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, 2017
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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
  
Accelerated filer
 
¨
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
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 June 30, 2017, there were 483,692,646 shares of the registrant’s Common Stock outstanding.
______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________


TABLE OF CONTENTS
 
 
Page
PART I—FINANCIAL INFORMATION
Item 1.
 
 
 
 
 
 
 
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
 
Consolidated Balance Sheets Analysis
 
 
Business Segment Financial Performance
 
 
 
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.
 
 
 
PART II—OTHER INFORMATION
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 
 
SIGNATURES
EXHIBIT INDEX

 
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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
Average Balances, Net Interest Income and Net Interest Margin
3
Rate/Volume Analysis of Net Interest Income
4
Non-Interest Income
5
Non-Interest Expense
6
Investment Securities
7
Non-Agency Investment Securities Credit Ratings
8
Loans Held for Investment
9
Business Segment Results
10
Credit Card Business Results
10.1
Domestic Card Business Results
11
Consumer Banking Business Results
12
Commercial Banking Business Results
13
Other Category Results
14
Capital Ratios under Basel III
15
Regulatory Capital Reconciliations between Basel III Transition to Fully Phased-in
16
Preferred Stock Dividends Paid Per Share
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
Deposits Composition and Average Deposits Interest Rates
32
Senior Unsecured Long-Term Debt Credit Ratings
33
Interest Rate Sensitivity Analysis
 
 
 
 
A
Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures

 
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Capital One Financial Corporation (COF)

Table of Contents


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 2016 Annual Report on Form 10-K (“2016 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, 2017 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 consolidated financial statements and related notes in this Report and the more detailed information contained in our 2016 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, 2017, 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 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, and international card 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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Capital One Financial Corporation (COF)

Table of Contents


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 business. We may issue equity or debt in connection with acquisitions, including public offerings, to fund such acquisitions.
On October 3, 2016, we announced that we entered into a 10-year program agreement (the “Program Agreement”) to become the exclusive issuing partner of co-branded credit cards to Cabela’s customers. In connection with this credit card program, we entered into a definitive agreement under which we would acquire the credit card operations from Cabela’s, including approximately $5.2 billion in credit card receivables and other assets and approximately $5.0 billion in associated funding liabilities from Cabela’s wholly-owned subsidiary, World’s Foremost Bank (“WFB”). This transaction was subject to the satisfaction of customary closing conditions, including receipt of various regulatory approvals and the approval of the stockholders of Cabela’s. On January 28, 2017, Capital One withdrew its Bank Merger Act (“BMA”) application from the OCC, as we did not expect to receive regulatory approval of any BMA application for this transaction prior to October 3, 2017. This is the date when any of the parties involved in the agreement could terminate the agreement.
On April 17, 2017, we entered into agreements with Synovus Bank, a subsidiary of Synovus Financial Corp. (“Synovus”) and Cabela’s under which Synovus will acquire certain assets and assume certain liabilities of WFB, including WFB’s deposits. Immediately following the completion of this acquisition, Synovus will sell WFB’s credit card assets and related liabilities to Capital One. Synovus will retain WFB’s deposits. Capital One is not required to file any regulatory applications to complete this acquisition from Synovus. These transactions are subject to customary closing conditions, including approval by Synovus’s primary banking regulators. The closing of these transactions is also subject to the closing of the Agreement and Plan of Merger between Cabela’s and Bass Pro Group, LLC, entered into on October 3, 2016. We expect these transactions will close after all closing conditions have been satisfied. These agreements may be terminated by any of the parties if all closing conditions have not been satisfied by October 3, 2017. Upon closing of the acquisition of the credit card assets and related liabilities from Synovus, Capital One will become the exclusive issuing partner of co-branded credit cards to Cabela’s customers under the Program Agreement.
We had no significant acquisitions or dispositions in the first six months of 2017.

 
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SUMMARY OF SELECTED FINANCIAL DATA
The following table presents selected consolidated financial data and performance from our results of operations for the second quarter and first six months of 2017 and 2016 and selected comparative balance sheet data as of June 30, 2017 and December 31, 2016. 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)
 
2017
 
2016
 
Change
 
2017
 
2016
 
Change
Income statement
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
$
5,473

 
$
5,093

 
7%

 
$
10,947

 
$
10,149

 
8%

Non-interest income
 
1,231

 
1,161

 
6

 
2,292

 
2,325

 
(1
)
Total net revenue
 
6,704

 
6,254

 
7

 
13,239

 
12,474

 
6

Provision for credit losses
 
1,800

 
1,592

 
13

 
3,792

 
3,119

 
22

Non-interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
Marketing
 
435

 
415

 
5

 
831

 
843

 
(1
)
Amortization of intangibles
 
61

 
95

 
(36
)
 
123

 
196

 
(37
)
Operating expenses
 
2,918

 
2,785

 
5

 
5,894

 
5,479

 
8

Total non-interest expense
 
3,414

 
3,295

 
4

 
6,848

 
6,518

 
5

Income from continuing operations before income taxes
 
1,490

 
1,367

 
9

 
2,599

 
2,837

 
(8
)
Income tax provision
 
443

 
424

 
4

 
757

 
876

 
(14
)
Income from continuing operations, net of tax
 
1,047

 
943

 
11

 
1,842

 
1,961

 
(6
)
Income (loss) from discontinued operations, net of tax
 
(11
)
 
