
 
Average
Balance
 
Interest
Income/
Expense(2)(3)
 
Yield/
Rate
 
Average
Balance
 
Interest
Income/
Expense(2)(3)
 
Yield/
Rate
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
 
Credit card:
 
 
 
 
 
 
 
 
 
 
 
 
Domestic credit card
 
$
80,678

 
$
2,884

 
14.30%
 
$
71,776

 
$
2,594

 
14.46%

International credit card
 
8,048

 
299

 
14.86
 
7,710

 
317

 
16.45

Total credit card
 
88,726

 
3,183

 
14.35
 
79,486

 
2,911

 
14.65

Consumer banking
 
71,374

 
1,113

 
6.24
 
71,237

 
1,100

 
6.18

Commercial banking
 
51,879

 
416

 
3.21
 
49,218

 
417

 
3.39

Other
 
97

 
41

 
169.07
 
125

 
35

 
112.00

Total loans, including loans held for sale
 
212,076

 
4,753

 
8.96
 
200,066

 
4,463

 
8.92

Investment securities
 
63,541

 
386

 
2.43
 
62,582

 
398

 
2.54

Cash equivalents and other interest-earning assets
 
7,465

 
25

 
1.34
 
6,242

 
26

 
1.67

Total interest-earning assets
 
$
283,082

 
$
5,164

 
7.30
 
$
268,890

 
$
4,887

 
7.27

Cash and due from banks
 
2,907

 
 
 
 
 
2,907

 
 
 
 
Allowance for loan and lease losses
 
(4,671
)
 
 
 
 
 
(3,995
)
 
 
 
 
Premises and equipment, net
 
3,698

 
 
 
 
 
3,778

 
 
 
 
Other assets
 
28,806

 
 
 
 
 
27,333

 
 
 
 
Total assets
 
$
313,822

 
 
 
 
 
$
298,913

 
 
 
 
Liabilities and stockholders’ equity:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
$
185,800

 
$
271

 
0.58
 
$
179,928

 
$
271

 
0.60

Securitized debt obligations
 
14,881

 
39

 
1.05
 
10,110

 
32

 
1.27

Senior and subordinated notes
 
20,806

 
82

 
1.58
 
17,267

 
71

 
1.64

Other borrowings and liabilities
 
10,114

 
12

 
0.47
 
12,937

 
16

 
0.49

Total interest-bearing liabilities
 
$
231,601

 
$
404

 
0.70
 
$
220,242

 
$
390

 
0.71

Non-interest bearing deposits
 
25,174

 
 
 
 
 
25,271

 
 
 
 
Other liabilities
 
8,591

 
 
 
 
 
8,573

 
 
 
 
Total liabilities
 
265,366

 
 
 
 
 
254,086

 
 
 
 
Stockholders’ equity
 
48,456

 
 
 
 
 
44,827

 
 
 
 
Total liabilities and stockholders’ equity
 
$
313,822

 
 
 
 
 
$
298,913

 
 
 
 
Net interest income/spread
 
 
 
$
4,760

 
6.60
 
 
 
$
4,497

 
6.56

Impact of non-interest bearing funding
 
 
 
 
 
0.13
 
 
 
 
 
0.13

Net interest margin
 
 
 
 
 
6.73%
 
 
 
 
 
6.69
%

 
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Nine Months Ended September 30,
 
 
2015
 
2014
(Dollars in millions)
 
Average
Balance
 
Interest
Income/
Expense(2)(3)
 
Yield/
Rate
 
Average
Balance
 
Interest
Income/
Expense(2)(3)
 
Yield/
Rate
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
 
Credit card:
 
 
 
 
 
 
 
 
 
 
 
 
Domestic credit card
 
$
77,235

 
$
8,191

 
14.14%
 
$
70,321

 
$
7,491

 
14.20%

International credit card
 
7,946

 
876

 
14.70
 
7,674

 
954

 
16.58

Total credit card
 
85,181

 
9,067

 
14.19
 
77,995

 
8,445

 
14.44

Consumer banking
 
71,528

 
3,354

 
6.25
 
71,042

 
3,297

 
6.19

Commercial banking
 
51,631

 
1,250

 
3.23
 
47,324

 
1,224

 
3.45

Other
 
104

 
153

 
196.15
 
131

 
83

 
84.48

Total loans, including loans held for sale
 
208,444

 
13,824

 
8.84
 
196,492

 
13,049

 
8.85

Investment securities
 
63,500

 
1,174

 
2.47
 
62,411

 
1,223

 
2.61

Cash equivalents and other interest-earning assets
 
7,444

 
77

 
1.38
 
6,162

 
80

 
1.73

Total interest-earning assets
 
$
279,388

 
$
15,075

 
7.19
 
$
265,065

 
$
14,352

 
7.22

Cash and due from banks
 
2,928

 
 
 
 
 
2,853

 
 
 
 