(1
)
 
**

 
4

 
(6
)
 
**

Net income
 
1,036

 
942

 
10

 
1,846

 
1,955

 
(6
)
Dividends and undistributed earnings allocated to participating securities
 
(8
)
 
(6
)
 
33

 
(13
)
 
(12
)
 
8

Preferred stock dividends
 
(80
)
 
(65
)
 
23

 
(133
)
 
(102
)
 
30

Net income available to common stockholders
 
$
948

 
$
871

 
9

 
$
1,700

 
$
1,841

 
(8
)
Common share statistics
 
 

 
 
 
 

 
 
 
 
 
 

Basic earnings per common share:
 
 
 
 
 
 
 
 
 
 
 
 
Net income from continuing operations
 
$
1.98

 
$
1.70

 
16%

 
$
3.51

 
$
3.57

 
(2)%

Income (loss) from discontinued operations
 
(0.02
)
 
—

 
**

 
0.01

 
(0.01
)
 
**

Net income per basic common share
 
$
1.96

 
$
1.70

 
15

 
$
3.52

 
$
3.56

 
(1
)
Diluted earnings per common share:
 
 
 
 
 
 
 
 
 
 
 
 
Net income from continuing operations
 
$
1.96

 
$
1.69

 
16

 
$
3.48

 
$
3.53

 
(1
)
Income (loss) from discontinued operations
 
(0.02
)
 
—

 
**

 
0.01

 
(0.01
)
 
**

Net income per diluted common share
 
$
1.94

 
$
1.69

 
15

 
$
3.49

 
$
3.52

 
(1
)
Weighted-average common shares outstanding (in millions):
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
484.0

 
511.7

 
(5)%

 
483.1

 
517.6

 
(7)%

Diluted
 
488.1

 
516.5

 
(5
)
 
487.7

 
522.3

 
(7
)
Common shares outstanding (period-end, in millions)
 
483.7

 
505.9

 
(4
)
 
483.7

 
505.9

 
(4
)
Dividends paid per common share
 
$
0.40

 
$
0.40

 
—

 
$
0.80

 
$
0.80

 
—

Tangible book value per common share (period-end)(1)
 
60.94

 
57.84

 
5

 
60.94

 
57.84

 
5

Balance sheet (average balances)
 
 
 
 
 
 
 
 
 
 
 
 
Loans held for investment
 
$
242,241

 
$
230,379

 
5%

 
$
241,875

 
$
228,557

 
6%

Interest-earning assets
 
318,078

 
302,764

 
5

 
318,215

 
301,106

 
6

Total assets
 
349,891

 
334,479

 
5

 
350,761

 
333,197

 
5

Interest-bearing deposits
 
214,412

 
195,641

 
10

 
213,696

 
194,883

 
10

Total deposits
 
240,550

 
221,146

 
9

 
239,555

 
220,163

 
9

Borrowings
 
48,838

 
54,359

 
(10
)
 
51,085

 
54,060

 
(6
)
Common equity
 
44,645

 
45,640

 
(2
)
 
44,241

 
45,711

 
(3
)

 
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Three Months Ended June 30,
 
Six Months Ended June 30,
(Dollars in millions, except per share data and as noted)
 
2017
 
2016
 
Change
 
2017
 
2016
 
Change
Total stockholders’ equity
 
49,005

 
48,934

 
—

 
48,602

 
49,007

 
(1
)
Selected performance metrics
 
 

 
 

 
 

 
 
 
 
 
 

Purchase volume(2)
 
$
83,079

 
$
78,019

 
6%

 
$
156,276

 
$
146,208

 
7%

Total net revenue margin(3)
 
8.43%

 
8.26%

 
17
bps
 
8.32%

 
8.29%

 
3
bps
Net interest margin(4)
 
6.88

 
6.73

 
15

 
6.88

 
6.74

 
14

Return on average assets
 
1.20

 
1.13

 
7

 
1.05

 
1.18

 
(13
)
Return on average tangible assets(5)
 
1.25

 
1.18

 
7

 
1.10

 
1.24

 
(14
)
Return on average common equity(6)
 
8.59

 
7.64

 
95

 
7.67

 
8.08

 
(41
)
Return on average tangible common equity (“TCE”)(7)
 
13.09

 
11.61

 
148

 
11.75

 
12.28

 
(53
)
Equity-to-assets ratio(8)
 
14.01

 
14.63

 
(62
)
 
13.86

 
14.71

 
(85
)
Non-interest expense as a percentage of average loans held for investment(9)
 
5.64

 
5.72

 
(8
)
 
5.66

 
5.70

 
(4
)
Efficiency ratio(10)
 
50.92

 
52.69

 
(177
)
 
51.73

 
52.25

 
(52
)
Effective income tax rate from continuing operations
 
29.7

 
31.0

 
(130
)
 
29.1

 
30.9

 
(180
)
Net charge-offs
 
$
1,618

 
$
1,155

 
40%

 
$
3,128

 
$
2,333

 
34%

Net charge-off rate(11)
 
2.67%

 
2.01%

 
66
bps
 
2.59%

 
2.04%

 
55
bps
(Dollars in millions, except as noted)

June 30,
2017
 
December 31,
2016
 
Change
Balance sheet (period-end)
 
 
 
 
 
 
Loans held for investment
 
$
244,302

 
$
245,586

 
(1)%

Interest-earning assets
 
319,286

 
321,807

 
(1
)
Total assets
 
350,593

 
357,033

 
(2
)
Interest-bearing deposits
 
213,810

 
211,266

 
1

Total deposits
 
239,763

 
236,768

 
1

Borrowings
 
49,954

 
60,460

 
(17
)
Common equity
 
44,777

 
43,154

 
4

Total stockholders’ equity
 
49,137

 
47,514

 
3

Credit quality metrics
 
 
 
 
 


Allowance for loan and lease losses
 
$
7,170

 
$
6,503

 
10%

Allowance as a percentage of loans held for investment (“allowance coverage ratio”)
 
2.93%

 
2.65%

 
28
bps
30+ day performing delinquency rate
 
2.69

 
2.93

 
(24
)
30+ day delinquency rate
 
2.99

 
3.27

 
(28
)
Capital ratios
 
 

 
 
 


Common equity Tier 1 capital(12)
 
10.7%

 
10.1%

 
60
bps
Tier 1 capital(12)
 
12.2

 
11.6

 
60

Total capital(12)
 
14.9

 
14.3

 
60

Tier 1 leverage (12)
 
10.3

 
9.9

 
40

Tangible common equity(13)
 
8.8

 
8.1

 
70

Supplementary leverage(12)
 
8.9

 
8.6

 
30

Other
 
 
 
 
 


Employees (period end, in thousands)
 
49.9

 
47.3

 
5%

__________
(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) 
Purchase volume consists of purchase transactions, net of returns, for the period for loans both classified as held for investment and held for sale. Excludes cash advance and balance transfer transactions.
(3) 
Total net revenue margin is calculated based on annualized total net revenue for the period divided by average interest-earning assets for the period.
(4) 
Net interest margin is 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) 
Return on average common equity is calculated based on annualized (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 annualized (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 on non-GAAP measures.
(8) 
Equity-to-assets ratio is calculated based on average stockholders’ equity for the period divided by average total assets for the period.
(9) 
Non-interest expense as a percentage of average loans held for investment is calculated based on annualized non-interest expense for the period divided by average loans held for investment for the period.
(10) 
Efficiency ratio is calculated based on non-interest expense for the period divided by total net revenue for the period.
(11) 
Net charge-off rate is calculated based on annualized net charge-offs for the period divided by average loans held for investment for the period.
(12) 
Capital ratios are calculated based on the Basel III Standardized Approach framework, subject to applicable transition provision. See “MD&A—Capital Management” for additional information.
(13) 
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.
**
Change is not meaningful.
EXECUTIVE SUMMARY AND BUSINESS OUTLOOK
Financial Highlights
We reported net income of $1.0 billion ($1.94 per diluted common share) on total net revenue of $6.7 billion and net income of $1.8 billion ($3.49 per diluted common share) on total net revenue of $13.2 billion for the second quarter and first six months of 2017, respectively. In comparison, 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.
Our common equity Tier 1 capital ratio as calculated under the Basel III Standardized Approach, including transition provisions, was 10.7% and 10.1% as of June 30, 2017 and December 31, 2016, respectively. See “MD&A—Capital Management” below for additional information.
On June 29, 2016, we announced that our Board of Directors authorized the repurchase of up to $2.5 billion in shares of our common stock (“2016 Stock Repurchase Program”) from the third quarter of 2016 through the end of the second quarter of 2017. Through the end of the second quarter of 2017, we repurchased approximately $2.2 billion of common stock as part of the 2016 Stock Repurchase Program. Additionally, on June 28, 2017, we announced that our Board of Directors authorized the repurchase of up to $1.85 billion of shares of our common stock (“2017 Stock Repurchase Program”) from the third quarter of 2017 through the end of the second quarter of 2018. 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 2017. These highlights are generally based on a comparison between the results of the second quarter and first six months of 2017 and 2016, 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, 2017 compared to our financial condition and credit performance as of December 31, 2016. 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 $94 million to $1.0 billion in the second quarter of 2017 primarily driven by:
◦
higher interest income due to growth in our auto and domestic credit card loan portfolios, as well as higher yields as a result of higher interest rates; and
◦
higher non-interest income primarily attributable to higher net interchange fees driven by higher purchase volume.
These increases were partially offset by:
◦
higher provision for credit losses primarily driven by higher charge-offs, partially offset by smaller allowance builds in our domestic credit card and commercial loan portfolios;

 
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◦
higher interest expense due to higher interest rates and growth in our interest-bearing liabilities; and
◦
higher operating expenses associated with loan growth, as well as continued investments in technology and infrastructure.
Our net income decreased by $109 million to $1.8 billion in the first six months of 2017 primarily due to:
◦
higher provision for credit losses primarily driven by higher charge-offs;
◦
higher operating expenses associated with loan growth, as well as continued investments in technology and infrastructure; and
◦
higher interest expense due to higher interest rates and growth in our interest-bearing liabilities.
These higher expenses were partially offset by higher interest income due to growth in our auto and domestic credit card loan portfolios, as well as higher yields as a result of higher interest rates.
•
Loans Held for Investment:
◦
Period-end loans held for investment decreased by $1.3 billion to $244.3 billion as of June 30, 2017 from December 31, 2016 primarily due to expected seasonal paydowns in our domestic credit card loan portfolio and run-off of our acquired home loan portfolio, partially offset by growth in our auto, domestic credit card and commercial loan portfolios.
◦
Average loans held for investment increased by $11.9 billion to $242.2 billion in the second quarter of 2017 compared to the second quarter of 2016, and increased by $13.3 billion to $241.9 billion in the first six months of 2017 compared to the first six months of 2016, primarily driven by growth in our auto, domestic credit card and commercial loan portfolios, partially offset by run-off of our acquired home loan portfolio.
•
Net Charge-Off and Delinquency Metrics: Our net charge-off rate increased by 66 basis points to 2.67% in the second quarter of 2017 compared to the second quarter of 2016, and increased by 55 basis points to 2.59% in the first six months of 2017 compared to the first six months of 2016, primarily due to growth and seasoning of recent domestic credit card loan originations, as well as higher losses in our auto loan portfolio due to recent growth and declines in used car auction prices, as well as changes in our charge-off practices for the treatment of certain loans within our consumer banking loan portfolio.
Our 30+ day delinquency rate decreased by 28 basis points to 2.99% as of June 30, 2017 from December 31, 2016 primarily due to seasonally lower delinquency inventories.
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 $667 million to $7.2 billion as of June 30, 2017 from December 31, 2016, and the allowance coverage ratio increased by 28 basis points to 2.93% as of June 30, 2017 from December 31, 2016. The increases were primarily driven by:
◦
an allowance build in our domestic credit card loan portfolio primarily due to increasing loss expectations on recent vintages and portfolio seasoning; and
◦
an allowance build in our auto loan portfolio due to higher losses associated with growth.
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 2016 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:

 
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•
any change in current dividend or repurchase strategies;
•
the effect of any acquisitions, divestitures or similar transactions that have not been previously disclosed; or
•
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 2016 Form 10-K for factors that could materially influence our results.
Total Company Expectations
All expectations herein exclude any potential impacts of the anticipated Cabela’s acquisition, which is subject to regulatory approval.
We expect annual efficiency ratio for 2017, excluding adjusting items, will be in the 51%s, plus or minus a reasonable margin of volatility.
We expect to deliver earnings per share growth, excluding adjusting items, between 7% and 11% in 2017, assuming no substantial change in the broader credit and economic cycles.
We believe our actions have created a well-positioned balance sheet with strong capital and liquidity. We believe that we are currently at the destination capital ratios appropriate for our current balance sheet mix. On June 28, 2017, we announced that our Board of Directors authorized the repurchase of up to $1.85 billion of shares of our common stock from the third quarter of 2017 through the end of the second quarter of 2018 as part of the 2017 Stock Repurchase Program. The timing and exact amount of any common stock repurchases will depend on various factors, including market conditions, opportunities for growth and 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 2017 charge-off rate will be in the high 4%s to around 5%, with quarterly variability. We continue to expect the impacts of the upward pressure on charge-offs as new loan balances in our front book season and become a larger proportion of our overall portfolio relative to the older and highly seasoned back book, will moderate in the second half of 2017, with a small impact beyond 2017.
Consumer Banking: In our Consumer Banking business, we expect that the charge-off rate in our auto finance business will increase gradually and the growth we have experienced in that business will moderate. Beginning in the third quarter of 2017 and continuing into 2018, we expect changes in our charge-off practices for certain loans to increase annualized Auto charge-off rates by 15 to 20 basis points, after which the effect begins to reverse over time.
Commercial Banking: In our Commercial Banking business, we expect credit pressures will continue to be focused in our oil field service and taxi medallion lending portfolios.
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 2017 and 2016. We provide a discussion of our business segment results in the following section, “MD&A—Business Segment Financial Performance.” 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, while our interest-bearing liabilities include interest-bearing deposits, securitized debt obligations,

 
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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.
Table 2 below presents, for each major category of our interest-earning assets and interest-bearing liabilities, the average outstanding balance, interest income earned or interest expense incurred, and average yield for the second quarter and first six months of 2017 and 2016.
Table 2: Average Balances, Net Interest Income and Net Interest Margin
 
 
Three Months Ended June 30,
 
 
2017
 
2016
(Dollars in millions)
 
Average
Balance
 
Interest
Income/
Expense
 
Average Yield/
Rate
 
Average
Balance
 
Interest
Income/
Expense
 
Average Yield/
Rate
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
Loans:(1)
 
 
 
 
 
 
 
 
 
 
 
 
Credit card
 
$
100,043

 
$
3,787

 
15.14
%
 
$
94,374

 
$
3,420

 
14.50
%
Consumer banking
 
74,644

 
1,223

 
6.55

 
71,170

 
1,116

 
6.27

Commercial banking(2)
 
68,220

 
647

 
3.79

 
65,872

 
567

 
3.44

Other(3)
 
60

 
12

 
80.00

 
80

 
45

 
225.00

Total loans, including loans held for sale
 
242,967

 
5,669

 
9.33

 
231,496

 
5,148

 
8.90

Investment securities
 
68,857

 
433

 
2.52

 
65,754

 
405

 
2.46

Cash equivalents and other interest-earning assets
 
6,254

 
26

 
1.66

 
5,514

 
18

 
1.31

Total interest-earning assets
 
318,078

 
6,128

 
7.71

 
302,764

 
5,571

 
7.36

Cash and due from banks
 
3,314

 
 
 
 
 
3,129

 
 
 
 
Allowance for loan and lease losses
 
(6,982
)
 
 
 
 
 
(5,425
)
 
 
 
 
Premises and equipment, net
 
3,855

 
 
 
 
 
3,645

 
 
 
 
Other assets
 
31,626

 
 
 
 
 
30,366

 
 
 
 
Total assets
 
$
349,891

 
 
 
 
 
$
334,479

 
 
 
 
Liabilities and stockholders’ equity:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:(3)
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
$
214,412

 
$
382

 
0.71
%
 
$
195,641

 
$
292

 
0.60
%
Securitized debt obligations
 
18,400

 
82

 
1.78

 
15,226

 
47

 
1.23

Senior and subordinated notes
 
27,821

 
179

 
2.57

 
21,717

 
111

 
2.04

Other borrowings and liabilities
 
3,656

 
12

 
1.31

 
18,255

 
28

 
0.61

Total interest-bearing liabilities
 
264,289

 
655

 
0.99

 
250,839

 
478

 
0.76

Non-interest-bearing deposits
 
26,138

 
 
 
 
 
25,505

 
 
 
 
Other liabilities
 
10,459

 
 
 
 
 
9,201

 
 
 
 
Total liabilities
 
300,886

 
 
 
 
 
285,545

 
 
 
 
Stockholders’ equity
 
49,005

 
 
 
 
 
48,934

 
 
 
 
Total liabilities and stockholders’ equity
 
$
349,891

 
 
 
 
 
$
334,479

 
 
 
 
Net interest income/spread
 
$
5,473

 
6.72

 
 
 
$
5,093

 
6.60

Impact of non-interest-bearing funding
 
0.16

 
 
 
 
 
0.13

Net interest margin
 
6.88%

 
 
 
 
 
6.73
%

 
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Six Months Ended June 30,
 
 
2017
 
2016
(Dollars in millions)
 
Average
Balance
 
Interest
Income/
Expense
 
Average Yield/
Rate
 
Average
Balance
 
Interest
Income/
Expense
 
Average Yield/
Rate
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
Loans:(1)
 
 
 
 
 
 
 
 
 
 
 
 
Credit card
 
$
100,603

 
$
7,577

 
15.06
%
 
$
93,766

 
$
6,813

 
14.53
%
Consumer banking
 
74,081

 
2,413

 
6.51

 
70,805

 
2,204

 
6.23

Commercial banking(2)
 
67,863

 
1,262

 
3.72

 
64,878

 
1,107

 
3.41

Other(3)
 
63

 
43

 
136.51

 
85

 
109

 
256.47

Total loans, including loans held for sale
 
242,610

 
11,295

 
9.31

 
229,534

 
10,233

 
8.92

Investment securities
 
68,637

 
849

 
2.47

 
65,455

 
820

 
2.51

Cash equivalents and other interest-earning assets
 
6,968

 
54

 
1.55

 
6,117

 
35

 
1.14

Total interest-earning assets
 
318,215

 
12,198

 
7.67

 
301,106

 
11,088

 
7.36

Cash and due from banks
 
3,400

 
 
 
 
 
3,244

 
 
 
 
Allowance for loan and lease losses
 
(6,749
)
 
 
 
 
 
(5,278
)
 
 
 
 
Premises and equipment, net
 
3,826

 
 
 
 
 
3,643

 
 
 
 
Other assets
 
32,069

 
 
 
 
 
30,482

 
 
 
 
Total assets
 
$
350,761

 
 
 
 
 
$
333,197

 
 
 
 
Liabilities and stockholders’ equity:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:(3)
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
$
213,696

 
$
735

 
0.69%

 
$
194,883

 
$
575

 
0.59%

Securitized debt obligations
 
17,791

 
151

 
1.70

 
15,293

 
95

 
1.24

Senior and subordinated notes
 
26,321

 
328

 
2.49

 
21,855

 
217

 
1.99

Other borrowings and liabilities
 
7,981

 
37

 
0.93

 
17,716

 
52

 
0.59

Total interest-bearing liabilities
 
265,789

 
1,251

 
0.94

 
$
249,747

 
939

 
0.75

Non-interest-bearing deposits
 
25,859

 
 
 
 
 
25,280

 
 
 
 
Other liabilities
 
10,511

 
 
 
 
 
9,163

 
 
 
 
Total liabilities
 
302,159

 
 
 
 
 
284,190

 
 
 
 
Stockholders’ equity
 
48,602

 
 
 
 
 
49,007

 
 
 
 
Total liabilities and stockholders’ equity
 
$
350,761

 
 
 
 
 
$
333,197

 
 
 
 
Net interest income/spread
 
$
10,947

 
6.73

 
 
 
$
10,149

 
6.61

Impact of non-interest-bearing funding
 
0.15

 
 
 
 
 
0.13

Net interest margin
 
6.88%

 
 
 
 
 
6.74
%
__________
(1)  
Past due fees included in interest income totaled approximately $382 million and $766 million in the second quarter and first six months of 2017, respectively, and $354 million and $706 million in the second quarter and first six months of 2016, respectively.
(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.
(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 $380 million to $5.5 billion in the second quarter of 2017 compared to the second quarter of 2016 and increased by $798 million to $10.9 billion in the first six months of 2017 compared to the first six months of 2016. Net interest margin increased by 15 basis points to 6.88% in the second quarter of 2017 compared to the second quarter of 2016 and increased by 14 basis points to 6.88% in the first six months of 2017 compared to the first six months of 2016. These increases were primarily driven by:
•
growth in our auto and domestic credit card loan portfolios; and
•
higher yields as a result of higher interest rates.

 
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These increases were partially offset by:
•
higher interest expense due to higher interest rates and growth in our interest-bearing liabilities; and
•
one less day in the first six months of 2017.
Table 3 displays the change in our net interest income between periods and the extent to which the variance is attributable to:
•
changes in the volume of our interest-earning assets and interest-bearing liabilities; or
•
changes in the interest rates related to these assets and liabilities.
Table 3: Rate/Volume Analysis of Net Interest Income(1)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017 vs. 2016
 
2017 vs. 2016
(Dollars in millions)
 
Total Variance
 
Volume
 
Rate
 
Total Variance
 
Volume
 
Rate
Interest income:
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
 
Credit card
 
$
367

 
$
210

 
$
157

 
$
764

 
$
509

 
$
255

Consumer banking
 
107

 
56

 
51

 
209

 
104

 
105

Commercial banking(2)
 
80

 
21

 
59

 
155

 
53

 
102

Other
 
(33
)
 
(9
)
 
(24
)
 
(66
)
 
(23
)
 
(43
)
Total loans, including loans held for sale
 
521

 
278

 
243

 
1,062

 
643

 
419

Investment securities
 
28

 
19

 
9

 
29

 
39

 
(10
)
Cash equivalents and other interest-earning assets
 
8

 
3

 
5

 
19

 
5

 
14

Total interest income
 
557

 
300

 
257

 
1,110

 
687

 
423

Interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
90

 
29

 
61

 
160

 
59

 
101

Securitized debt obligations
 
35

 
11

 
24

 
56

 
17

 
39

Senior and subordinated notes
 
68

 
35

 
33

 
111

 
49

 
62

Other borrowings and liabilities
 
(16
)
 
(22
)
 
6

 
(15
)
 
(29
)
 
14

Total interest expense
 
177

 
53

 
124

 
312

 
96

 
216

Net interest income
 
$
380

 
$
247

 
$
133

 
$
798

 
$
591

 
$
207

__________
(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 on free-standing derivatives not accounted for in hedge accounting relationships and hedge ineffectiveness.

 
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Table 4 displays the components of non-interest income for the second quarter and first six months of 2017 and 2016.
Table 4: Non-Interest Income
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Dollars in millions)
 
2017
 
2016(1)
 
2017
 
2016(1)
Interchange fees, net
 
$
676

 
$
621

 
$
1,246

 
$
1,225

Service charges and other customer-related fees
 
418

 
393

 
789

 
816

Net securities gains (losses)
 
(4
)
 
—

 
(4
)
 
(8
)
Other non-interest income:
 
 
 
 
 
 
 
 
Benefit for mortgage representation and warranty losses(2)
 
—

 
1

 
25

 
2

Net fair value gains on free-standing derivatives
 
23

 
22

 
40

 
52

Other
 
118

 
124

 
196

 
238

Total other non-interest income
 
141

 
147

 
261

 
292

Total non-interest income
 
$
1,231

 
$
1,161

 
$
2,292

 
$
2,325

__________
(1) 
We made certain non-interest income reclassifications in the fourth quarter of 2016 to conform to the current period presentation. The primary net effects of the reclassifications compared to previously reported results were (i) an increase to Service charges and other customer-related fees of $22 million and $41 million for the three and six months ended June 30, 2016, respectively; and (ii) a decrease to Other non-interest income of $29 million and $56 million for the three and six months ended June 30, 2016, respectively. We have also consolidated the Non-interest income presentation of Other-than-temporary impairment (“OTTI”) with net realized gains or losses from investment securities into a new Net securities gains (losses) line. See Note 1—Summary of Significant Accounting Policies in our 2016 Form 10-K for additional information.
(2) 
Represents the benefit for mortgage representation and warranty losses recorded in continuing operations.
Non-interest income increased by $70 million to $1.2 billion in the second quarter of 2017 compared to the second quarter of 2016 primarily due to an increase in gross interchange fees driven by higher purchase volume. This increase was partially offset by higher rewards expense due to higher purchase volume and the continued expansion of our rewards franchise, net of the impact of updated rewards cost estimates.
Non-interest income decreased by $33 million to $2.3 billion in the first six months of 2017 compared to the first six months of 2016 primarily driven 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; and
•
higher rewards expense due to higher purchase volume and the continued expansion of our rewards franchise, net of the impact of updated rewards cost estimates.
These decreases were partially offset by an increase in gross interchange fees driven by higher purchase volume.
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 $1.8 billion and $3.8 billion in the second quarter and first six months of 2017, respectively, compared to $1.6 billion and $3.1 billion in the second quarter and first six months of 2016, respectively. The provision for credit losses as a percentage of net interest income was 32.9% and 34.6% in the second quarter and first six months of 2017, respectively, compared to 31.3% and 30.7% in the second quarter and first six months of 2016, respectively.

 
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Our provision for credit losses increased by $208 million in the second quarter of 2017 compared to the second quarter of 2016 primarily driven by:
•
higher charge-offs in our domestic credit card loan portfolio due to growth and portfolio seasoning;
•
higher charge-offs in our auto loan portfolio due to recent growth and declines in used car auction prices; and
•
higher charge-offs in our commercial loan portfolio as a result of continued adverse industry conditions impacting certain segments of our oil and gas lending portfolio and our taxi medallion lending portfolio.
These increases were partially offset by smaller allowance builds in our domestic credit card and commercial loan portfolios.
Our provision for credit losses increased by $673 million in the first six months of 2017 compared to the first six months of 2016 primarily driven by:
•
higher charge-offs in our domestic credit card loan portfolio due to growth and portfolio seasoning;
•
a larger allowance build in our domestic credit card loan portfolio due to increasing loss expectations on recent vintages and portfolio seasoning; and
•
higher charge-offs in our auto loan portfolio due to recent growth and declines in used car auction prices.
These increases were partially offset by an allowance release in our Commercial Banking business in the first six months of 2017 compared to a build in the first six months of 2016, primarily reflecting charge-offs in our taxi medallion lending portfolio and certain segments of our oil and gas lending portfolio.
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,” “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 2016 Form 10-K.
Non-Interest Expense
Non-interest expense consists of operating expenses related to continuing operations, such as salaries and associate benefits, occupancy and equipment costs, professional services, communications and data processing expenses and other non-interest expenses, as well as marketing costs and amortization of intangibles.

 
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Table 5 displays the components of non-interest expense for the second quarter and first six months of 2017 and 2016.
Table 5: Non-Interest Expense
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Dollars in millions)
 
2017
 
2016(1)
 
2017
 
2016(1)
Salaries and associate benefits
 
$
1,383

 
$
1,279

 
$
2,854

 
$
2,549

Occupancy and equipment
 
474

 
465

 
945

 
923

Marketing
 
435

 
415

 
831

 
843

Professional services
 
279

 
264

 
526

 
505

Communications and data processing
 
289

 
302

 
577

 
582

Amortization of intangibles
 
61

 
95

 
123

 
196

Other non-interest expense:
 
 
 
 
 
 
 
 
Collections
 
88

 
77

  
173

 
158

Fraud losses
 
78

 
89

  
156

 
179

Bankcard, regulatory and other fee assessments
 
146

 
129

  
282

 
236

Other
 
181

 
180

  
381

 
347

Total other non-interest expense
 
493

 
475

 
992

 
920

Total non-interest expense
 
$
3,414

 
$
3,295

 
$
6,848

 
$
6,518

__________
(1) 
We made certain non-interest expense reclassifications in the fourth quarter of 2016 to conform to the current period presentation. The net effects of the reclassifications for the three and six months ended June 30, 2016 compared to previously reported results were increases to Communications and data processing expense of $40 million and $77 million, respectively, with corresponding decreases to Professional services. See “Note 1—Summary of Significant Accounting Policies” in our 2016 Form 10-K for additional information.
Non-interest expense increased by $119 million to $3.4 billion in the second quarter of 2017 compared to the second quarter of 2016, and increased by $330 million to $6.8 billion in the first six months of 2017 compared to the first six months of 2016 primarily due to higher operating expenses associated with loan growth, as well as continued investments in technology and infrastructure, partially offset by lower amortization of intangibles.
Income (Loss) from Discontinued Operations, Net of Tax
Income (loss) from discontinued operations consists of results from the discontinued mortgage origination operations of our wholesale mortgage banking unit, GreenPoint Mortgage Funding, Inc. (“GreenPoint”) and the discontinued manufactured housing operations of GreenPoint Credit, LLC, a subsidiary of GreenPoint, both of which were acquired as part of the North Fork Bancorporation, Inc. (“North Fork”) acquisition in December 2006. Loss from discontinued operations, net of tax, was $11 million in the second quarter of 2017, compared to a loss of $1 million in the second quarter of 2016. Income from discontinued operations, net of tax, was $4 million in the first six months of 2017, compared to a loss of $6 million in the first six months of 2016.
We recorded a provision related to our mortgage representation and warranty reserve, net of tax, of $2 million ($6 million before tax) in the second quarter of 2017 primarily driven by settlement activities. We recorded a release, net of tax, of $40 million ($61 million before tax) in the first six months of 2017 primarily as a result of favorable legal developments, partially offset by a pre-tax charge of $42 million to record a liability related to our contingent obligation to exercise certain mandatory clean-up calls associated with manufactured housing securitizations undertaken by GreenPoint Credit, LLC.
We provide additional information on the discontinued operations in “Note 2—Discontinued Operations” and on the net benefit (provision) for mortgage representation and warranty losses and the related reserve for representation and warranty claims in “MD&A—Consolidated Balance Sheets Analysis—Mortgage Representation and Warranty Reserve” and “Note 14—Commitments, Contingencies, Guarantees and Others.”