Allowance for loan and lease losses
 
(4,485
)
 
 
 
 
 
(4,132
)
 
 
 
 
Premises and equipment, net
 
3,704

 
 
 
 
 
3,808

 
 
 
 
Other assets
 
28,611

 
 
 
 
 
27,912

 
 
 
 
Total assets
 
$
310,146

 
 
 
 
 
$
295,506

 
 
 
 
Liabilities and stockholders’ equity:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
$
184,258

 
$
814

 
0.59
 
$
181,587

 
$
819

 
0.60

Securitized debt obligations
 
13,233

 
108

 
1.09
 
10,419

 
109

 
1.39

Senior and subordinated notes
 
20,580

 
241

 
1.56
 
15,822

 
226

 
1.90

Other borrowings and liabilities
 
11,214

 
39

 
0.46
 
11,091

 
36

 
0.43

Total interest-bearing liabilities
 
$
229,285

 
$
1,202

 
0.70
 
$
218,919

 
$
1,190

 
0.72

Non-interest bearing deposits
 
25,076

 
 
 
 
 
24,196

 
 
 
 
Other liabilities
 
8,409

 
 
 
 
 
8,563

 
 
 
 
Total liabilities
 
262,770

 
 
 
 
 
251,678

 
 
 
 
Stockholders’ equity
 
47,376

 
 
 
 
 
43,828

 
 
 
 
Total liabilities and stockholders’ equity
 
$
310,146

 
 
 
 
 
$
295,506

 
 
 
 
Net interest income/spread
 
 
 
$
13,873

 
6.49
 
 
 
$
13,162

 
6.50

Impact of non-interest bearing funding
 
 
 
 
 
0.13
 
 
 
 
 
0.12

Net interest margin
 
 
 
 
 
6.62%
 
 
 
 
 
6.62
%
__________
(1)  
As of January 1, 2015, we changed our accounting principle to move from a gross basis of presentation to a net basis, for presenting qualifying derivative assets and liabilities, as well as the related right to reclaim cash collateral or obligation to return cash collateral. See “Note 1—Summary of Significant Accounting Policies” for additional information. Prior period results have been recast to conform to this presentation.
(2)  
Past due fees included in interest income totaled approximately $373 million and $1.1 billion in the third quarter and first nine months of 2015, respectively, and $368 million and $1.1 billion in the third quarter and first nine months of 2014, respectively.
(3) 
Interest income and interest expense and the calculation of average yields on interest-earning assets and average rates on interest-bearing liabilities include the impact of hedge accounting.
Net interest income increased by $263 million to $4.8 billion in the third quarter of 2015 compared to the third quarter of 2014, and increased by $711 million to $13.9 billion in the first nine months of 2015 compared to the first nine months of 2014. These increases were primarily driven by growth in our credit card, auto and commercial loan portfolios. Net interest margin increased by 4 basis points to 6.73% in the third quarter of 2015 compared to the third quarter of 2014 and remained consistent at 6.62% in the first nine months of 2015 compared to the first nine months of 2014. The relatively consistent net interest margin reflected the shift in the mix of our overall loan portfolio to credit card loans as a result of continued loan growth in our domestic card loan

 
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portfolio and the planned run-off of the acquired home loan portfolio, as well as lower wholesale funding costs; offset by the impact of declining yields in our auto, commercial, international credit card and investment securities portfolios. The lower yield in the international credit card loan portfolio also reflected the impact from the build in the U.K. PPI Reserve in the second and third quarters of 2015.
Table 4 displays the change in our net interest income between periods and the extent to which the variance is attributable to (i) changes in the volume of our interest-earning assets and interest-bearing liabilities; or (ii) changes in the interest rates related to these assets and liabilities.
Table 4: Rate/Volume Analysis of Net Interest Income(1)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015 vs. 2014
 
2015 vs. 2014
(Dollars in millions)
 
Total Variance
 
Volume
 
Rate
 
Total Variance
 
Volume
 
Rate
Interest income:
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
 
Credit card
 
$
272

 
$
332

 
$
(60
)
 
$
622

 
$
765

 
$
(143
)
Consumer banking
 
13

 
2

 
11

 
57

 
23

 
34

Commercial banking
 
(1
)
 
21

 
(22
)
 
26

 
104

 
(78
)
Other
 
6

 
(8
)
 
14

 
70

 
(17
)
 
87

Total loans, including loans held for sale
 
290

 
347

 
(57
)
 
775

 
875

 
(100
)
Investment securities
 
(12
)
 
6

 
(18
)
 
(49
)
 
20

 
(69
)
Cash equivalents and other interest-earning assets
 
(1
)
 
4

 
(5
)
 
(3
)
 
13

 
(16
)
Total interest income
 
277

 
357

 
(80
)
 
723

 
908

 
(185
)
Interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
—

 
9

 
(9
)
 
(5
)
 
12

 
(17
)
Securitized debt obligations
 
7

 
12

 
(5
)
 