 
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Income Taxes
We recorded income tax provisions of $443 million (29.7% effective income tax rate) and $757 million (29.1% effective income tax rate) in the second quarter and first six months of 2017, respectively, compared to $424 million (31.0% effective income tax rate) and $876 million (30.9% effective income tax rate) in the second quarter and first six months of 2016, respectively. Our effective tax rate on income from continuing operations varies between periods due, in part, to fluctuations in our pre-tax earnings, which affects the relative tax benefit of tax-exempt income, tax credits and other permanent tax items.
The decrease in our effective income tax rate in the second quarter of 2017 from the second quarter of 2016 was primarily due to increases in the relative benefit of tax exempt income and tax credits, partially offset by reduced benefits associated with foreign earnings.
The decrease in our effective income tax rate in the first six months of 2017 from the first six months of 2016 was primarily due to:
•
increases in the relative benefit of tax exempt income and tax credits; and
•
increased discrete tax benefits recorded in the first six months of 2017.
These decreases were partially offset by reduced benefits associated with foreign earnings.
We provide additional information on items affecting our income taxes and effective tax rate under “Note 16—Income Taxes” in our 2016 Form 10-K.
CONSOLIDATED BALANCE SHEETS ANALYSIS
Total assets decreased by $6.4 billion to $350.6 billion as of June 30, 2017 from December 31, 2016 primarily due to:
•
a decrease in cash, cash equivalents and restricted cash for securitization investors, partially offset by an increase in investment securities due to purchases outpacing paydowns; and
•
a decrease in loans held for investment primarily due to expected seasonal paydowns in our domestic credit card loan portfolio and run-off of our acquired home loan portfolio, partially offset by growth in our auto, domestic credit card and commercial loan portfolios.
Total liabilities decreased by $8.1 billion to $301.5 billion as of June 30, 2017 from December 31, 2016 primarily driven by:
•
a decrease in other debt primarily attributable to a decrease in our FHLB advances outstanding, partially offset by an increase in our senior and subordinated notes.
Stockholders’ equity increased by $1.6 billion to $49.1 billion as of June 30, 2017 from December 31, 2016 primarily due to:
•
our net income of $1.8 billion in the first six months of 2017.
This increase was partially offset by:
•
$526 million of dividend payments to our common and preferred stockholders; and
•
$219 million of treasury stock purchases.
The following is a discussion of material changes in the major components of our assets and liabilities during the first six months of 2017. Period-end balance sheet amounts may vary from average balance sheet amounts due to liquidity and balance sheet management activities that are intended to ensure the adequacy of capital while managing the liquidity requirements of the Company and our customers and our market risk exposure in accordance with our risk appetite.

 
14
Capital One Financial Corporation (COF)

Table of Contents


Investment Securities
Our investment portfolio consists primarily of the following: U.S. Treasury securities; U.S. government-sponsored enterprise or agency (“Agency”) and non-agency residential mortgage-backed securities (“RMBS”); Agency and non-agency commercial mortgage-backed securities (“CMBS”); other asset-backed securities (“ABS”); and other securities. The carrying value of our investments in U.S. Treasury and Agency securities represented 91% of our total investment securities as of both June 30, 2017 and December 31, 2016.
The fair value of our available for sale securities portfolio was $41.1 billion as of June 30, 2017, an increase of $383 million from December 31, 2016. The increase in fair value was primarily due to a decline in interest rates. The fair value of our held to maturity securities portfolio was $28.4 billion as of June 30, 2017, an increase of $2.2 billion from December 31, 2016. The increase in the fair value was primarily driven by purchases outpacing paydowns.
Gross unrealized gains on our available for sale securities portfolio increased to $647 million as of June 30, 2017 compared to $539 million as of December 31, 2016, and gross unrealized losses on this portfolio decreased to $360 million as of June 30, 2017 compared to $535 million as of December 31, 2016, both of which were primarily due to declines in interest rates. Of the $360 million gross unrealized losses as of June 30, 2017, $107 million was related to securities that had been in a loss position for 12 months or longer.
Table 6 presents the amortized cost, carrying value and fair value for the major categories of our investment securities portfolio as of June 30, 2017 and December 31, 2016.
Table 6: Investment Securities
 
 
June 30, 2017
 
December 31, 2016
(Dollars in millions)
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Investment securities available for sale:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
5,218

 
$
5,215

 
$
5,103

 
$
5,065

RMBS:
 
 
 
 
 
 
 
 
Agency(1)
 
26,693

 
26,511

 
26,830

 
26,527

Non-agency
 
2,163

 
2,617

 
2,349

 
2,722

Total RMBS
 
28,856

 
29,128

 
29,179

 
29,249

CMBS:
 
 
 
 
 
 
 
 
Agency(1)
 
3,136

 
3,124

 
3,335

 
3,304

Non-agency
 
1,777

 
1,802

 
1,676

 
1,684

Total CMBS
 
4,913

 
4,926

 
5,011

 
4,988

Other ABS(2)
 
626

 
627

 
714

 
714

Other securities(3)
 
1,220

 
1,224

 
726

 
721

Total investment securities available for sale
 
$
40,833

 
$
41,120

 
$
40,733

 
$
40,737

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

 
$
199

 
$
199

 
$
199

Agency RMBS
 
23,910

 
24,537

 
22,125

 
22,573

Agency CMBS
 
3,611

 
3,687

 
3,388

 
3,424

Total investment securities held to maturity
 
$
27,720

 
$