(1
)
 
23

 
(24
)
Senior and subordinated notes
 
11

 
14

 
(3
)
 
15

 
56

 
(41
)
Other borrowings and liabilities
 
(4
)
 
(3
)
 
(1
)
 
3

 
—

 
3

Total interest expense
 
14

 
32

 
(18
)
 
12

 
91

 
(79
)
Net interest income
 
$
263

 
$
325

 
$
(62
)
 
$
711

 
$
817

 
$
(106
)
__________
(1) 
We calculate the change in interest income and interest expense separately for each item. The portion of interest income or interest expense attributable to both volume and rate is allocated proportionately when the calculation results in a positive value. When the portion of interest income or interest expense attributable to both volume and rate results in a negative value, the total amount is allocated to volume or rate, depending on which amount is positive.
Non-Interest Income
Non-interest income primarily consists of 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, which we generally do not allocate to our business segments because it relates to centralized asset/liability and market risk management activities undertaken by our Corporate Treasury group.

 
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Table 5 displays the components of non-interest income for the third quarter and first nine months of 2015 and 2014.
Table 5: Non-Interest Income
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Dollars in millions)
 
2015
 
2014
 
2015
 
2014
Service charges and other customer-related fees
 
$
423

 
$
471

 
$
1,289

 
$
1,405

Interchange fees, net
 
555

 
523

 
1,618

 
1,498

Net other-than-temporary impairment recognized in earnings
 
(5
)
 
(9
)
 
(27
)
 
(15
)
Other non-interest income:
 
 
 
 
 
 
 
 
Benefit for mortgage representation and warranty losses(1)
 
7

 
—

 
15

 
15

Net gains from the sale of investment securities
 
3

 
6

 
4

 
18

Net fair value gains on free-standing derivatives
 
25

 
11

 
47

 
37

Other
 
132

 
140

 
400

 
357

Total other non-interest income
 
167

 
157

 
466

 
427

Total non-interest income
 
$
1,140

 
$
1,142

 
$
3,346

 
$
3,315

__________
(1) 
Represents the benefit 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 remained relatively consistent at $1.1 billion and $3.3 billion in the third quarter and first nine months of 2015, respectively, as compared to the same periods in 2014. The main drivers for the movements include an increase in net interchange fees due to higher purchase volume in our Credit Card business offset by a decrease in customer-related fees primarily due to the continued run-off of our payment protection products in our Domestic Card business and a build in the U.K. PPI Reserve in our International Card business.
Provision for Credit Losses
Our provision for credit losses in each period is driven by net charge-offs, changes to the allowance for loan and lease losses and changes to the reserve for unfunded lending commitments. We recorded a provision for credit losses of $1.1 billion and $3.2 billion in the third quarter and first nine months of 2015, respectively, compared to $993 million and $2.4 billion in the third quarter and first nine months of 2014, respectively. The provision for credit losses as a percentage of net interest income was 22.9% and 22.7% in the third quarter and first nine months of 2015, respectively, compared to 22.1% and 18.5% in the third quarter and first nine months of 2014, respectively.
Our provision for credit losses increased by $99 million and $724 million in the third quarter and first nine months of 2015 compared to the third quarter and first nine months of 2014, respectively. The increase in the third quarter was primarily driven by (i) higher net charge-offs due to continued loan growth in our domestic credit card portfolio; and (ii) higher net charge-offs and a larger build in both the allowance and reserve for unfunded lending commitments resulting from adverse market conditions impacting our oil and gas portfolios and the taxi-lending component of our transportation loan portfolio in our Commercial Banking business. The increase in the first nine months of 2015 was primarily attributable to an allowance build in our credit card loan portfolio in 2015 due to continued loan growth coupled with our expectations for rising charge-off rates, as compared to an allowance release in the first nine months of 2014 due to improved credit outlook and delinquency inventories; as well as the changes in our Commercial Banking business as discussed above.
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.” For information on the allowance methodology for each of our loan categories, see “Note 1—Summary of Significant Accounting Policies” in our 2014 Form 10-K.

 
11
Capital One Financial Corporation (COF)

Table of Contents

Non-Interest Expense
Non-interest expense consists of ongoing operating costs, such as salaries and associate benefits, occupancy and equipment costs, professional services, communications and data processing 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 third quarter and first nine months of 2015 and 2014.
Table 6: Non-Interest Expense
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Dollars in millions)
 
2015
 
2014
 
2015
 
2014
Salaries and associate benefits
 
$
1,189

 
$
1,128

 
$
3,760

 
$
3,414

Occupancy and equipment
 
444

 
419

 
1,318

 
1,271

Marketing
 
418

 
392

 
1,180

 
1,052

Professional services
 
313

 
304

 
943

 
887

Communications and data processing
 
226

 
196

 
636

 
595

Amortization of intangibles
 
106

 
130

 
327

 
409

Other non-interest expense: