Companies: 10,652     total market cap: $142.047 T
โ‚ฌEUR๐Ÿ‡ช๐Ÿ‡บโ‚นINR๐Ÿ‡ฎ๐Ÿ‡ณยฃGBP๐Ÿ‡ฌ๐Ÿ‡ง$CAD๐Ÿ‡จ๐Ÿ‡ฆ$AUD๐Ÿ‡ฆ๐Ÿ‡บ$NZD๐Ÿ‡ณ๐Ÿ‡ฟ$HKD๐Ÿ‡ญ๐Ÿ‡ฐ$SGD๐Ÿ‡ธ๐Ÿ‡ฌ
Capital One
COF
#152
Rank
$136.33 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
$214.45
Share price
-2.49%
Change (1 day)
8.84%
Change (1 year)
๐Ÿฆ Banks๐Ÿ’ณ Financial services
Categories
  1. Capital One
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2019 Q2

Capital One - 10-Q quarterly report FY2019 Q2


Text size:
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________
FORM 10-Q
____________________________________
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
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. 001-13300
____________________________________
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
(Not applicable)
(Former name, former address and former fiscal year, if changed since last report)
____________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
Common Stock (par value $.01 per share)
COF
New York Stock Exchange
Depositary Shares, Each Representing a 1/40th Interest in a Share of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series B
COF PRP
New York Stock Exchange
Depositary Shares, Each Representing a 1/40th Interest in a Share of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series C
COF PRC
New York Stock Exchange
Depositary Shares, Each Representing a 1/40th Interest in a Share of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series D
COF PRD
New York Stock Exchange
Depositary Shares, Each Representing a 1/40th Interest in a Share of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series F
COF PRF
New York Stock Exchange
Depositary Shares, Each Representing a 1/40th Interest in a Share of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series G
COF PRG
New York Stock Exchange
Depositary Shares, Each Representing a 1/40th Interest in a Share of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series H
COF PRH
New York Stock Exchange
0.800% Senior Notes Due 2024
COF24
New York Stock Exchange
1.650% Senior Notes Due 2029
COF29
New York Stock Exchange
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 ☒  No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ 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
 
☒
  
Accelerated filer
 
☐
Non-accelerated filer
 
☐
  
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 ☒
As of June 30, 2019, there were 470,333,041 shares of the registrant’s Common Stock outstanding.

 



TABLE OF CONTENTS
 
 
Page
PART I—FINANCIAL INFORMATION
4
Item 1.
Financial Statements and Supplementary Data
62
 
Consolidated Statements of Income
63
 
Consolidated Statements of Comprehensive Income
64
 
Consolidated Balance Sheets
65
 
Consolidated Statements of Changes in Stockholders’ Equity
66
 
Consolidated Statements of Cash Flows
67
 
Notes to Consolidated Financial Statements
68
 
Note 1—Summary of Significant Accounting Policies
68
 
Note 2—Leases
71
 
Note 3—Investment Securities
73
 
Note 4—Loans
79
 
Note 5—Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments
91
 
Note 6—Variable Interest Entities and Securitizations
95
 
Note 7—Goodwill and Intangible Assets
99
 
Note 8—Deposits and Borrowings
101
 
Note 9—Derivative Instruments and Hedging Activities
102
 
Note 10—Stockholders’ Equity
111
 
Note 11—Earnings Per Common Share
115
 
Note 12—Fair Value Measurement
116
 
Note 13—Business Segments and Revenue from Contracts with Customers
123
 
Note 14—Commitments, Contingencies, Guarantees and Others
127
 
Note 15—Subsequent Events
131
 
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)
4
 
Introduction
4
 
Summary of Selected Financial Data
6
 
Executive Summary and Business Outlook
9
 
Consolidated Results of Operations
11
 
Consolidated Balance Sheets Analysis
17
 
Off-Balance Sheet Arrangements
19
 
Business Segment Financial Performance
19
 
Critical Accounting Policies and Estimates
29
 
Accounting Changes and Developments
30
 
Capital Management
30
 
Risk Management
34
 
Credit Risk Profile
34
 
Liquidity Risk Profile
46
 
Market Risk Profile
49
 
Supervision and Regulation
53
 
Forward-Looking Statements
53

 
 
1
Capital One Financial Corporation (COF)

 
Supplemental Table
55
 
Glossary and Acronyms
56
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
132
Item 4.
Controls and Procedures
132
 
 
 
PART II—OTHER INFORMATION
133
Item 1.
Legal Proceedings
133
Item 1A.
Risk Factors
137
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
137
Item 3.
Defaults Upon Senior Securities
137
Item 4.
Mine Safety Disclosures
137
Item 5.
Other Information
137
Item 6.
Exhibits
137
 
 
 
EXHIBIT INDEX
138
SIGNATURES
139

 
 
2
Capital One Financial Corporation (COF)

INDEX OF MD&A AND SUPPLEMENTAL TABLES
MD&A Tables:
Page
1
Consolidated Financial Highlights
6
2
Average Balances, Net Interest Income and Net Interest Margin
12
3
Rate/Volume Analysis of Net Interest Income
14
4
Non-Interest Income
15
5
Non-Interest Expense
16
6
Investment Securities
18
7
Loans Held for Investment
18
8
Funding Sources Composition
19
9
Business Segment Results
20
10
Credit Card Business Results
21
10.1
Domestic Card Business Results
22
11
Consumer Banking Business Results
24
12
Commercial Banking Business Results
26
13
Other Category Results
28
14
Capital Ratios under Basel III
31
15
Regulatory Risk-Based Capital Components and Regulatory Capital Metrics
32
16
Preferred Stock Dividends Paid Per Share
33
17
Portfolio Composition of Loans Held for Investment
35
18
Commercial Loans by Industry
36
19
Credit Score Distribution
36
20
30+ Day Delinquencies
37
21
Aging and Geography of 30+ Day Delinquent Loans
38
22
90+ Day Delinquent Loans Accruing Interest
39
23
Nonperforming Loans and Other Nonperforming Assets
39
24
Net Charge-Offs (Recoveries)
41
25
Troubled Debt Restructurings
41
26
Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments Activity
44
27
Allowance Coverage Ratios
46
28
Liquidity Reserves
46
29
Deposits Composition and Average Deposits Interest Rates
48
30
Long-Term Funding
49
31
Senior Unsecured Long-Term Debt Credit Ratings
49
32
Interest Rate Sensitivity Analysis
51
 
 
 
Supplemental Table:
 
A
Reconciliation of Non-GAAP Measures
55

 
 
3
Capital One Financial Corporation (COF)

PART I—FINANCIAL INFORMATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)
 
This discussion contains forward-looking statements that are based upon management’s current expectations and are subject to significant uncertainties and changes in circumstances. Please review “MD&A—Forward-Looking Statements” for more information on the forward-looking statements in this Quarterly Report on Form 10-Q (“this Report”). All statements that address operating performance, events or developments that we expect or anticipate will occur in the future, including those relating to operating results and the Cybersecurity Incident described in “MD&A—Introduction—Cybersecurity Incident” and “Note 14—Commitments, Contingencies, Guarantees and Others” are forward-looking statements. 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 2018 Annual Report on Form 10-K (“2018 Form 10-K”). Unless otherwise specified, references to notes to our consolidated financial statements refer to the notes to our consolidated financial statements as of June 30, 2019 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 2018 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, 2019, 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, small business, 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 reward 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 primarily based on the products and services provided or the types 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, asset/liability management by our centralized Corporate Treasury group and residual tax expense or benefit to arrive at the consolidated effective tax rate that is not assessed to our primary business segments, 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 and national auto lending.

 
 
4
Capital One Financial Corporation (COF)

•
Commercial Banking: Consists of our lending, deposit gathering, capital markets and treasury management services to commercial real estate and commercial and industrial customers. Our commercial and industrial customers typically include companies with annual revenues between $20 million and $2 billion.
Business Developments
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 technology companies and related assets to improve our information technology infrastructure and to deliver on our digital strategy. In addition, we regularly consider the potential disposition of certain of our assets, branches, partnership agreements or lines of business. We may issue equity or debt to fund our acquisitions.
In the second quarter of 2019, we made the decision to exit several small partnership portfolios in our Credit Card business. We sold approximately $900 million of receivables and transferred approximately $100 million to loans held for sale as of June 30, 2019, which resulted in a gain on sale of $49 million recognized in other non-interest income and an allowance release of $68 million.
On July 26, 2018, we announced that we entered into a new, long-term credit card program agreement with Walmart Inc. (“Walmart”). Under the terms of the agreement, we will become the exclusive issuer of Walmart’s cobrand and private label credit card program in the U.S. On January 22, 2019, we announced that we entered into a definitive agreement to acquire the existing portfolio of Walmart’s cobrand and private label credit card receivables. We expect to launch the new issuance program and close on the acquired portfolio late in the third quarter or early in the fourth quarter of 2019.
Cybersecurity Incident
On July 29, 2019, we announced that on July 19, 2019, we determined there was unauthorized access by an outside individual who obtained certain types of personal information relating to people who had applied for our credit card products and to our credit card customers (the “Cybersecurity Incident”). The Cybersecurity Incident occurred on March 22 and 23, 2019. We believe that a highly sophisticated individual was able to exploit a specific configuration vulnerability in our infrastructure. The configuration vulnerability was reported to us by an external security researcher on July 17, 2019. We then began our own internal investigation, leading to the July 19, 2019, determination that the Cybersecurity Incident occurred. We immediately fixed the configuration vulnerability that this individual exploited and verified there are no other instances in our environment. Among other things, we also augmented our routine automated scanning to look for this issue on a continuous basis. We promptly began working with federal law enforcement. The person responsible was arrested by the Federal Bureau of Investigation on July 29, 2019 and federal prosecution of the responsible person commenced.
Based on our analysis to date, we believe it is unlikely that the information was used for fraud or disseminated by this individual. However, we will continue to investigate. Based on our analysis to date, this event affected approximately 100 million individuals in the United States and approximately 6 million in Canada. We believe no credit card account numbers or log-in credentials were compromised. The largest category of information accessed was information on consumers and small businesses as of the time they applied for one of our credit card products from 2005 through early 2019. This information included personal information that we routinely collect at the time we receive credit card applications, including names, addresses, zip codes/postal codes, phone numbers, email addresses, dates of birth, and self-reported income. In addition to credit card application data, the individual also obtained portions of credit card customer data, including customer status data (e.g., credit scores, credit limits, balances, payment history, contact information) and fragments of transaction data from a total of 23 days during 2016, 2017 and 2018. Approximately 140,000 Social Security numbers of our credit card customers and approximately 80,000 linked bank account numbers of our secured credit card customers were compromised in this incident. For our Canadian credit card customers, approximately 1 million Social Insurance Numbers were compromised in this incident. Our assessment of the incident is ongoing and analysis is subject to change.
We expect to notify affected individuals through a variety of channels and make free credit monitoring and identity protection available to everyone affected. We have retained a leading independent cybersecurity firm to conduct a comprehensive assessment to confirm the scope of the access and the specific data impacted.
We expect the Cybersecurity Incident to generate incremental costs of approximately $100 to $150 million in 2019. Expected costs are largely driven by customer notifications, credit monitoring, technology costs, and professional support relating to the remediation

 
 
5
Capital One Financial Corporation (COF)

of and response to the Cybersecurity Incident. We expect to accrue the costs for customer notification and credit monitoring in 2019. The expected incremental costs related to the incident will be separately reported as an adjusting item as it relates to our financial results. In addition to the adjusting item in 2019, we expect any incremental investments in cybersecurity to be funded within our current budget. We carry insurance to cover certain costs associated with a cyber risk event. This insurance is subject to a $10 million deductible and standard exclusions and carries a total coverage limit of $400 million. The timing of recognition of costs may differ from the timing of recognition of any insurance reimbursement. Insurance recoveries associated with the incident will also be treated as an adjusting item as it relates to our financial results.
The ultimate magnitude of any expenses or any other impact to our business or reputation may be significant and some of our expenses may not be covered by insurance. However, we do not believe that this incident will impact our strategy or long-term financial health. For more information, see “Note 14—Commitments, Contingencies, Guarantees and Others.”
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 2019 and 2018 and selected comparative balance sheet data as of June 30, 2019 and December 31, 2018. 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 as they provide an alternate measurement of our performance and assist in assessing our capital adequacy and level of return generated.
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)
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
Income statement
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
$
5,746

 
$
5,551

 
4
 %
 
$
11,537

 
$
11,269

 
2
 %
Non-interest income
 
1,378

 
1,641

 
(16
)
 
2,670

 
2,832

 
(6
)
Total net revenue
 
7,124

 
7,192

 
(1
)
 
14,207

 
14,101

 
1

Provision for credit losses
 
1,342

 
1,276

 
5

 
3,035

 
2,950

 
3

Non-interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
Marketing
 
546

 
425

 
28

 
1,063

 
839

 
27

Operating expense
 
3,233

 
2,999

 
8

 
6,387

 
6,158

 
4

Total non-interest expense
 
3,779

 
3,424

 
10

 
7,450

 
6,997

 
6

Income from continuing operations before income taxes
 
2,003

 
2,492

 
(20
)
 
3,722

 
4,154

 
(10
)
Income tax provision
 
387

 
575

 
(33
)
 
696

 
894

 
(22
)
Income from continuing operations, net of tax
 
1,616

 
1,917

 
(16
)
 
3,026

 
3,260

 
(7
)
Income (loss) from discontinued operations, net of tax
 
9

 
(11
)
 
**

 
11

 
(8
)
 
**

Net income
 
1,625

 
1,906

 
(15
)
 
3,037

 
3,252

 
(7
)
Dividends and undistributed earnings allocated to participating securities
 
(12
)
 
(12
)
 
—

 
(24
)
 
(23
)
 
4

Preferred stock dividends
 
(80
)
 
(80
)
 
—

 
(132
)
 
(132
)
 
—

Net income available to common stockholders
 
$
1,533

 
$
1,814

 
(15
)
 
$
2,881

 
$
3,097

 
(7
)
Common share statistics
 
 
 
 
 
 
 
 
 
 
 
 

Basic earnings per common share:
 
 
 
 
 
 
 
 
 
 
 
 
Net income from continuing operations
 
$
3.24

 
$
3.76

 
(14
)%
 
$
6.11

 
$
6.39

 
(4
)%
Income (loss) from discontinued operations
 
0.02

 
(0.02
)
 
**

 
0.02

 
(0.02
)
 
**

Net income per basic common share
 
$
3.26

 
$
3.74

 
(13
)
 
$
6.13

 
$
6.37

 
(4
)
Diluted earnings per common share:
 
 
 
 
 
 
 
 
 
 
 
 
Net income from continuing operations
 
$
3.22

 
$
3.73

 
(14
)%
 
$
6.08

 
$
6.35

 
(4
)%
Income (loss) from discontinued operations
 
0.02

 
(0.02
)
 
**

 
0.02

 
(0.02
)
 
**

Net income per diluted common share
 
$
3.24

 
$
3.71

 
(13
)
 
$
6.10

 
$
6.33

 
(4
)
Weighted-average common shares outstanding (in millions):
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
470.8

 
485.1

 
(3
)%
 
470.1

 
485.9

 
(3
)%

 
 
6
Capital One Financial Corporation (COF)

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Dollars in millions, except per share data and as noted)
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
Diluted
 
473.0

 
488.3

 
(3
)%
 
472.3

 
489.6

 
(4
)%
Common shares outstanding (period-end, in millions)
 
470.3

 
478.4

 
(2
)
 
470.3

 
478.4

 
(2
)
Dividends declared and paid per common share
 
$
0.40

 
$
0.40

 
—

 
$
0.80

 
$
0.80

 
—

Tangible book value per common share (period-end)(1)
 
77.65

 
63.86

 
22

 
77.65

 
63.86

 
22

Balance sheet (average balances)
 
 
 
 
 
 
 
 
 
 
 
 
Loans held for investment
 
$
242,653

 
$
240,758

 
1
 %
 
$
242,307

 
$
245,218

 
(1
)%
Interest-earning assets
 
338,026

 
333,495

 
1

 
337,913

 
331,850

 
2

Total assets
 
371,095

 
363,929

 
2

 
370,746

 
362,988

 
2

Interest-bearing deposits
 
230,452

 
223,079

 
3

 
229,020

 
221,384

 
3

Total deposits
 
253,634

 
248,790

 
2

 
252,528

 
247,040

 
2

Borrowings
 
49,982

 
52,333

 
(4
)
 
51,510

 
53,454

 
(4
)
Common equity
 
50,209

 
45,466

 
10

 
49,289

 
45,070

 
9

Total stockholders’ equity
 
54,570

 
49,827

 
10

 
53,650

 
49,431

 
9

Selected performance metrics
 
 
 
 
 
 
 
 
 
 
 
 

Purchase volume(2)
 
$
106,903

 
$
97,392

 
10
 %
 
$
200,100

 
$
183,937

 
9
 %
Total net revenue margin(3)
 
8.43
%
 
8.63
%
 
(20
)bps
 
8.41
%
 
8.50
%
 
(9
)bps
Net interest margin(4)
 
6.80

 
6.66

 
14

 
6.83

 
6.79

 
4

Return on average assets
 
1.74

 
2.11

 
(37
)
 
1.63

 
1.80

 
(17
)
Return on average tangible assets(5)
 
1.82

 
2.20

 
(38
)
 
1.70

 
1.87

 
(17
)
Return on average common equity(6)
 
12.14

 
16.06

 
(392
)
 
11.65

 
13.78

 
(213
)
Return on average tangible common equity (“TCE”)(7)
 
17.26

 
23.99

 
(673
)
 
16.70

 
20.70

 
(400
)
Equity-to-assets ratio(8)
 
14.71

 
13.69

 
102

 
14.47

 
13.62

 
85

Non-interest expense as a percentage of average loans held for investment
 
6.23

 
5.69

 
54

 
6.15

 
5.71

 
44

Efficiency ratio(9)
 
53.05

 
47.61

 
544

 
52.44

 
49.62

 
282

Operating efficiency ratio(10)
 
45.38

 
41.70

 
368

 
44.96

 
43.67

 
129

Effective income tax rate from continuing operations
 
19.3

 
23.1

 
(380
)
 
18.7

 
21.5

 
(280
)
Net charge-offs
 
$
1,508

 
$
1,459

 
3
 %
 
$
3,107

 
$
3,077

 
1
 %
Net charge-off rate(11)
 
2.48
%
 
2.42
%
 
6
bps
 
2.56
%
 
2.51
%
 
5
bps
(Dollars in millions, except as noted)

June 30, 2019
 
December 31, 2018
 
Change
Balance sheet (period-end)
 
 
 
 
 
 
Loans held for investment
 
$
244,460

 
$
245,899

 
(1
)%
Interest-earning assets
 
339,160

 
341,293

 
(1
)
Total assets
 
373,619

 
372,538

 
—

Interest-bearing deposits
 
231,161

 
226,281

 
2

Total deposits
 
254,535

 
249,764

 
2

Borrowings
 
49,233

 
58,905

 
(16
)
Common equity
 
51,406

 
47,307

 
9

Total stockholders’ equity
 
55,767

 
51,668

 
8

Credit quality metrics
 
 
 
 
 


Allowance for loan and lease losses
 
$
7,133

 
$
7,220

 
(1
)%
Allowance as a percentage of loans held for investment (“allowance coverage ratio”)
 
2.92
%
 
2.94
%
 
(2
)bps
30+ day performing delinquency rate
 
3.15

 
3.62

 
(47
)
30+ day delinquency rate
 
3.35

 
3.84

 
(49
)
Capital ratios
 
 

 
 
 


Common equity Tier 1 capital(12)
 
12.3
%
 
11.2
%
 
110
bps
Tier 1 capital(12)
 
13.8

 
12.7

 
110

Total capital(12)
 
16.2

 
15.1

 
110

Tier 1 leverage(12)
 
11.4

 
10.7

 
70

Tangible common equity(13)
 
10.2

 
9.1

 
110

Supplementary leverage(12)
 
9.7

 
9.0

 
70

Other
 
 
 
 
 


Employees (period end, in thousands)
 
50.7

 
47.6

 
7
 %

 
 
7
Capital One Financial Corporation (COF)

__________
(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” 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 in our Credit Card business, and 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” 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.
(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” 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) 
Efficiency ratio is calculated based on non-interest expense for the period divided by total net revenue for the period.
(10) 
Operating efficiency ratio is calculated based on operating expense for the period divided by total net revenue for the period.
(11) 
Net charge-off rate is calculated by dividing annualized net charge-offs by average loans held for investment for the period for each loan category.
(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” for the calculation of this measure and reconciliation to the comparative U.S. GAAP measure.
**
Not meaningful.

 
 
8
Capital One Financial Corporation (COF)

EXECUTIVE SUMMARY AND BUSINESS OUTLOOK
Financial Highlights
We reported net income of $1.6 billion ($3.24 per diluted common share) on total net revenue of $7.1 billion and net income of $3.0 billion ($6.10 per diluted common share) on total net revenue of $14.2 billion for the second quarter and first six months of 2019, respectively. In comparison, we reported net income of $1.9 billion ($3.71 per diluted common share) on total net revenue of $7.2 billion and net income of $3.3 billion ($6.33 per diluted common share) on total net revenue of $14.1 billion for the second quarter and first six months of 2018, respectively.
Our common equity Tier 1 capital ratio as calculated under the Basel III Standardized Approach was 12.3% and 11.2% as of June 30, 2019 and December 31, 2018, respectively. See “MD&A—Capital Management” below for additional information.
On June 28, 2018, we announced that our Board of Directors authorized the repurchase of up to $1.2 billion of shares of our common stock (“2018 Stock Repurchase Program”) beginning in the third quarter of 2018 through the end of the second quarter of 2019. We completed the 2018 Stock Repurchase Program in the fourth quarter of 2018. Additionally, on June 27, 2019, we announced that our Board of Directors authorized the repurchase of up to $2.2 billion of shares of our common stock (“2019 Stock Repurchase Program”) beginning in the third quarter of 2019 through the end of the second quarter of 2020. See “MD&A—Capital Management—Dividend Policy and Stock Purchases” for additional information.
On July 29, 2019, we announced the Cybersecurity Incident. For more information, see “MD&A—Introduction—Cybersecurity Incident” and “Note 14—Commitments, Contingencies, Guarantees and Others.”
Below are additional highlights of our performance in the second quarter and first six months of 2019. These highlights are generally based on a comparison between the results of the second quarter and first six months of 2019 and 2018, 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, 2019 compared to our financial condition and credit performance as of December 31, 2018. We provide a more detailed discussion of our financial performance in the sections following this “Executive Summary and Business Outlook.”
Total Company Performance
•
Earnings: Our net income decreased by $281 million to $1.6 billion in the second quarter of 2019 and decreased by $215 million to $3.0 billion in the first six months of 2019 primarily driven by:
◦
lower non-interest income largely due to the absence of the net gain from the sale of our consumer home loan portfolio; and
◦
higher non-interest expense due to increased marketing expenses and higher operating expenses associated with continued investments in technology and infrastructure including Walmart partnership related expenses.
These drivers were partially offset by:
◦
higher net interest income primarily driven by higher yields on interest earning assets and growth in our loan and investment portfolios, partially offset by higher deposit rates paid and deposit growth; and
◦
higher net interchange fees, driven by higher purchase volume and the impact of updated rewards cost estimates.
•
Loans Held for Investment:
◦
Period-end loans held for investment decreased by $1.4 billion to $244.5 billion as of June 30, 2019 from December 31, 2018 primarily driven by expected seasonal paydowns in our domestic credit card loan portfolio and sale of certain partnership receivables, partially offset by growth in our commercial, domestic credit card and auto loan portfolios.
◦
Average loans held for investment increased by $1.9 billion to $242.7 billion in the second quarter of 2019 compared to the second quarter of 2018 primarily driven by growth in our commercial, domestic credit card and auto loan portfolios, partially offset by the sale of our consumer home loan portfolio. These same factors drove average loans held for investment to decrease $2.9 billion to $242.3 billion in the first six months of 2019 compared to the first six

 
 
9
Capital One Financial Corporation (COF)

months of 2018 as the growth in our commercial, domestic credit card and auto loan portfolios being more than offset by the impact of the sale of our consumer home loan portfolio.
•
Net Charge-Off and Delinquency Metrics: Our net charge-off rate increased by 6 basis points to 2.48% in the second quarter of 2019 compared to the second quarter of 2018 primarily driven by higher net charge-offs in our domestic credit card loan portfolio and the impact of lower loan balances from the sale of our consumer home loan portfolio, partially offset by lower net charge-offs in our auto loan portfolio.
Our net charge-off rate increased by 5 basis points to 2.56% in the first six months of 2019 compared to the first six months of 2018 primarily driven by the impact of lower loan balances from the sale of our consumer home loan portfolio, partially offset by growth in our commercial and auto loan portfolios.
Our 30+ day delinquency rate decreased by 49 basis points to 3.35% as of June 30, 2019 from December 31, 2018 primarily driven by seasonally lower delinquency inventories in our auto and domestic credit card loan portfolios.
•
Allowance for Loan and Lease Losses: Our allowance for loan and lease losses decreased by $87 million to $7.1 billion and the allowance coverage ratio decreased by 2 basis points to 2.92% as of June 30, 2019 from December 31, 2018 primarily driven by an allowance release in our domestic credit card loan portfolio largely due to the strong economy, stable underlying credit performance and the impact of the sale of certain partnership receivables, partially offset by an allowance build in our commercial loan portfolio.
Business Outlook
We discuss below our current expectations regarding our total company performance and the performance of our business segments based on market conditions, the regulatory environment and our business strategies. 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 II—Item 7. MD&A” in our 2018 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:
•
any change in current dividend or repurchase strategies;
•
the effect of any acquisitions, divestitures or similar transactions that have not been previously disclosed;
•
any changes in laws, regulations or regulatory interpretations, in each case after the date as of which such statements are made; or
•
the potential impact on our business, operations and reputation from, and expenses and uncertainties associated with, the Cybersecurity Incident, other than the incremental costs related to the incident we expect to incur in 2019 which will be separately reported as an adjusting item as it relates to the Company’s financial results.
See “MD&A—Forward-Looking Statements” in this Report for more information on the forward-looking statements and “Part I—Item 1A. Risk Factors” in our 2018 Form 10-K for factors that could materially influence our results.
Total Company Expectations
Net Interest Margin:
•
We continue to expect deposit mix changes will have a negative impact on net interest margin during 2019.
Marketing and Efficiency:
•
We expect marketing for full-year 2019 to be modestly higher than full-year 2018, with a more normal seasonal pattern than the exaggerated pattern in 2018.
•
We expect to achieve modest improvements in full-year operating efficiency ratio, net of adjustments, in both 2019 and 2020, while we expect full-year operating efficiency ratio, net of adjustments, to improve to 42% in 2021.

 
 
10
Capital One Financial Corporation (COF)

•
We expect this operating efficiency ratio improvement to drive significant improvement in our total efficiency ratio by 2021.
Business Segment Expectations
Consumer Banking:
•
We expect that faster growth in higher-rate deposit products will continue to change our product mix.
•
We continue to expect that the annual auto charge-off rate will increase gradually as the cycle plays out.
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 2019 and 2018. 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 paid 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, senior and subordinated notes, other borrowings and other interest-bearing liabilities. 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.

 
 
11
Capital One Financial Corporation (COF)

Table 2 below presents, for each major category of our interest-earning assets and interest-bearing liabilities, the average outstanding balance, interest income earned, interest expense incurred and average yield for the second quarter and first six months of 2019 and 2018. Nonperforming loans are included in the average loan balances below.
Table 2: Average Balances, Net Interest Income and Net Interest Margin
 
 
Three Months Ended June 30,
 
 
2019
 
2018
(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
 
$
110,800

 
$
4,339

 
15.66
%
 
$
107,893

 
$
4,062

 
15.06
 %
Consumer banking
 
59,858

 
1,251

 
8.36

 
66,692

 
1,218

 
7.31

Commercial banking(2)
 
73,157

 
864

 
4.72

 
67,198

 
744

 
4.43

Other
 
16

 
(71
)
 
**

 
260

 
(35
)
 
(53.85
)
Total loans, including loans held for sale
 
243,831

 
6,383

 
10.47

 
242,043

 
5,989

 
9.90

Investment securities
 
82,383

 
629

 
3.05

 
79,829

 
539

 
2.70

Cash equivalents and other interest-earning assets
 
11,812

 
64

 
2.16

 
11,623

 
68

 
2.34

Total interest-earning assets
 
338,026

 
7,076

 
8.37

 
333,495

 
6,596

 
7.91

Cash and due from banks
 
4,180

 
 
 
 
 
3,596

 
 
 
 
Allowance for loan and lease losses
 
(7,308
)
 
 
 
 
 
(7,536
)
 
 
 
 
Premises and equipment, net
 
4,266

 
 
 
 
 
4,145

 
 
 
 
Other assets
 
31,931

 
 
 
 
 
30,229

 
 
 
 
Total assets
 
$
371,095

 
 
 
 
 
$
363,929

 
 
 
 
Liabilities and stockholders’ equity:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits
 
$
230,452

 
$
870

 
1.51
%
 
$
223,079

 
$
622

 
1.12
 %
Securitized debt obligations
 
18,262

 
139

 
3.04

 
19,147

 
124

 
2.59

Senior and subordinated notes
 
30,630

 
310

 
4.05

 
32,250

 
289

 
3.58

Other borrowings and liabilities
 
2,322

 
11

 
1.91

 
4,132

 
10

 
0.97

Total interest-bearing liabilities
 
281,666

 
1,330

 
1.89

 
278,608

 
1,045

 
1.50

Non-interest-bearing deposits
 
23,182

 
 
 
 
 
25,711

 
 
 
 
Other liabilities
 
11,677

 
 
 
 
 
9,783

 
 
 
 
Total liabilities
 
316,525

 
 
 
 
 
314,102

 
 
 
 
Stockholders’ equity
 
54,570

 
 
 
 
 
49,827

 
 
 
 
Total liabilities and stockholders’ equity
 
$
371,095

 
 
 
 
 
$
363,929

 
 
 
 
Net interest income/spread
 
$
5,746

 
6.48

 
 
 
$
5,551

 
6.41

Impact of non-interest-bearing funding
 
0.32

 
 
 
 
 
0.25

Net interest margin
 
6.80
%
 
 
 
 
 
6.66
 %

 
 
12
Capital One Financial Corporation (COF)

 
 
Six Months Ended June 30,
 
 
2019
 
2018
(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
 
$
111,126

 
$
8,734

 
15.72
%
 
$
108,693

 
$
8,235

 
15.15
 %
Consumer banking
 
59,464

 
2,454

 
8.25

 
70,875

 
2,504

 
7.07

Commercial banking(2)
 
72,762

 
1,697

 
4.67

 
66,590

 
1,427

 
4.29

Other
 
31

 
(134
)
 
**

 
293

 
(43
)
 
(29.35
)
Total loans, including loans held for sale
 
243,383

 
12,751

 
10.48

 
246,451

 
12,123

 
9.84

Investment securities
 
83,027

 
1,284

 
3.09

 
74,731

 
991

 
2.65

Cash equivalents and other interest-earning assets
 
11,503

 
133

 
2.31

 
10,668

 
119

 
2.23

Total interest-earning assets
 
337,913

 
14,168

 
8.39

 
331,850

 
13,233

 
7.98

Cash and due from banks
 
4,233

 
 
 
 
 
3,704

 
 
 
 
Allowance for loan and lease losses
 
(7,269
)
 
 
 
 
 
(7,520
)
 
 
 
 
Premises and equipment, net
 
4,273

 
 
 
 
 
4,142

 
 
 
 
Other assets
 
31,596

 
 
 
 
 
30,812

 
 
 
 
Total assets
 
$
370,746

 
 
 
 
 
$
362,988

 
 
 
 
Liabilities and stockholders’ equity:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits
 
$
229,020

 
$
1,687

 
1.47
%
 
$
221,384

 
$
1,161

 
1.05
 %
Securitized debt obligations
 
18,503

 
282

 
3.05

 
19,421

 
231

 
2.38

Senior and subordinated notes
 
30,732

 
624

 
4.06

 
31,345

 
540

 
3.45

Other borrowings and liabilities
 
3,497

 
38

 
2.20

 
5,483

 
32

 
1.17

Total interest-bearing liabilities
 
281,752

 
2,631

 
1.87

 
277,633

 
1,964

 
1.41

Non-interest-bearing deposits
 
23,508

 
 
 
 
 
25,656

 
 
 
 
Other liabilities
 
11,836

 
 
 
 
 
10,268

 
 
 
 
Total liabilities
 
317,096

 
 
 
 
 
313,557

 
 
 
 
Stockholders’ equity
 
53,650

 
 
 
 
 
49,431

 
 
 
 
Total liabilities and stockholders’ equity
 
$
370,746

 
 
 
 
 
$
362,988

 
 
 
 
Net interest income/spread
 
$
11,537

 
6.52

 
 
 
$
11,269

 
6.57

Impact of non-interest-bearing funding
 
0.31

 
 
 
 
 
0.22

Net interest margin
 
6.83
%
 
 
 
 
 
6.79
 %
__________
(1) 
Past due fees included in interest income totaled approximately $406 million and $801 million in the second quarter and first six months of 2019, respectively, and $387 million and $790 million in the second quarter and first six months of 2018, respectively.
(2) 
Some of our commercial loans generate tax-exempt income. Accordingly, we present our Commercial Banking interest income and yields on a taxable- equivalent basis, calculated using the federal statutory rate of 21% and state taxes where applicable, with offsetting reductions to the Other category. Taxable-equivalent adjustments included in the interest income and yield computations for our commercial loans totaled approximately $20 million and $41 million in the second quarter and first six months of 2019, respectively, and $21 million and $41 million in the second quarter and first six months of 2018, respectively, with corresponding reductions to the Other category.
**    Not meaningful.
Net interest income increased by $195 million to $5.7 billion in the second quarter of 2019 compared to the second quarter of 2018, and increased by $268 million to $11.5 billion in the first six months of 2019 compared to the first six months of 2018, primarily driven by higher yields on interest earning assets and growth in our loan and investment portfolios, partially offset by higher deposit rates paid and deposit growth.
Net interest margin increased by 14 basis points to 6.80% in the second quarter of 2019 compared to the second quarter of 2018, and increased by 4 basis points to 6.83% in the first six months of 2019 compared to the first six months of 2018, primarily driven by changes in product mix and higher rates on interest-earnings assets, partially offset by higher rates on interest-bearing liabilities.

 
 
13
Capital One Financial Corporation (COF)

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,
 
 
2019 vs. 2018
 
2019 vs. 2018
(Dollars in millions)
 
Total Variance
 
Volume
 
Rate
 
Total Variance
 
Volume
 
Rate
Interest income:
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
 
Credit card
 
$
277

 
$
111

 
$
166

 
$
499

 
$
187

 
$
312

Consumer banking
 
33

 
(125
)
 
158

 
(50
)
 
(403
)
 
353

Commercial banking(2)
 
120

 
68

 
52

 
270

 
138

 
132

Other(2)
 
(36
)
 
(4
)
 
(32
)
 
(91
)
 
51

 
(142
)
Total loans, including loans held for sale
 
394

 
50

 
344

 
628

 
(27
)
 
655

Investment securities
 
90

 
18

 
72

 
293

 
117

 
176

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

 
(5
)
 
14

 
10

 
4

Total interest income
 
480

 
69

 
411

 
935

 
100

 
835

Interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits
 
248

 
21

 
227

 
526

 
41

 
485

Securitized debt obligations
 
15

 
(6
)
 
21

 
51

 
(11
)
 
62

Senior and subordinated notes
 
21

 
(15
)
 
36

 
84

 
(10
)
 
94

Other borrowings and liabilities
 
1

 
(4
)
 
5

 
6

 
(12
)
 
18

Total interest expense
 
285

 
(4
)
 
289

 
667

 
8

 
659

Net interest income
 
$
195

 
$
73

 
$
122

 
$
268

 
$
92

 
$
176

__________
(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 commercial loans generate tax-exempt income. Accordingly, we present our Commercial Banking interest income and yields on a taxable- equivalent basis, calculated using the federal statutory rate of 21% and state taxes where applicable, with offsetting reductions to the Other category.

 
 
14
Capital One Financial Corporation (COF)

Non-Interest Income
Table 4 displays the components of non-interest income for the second quarter and first six months of 2019 and 2018.
Table 4: Non-Interest Income
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Dollars in millions)
 
2019
 
2018
 
2019
 
2018
Interchange fees, net
 
$
820

 
$
723

 
$
1,578

 
$
1,366

Service charges and other customer-related fees
 
352

 
391

 
705

 
823

Net securities gains (losses)
 
15

 
(1
)
 
39

 
7

Other non-interest income:(1)
 
 
 
 
 
 
 
 
Mortgage banking revenue
 
33

 
440

 
79

 
478

Treasury and other investment income
 
47

 
38

 
103

 
46

Other
 
111

 
50

 
166

 
112

Total other non-interest income
 
191

 
528

 
348

 
636

Total non-interest income
 
$
1,378

 
$
1,641

 
$
2,670

 
$
2,832

__________
(1) 
Includes gains on deferred compensation plan investments of $10 million and $38 million for the second quarter and first six months of 2019, respectively, and $6 million and $5 million for the second quarter and first six months of 2018, respectively. These amounts have corresponding offsets in salaries and associate benefits expense.
Non-interest income decreased by $263 million to $1.4 billion in the second quarter of 2019 compared to the second quarter of 2018 and decreased by $162 million to $2.7 billion in the first six months of 2019 compared to first six months of 2018 primarily due to the absence of the net gain from the sale of our consumer home loan portfolio and lower service charges and other customer-related fees, partially offset by an increase in net interchange fees, driven by higher purchase volume and the impact of updated rewards cost estimates, as well as a gain on the sale of certain partnership receivables.
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. Our provision for credit losses increased by $66 million to $1.3 billion in the second quarter of 2019 compared to the second quarter of 2018 primarily driven by the absence of the impact from the sale of our consumer home loan portfolio. Provision for credit losses increased by $85 million to $3.0 billion in the first six months of 2019 compared to the first six months of 2018 primarily driven by allowance builds in our commercial loan portfolio.
The provision for credit losses as a percentage of net interest income was 23.4% and 26.3% in the second quarter and first six months of 2019, respectively, compared to 23.0% and 26.2% in the second quarter and first six months of 2018, respectively. 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 2018 Form 10-K.

 
 
15
Capital One Financial Corporation (COF)

Non-Interest Expense
Table 5 displays the components of non-interest expense for the second quarter and first six months of 2019 and 2018.
Table 5: Non-Interest Expense
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Dollars in millions)
 
2019
 
2018
 
2019
 
2018
Salaries and associate benefits(1)
 
$
1,558

 
$
1,430

 
$
3,131

 
$
2,950

Occupancy and equipment
 
521

 
503

 
1,014

 
993

Marketing
 
546

 
425

 
1,063

 
839

Professional services
 
314

 
234

 
605

 
444

Communications and data processing
 
329

 
317

 
632

 
623

Amortization of intangibles
 
29

 
43

 
59

 
87

Other non-interest expense:
 
 
 
 
 
 
 
 
Bankcard, regulatory and other fee assessments
 
86

 
65

 
173

 
234

Collections
 
96

 
104

 
191

 
212

Fraud losses
 
97

 
89

 
200

 
186

Other
 
203

 
214

 
382

 
429

Total other non-interest expense
 
482

 
472

 
946

 
1,061

Total non-interest expense
 
$
3,779

 
$
3,424

 
$
7,450

 
$
6,997

__________
(1) 
Includes expenses related to our deferred compensation plan of $10 million and $38 million for the second quarter and first six months of 2019, respectively, and $6 million and $5 million for the second quarter and first six months of 2018, respectively. These amounts have corresponding offsets in non-interest income.
Non-interest expense increased by $355 million to $3.8 billion in the second quarter of 2019 compared to the second quarter of 2018 and increased by $453 million to $7.5 billion in the first six months of 2019 compared to the first six months of 2018, primarily due to increased marketing expenses and higher operating expenses associated with continued investments in technology and infrastructure including Walmart partnership related expenses.
Income Taxes
We recorded income tax provisions of $387 million (19.3% effective income tax rate) and $696 million (18.7% effective income tax rate) in the second quarter and first six months of 2019, respectively, compared to $575 million (23.1% effective income tax rate) and $894 million (21.5% effective income tax rate) in the second quarter and first six months of 2018, 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 income tax provision and effective income tax rate in the second quarter and first six months of 2019 compared to the second quarter and first six months of 2018 was primarily due to higher tax credits and lower non-deductible expenses relative to our income, and lower discrete tax expense.
We provide additional information on items affecting our income taxes and effective tax rate in “Note 16—Income Taxes” in our 2018 Form 10-K.

 
 
16
Capital One Financial Corporation (COF)

CONSOLIDATED BALANCE SHEETS ANALYSIS
Total assets increased by $1.1 billion to $373.6 billion as of June 30, 2019 from December 31, 2018 driven by an increase in cash and cash equivalents and growth in commercial, domestic credit card and auto loan portfolios, largely offset by a decrease in our domestic credit card loan portfolio due to the expected seasonal paydowns as well as sale of certain partnership receivables.
Total liabilities decreased by $3.0 billion to $317.9 billion as of June 30, 2019 from December 31, 2018 primarily driven by maturities of our short-term Federal Home Loan Banks (“FHLB”) advances, partially offset by deposit growth.
Stockholders’ equity increased by $4.1 billion to $55.8 billion as of June 30, 2019 from December 31, 2018 primarily due to our net income of $3.0 billion and $1.4 billion of other comprehensive income in the first six months of 2019, partially offset by dividend payments to our stockholders.
The following is a discussion of material changes in the major components of our assets and liabilities during the first six months of 2019. Period-end balance sheet amounts may vary from average balance sheet amounts due to liquidity and balance sheet management activities that are intended to support the adequacy of capital while managing our liquidity requirements, our customers and our market risk exposure in accordance with our risk appetite.
Investment Securities
Our investment securities 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 commercial mortgage-backed securities (“CMBS”); and other securities. Agency securities include Government National Mortgage Association (“Ginnie Mae”) guaranteed securities, and Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”) issued securities. The U.S. Treasury and Agency securities generally have high credit ratings and low credit risks, and our investments in U.S. Treasury and Agency securities represented 96% of our total investment securities portfolio, as of both June 30, 2019 and December 31, 2018.
The fair value of our available for sale securities portfolio decreased by $492 million to $45.7 billion as of June 30, 2019 from December 31, 2018 primarily driven by sales and maturities outpacing purchases, partially offset by the fair value gains as a result of changes in interest rates. The fair value of our held to maturity securities portfolio remained substantially flat at $36.5 billion as of June 30, 2019 from December 31, 2018 as fair value gains were largely offset by the decline from maturities.

 
 
17
Capital One Financial Corporation (COF)

Table 6 presents the amortized cost, carrying value and fair value for the major categories of our investment securities portfolio as of June 30, 2019 and December 31, 2018.
Table 6: Investment Securities
 
 
June 30, 2019
 
December 31, 2018
(Dollars in millions)
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Investment securities available for sale:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
4,226

 
$
4,219

 
$
6,146

 
$
6,144

RMBS:
 
 
 
 
 
 
 
 
Agency
 
33,183

 
33,032

 
32,710

 
31,903

Non-agency
 
1,362

 
1,675

 
1,440

 
1,742

Total RMBS
 
34,545

 
34,707

 
34,150

 
33,645

Agency CMBS
 
5,380

 
5,389

 
4,806

 
4,739

Other securities(1)
 
1,343

 
1,343

 
1,626

 
1,622

Total investment securities available for sale
 
$
45,494

 
$
45,658

 
$
46,728

 
$
46,150

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in millions)
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Investment securities held to maturity:
 
 
 
 
 
 
 
 
Agency RMBS
 
$
31,635

 
$
32,582

 
$
33,061

 
$
32,977

Agency CMBS
 
3,840

 
3,959

 
3,710

 
3,642

Total investment securities held to maturity
 
$
35,475

 
$
36,541

 
$
36,771

 
$
36,619

__________
(1) 
Includes primarily supranational bonds, foreign government bonds and other asset-backed securities.
Loans Held for Investment
Total loans held for investment consist of both unsecuritized loans and loans held in our consolidated trusts. Table 7 summarizes the carrying value of our loans held for investment by portfolio segment, the allowance for loan and lease losses, and net loan balance as of June 30, 2019 and December 31, 2018.
Table 7: Loans Held for Investment
 
 
June 30, 2019
 
December 31, 2018
(Dollars in millions)
 
Loans
 
Allowance
 
Net Loans
 
Loans
 
Allowance
 
Net Loans
Credit Card
 
$
112,141

 
$
5,342

 
$
106,799

 
$
116,361

 
$
5,535

 
$
110,826

Consumer Banking
 
60,327

 
1,055

 
59,272

 
59,205

 
1,048

 
58,157

Commercial Banking
 
71,992

 
736

 
71,256

 
70,333

 
637

 
69,696

Total
 
$
244,460

 
$
7,133

 
$
237,327

 
$
245,899

 
$
7,220

 
$
238,679

Loans held for investment decreased by $1.4 billion to $244.5 billion as of June 30, 2019 from December 31, 2018 primarily driven by expected seasonal paydowns in our domestic credit card loan portfolio and sale of certain partnership receivables, partially offset by growth in our commercial, domestic credit card and auto loan portfolios.
We provide additional information on the composition of our loan portfolio and credit quality below in “MD&A—Credit Risk Profile,” “MD&A—Consolidated Results of Operations” and “Note 4—Loans.”

 
 
18
Capital One Financial Corporation (COF)

Funding Sources
Our primary source of funding comes from deposits, as they are a stable and relatively low cost source of funding. In addition to deposits, we also raise funding through the issuance of securitized debt obligations and other debt. Other debt primarily consists of senior and subordinated notes, FHLB advances secured by certain portions of our loan and securities portfolios, and federal funds purchased and securities loaned or sold under agreements to repurchase.
Table 8 provides the composition of our primary sources of funding as of June 30, 2019 and December 31, 2018.
Table 8: Funding Sources Composition
 
 
June 30, 2019
 
December 31, 2018
(Dollars in millions)
 
Amount
 
% of Total
 
Amount
 
% of Total
Deposits:
 
 
 
 
 
 
 
 
Consumer Banking
 
$
205,220

 
68
%
 
$
198,607

 
64
%
Commercial Banking
 
30,761

 
10

 
29,480

 
10

Other(1)
 
18,554

 
6

 
21,677

 
7

Total deposits
 
254,535

 
84

 
249,764

 
81

Securitized debt obligations
 
16,959

 
6

 
18,307

 
6

Other debt
 
32,274

 
10

 
40,598

 
13

Total funding sources
 
$
303,768

 
100
%
 
$
308,669

 
100
%
__________
(1) 
Includes brokered deposits of $17.8 billion and $21.2 billion as of June 30, 2019 and December 31, 2018, respectively.
Total deposits increased by $4.8 billion to $254.5 billion as of June 30, 2019 from December 31, 2018 primarily driven by strong growth in our deposit products as a result of our national banking strategy in our Consumer Banking business.
Securitized debt obligations decreased by $1.3 billion to $17.0 billion as of June 30, 2019 from December 31, 2018 as debt maturities outpaced issuances in the first six months of 2019.
Other debt decreased by $8.3 billion to $32.3 billion as of June 30, 2019 from December 31, 2018 primarily driven by maturities of our short-term FHLB advances.
We provide additional information on our funding sources in “MD&A—Liquidity Risk Profile” and in “Note 8—Deposits and Borrowings.”
OFF-BALANCE SHEET ARRANGEMENTS
In the ordinary course of business, we engage in certain activities that are not reflected on our consolidated balance sheets, generally referred to as off-balance sheet arrangements. These activities typically involve transactions with unconsolidated variable interest entities (“VIEs”) as well as other arrangements, such as letters of credit, loan commitments and guarantees, to meet the financing needs of our customers and support their ongoing operations. We provide additional information regarding these types of activities in “Note 6—Variable Interest Entities and Securitizations” and “Note 14—Commitments, Contingencies, Guarantees and Others.”
BUSINESS SEGMENT FINANCIAL PERFORMANCE
Our principal operations are organized for management reporting purposes into three major business segments, which are defined primarily based on the products and services provided or the types 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 and residual tax expense or benefit to arrive at the consolidated effective tax rate that is not assessed to our primary business segments, are included in the Other category.

 
 
19
Capital One Financial Corporation (COF)

The results of our individual businesses, which we report on a continuing operations basis, reflect the manner in which management evaluates performance and makes decisions about funding our operations and allocating resources. We provide additional information on the allocation methodologies used to derive our business segment results in “Note 18—Business Segments and Revenue from Contracts with Customers” in our 2018 Form 10-K.
We refer to the business segment results derived from our internal management accounting and reporting process as our “managed” presentation, which differs in some cases from our reported results prepared based on U.S. GAAP. There is no comprehensive authoritative body of guidance for management accounting equivalent to U.S. GAAP; therefore, the managed presentation of our business segment results may not be comparable to similar information provided by other financial services companies. In addition, our individual business segment results should not be used as a substitute for comparable results determined in accordance with U.S. GAAP.
We summarize our business segment results for the second quarter and first six months of 2019 and 2018 and provide a comparative discussion of these results, as well as changes in our financial condition and credit performance metrics as of June 30, 2019 compared to December 31, 2018. We provide a reconciliation of our total business segment results to our reported consolidated results in “Note 13—Business Segments and Revenue from Contracts with Customers.”
Business Segment Financial Performance
Table 9 summarizes our business segment results, which we report based on revenue and income from continuing operations, for the second quarter and first six months of 2019 and 2018.
Table 9: Business Segment Results
 
 
Three Months Ended June 30,
 
 
2019
 
2018
 
 
Total Net
Revenue(1)
 
Net Income
(Loss)(2)
 
Total Net
Revenue(1)
 
Net Income
(Loss)(2)
(Dollars in millions)
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
Credit Card
 
$
4,569

 
64
 %
 
$
938

 
58
 %
 
$
4,280

 
59
%
 
$
923

 
48
%
Consumer Banking
 
1,875

 
26

 
543

 
33

 
1,784

 
25

 
539

 
28

Commercial Banking(3)(4)
 
714

 
10

 
157

 
10

 
726

 
10

 
217

 
11

Other(3)(4)
 
(34
)
 
—

 
(22
)
 
(1
)
 
402

 
6

 
238

 
13

Total
 
$
7,124

 
100
 %
 
$
1,616

 
100
 %
 
$
7,192

 
100
%
 
$
1,917

 
100
%
 
 
Six Months Ended June 30,
 
 
2019
 
2018
 
 
Total Net
Revenue(1)
 
Net Income
(Loss)(2)
 
Total Net
Revenue(1)
 
Net Income
(Loss)(2)
(Dollars in millions)
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
Credit Card
 
$
9,109

 
64
 %
 
$
1,689

 
56
%
 
$
8,695

 
62
%
 
$
1,630

 
50
%
Consumer Banking
 
3,714

 
26

 
1,011

 
33

 
3,573

 
25

 
965

 
30

Commercial Banking(3)(4)
 
1,390

 
10

 
303

 
10

 
1,419

 
10

 
450

 
14

Other(3)(4)
 
(6
)
 
—

 
23

 
1

 
414

 
3

 
215

 
6

Total
 
$
14,207

 
100
 %
 
$
3,026

 
100
%
 
$
14,101

 
100
%
 
$
3,260

 
100
%

 
 
20
Capital One Financial Corporation (COF)

__________
(1) 
Total net revenue consists of net interest income and non-interest income.
(2) 
Net income (loss) for our business segments and the Other category is based on income from continuing operations, net of tax.
(3) 
Some of our commercial investments generate tax-exempt income, tax credits or other tax benefits. Accordingly, we present our Commercial Banking revenue and yields on a taxable-equivalent basis, calculated using the federal statutory tax rate of 21% and state taxes where applicable, with offsetting reductions to the Other category.  
(4) 
In the first quarter of 2019, we made a change in how revenue is measured in our Commercial Banking business by revising the allocation of tax benefits on certain tax-advantaged investments. As such, prior period results have been recast to conform with the current period presentation. The result of this measurement change reduced the previously reported total net revenue in our Commercial Banking business by $32 million and $62 million for the second quarter and first six months of 2018, with an offsetting increase in the Other category.
Credit Card Business
The primary sources of revenue for our Credit Card business are net interest income, net interchange income and fees collected from customers. Expenses primarily consist of the provision for credit losses, operating costs and marketing expenses.
Our Credit Card business generated net income from continuing operations of $938 million and $1.7 billion in the second quarter and first six months of 2019, respectively, and $923 million and $1.6 billion in the second quarter and first six months of 2018, respectively.
Table 10 summarizes the financial results of our Credit Card business and displays selected key metrics for the periods indicated.
Table 10: Credit Card Business Results
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Dollars in millions, except as noted)
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
Selected income statement data:
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
$
3,531

 
$
3,396

 
4
 %
 
$
7,121

 
$
6,954

 
2
 %
Non-interest income
 
1,038

 
884

 
17

 
1,988

 
1,741

 
14

Total net revenue(1)
 
4,569

 
4,280

 
7

 
9,109

 
8,695

 
5

Provision for credit losses
 
1,095

 
1,171

 
(6
)
 
2,484

 
2,627

 
(5
)
Non-interest expense
 
2,253

 
1,904

 
18

 
4,424

 
3,943

 
12

Income from continuing operations before income taxes
 
1,221

 
1,205

 
1

 
2,201

 
2,125

 
4

Income tax provision
 
283

 
282

 
—

 
512

 
495

 
3

Income from continuing operations, net of tax
 
$
938

 
$
923

 
2

 
$
1,689

 
$
1,630

 
4

Selected performance metrics:
 
 
 
 
 
 
 
 
 
 
 
 
Average loans held for investment(2)
 
$
110,798

 
$
107,893

 
3

 
$
111,125

 
$
108,693

 
2

Average yield on loans held for investment(3)
 
15.66
%
 
15.06
%
 
60
bps
 
15.72
%
 
15.15
%
 
57
bps
Total net revenue margin(4)
 
16.50

 
15.87

 
63

 
16.39

 
16.00

 
39

Net charge-offs
 
$
1,320

 
$
1,260

 
5
 %
 
$
2,684

 
$
2,637

 
2
 %
Net charge-off rate
 
4.76
%
 
4.67
%
 
9
bps
 
4.83
%
 
4.85
%
 
(2
)bps
Purchase volume(5)
 
$
106,903

 
$
97,392

 
10
 %
 
$
200,100

 
$
183,937

 
9
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in millions, except as noted)
 
June 30, 2019
 
December 31, 2018
 
Change
 
 
 
 
 
 
Selected period-end data:
 
 
 
 
 
 
 
 
 
 
 
 
Loans held for investment(2)
 
$
112,141

 
$
116,361

 
(4
)%

 

 
 
 
30+ day performing delinquency rate
 
3.40
%
 
4.00
%
 
(60
)bps

 

 
 
 
30+ day delinquency rate
 
3.42

 
4.01

 
(59
)

 

 
 
 
Nonperforming loan rate(6)
 
0.02

 
0.02

 
—


 

 
 
 
Allowance for loan and lease losses
 
$
5,342

 
$
5,535

 
(3
)%

 

 
 
 
Allowance coverage ratio
 
4.76
%
 
4.76
%
 
—


 

 
 
 
__________
(1) 
We recognize billed finance charges and fee income on open-ended loans in accordance with the contractual provisions of the credit arrangements and estimate the uncollectible amount on a quarterly basis. The estimated uncollectible amount of billed finance charges and fees is reflected as a reduction in

 
 
21
Capital One Financial Corporation (COF)

revenue and is not included in our net charge-offs. Total net revenue was reduced by $318 million and $694 million in the second quarter and first six months of 2019, respectively, and by $309 million and $644 million in the second quarter and first six months of 2018, respectively, for the estimated uncollectible amount of billed finance charges and fees and related losses. The finance charge and fee reserve totaled $426 million and $468 million as of June 30, 2019 and December 31, 2018, respectively.
(2) 
Period-end loans held for investment and average loans held for investment include billed finance charges and fees, net of the estimated uncollectible amount.
(3) 
Average yield on loans held for investment is calculated by dividing annualized interest income for the period by average loans held for investment during the period. Interest income excludes various allocations including funds transfer pricing that assigns certain balance sheet assets, deposits and other liabilities and their related revenue and expenses attributable to each business segment.
(4) 
Total net revenue margin is calculated by dividing annualized total net revenue for the period by average loans held for investment during the period. Interest income also includes interest income on loans held for sale.
(5) 
Purchase volume consists of purchase transactions, net of returns, for the period, and excludes cash advance and balance transfer transactions.
(6) 
Within our credit card loan portfolio, only certain loans in our international card businesses are classified as nonperforming. See “MD&A—Nonperforming Loans and Other Nonperforming Assets” for additional information.
Key factors affecting the results of our Credit Card business for the second quarter and first six months of 2019 compared to the second quarter and first six months of 2018, and changes in financial condition and credit performance between June 30, 2019 and December 31, 2018 include the following:
•
Net Interest Income: Net interest income increased by $135 million to $3.5 billion in the second quarter of 2019 and increased by $167 million to $7.1 billion in the first six months of 2019 primarily driven by growth in our domestic credit card loan portfolio.
•
Non-Interest Income: Non-interest income increased by $154 million to $1.0 billion in the second quarter of 2019 and increased by $247 million to $2.0 billion in the first six months of 2019 primarily due to an increase in net interchange fees, driven by higher purchase volume and the impact of updated rewards cost estimates, as well as a gain on the sale of certain partnership receivables.
•
Provision for Credit Losses: The provision for credit losses decreased by $76 million to $1.1 billion in the second quarter of 2019 and decreased by $143 million to $2.5 billion in the first six months of 2019 primarily driven by an allowance release in our domestic card loan portfolio due to the strong economy, stable underlying credit performance and the impact of the sale of certain partnership receivables.
•
Non-Interest Expense: Non-interest expense increased by $349 million to $2.3 billion in the second quarter of 2019 and increased by $481 million to $4.4 billion in the first six months of 2019 primarily driven by increased marketing expenses and higher operating expenses including Walmart partnership and related expenses.
•
Loans Held for Investment:
◦
Period-end loans held for investment decreased by $4.2 billion to $112.1 billion as of June 30, 2019 from December 31, 2018 primarily due to expected seasonal paydowns and the sale of certain partnership receivables, partially offset by growth in our domestic credit card loan portfolio.
◦
Average loans held for investment increased by $2.9 billion to $110.8 billion in the second quarter of 2019 compared to the second quarter of 2018 and increased by $2.4 billion to $111.1 billion in the first six months of 2019 compared to the first six months of 2018 primarily due to growth in our domestic credit card loan portfolio.
•
Net Charge-Off and Delinquency Metrics: The net charge-off rate increased by 9 basis points to 4.76% in the second quarter of 2019 compared to the second quarter of 2018 primarily driven by higher net charge-offs in our domestic credit card loan portfolio. The net charge-off rate decreased by 2 basis points to 4.83% in the first six months of 2019 compared to the first six months of 2018 primarily driven by favorability realized from portfolio seasoning.
The 30+ day delinquency rate decreased by 59 basis points to 3.42% as of June 30, 2019 from December 31, 2018 primarily due to seasonally lower delinquency inventories in our domestic credit card loan portfolio.
Domestic Card Business
The Domestic Card business generated net income from continuing operations of $869 million and $1.6 billion in the second quarter and first six months of 2019, respectively, compared to net income from continuing operations of $881 million and $1.5 billion in the second quarter and first six months of 2018, respectively. In the second quarter and first six months of 2019 and 2018, Domestic Card business accounted for greater than 90% of total net revenue of our Credit Card business.

 
 
22
Capital One Financial Corporation (COF)

Table 10.1 summarizes the financial results for Domestic Card business and displays selected key metrics for the periods indicated.
Table 10.1: Domestic Card Business Results
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Dollars in millions, except as noted)
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
Selected income statement data:
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
$
3,220

 
$
3,108

 
4
 %
 
$
6,493

 
$
6,337

 
2
 %
Non-interest income
 
971

 
818

 
19

 
1,844

 
1,592

 
16

Total net revenue(1)
 
4,191

 
3,926

 
7

 
8,337

 
7,929

 
5

Provision for credit losses
 
1,024

 
1,094

 
(6
)
 
2,315

 
2,474

 
(6
)
Non-interest expense
 
2,034

 
1,683

 
21

 
3,983

 
3,515

 
13

Income from continuing operations before income taxes
 
1,133

 
1,149

 
(1
)
 
2,039

 
1,940

 
5

Income tax provision
 
264

 
268

 
(1
)
 
475

 
452

 
5

Income from continuing operations, net of tax
 
$
869

 
$
881

 
(1
)
 
$
1,564

 
$
1,488

 
5

Selected performance metrics:
 
 
 
 
 
 
 
 
 
 
 
 
Average loans held for investment(2)
 
$
101,930

 
$
98,895

 
3

 
$
102,296

 
$
99,668

 
3

Average yield on loans held for investment(3)
 
15.60
%
 
15.05
%
 
55
bps
 
15.65
%
 
15.07
%
 
58
bps
Total net revenue margin(4)
 
16.45

 
15.88

 
57

 
16.30

 
15.91

 
39

Net charge-offs
 
$
1,240

 
$
1,166

 
6
 %
 
$
2,534

 
$
2,487

 
2
 %
Net charge-off rate
 
4.86
%
 
4.72
%
 
14
bps
 
4.95
%
 
4.99
%
 
(4
)bps
Purchase volume(5)
 
$
98,052

 
$
88,941

 
10
 %
 
$
183,790

 
$
168,135

 
9
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in millions, except as noted)
 
June 30, 2019
 
December 31, 2018
 
Change
 
 
 
 
 
 
Selected period-end data:
 
 
 
 
 
 
 
 
 
 
 
 
Loans held for investment(2)
 
$
102,959

 
$
107,350

 
(4
)%
 
 
 
 
 
 
30+ day delinquency rate
 
3.40
%
 
4.04
%
 
(64
)bps
 
 
 
 
 
 
Allowance for loan and lease losses
 
$
4,925

 
$
5,144

 
(4
)
 
 
 
 
 
 
Allowance coverage ratio
 
4.78
%
 
4.79
%
 
(1
)bps
 
 
 
 
 
 
__________
(1) 
We recognize billed finance charges and fee income on open-ended loans in accordance with the contractual provisions of the credit arrangements and estimate the uncollectible amount on a quarterly basis. The estimated uncollectible amount of billed finance charges and fees is reflected as a reduction in revenue and is not included in our net charge-offs.
(2) 
Period-end loans held for investment and average loans held for investment include billed finance charges and fees, net of the estimated uncollectible amount.
(3) 
Average yield on loans held for investment is calculated by dividing annualized interest income for the period by average loans held for investment during the period. Interest income excludes various allocations including funds transfer pricing that assigns certain balance sheet assets, deposits and other liabilities and their related revenue and expenses attributable to each business segment.
(4) 
Total net revenue margin is calculated by dividing annualized total net revenue for the period by average loans held for investment during the period.
(5) 
Purchase volume consists of purchase transactions, net of returns, for the period, and excludes cash advance and balance transfer transactions.
Because our Domestic Card business accounts for the substantial majority of our Credit Card business, the key factors driving the results are similar to the key factors affecting our total Credit Card business. Net income for our Domestic Card business remained substantially flat in the second quarter of 2019 compared to the second quarter of 2018 and increased in the first six months of 2019 compared to the first six months of 2018 primarily driven by:
•
higher non-interest income due to an increase in net interchange fees, driven by higher purchase volume and the impact of updated rewards cost estimates, as well as a gain on the sale of certain partnership receivables;
•
lower provision for credit losses due to the strong economy, stable underlying credit performance and the impact of the sale of certain partnership receivables; and
•
higher net interest income due to portfolio growth.

 
 
23
Capital One Financial Corporation (COF)

These drivers were largely offset by increased marketing expenses and higher operating expenses including Walmart partnership and related expenses.
Consumer Banking Business
The primary sources of revenue for our Consumer Banking business are net interest income from loans and deposits, net interchange income and non-interest income from service charges and customer-related fees. Expenses primarily consist of the provision for credit losses, operating costs and marketing expenses.
Our Consumer Banking business generated net income from continuing operations of $543 million and $1.0 billion in the second quarter and first six months of 2019, respectively, and $539 million and $965 million in the second quarter and first six months of 2018, respectively.

 
 
24
Capital One Financial Corporation (COF)

Table 11 summarizes the financial results of our Consumer Banking business and displays selected key metrics for the periods indicated.
Table 11: Consumer Banking Business Results
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Dollars in millions, except as noted)
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
Selected income statement data:
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
$
1,709

 
$
1,609

 
6
 %
 
$
3,388

 
$
3,224

 
5
 %
Non-interest income
 
166

 
175

 
(5
)
 
326

 
349

 
(7
)
Total net revenue
 
1,875

 
1,784

 
5

 
3,714

 
3,573

 
4

Provision for credit losses
 
165

 
118

 
40

 
400

 
351

 
14

Non-interest expense
 
1,002

 
963

 
4

 
1,996

 
1,963

 
2

Income from continuing operations before income taxes
 
708

 
703

 
1

 
1,318

 
1,259

 
5

Income tax provision
 
165

 
164

 
1

 
307

 
294

 
4

Income from continuing operations, net of tax
 
$
543

 
$
539

 
1

 
$
1,011

 
$
965

 
5

Selected performance metrics:
 
 
 
 
 
 
 
 
 
 
 
 
Average loans held for investment:
 
 
 
 
 
 
 
 
 
 
 
 
Auto
 
$
57,070

 
$
55,298

 
3

 
$
56,654

 
$
54,824

 
3

Home loan(1)
 
—

 
8,098

 
**

 
—

 
12,635

 
**

Retail banking
 
2,788

 
3,084

 
(10
)
 
2,809

 
3,256

 
(14
)
Total consumer banking
 
$
59,858

 
$
66,480

 
(10
)
 
$
59,463

 
$
70,715

 
(16
)
Average yield on loans held for investment(2)
 
8.36
%
 
7.32
%
 
104
bps
 
8.25
%
 
7.08
%
 
117
bps
Average deposits
 
$
204,164

 
$
193,278

 
6
 %
 
$
202,627

 
$
190,547

 
6
 %
Average deposits interest rate
 
1.26
%
 
0.88
%
 
38
bps
 
1.22
%
 
0.84
%
 
38
bps
Net charge-offs
 
$
172

 
$
198

 
(13
)%
 
$
393

 
$
421

 
(7
)%
Net charge-off rate
 
1.15
%
 
1.19
%
 
(4
)bps
 
1.32
%
 
1.19
%
 
13
bps
Auto loan originations
 
$
7,327

 
$
6,994

 
5
 %
 
$
13,549

 
$
13,701

 
(1
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in millions, except as noted)
 
June 30, 2019
 
December 31, 2018
 
Change
 
 
 
 
 
 
Selected period-end data:
 
 
 
 
 
 
 
 
 
 
 
 
Loans held for investment:
 
 
 
 
 
 
 
 
 
 
 
 
Auto
 
$
57,556

 
$
56,341

 
2
 %
 
 
 
 
 
 
Retail banking
 
2,771

 
2,864

 
(3
)
 
 
 
 
 
 
Total consumer banking
 
$
60,327

 
$
59,205

 
2

 
 
 
 
 
 
30+ day performing delinquency rate
 
5.87
%
 
6.67
%
 
(80
)bps
 
 
 
 
 
 
30+ day delinquency rate
 
6.41

 
7.36

 
(95
)
 
 
 
 
 
 
Nonperforming loan rate
 
0.66

 
0.81

 
(15
)
 
 
 
 
 
 
Nonperforming asset rate(3)
 
0.75

 
0.90

 
(15
)
 
 
 
 
 
 
Allowance for loan and lease losses
 
$
1,055

 
$
1,048

 
1
 %
 
 
 
 
 
 
Allowance coverage ratio
 
1.75
%
 
1.77
%
 
(2
)bps
 
 
 
 
 
 
Deposits
 
$
205,220

 
$
198,607

 
3
 %
 
 
 
 
 
 
__________
(1) 
In 2018, we sold all of our consumer home loan portfolio and the related servicing. The impact of this sale is reflected in the Other category.
(2) 
Average yield on loans held for investment is calculated by dividing annualized interest income for the period by average loans held for investment during the period. Interest income excludes various allocations including funds transfer pricing that assigns certain balance sheet assets, deposits and other liabilities and their related revenue and expenses attributable to each business segment.
(3) 
Nonperforming assets primarily consist of nonperforming loans and repossessed assets. The total nonperforming asset rate is calculated based on total nonperforming assets divided by the combined period-end total loans held for investment and repossessed assets.
**
Not meaningful.

 
 
25
Capital One Financial Corporation (COF)

Key factors affecting the results of our Consumer Banking business for the second quarter and first six months of 2019 compared to the second quarter and first six months of 2018, and changes in financial condition and credit performance between June 30, 2019 and December 31, 2018 include the following:
•
Net Interest Income: Net interest income increased by $100 million to $1.7 billion in the second quarter of 2019 and increased by $164 million to $3.4 billion in the first six months of 2019 primarily driven by higher deposit volumes and margins in our Retail Banking business as well as growth in our auto loan portfolio, partially offset by the reduction in net interest income from the sale of our consumer home loan portfolio.
Consumer Banking loan yield increased by 104 basis points to 8.36% and increased by 117 basis points to 8.25% in the second quarter and first six months of 2019, respectively, compared to the second quarter and first six months of 2018. The increase was primarily driven by changes in product mix due to the sale of our consumer home loan portfolio and higher yields as a result of higher interest rates.
•
Non-Interest Income: Non-interest income was substantially flat at $166 million in the second quarter of 2019 and decreased by $23 million to $326 million in the first six months of 2019 primarily driven by the impact of the sale of our online retail brokerage business in the fourth quarter of 2018.
•
Provision for Credit Losses: The provision for credit losses increased by $47 million to $165 million in the second quarter of 2019 and increased by $49 million to $400 million in the first six months of 2019 primarily driven by the allowance release in 2018 largely due to improvements in credit trends in our auto loan portfolio.
•
Non-Interest Expense: Non-interest expense increased by $39 million to $1.0 billion in the second quarter of 2019 and increased by $33 million to $2.0 billion in the first six months of 2019 primarily driven by higher operating expenses due to growth in our auto loan portfolio and increased marketing expense associated with our national banking strategy, partially offset by lower operating expense due to the sale of our consumer home loan portfolio.
•
Loans Held for Investment: Period-end loans held for investment increased by $1.1 billion to $60.3 billion as of June 30, 2019 compared to December 31, 2018 due to growth in our auto loan portfolio. Average loans held for investment decreased by $6.6 billion to $59.9 billion in the second quarter of 2019 compared to the second quarter of 2018 and decreased by $11.3 billion to $59.5 billion in the first six months of 2019 compared to the first six months of 2018 primarily driven by the sale of our consumer home loan portfolio, partially offset by growth in our auto loan portfolio.
•
Deposits: Period-end deposits increased by $6.6 billion to $205.2 billion as of June 30, 2019 from December 31, 2018 driven by strong growth in our deposit products as a result of our national banking strategy.
•
Net Charge-Off and Delinquency Metrics: The net charge-off rate decreased by 4 basis points to 1.15% in the second quarter of 2019 compared to the second quarter of 2018 primarily driven by lower net charge-offs in our auto loan portfolio, partially offset by the lower loan balances due to the sale of our consumer home loan portfolio.
The net charge-off rate increased by 13 basis points to 1.32% in the first six months of 2019 compared to the first six months of 2018 primarily driven by lower loan balances due to the sale of our consumer home loan portfolio, partially offset by lower net charge-offs in our auto loan portfolio.
The 30+ day delinquency rate decreased by 95 basis points to 6.41% as of June 30, 2019 from December 31, 2018 primarily attributable to seasonally lower auto delinquency inventories.
Commercial Banking Business
The primary sources of revenue for our Commercial Banking business are net interest income from loans and deposits and non-interest income from customer fees and other products and services. Because our Commercial Banking business has loans and investments that generate tax-exempt income, tax credits or other tax benefits, we present the revenues on a taxable-equivalent basis. Expenses primarily consist of the provision for credit losses, operating costs and marketing expenses.
Our Commercial Banking business generated net income from continuing operations of $157 million and $303 million in the second quarter and first six months of 2019, respectively, and $217 million and $450 million in the the second quarter and first six months of 2018, respectively.

 
 
26
Capital One Financial Corporation (COF)

Table 12 summarizes the financial results of our Commercial Banking business and displays selected key metrics for the periods indicated.
Table 12: Commercial Banking Business Results
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Dollars in millions, except as noted)
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
Selected income statement data:
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
$
514

 
$
517

 
(1
)%
 
$
1,003

 
$
1,023

 
(2
)%
Non-interest income
 
200

 
209

 
(4
)
 
387

 
396

 
(2
)
Total net revenue (1)(2)
 
714

 
726

 
(2
)
 
1,390

 
1,419

 
(2
)
Provision for credit losses(3)
 
82

 
34

 
141

 
151

 
20

 
**

Non-interest expense
 
427

 
409

 
4

 
844

 
812

 
4

Income from continuing operations before income taxes
 
205

 
283

 
(28
)
 
395

 
587

 
(33
)
Income tax provision
 
48

 
66

 
(27
)
 
92

 
137

 
(33
)
Income from continuing operations, net of tax
 
$
157

 
$
217

 
(28
)
 
$
303

 
$
450

 
(33
)
Selected performance metrics:
 
 
 
 
 
 
 
 
 
 
 
 
Average loans held for investment:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and multifamily real estate
 
$
29,514

 
$
27,302

 
8

 
$
29,276

 
$
26,924

 
9

Commercial and industrial
 
42,476

 
38,686

 
10

 
42,304

 
38,467

 
10

Total commercial lending
 
71,990

 
65,988

 
9

 
71,580

 
65,391

 
9

Small-ticket commercial real estate
 
7

 
376

 
(98
)
 
139

 
385

 
(64
)
Total commercial banking
 
$
71,997

 
$
66,364

 
8

 
$
71,719

 
$
65,776

 
9

Average yield on loans held for investment(1)(4)
 
4.75
%
 
4.43
 %
 
32
bps
 
4.68
%
 
4.30
%
 
38
bps
Average deposits
 
$
31,364

 
$
32,951

 
(5
)%
 
$
31,092

 
$
33,501

 
(7
)%
Average deposits interest rate
 
1.28
%
 
0.65
 %
 
63
bps
 
1.19
%
 
0.59
%
 
60
bps
Net charge-offs (recovery)
 
$
16

 
$
(7
)
 
**

 
$
30

 
$
12

 
150
 %
Net charge-off (recovery) rate
 
0.09
%
 
(0.04
)%
 
13
bps
 
0.08
%
 
0.04
%
 
4
bps
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in millions, except as noted)
 
June 30, 2019
 
December 31, 2018
 
Change
 
 
 
 
 
 
Selected period-end data:
 
 
 
 
 
 
 
 
 
 
 
 
Loans held for investment:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and multifamily real estate
 
$
29,861

 
$
28,899

 
3
 %
 
 
 
 
 
 
Commercial and industrial
 
42,125

 
41,091

 
3

 
 
 
 
 
 
Total commercial lending
 
71,986

 
69,990

 
3

 
 
 
 
 
 
Small-ticket commercial real estate
 
6

 
343

 
(98
)
 
 
 
 
 
 
Total commercial banking
 
$
71,992

 
$
70,333

 
2

 
 
 
 
 
 
Nonperforming loan rate
 
0.50
%
 
0.44
 %
 
6
bps
 
 
 
 
 
 
Nonperforming asset rate(5)
 
0.50

 
0.45

 
5

 
 
 
 
 
 
Allowance for loan and lease losses(3)
 
$
736

 
$
637

 
16
 %
 
 
 
 
 
 
Allowance coverage ratio
 
1.02
%
 
0.91
 %
 
11
bps
 
 
 
 
 
 
Deposits
 
$
30,761

 
$
29,480

 
4
 %
 
 
 
 
 
 
Loans serviced for others
 
35,609

 
32,588

 
9

 
 
 
 
 
 
__________
(1) 
Some of our commercial investments generate tax-exempt income, tax credits or other tax benefits. Accordingly, we present our Commercial Banking revenue and yields on a taxable-equivalent basis, calculated using the federal statutory tax rate of 21% and state taxes where applicable, with offsetting reductions to the Other category.
(2) 
In the first quarter of 2019, we made a change in how revenue is measured in our Commercial Banking business by revising the allocation of tax benefits on certain tax-advantaged investments. As such, prior period results have been recast to conform with the current period presentation. The result of this measurement change reduced the previously reported total net revenue in our Commercial Banking business by $32 million and $62 million for the second quarter and first six months of 2018, with an offsetting increase in the Other category.  

 
 
27
Capital One Financial Corporation (COF)

(3) 
The provision for losses on unfunded lending commitments is included in the provision for credit losses in our consolidated statements of income and the related reserve for unfunded lending commitments is included in other liabilities on our consolidated balance sheets. Our reserve for unfunded lending commitments totaled $140 million and $118 million as of June 30, 2019 and December 31, 2018, respectively.
(4) 
Average yield on loans held for investment is calculated by dividing annualized interest income for the period by average loans held for investment during the period. Interest income excludes various allocations including funds transfer pricing that assigns certain balance sheet assets, deposits and other liabilities and their related revenue and expenses attributable to each business segment.
(5) 
Nonperforming assets consist of nonperforming loans, real estate owned (“REO”) and other foreclosed assets. The total nonperforming asset rate is calculated based on total nonperforming assets divided by the combined period-end total loans held for investment, REO and other foreclosed assets.
** 
Not meaningful.
Key factors affecting the results of our Commercial Banking business for the second quarter and first six months of 2019 compared to the second quarter and first six months of 2018, and changes in financial condition and credit performance between June 30, 2019 and December 31, 2018 include the following:
•
Net Interest Income: Net interest income was substantially flat at $514 million in the second quarter of 2019 and decreased by $20 million to $1.0 billion in the first six months of 2019 primarily driven by lower average deposit balances, higher rates paid and lower loan margins, partially offset by growth across our commercial loan portfolios.
•
Non-Interest Income: Non-interest income remained substantially flat at $200 million in the second quarter of 2019 and $387 million in the first six months of 2019.
•
Provision for Credit Losses: Provision for credit losses increased by $48 million to $82 million in the second quarter of 2019 and increased by $131 million to $151 million in the first six months of 2019 primarily driven by an allowance build.
•
Non-Interest Expense: Non-interest expense increased by $18 million to $427 million in the second quarter of 2019 and increased by $32 million to $844 million in the first six months of 2019 primarily driven by higher operating expenses associated with continued investments in technology and other business initiatives.
•
Loans Held for Investment: Period-end loans held for investment increased by $1.7 billion to $72.0 billion as of June 30, 2019 from December 31, 2018, and average loans held for investment increased by $5.6 billion to $72.0 billion in the second quarter of 2019 compared to the second quarter of 2018 and increased by $5.9 billion to $71.7 billion in the first six months of 2019 compared to the first six months of 2018 primarily driven by growth across our commercial loan portfolios.
•
Deposits: Period-end deposits increased by $1.3 billion to $30.8 billion as of June 30, 2019, from December 31, 2018 primarily driven by new business growth.
•
Net Charge-Off and Nonperforming Metrics: The net charge-off rate increased by 13 basis points to 0.09% in the second quarter of 2019 and increased by 4 basis points to 0.08% in the first six months of 2019.
The nonperforming loan rate increased by 6 basis points to 0.50% as of June 30, 2019 from December 31, 2018 primarily driven by some isolated credit deterioration.
Other Category
Other includes unallocated amounts related to our centralized Corporate Treasury group activities, such as management of our corporate investment portfolio, asset/liability management and certain capital management activities. Other also includes:
•
unallocated corporate revenue and expenses that do not directly support the operations of the business segments or for which the business segments are not considered financially accountable in evaluating their performance, such as certain restructuring charges;
•
offsets related to certain line-item reclassifications;
•
residual tax expense or benefit to arrive at the consolidated effective tax rate that is not assessed to our primary business segments; and
•
foreign exchange-rate fluctuations on foreign currency-denominated balances.

 
 
28
Capital One Financial Corporation (COF)

Table 13 summarizes the financial results of our Other category for the periods indicated.
Table 13: Other Category Results
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Dollars in millions)
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
Selected income statement data:
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income (loss)
 
$
(8
)
 
$
29

 
**

 
$
25

 
$
68

 
(63
)%
Non-interest income (loss)
 
(26
)
 
373

 
**

 
(31
)
 
346

 
**

Total net revenue (loss) (1)(2)
 
(34
)
 
402

 
**

 
(6
)
 
414

 
**

Benefit for credit losses
 
—

 
(47
)
 
**

 
—

 
(48
)
 
**

Non-interest expense
 
97

 
148

 
(34
)%
 
186

 
279

 
(33
)
Income (loss) from continuing operations before income taxes
 
(131
)
 
301

 
**

 
(192
)
 
183

 
**

Income tax provision (benefit)
 
(109
)
 
63

 
**

 
(215
)
 
(32
)
 
**

Income (loss) from continuing operations, net of tax
 
$
(22
)
 
$
238

 
**

 
$
23

 
$
215

 
(89
)
__________
(1) 
Some of our commercial investments generate tax-exempt income, tax credits or other tax benefits. Accordingly, we present our Commercial Banking revenue and yields on a taxable-equivalent basis, calculated using the federal statutory tax rate of 21% and state taxes where applicable, with offsetting reductions to the Other category.
(2) 
In the first quarter of 2019, we made a change in how revenue is measured in our Commercial Banking business by revising the allocation of tax benefits on certain tax-advantaged investments. As such, prior period results have been recast to conform with the current period presentation. The result of this measurement change reduced the previously reported total net revenue in our Commercial Banking business by $32 million and $62 million for the second quarter and first six months of 2018, with an offsetting increase in the Other category.
**
Not meaningful.
Net loss from continuing operations recorded in the Other category was $22 million in the second quarter of 2019 and net income was $23 million for the first six months of 2019, compared to net income of $238 million and $215 million in the second quarter and first six months of 2018, respectively, primarily driven by the absence of the net gain from the sale of our consumer home loan portfolio in the second quarter of 2018.
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 2018 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
•
Customer rewards reserve
We evaluate our critical accounting estimates and judgments on an ongoing basis and update them as necessary, based on changing conditions. There have been no changes to our critical accounting policies and estimates described in our 2018 Form 10-K under “MD&A—Critical Accounting Policies and Estimates.”

 
 
29
Capital One Financial Corporation (COF)

ACCOUNTING CHANGES AND DEVELOPMENTS
See “Note 1—Summary of Significant Accounting Policies” for information on the accounting standards we adopted in 2019 and the expected impacts of accounting standards issued but not adopted as of June 30, 2019.
CAPITAL MANAGEMENT
The level and composition of our capital are determined by multiple factors, including our consolidated regulatory capital requirements and internal risk-based capital assessments such as internal stress testing and economic capital. The level and composition of our capital may also be influenced by rating agency guidelines, subsidiary capital requirements, business environment, conditions in the financial markets and assessments of potential future losses due to adverse changes in our business and market environments.
Capital Standards and Prompt Corrective Action
We are subject to capital adequacy standards adopted by the Board of Governors of the Federal Reserve System (“Federal Reserve”), Office of the Comptroller of the Currency (“OCC”) and Federal Deposit Insurance Corporation (“FDIC”) (collectively, the “Federal Banking Agencies”), including the capital rules that implemented the Basel III capital framework (“Basel III Capital Rule”) developed by the Basel Committee on Banking Supervision (“Basel Committee”). The Basel III Capital Rule includes the “Basel III Standardized Approach” and the “Basel III Advanced Approaches.” Moreover, the Banks, as insured depository institutions, are subject to Prompt Corrective Action (“PCA”) capital regulations.
We entered parallel run under Basel III Advanced Approaches on January 1, 2015, during which we are required to calculate capital ratios under both the Basel III Standardized Approach and the Basel III Advanced Approaches, though we continue to use the Standardized Approach for purposes of meeting regulatory capital requirements. Under the Basel III Capital Rule, when we complete our parallel run for the Advanced Approaches, our minimum risk-based capital requirement will be determined by the greater of our risk-weighted assets under the Basel III Standardized Approach and the Basel III Advanced Approaches. Once we exit parallel run, based on clarification of the Basel III Capital Rule from our regulators, any amount by which our expected credit losses exceed eligible credit reserves, as each term is defined under the Basel III Capital Rule, will be deducted from our Basel III Standardized Approach numerator, subject to transition provisions. Inclusive of this impact, based on current capital rules and our business mix, we estimate that our Basel III Advanced Approaches ratios will be lower than our Basel III Standardized Approach ratios. However, there is uncertainty whether this will remain the case, or whether we will remain subject to the Basel III Advanced Approaches in light of potential changes to the United States capital rules.
The Basel III Capital Rule also introduced the supplementary leverage ratio for all Advanced Approaches banking organizations with a minimum requirement of 3.0%. The supplementary leverage ratio compares Tier 1 capital to total leverage exposure, which includes all on-balance sheet assets and certain off-balance sheet exposures, including derivatives and unused commitments. Given that we are in our Basel III Advanced Approaches parallel run, we calculate the ratio based on Tier 1 capital under the Standardized Approach.
The Market Risk Rule supplements both the Basel III Standardized Approach and the Basel III Advanced Approaches by requiring institutions subject to the Market Risk Rule to adjust their risk-based capital ratios to reflect the market risk in their trading portfolios. As of June 30, 2019, the Company and CONA are subject to the Market Risk Rule. See “MD&A—Market Risk Profile” below for additional information.
For the description of the regulatory capital rules we are subject to, see “Part I—Item 1. Business—Supervision and Regulation” in our 2018 Form 10-K.

 
 
30
Capital One Financial Corporation (COF)

Table 14 provides a comparison of our regulatory capital ratios under the Basel III Standardized Approach, the regulatory minimum capital adequacy ratios and the PCA well-capitalized level for each ratio, where applicable, as of June 30, 2019 and December 31, 2018.
Table 14: Capital Ratios under Basel III(1)(2)
 
 
June 30, 2019
 
December 31, 2018
 
 
Capital
Ratio
 
Minimum
Capital
Adequacy
 
Well-
Capitalized
 
Capital
Ratio
 
Minimum
Capital
Adequacy
 
Well-
Capitalized
Capital One Financial Corp:
 
 
 
 
 
 
 
 
 
 
 
 
Common equity Tier 1 capital(3)
 
12.3
%
 
4.5
%
 
N/A

 
11.2
%
 
4.5
%
 
N/A

Tier 1 capital(4)
 
13.8

 
6.0

 
6.0
%
 
12.7

 
6.0

 
6.0
%
Total capital(5) 
 
16.2

 
8.0

 
10.0

 
15.1

 
8.0

 
10.0

Tier 1 leverage(6)
 
11.4

 
4.0

 
N/A

 
10.7

 
4.0

 
N/A

Supplementary leverage(7)
 
9.7

 
3.0

 
N/A

 
9.0

 
3.0

 
N/A

COBNA:
 


 
 
 
 
 
 
 
 
 
 
Common equity Tier 1 capital(3)
 
15.5

 
4.5

 
6.5

 
15.3

 
4.5

 
6.5

Tier 1 capital(4)
 
15.5

 
6.0

 
8.0

 
15.3

 
6.0

 
8.0

Total capital(5) 
 
17.6

 
8.0

 
10.0

 
17.6

 
8.0

 
10.0

Tier 1 leverage(6)
 
14.0

 
4.0

 
5.0

 
14.0

 
4.0

 
5.0

Supplementary leverage(7)
 
11.4

 
3.0

 
N/A

 
11.5

 
3.0

 
N/A

CONA:
 


 
 
 
 
 
 
 
 
 
 
Common equity Tier 1 capital(3)
 
13.9

 
4.5

 
6.5

 
13.0

 
4.5

 
6.5

Tier 1 capital(4)
 
13.9

 
6.0

 
8.0

 
13.0

 
6.0

 
8.0

Total capital(5) 
 
15.0

 
8.0

 
10.0

 
14.2

 
8.0

 
10.0

Tier 1 leverage(6)
 
9.4

 
4.0

 
5.0

 
9.1

 
4.0

 
5.0

Supplementary leverage(7)
 
8.4

 
3.0

 
N/A

 
8.0

 
3.0

 
N/A

__________
(1) 
Capital requirements that are not applicable are denoted by “N/A.”
(2) 
Ratios as of June 30, 2019 are preliminary. As we continue to validate our data, the calculations are subject to change until we file our June 30, 2019 Form FR Y-9C—Consolidated Financial Statements for Holding Companies and Call Reports.
(3) 
Common equity Tier 1 capital ratio is a regulatory capital measure calculated based on common equity Tier 1 capital divided by risk-weighted assets.
(4) 
Tier 1 capital ratio is a regulatory capital measure calculated based on Tier 1 capital divided by risk-weighted assets.
(5) 
Total capital ratio is a regulatory capital measure calculated based on total capital divided by risk-weighted assets.
(6) 
Tier 1 leverage ratio is a regulatory capital measure calculated based on Tier 1 capital divided by adjusted average assets.
(7) 
Supplementary leverage ratio is a regulatory capital measure calculated based on Tier 1 capital divided by total leverage exposure.

 
 
31
Capital One Financial Corporation (COF)

Table 15 presents regulatory capital under the Basel III Standardized Approach and regulatory capital metrics as of June 30, 2019 and December 31, 2018.
Table 15: Regulatory Risk-Based Capital Components and Regulatory Capital Metrics
(Dollars in millions)
 
June 30, 2019
 
December 31, 2018
Regulatory Capital Under Basel III Standardized Approach
 
 
 
 
Common equity excluding AOCI
 
$
51,236

 
$
48,570

Adjustments:
 
 
 
 
AOCI(1)
 
170

 
(1,263
)
Goodwill, net of related deferred tax liabilities
 
(14,365
)
 
(14,373
)
Intangible assets, net of related deferred tax liabilities
 
(194
)
 
(254
)
Other
 
(401
)
 
391

Common equity Tier 1 capital
 
36,446

 
33,071

Tier 1 capital instruments
 
4,360

 
4,360

Tier 1 capital
 
40,806

 
37,431

Tier 2 capital instruments
 
3,379

 
3,483

Qualifying allowance for loan and lease losses
 
3,734

 
3,731

Tier 2 capital
 
7,113

 
7,214

Total capital
 
$
47,919

 
$
44,645

 
 
 
 
 
Regulatory Capital Metrics
 
 
 
 
Risk-weighted assets
 
$
295,255

 
$
294,950

Adjusted average assets
 
356,518

 
350,606

Total leverage exposure
 
421,139

 
414,701

__________
(1) 
Amounts presented are net of tax.
The Company exceeded the minimum capital requirements and each of the Banks exceeded the minimum regulatory requirements and were well capitalized under PCA requirements as of both June 30, 2019 and December 31, 2018.
The Basel III Capital Rule requires banks to maintain a capital conservation buffer, composed of common equity Tier 1 capital, of 2.5% above the regulatory minimum ratios. For banks subject to the Advanced Approaches, including the Company and the Banks, the capital conservation buffer may be supplemented by an incremental countercyclical capital buffer of up to 2.5% composed of common equity Tier 1 capital and set at the discretion of the Federal Banking Agencies. As of June 30, 2019, the countercyclical capital buffer was zero percent in the United States. A determination to increase the countercyclical capital buffer generally would be effective twelve months after the announcement of such an increase, unless the Federal Banking Agencies set an earlier effective date.
For 2019, the minimum capital requirement plus capital conservation buffer and countercyclical capital buffer for common equity Tier 1 capital, Tier 1 capital and total capital ratios is 7.0%, 8.5% and 10.5%, respectively, for the Company and the Banks. A common equity Tier 1 capital ratio, Tier 1 capital ratio, or total capital ratio below the applicable regulatory minimum ratio plus the applicable capital conservation buffer and the applicable countercyclical buffer (if set to an amount greater than zero percent) might restrict a bank’s ability to distribute capital and make discretionary bonus payments. As of June 30, 2019, the Company and each of the Banks were all above the applicable combined thresholds.

 
 
32
Capital One Financial Corporation (COF)

Capital Planning and Regulatory Stress Testing
On June 27, 2019, the Federal Reserve completed its 2019 Comprehensive Capital Analysis and Review (“CCAR”) and did not object to our proposed adjusted capital plan. As a result of this non-objection to our capital plan, the Board of Directors authorized the repurchase of up to $2.2 billion of shares of our common stock beginning in the third quarter of 2019 through the end of the second quarter of 2020. We expect to maintain the quarterly dividend on our common stock of $0.40 per share, subject to the approval of the Board of Directors. For the description of the regulatory capital planning rules we are subject to, see “Part I—Item 1. Business—Supervision and Regulation” in our 2018 Form 10-K.
Dividend Policy and Stock Purchases
In the first six months of 2019, we declared and paid common stock dividends of $383 million, or $0.80 per share, and preferred stock dividends of $132 million. The following table summarizes the dividends paid per share on our various preferred stock series in the first six months of 2019.
Table 16: Preferred Stock Dividends Paid Per Share
Series
 
Description
 
Issuance Date
 
Per Annum Dividend Rate
 
Dividend Frequency
 
2019
 
Q2
 
Q1
Series B
 
6.00%
Non-Cumulative
 
August 20, 2012
 
6.00%
 
Quarterly
 
$15.00
 
$15.00
Series C
 
6.25%
Non-Cumulative
 
June 12, 2014
 
6.25
 
Quarterly
 
15.63
 
15.63
Series D
 
6.70%
Non-Cumulative
 
October 31, 2014
 
6.70
 
Quarterly
 
16.75
 
16.75
Series E
 
Fixed-to-Floating Rate
Non-Cumulative
 
May 14, 2015
 
5.55% through 5/31/2020;
3-mo. LIBOR+ 380 bps thereafter
 
Semi-Annually through 5/31/2020; Quarterly thereafter
 
27.75
 
—
Series F
 
6.20%
Non-Cumulative
 
August 24, 2015
 
6.20
 
Quarterly
 
15.50
 
15.50
Series G
 
5.20%
Non-Cumulative
 
July 29, 2016
 
5.20
 
Quarterly
 
13.00
 
13.00
Series H
 
6.00%
Non-Cumulative
 
November 29, 2016
 
6.00
 
Quarterly
 
15.00
 
15.00
The declaration and payment of dividends to our stockholders, as well as the amount thereof, are subject to the discretion of our Board of Directors and depend upon our results of operations, financial condition, capital levels, cash requirements, future prospects and other factors deemed relevant by the Board of Directors. As a bank holding company (“BHC”), our ability to pay dividends is largely dependent upon the receipt of dividends or other payments from our subsidiaries. Regulatory restrictions exist that limit the ability of the Banks to transfer funds to our BHC. As of June 30, 2019, funds available for dividend payments from COBNA and CONA were $2.0 billion and $4.7 billion, respectively. There can be no assurance that we will declare and pay any dividends to stockholders. Consistent with our 2018 Stock Repurchase Program, our Board of Directors authorized the repurchase of up to $1.2 billion of shares of common stock beginning in the third quarter of 2018 through the end of the second quarter of 2019. We completed the 2018 Stock Repurchase Program in the fourth quarter of 2018.
The timing and exact amount of any future common stock repurchases will depend on various factors, including regulatory approval, market conditions, opportunities for growth, our capital position and the amount of retained earnings. Our stock repurchase program does not include specific price targets, may be executed through open market purchases or privately negotiated transactions, including utilizing Rule 10b5-1 programs, and may be suspended at any time. For additional information on dividends and stock repurchases, see “Part I—Item 1. Business—Supervision and Regulation—Dividends, Stock Repurchases and Transfers of Funds” in our 2018 Form 10-K.

 
 
33
Capital One Financial Corporation (COF)

RISK MANAGEMENT
Risk Framework
The risk framework was refined at the end of the second quarter of 2019 to enhance risk management and more fully articulate alignment with regulatory guidance and industry practices.
We use a risk framework to provide an overall enterprise-wide approach for effectively managing risk. We execute against our risk framework with the “Three Lines of Defense” risk management model to structure the roles, responsibilities and accountabilities in the organization for taking and managing risk.
The “First Line of Defense” consists of any line of business or function that is accountable for risk taking and is responsible for: (i) engaging in activities designed to generate revenue or reduce expenses; (ii) providing operational support or servicing to any business function for the delivery of products or services to customers; or (iii) providing technology services in direct support of first line business areas. Each line of business or first line function is responsible for managing the risks associated with their activities, including identifying, assessing, measuring, monitoring, controlling, and reporting the risks within its business activities, consistent with the risk framework. The “Second Line of Defense” consists of two types of functions: Independent Risk Management (“IRM”) and Support Functions. IRM oversees risk-taking activities and assesses risks and issues independent from the first line of defense. Support Functions are centers of specialized expertise (e.g., Human Resources, Accounting, Legal) that provide support services to the enterprise. The “Third Line of Defense” is comprised of the Internal Audit and Credit Review functions. The third line provides independent and objective assurance to senior management and to the Board of Directors that the first and second lines of defense have systems and governance processes which are well-designed and working as intended, and that the risk framework is appropriate for the size, complexity and risk profile of Capital One.
The risk framework is also used to guide design of risk programs and performance of risk activity within each risk category and across the entire enterprise.
There are nine elements that comprise the risk framework:
•
Governance and Accountability
•
Strategy and Risk Alignment
•
Identification
•
Assessment, Measurement and Response
•
Monitoring and Testing
•
Aggregation, Reporting and Escalation
•
Capital and Liquidity Management (including Stress Testing)
•
Risk Data and Enabling Technology
•
Culture and Talent Management
We provide additional discussion of our risk management principles, roles and responsibilities, framework and risk appetite under “MD&A—Risk Management” in our 2018 Form 10-K.
CREDIT RISK PROFILE
Our loan portfolio accounts for the substantial majority of our credit risk exposure. Our lending activities are governed under our credit policy and are subject to independent review and approval. Below we provide information about the composition of our loan portfolio, key concentrations and credit performance metrics.
We also engage in certain non-lending activities that may give rise to credit and counterparty settlement risk, including purchasing securities for our investment securities portfolio, entering into derivative transactions to manage our market risk exposure and to

 
 
34
Capital One Financial Corporation (COF)

accommodate customers, extending short-term advances on syndication activity (including bridge financing transactions we have underwritten), depositing certain operational cash balances in other financial institutions, executing certain foreign exchange transactions and extending customer overdrafts. We provide additional information on credit risk related to our investment securities portfolio under “MD&A—Consolidated Balance Sheets Analysis—Investment Securities” and credit risk related to derivative transactions in “Note 9—Derivative Instruments and Hedging Activities.”
Portfolio Composition of Loans Held for Investment
We provide a variety of lending products. Our primary products include credit cards, auto loans and commercial lending products. We sold all of our consumer home loan portfolio and the related servicing during 2018. For information on our lending policies and procedures, including our underwriting criteria for our primary loan products, see “MD&A—Credit Risk Profile” in our 2018 Form 10-K.
Our loan portfolio consists of loans held for investment, including loans held in our consolidated trusts, and loans held for sale.  Loans and the related credit metrics presented in this section exclude loans held for sale, which are carried at lower of cost or fair value and totaled $1.8 billion and $1.2 billion as of June 30, 2019 and December 31, 2018, respectively.
Table 17 presents the composition of our portfolio of loans held for investment by portfolio segment as of June 30, 2019 and December 31, 2018.
Table 17: Portfolio Composition of Loans Held for Investment
 
 
June 30, 2019
 
December 31, 2018
(Dollars in millions)
 
Loans
 
% of Total
 
Loans
 
% of Total
Credit Card:
 
 
 
 
 
 
 
 
Domestic credit card
 
$
102,959

 
42.1
%
 
$
107,350

 
43.6
%
International card businesses
 
9,182

 
3.8

 
9,011

 
3.7

Total credit card
 
112,141

 
45.9

 
116,361

 
47.3

Consumer Banking:
 
 
 
 
 
 
 
 
Auto
 
57,556

 
23.6

 
56,341

 
22.9

Retail banking
 
2,771

 
1.1

 
2,864

 
1.2

Total consumer banking
 
60,327

 
24.7

 
59,205

 
24.1

Commercial Banking:
 
 
 
 
 
 
 
 
Commercial and multifamily real estate
 
29,861

 
12.2

 
28,899

 
11.8

Commercial and industrial
 
42,125

 
17.2

 
41,091

 
16.7

Total commercial lending
 
71,986

 
29.4

 
69,990

 
28.5

Small-ticket commercial real estate
 
6

 
—

 
343

 
0.1

Total commercial banking
 
71,992

 
29.4

 
70,333

 
28.6

Total loans held for investment
 
$
244,460

 
100.0
%
 
$
245,899

 
100.0
%

 
 
35
Capital One Financial Corporation (COF)

Commercial Loans
Table 18 summarizes our commercial loans held for investment portfolio by industry classification as of June 30, 2019 and December 31, 2018. Industry classifications below are based on our interpretation of the North American Industry Classification System codes as they pertain to each individual loan.
Table 18: Commercial Loans by Industry
(Percentage of portfolio)
 
June 30,
2019
 
December 31,
2018
Real estate
 
39
%
 
40
%
Finance
 
16

 
16

Healthcare
 
11

 
12

Business services
 
6

 
5

Oil and gas
 
5

 
5

Public administration
 
4

 
4

Educational services
 
4

 
4

Retail trade
 
3

 
3

Construction and land
 
3

 
2

Other
 
9

 
9

Total
 
100
%
 
100
%
Credit Risk Measurement
We closely monitor economic conditions and loan performance trends to assess and manage our exposure to credit risk. Key metrics we track in evaluating the credit quality of our loan portfolio include delinquency and nonperforming asset rates, as well as net charge-off rates and our internal risk ratings of larger-balance commercial loans. Trends in delinquency rates are one of the primary indicators of credit risk within our consumer loan portfolios, particularly in our credit card loan portfolios, as changes in delinquency rates can provide an early warning of changes in credit losses. The primary indicator of credit risk in our commercial loan portfolios is our internal risk ratings. Because we generally classify loans that have been delinquent for an extended period of time and other loans with significant risk of loss as nonperforming, the level of nonperforming assets represents another indicator of the potential for future credit losses. In addition to delinquency rates, the geographic distribution of our loans provides insight as to the exposure of the portfolio to regional economic conditions.
We underwrite most consumer loans using proprietary models, which are typically based on credit bureau data, including borrower credit scores, along with application information and, where applicable, collateral and deal structure data. We continuously adjust our management of credit lines and collection strategies based on customer behavior and risk profile changes. We also use borrower credit scores for subprime classification, for competitive benchmarking and, in some cases, to drive product segmentation decisions. 

 
 
36
Capital One Financial Corporation (COF)

Table 19 provides details on the credit scores of our domestic credit card and auto loan portfolios as of June 30, 2019 and December 31, 2018.
Table 19: Credit Score Distribution
(Percentage of portfolio)
 
June 30,
2019
 
December 31,
2018
Domestic credit card—Refreshed FICO scores:(1)
 
 
 
 
Greater than 660
 
68
%
 
67
%
660 or below
 
32

 
33

Total
 
100
%
 
100
%
Auto—At origination FICO scores:(2)
 
 
 
 
Greater than 660
 
49
%
 
50
%
621 - 660
 
19

 
19

620 or below
 
32

 
31

Total
 
100
%
 
100
%
__________
(1) 
Percentages represent period-end loans held for investment in each credit score category. Domestic card credit scores generally represent FICO scores. These scores are obtained from one of the major credit bureaus at origination and are refreshed monthly thereafter. We approximate non-FICO credit scores to comparable FICO scores for consistency purposes. Balances for which no credit score is available or the credit score is invalid are included in the 660 or below category.
(2) 
Percentages represent period-end loans held for investment in each credit score category. Auto credit scores generally represent average FICO scores obtained from three credit bureaus at the time of application and are not refreshed thereafter. Balances for which no credit score is available or the credit score is invalid are included in the 620 or below category.
We present information in the section below on the credit performance of our loan portfolio, including the key metrics we use in tracking changes in the credit quality of our loan portfolio. See “Note 4—Loans” in this Report for additional credit quality information, and see “Note 1—Summary of Significant Accounting Policies” in our 2018 Form 10-K for information on our accounting policies for delinquent and nonperforming loans, charge-offs and troubled debt restructurings (“TDRs”) for each of our loan categories.
Delinquency Rates
We consider the entire balance of an account to be delinquent if the minimum required payment is not received by the customer’s due date, measured at each balance sheet date. Our 30+ day delinquency metrics include all loans held for investment that are 30 or more days past due, whereas our 30+ day performing delinquency metrics include loans that are 30 or more days past due but are currently classified as performing and accruing interest. The 30+ day delinquency and 30+ day performing delinquency metrics are the same for domestic credit card loans, as we continue to classify these loans as performing until the account is charged off, typically when the account is 180 days past due. See “Note 1—Summary of Significant Accounting Policies” in our 2018 Form 10-K for information on our policies for classifying loans as nonperforming for each of our loan categories. We provide additional information on our credit quality metrics above under “MD&A—Business Segment Financial Performance.”

 
 
37
Capital One Financial Corporation (COF)

Table 20 presents our 30+ day performing delinquency rates and 30+ day delinquency rates of our portfolio of loans held for investment, by portfolio segment, as of June 30, 2019 and December 31, 2018.
Table 20: 30+ Day Delinquencies
 
 
June 30, 2019
 
December 31, 2018
 
 
30+ Day Performing Delinquencies
 
30+ Day Delinquencies
 
30+ Day Performing Delinquencies
 
30+ Day Delinquencies
(Dollars in millions)
 
Amount
 
Rate(1)
 
Amount
 
Rate(1)
 
Amount
 
Rate(1)
 
Amount
 
Rate(1)
Credit Card:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Domestic credit card
 
$
3,503

 
3.40
%
 
$
3,503

 
3.40
%
 
$
4,335

 
4.04
%
 
$
4,335

 
4.04
%
International card businesses
 
312

 
3.40

 
329

 
3.59

 
317

 
3.52

 
333

 
3.70

Total credit card
 
3,815

 
3.40

 
3,832

 
3.42

 
4,652

 
4.00

 
4,668

 
4.01

Consumer Banking:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Auto
 
3,512

 
6.10

 
3,820

 
6.64

 
3,918

 
6.95

 
4,309

 
7.65

Retail banking
 
26

 
0.93

 
45

 
1.62

 
29

 
1.01

 
51

 
1.77

Total consumer banking
 
3,538

 
5.87

 
3,865

 
6.41

 
3,947

 
6.67

 
4,360

 
7.36

Commercial Banking:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and multifamily real estate
 
41

 
0.14

 
50

 
0.17

 
119

 
0.41

 
140

 
0.49

Commercial and industrial
 
307

 
0.73

 
432

 
1.02

 
176

 
0.43

 
279

 
0.68

Total commercial lending
 
348

 
0.48

 
482

 
0.67

 
295

 
0.42

 
419

 
0.60

Small-ticket commercial real estate
 
—

 
—

 
4

 
**

 
1

 
0.39

 
7

 
1.84

Total commercial banking
 
348

 
0.48

 
486

 
0.67

 
296

 
0.42

 
426

 
0.61

Total
 
$
7,701

 
3.15

 
$
8,183

 
3.35

 
$
8,895

 
3.62

 
$
9,454

 
3.84

__________
(1) 
Delinquency rates are calculated by dividing delinquency amounts by period-end loans held for investment for each specified loan category, including purchased credit-impaired (“PCI”) loans as applicable.
** 
Not meaningful.
Table 21 presents our 30+ day delinquent loans, by aging and geography, as of June 30, 2019 and December 31, 2018.
Table 21: Aging and Geography of 30+ Day Delinquent Loans
 
 
June 30, 2019
 
December 31, 2018
(Dollars in millions)
 
Amount
 
Rate(1)
 
Amount
 
Rate(1)
Delinquency status:
 
 
 
 
 
 
 
 
30 – 59 days
 
$
3,878

 
1.59
%
 
$
4,282

 
1.73
%
60 – 89 days
 
2,137

 
0.87

 
2,430

 
0.99

> 90 days
 
2,168

 
0.89

 
2,742

 
1.12

Total
 
$
8,183

 
3.35
%
 
$
9,454

 
3.84
%
Geographic region:
 
 
 
 
 
 
 
 
Domestic
 
$
7,854

 
3.21
%
 
$
9,121

 
3.70
%
International
 
329

 
0.14

 
333

 
0.14

Total
 
$
8,183

 
3.35
%
 
$
9,454

 
3.84
%
__________
(1) 
Delinquency rates are calculated by dividing delinquency amounts by total period-end loans held for investment, including PCI loans as applicable.

 
 
38
Capital One Financial Corporation (COF)

Table 22 summarizes loans that were 90+ days delinquent as to interest or principal, and still accruing interest as of June 30, 2019 and December 31, 2018. These loans consist primarily of credit card accounts between 90 days and 179 days past due. As permitted by regulatory guidance issued by the Federal Financial Institutions Examination Council, we continue to accrue interest and fees on domestic credit card loans through the date of charge-off, which is typically in the period the account becomes 180 days past due. While domestic credit card loans typically remain on accrual status until the loan is charged off, we reduce the balance of our credit card receivables by the amount of finance charges and fees billed but not expected to be collected and exclude this amount from revenue.
Table 22: 90+ Day Delinquent Loans Accruing Interest
 
 
June 30, 2019
 
December 31, 2018
(Dollars in millions)
 
Amount
 
Rate(1)
 
Amount
 
Rate(1)
Loan category:
 
 
 
 
 
 
 
 
Credit card
 
$
1,763

 
1.57
%
 
$
2,233

 
1.92
%
Commercial banking
 
6

 
0.01

 
—

 
—

Total
 
$
1,769

 
0.72

 
$
2,233

 
0.91

Geographic region:
 
 
 
 
 
 
 
 
Domestic
 
$
1,650

 
0.70
%
 
$
2,111

 
0.89
%
International
 
119

 
1.29

 
122

 
1.35

Total
 
$
1,769

 
0.72

 
$
2,233

 
0.91

__________
(1) 
Delinquency rates are calculated by dividing delinquency amounts by period-end loans held for investment for each specified loan category, including PCI loans as applicable.
Nonperforming Loans and Nonperforming Assets
Nonperforming assets consist of nonperforming loans, repossessed assets and foreclosed properties. Nonperforming loans include loans that have been placed on nonaccrual status. See “Note 1—Summary of Significant Accounting Policies” in our 2018 Form 10-K for information on our policies for classifying loans as nonperforming for each of our loan categories.
Table 23 presents our nonperforming loans, by portfolio segment, and other nonperforming assets as of June 30, 2019 and December 31, 2018. We do not classify loans held for sale as nonperforming, as they are recorded at the lower of cost or fair value. We provide additional information on our credit quality metrics above under “MD&A—Business Segment Financial Performance.”

 
 
39
Capital One Financial Corporation (COF)

Table 23: Nonperforming Loans and Other Nonperforming Assets(1)
 
 
June 30, 2019
 
December 31, 2018
(Dollars in millions)
 
Amount
 
Rate
 
Amount
 
Rate
Nonperforming loans held for investment:(2)
 
 
 
 
 
 
 
 
Credit Card:
 
 
 
 
 
 
 
 
International card businesses
 
$
23

 
0.25
%
 
$
22

 
0.25
%
Total credit card
 
23

 
0.02

 
22

 
0.02

Consumer Banking:
 
 
 
 
 
 
 
 
Auto
 
369

 
0.64

 
449

 
0.80

Retail banking
 
28

 
1.02

 
30

 
1.04

Total consumer banking
 
397

 
0.66

 
479

 
0.81

Commercial Banking:
 
 
 
 
 
 
 
 
Commercial and multifamily real estate
 
43

 
0.14

 
83

 
0.29

Commercial and industrial
 
311

 
0.74

 
223

 
0.54

Total commercial lending
 
354

 
0.49

 
306

 
0.44

Small-ticket commercial real estate
 
6

 
**

 
6

 
1.80

Total commercial banking
 
360

 
0.50

 
312

 
0.44

Total nonperforming loans held for investment(3)
 
$
780

 
0.32

 
$
813

 
0.33

Other nonperforming assets(4)
 
51

 
0.02

 
59

 
0.02

Total nonperforming assets
 
$
831

 
0.34

 
$
872

 
0.35

__________
(1) 
We recognized interest income for loans classified as nonperforming of $12 million and $11 million in the first six months of 2019 and 2018, respectively. Interest income foregone related to nonperforming loans was $39 million and $31 million in the first six months of 2019 and 2018, respectively. Foregone interest income represents the amount of interest income in excess of recognized interest income that would have been recorded during the period for nonperforming loans as of the end of the period had the loans performed according to their contractual terms.
(2) 
Nonperforming loan rates are calculated based on nonperforming loans for each category divided by period-end total loans held for investment for each respective category.
(3) 
Excluding the impact of domestic credit card loans, nonperforming loans as a percentage of total loans held for investment was 0.55% and 0.59% as of June 30, 2019 and December 31, 2018, respectively.
(4) 
The denominators used in calculating nonperforming asset rates consist of total loans held for investment and other nonperforming assets.
** 
Not meaningful.

 
 
40
Capital One Financial Corporation (COF)

Net Charge-Offs
Net charge-offs consist of the unpaid principal balance of loans held for investment that we determine to be uncollectible, net of recovered amounts. We charge off loans as a reduction to the allowance for loan and lease losses when we determine the loan is uncollectible and record subsequent recoveries of previously charged-off amounts as increases to the allowance for loan and lease losses. Uncollectible finance charges and fees are reversed through revenue and certain fraud losses are recorded in other non-interest expense. Generally, costs to recover charged-off loans are recorded as collection expenses as incurred and included in our consolidated statements of income as a component of other non-interest expense. Our charge-off policy for loans varies based on the loan type. See “Note 1—Summary of Significant Accounting Policies” in our 2018 Form 10-K for information on our charge-off policy for each of our loan categories.
Table 24 presents our net charge-off amounts and rates, by portfolio segment, in the second quarter and first six months of 2019 and 2018.
Table 24: Net Charge-Offs (Recoveries)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2019
 
2018
 
2019
 
2018
(Dollars in millions)
 
Amount
 
Rate(1)
 
Amount
 
Rate(1)
 
Amount
 
Rate(1)
 
Amount
 
Rate(1)
Credit Card:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Domestic credit card
 
$
1,240

 
4.86
%
 
$
1,166

 
4.72
 %
 
$
2,534

 
4.95
%
 
$
2,487

 
4.99
 %
International card businesses
 
80

 
3.63

 
94

 
4.14

 
150

 
3.41

 
150

 
3.32

Total credit card
 
1,320

 
4.76

 
1,260

 
4.67

 
2,684

 
4.83

 
2,637

 
4.85

Consumer Banking:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Auto
 
155

 
1.09

 
182

 
1.32

 
358

 
1.26

 
390

 
1.42

Retail banking
 
17

 
2.42

 
16

 
2.07

 
35

 
2.49

 
32

 
1.97

Home loan
 
—

 
—

 
—

 
—

 
—

 
—

 
(1
)
 
(0.02
)
Total consumer banking
 
172

 
1.15

 
198

 
1.19

 
393

 
1.32

 
421

 
1.19

Commercial Banking:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
16

 
0.15

 
(7
)
 
(0.07
)
 
30

 
0.14

 
12

 
0.06

Total commercial banking
 
16

 
0.09

 
(7
)
 
(0.04
)
 
30

 
0.08

 
12

 
0.04

Other loans
 
—

 
—

 
8

 
**

 
—

 
—

 
7

 
46.30

Total net charge-offs
 
$
1,508

 
2.48

 
$
1,459

 
2.42

 
$
3,107

 
2.56

 
$
3,077

 
2.51

Average loans held for investment
 
$
242,653

 
 
 
$
240,758

 
 
 
$
242,307

 
 
 
$
245,218

 
 
__________
(1) 
Net charge-off (recovery) rates are calculated by dividing annualized net charge-offs (recoveries) by average loans held for investment for the period for each loan category.
** 
Not meaningful.
Troubled Debt Restructurings
As part of our loss mitigation efforts, we may provide short-term (three to twelve months) or long-term (greater than twelve months) modifications to a borrower experiencing financial difficulty to improve long-term collectability of the loan and to avoid the need for repossession or foreclosure of collateral.

 
 
41
Capital One Financial Corporation (COF)

Table 25 presents our recorded investment of loans modified in TDRs as of June 30, 2019 and December 31, 2018, which excludes loan modifications that do not meet the definition of a TDR, and PCI loans, which we track and report separately.
Table 25: Troubled Debt Restructurings
 
 
June 30, 2019
 
December 31, 2018
(Dollars in millions)
 
Amount
 
% of Total Modifications
 
Amount
 
% of Total Modifications
Credit card
 
$
826

 
51.2
%
 
$
855

 
53.2
%
Consumer banking:
 
 
 
 
 
 
 
 
Auto
 
334

 
20.7

 
339

 
21.1

Retail banking
 
32

 
2.0

 
33

 
2.1

Total consumer banking
 
366

 
22.7

 
372

 
23.2

Commercial banking
 
420

 
26.1

 
379

 
23.6

Total
 
$
1,612

 
100.0
%
 
$
1,606

 
100.0
%
Status of TDRs:
 
 
 
 
 
 
 
 
Performing
 
$
1,396

 
86.6
%
 
$
1,433

 
89.2
%
Nonperforming
 
216

 
13.4

 
173

 
10.8

Total
 
$
1,612

 
100.0
%
 
$
1,606

 
100.0
%
In our Credit Card business, the majority of our credit card loans modified in TDRs involve reducing the interest rate on the account and placing the customer on a fixed payment plan not exceeding 60 months. The effective interest rate in effect immediately prior to the loan modification is used as the effective interest rate for purposes of measuring impairment using the present value of expected cash flows. If the customer does not comply with the modified payment terms, then the credit card loan agreement may revert to its original payment terms, generally resulting in any loan outstanding reflected in the appropriate delinquency category and charged off in accordance with our standard charge-off policy.
In our Consumer Banking business, the majority of our loans modified in TDRs receive an extension, an interest rate reduction or principal reduction, or a combination of these concessions. In addition, TDRs also occur in connection with bankruptcy of the borrower. In certain bankruptcy discharges, the loan is written down to the collateral value and the charged-off amount is reported as principal reduction. Impairment is determined using the present value of expected cash flows or a collateral evaluation for certain auto loans where the collateral value is lower than the recorded investment.
In our Commercial Banking business, the majority of loans modified in TDRs receive an extension, with a portion of these loans receiving an interest rate reduction or a gross balance reduction. The impairment on modified commercial loans is generally determined based on the underlying collateral value.
We provide additional information on modified loans accounted for as TDRs, including the performance of those loans subsequent to modification, in “Note 4—Loans.”
Impaired Loans
A loan is considered to be impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due from the borrower in accordance with the original contractual terms of the loan. Generally, we report loans as impaired based on the method for measuring impairment in accordance with applicable accounting guidance. Loans defined as individually impaired include larger-balance commercial nonperforming loans and TDRs. Loans held for sale are not reported as impaired, as these loans are recorded at lower of cost or fair value. Impaired loans also exclude PCI loans, which are accounted for based on expected cash flows because this accounting methodology takes into consideration future credit losses expected to be incurred.
Impaired loans totaled $1.9 billion and $1.8 billion as of June 30, 2019 and December 31, 2018, respectively. These amounts include TDRs of $1.6 billion as of both June 30, 2019 and December 31, 2018. We provide additional information on our impaired loans, including the allowance for loan and lease losses established for these loans, in “Note 4—Loans” and “Note 5—Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments.”

 
 
42
Capital One Financial Corporation (COF)

Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments
Our allowance for loan and lease losses represents management’s best estimate of incurred loan and lease credit losses inherent to our held for investment portfolio as of each balance sheet date. The allowance for loan and lease losses is increased through the provision for credit losses and reduced by net charge-offs. We provide additional information on the methodologies and key assumptions used in determining our allowance for loan and lease losses under “Note 1—Summary of Significant Accounting Policies” in our 2018 Form 10-K.
Table 26 presents changes in our allowance for loan and lease losses and reserve for unfunded lending commitments for the second quarter and first six months of 2019 and 2018, and details by portfolio segment for the provision for credit losses, charge-offs and recoveries.

 
 
43
Capital One Financial Corporation (COF)

Table 26: Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments Activity
 
 
Three Months Ended June 30, 2019
 
 
Credit Card
 
Consumer Banking
 
 
 
 
(Dollars in millions)
 
Domestic Card
 
International Card Businesses
 
Total Credit Card
 
Auto
 
Retail
Banking
 
Total
Consumer
Banking
 
Commercial Banking
 
Total
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of March 31, 2019
 
$
5,141

 
$
427

 
$
5,568

 
$
1,002

 
$
60

 
$
1,062

 
$
683

 
$
7,313

Charge-offs
 
(1,580
)
 
(131
)
 
(1,711
)
 
(401
)
 
(22
)
 
(423
)
 
(23
)
 
(2,157
)
Recoveries(1)
 
340

 
51

 
391

 
246

 
5

 
251

 
7

 
649

Net charge-offs
 
(1,240
)
 
(80
)
 
(1,320
)
 
(155
)
 
(17
)
 
(172
)
 
(16
)
 
(1,508
)
Provision for loan and lease losses
 
1,024

 
71

 
1,095

 
150

 
15

 
165

 
69

 
1,329

Allowance build (release) for loan and lease losses
 
(216
)
 
(9
)
 
(225
)
 
(5
)
 
(2
)
 
(7
)
 
53

 
(179
)
Other changes(2)
 
—

 
(1
)
 
(1
)
 
—

 
—

 
—

 
—

 
(1
)
Balance as of June 30, 2019
 
4,925

 
417

 
5,342

 
997

 
58

 
1,055

 
736

 
7,133

Reserve for unfunded lending commitments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of March 31, 2019
 
—

 
—

 
—

 
—

 
4

 
4

 
127

 
131

Provision for losses on unfunded lending commitments
 
—

 
—

 
—

 
—

 
—

 
—

 
13

 
13

Balance as of June 30, 2019
 
—

 
—

 
—

 
—

 
4

 
4

 
140

 
144

Combined allowance and reserve as of June 30, 2019
 
$
4,925

 
$
417

 
$
5,342

 
$
997

 
$
62

 
$
1,059

 
$
876

 
$
7,277

 
 
Six Months Ended June 30, 2019
 
 
Credit Card
 
Consumer Banking
 
 
 
 
(Dollars in millions)
 
Domestic Card
 
International Card Businesses
 
Total Credit Card
 
Auto
 
Retail
Banking
 
Total
Consumer
Banking
 
Commercial Banking
 
Total
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2018
 
$
5,144

 
$
391

 
$
5,535

 
$
990

 
$
58

 
$
1,048

 
$
637

 
$
7,220

Charge-offs
 
(3,232
)
 
(261
)
 
(3,493
)
 
(850
)
 
(44
)
 
(894
)
 
(43
)
 
(4,430
)
Recoveries(1)
 
698

 
111

 
809

 
492

 
9

 
501

 
13

 
1,323

Net charge-offs
 
(2,534
)
 
(150
)
 
(2,684
)
 
(358
)
 
(35
)
 
(393
)
 
(30
)
 
(3,107
)
Provision for loan and lease losses
 
2,315

 
169

 
2,484

 
365

 
35

 
400

 
129

 
3,013

Allowance build (release) for loan and lease losses
 
(219
)
 
19

 
(200
)
 
7

 
—

 
7

 
99

 
(94
)
Other changes(2)
 
—

 
7

 
7

 
—

 
—

 
—

 
—

 
7

Balance as of June 30, 2019
 
4,925

 
417

 
5,342

 
997

 
58

 
1,055

 
736

 
7,133

Reserve for unfunded lending commitments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2018
 
—

 
—

 
—

 
—

 
4

 
4

 
118

 
122

Provision for losses on unfunded lending commitments
 
—

 
—

 
—

 
—

 
—

 
—

 
22

 
22

Balance as of June 30, 2019
 
—

 
—

 
—

 
—

 
4

 
4

 
140

 
144

Combined allowance and reserve as of June 30, 2019
 
$
4,925

 
$
417

 
$
5,342

 
$
997

 
$
62

 
$
1,059

 
$
876

 
$
7,277


 
 
44
Capital One Financial Corporation (COF)

 
 
Three Months Ended June 30, 2018
 
 
Credit Card
 
Consumer Banking
 
 
 
 
 
 
(Dollars in millions)
 
Domestic Card
 
International Card Businesses
 
Total Credit Card
 
Auto
 
Home
Loan(3)
 
Retail
Banking
 
Total
Consumer
Banking
 
Commercial Banking
 
Other(3)
 
Total
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of March 31, 2018
 
$
5,332

 
$
394

 
$
5,726

 
$
1,137

 
$
53

 
$
63

 
$
1,253

 
$
587

 
$
1

 
$
7,567

Charge-offs
 
(1,549
)
 
(130
)
 
(1,679
)
 
(393
)
 
—

 
(21
)
 
(414
)
 
(7
)
 
(9
)
 
(2,109
)
Recoveries(1)
 
383

 
36

 
419

 
211

 
—

 
5

 
216

 
14

 
1

 
650

Net charge-offs
 
(1,166
)
 
(94
)
 
(1,260
)
 
(182
)
 
—

 
(16
)
 
(198
)
 
7

 
(8
)
 
(1,459
)
Provision (benefit) for loan and lease losses
 
1,094

 
77

 
1,171

 
105

 
—

 
14

 
119

 
30

 
(47
)
 
1,273

Allowance build (release) for loan and lease losses
 
(72
)
 
(17
)
 
(89
)
 
(77
)
 
—

 
(2
)
 
(79
)
 
37

 
(55
)
 
(186
)
Other changes(2)(3)
 
—

 
(13
)
 
(13
)
 
—

 
(53
)
 
(1
)
 
(54
)
 
—

 
54

 
(13
)
Balance as of June 30, 2018
 
5,260

 
364

 
5,624

 
1,060

 
—

 
60

 
1,120

 
624

 
—

 
7,368

Reserve for unfunded lending commitments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of March 31, 2018
 
—

 
—

 
—

 
—

 
—

 
6

 
6

 
108

 
—

 
114

Provision (benefit) for losses on unfunded lending commitments
 
—

 
—

 
—

 
—

 
—

 
(1
)
 
(1
)
 
4

 
—

 
3

Balance as of June 30, 2018
 
—

 
—

 
—

 
—

 
—

 
5

 
5

 
112

 
—

 
117

Combined allowance and reserve as of June 30, 2018
 
$
5,260

 
$
364

 
$
5,624

 
$
1,060

 
$
—

 
$
65

 
$
1,125

 
$
736

 
$
—

 
$
7,485

 
 
Six Months Ended June 30, 2018
 
 
Credit Card
 
Consumer Banking
 
 
 
 
 
 
(Dollars in millions)
 
Domestic Card
 
International Card Businesses
 
Total Credit Card
 
Auto
 
Home
Loan(3)
 
Retail
Banking
 
Total
Consumer
Banking
 
Commercial Banking
 
Other(3)
 
Total
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2017
 
$
5,273

 
$
375

 
$
5,648

 
$
1,119

 
$
58

 
$
65

 
$
1,242

 
$
611

 
$
1

 
$
7,502

Charge-offs
 
(3,246
)
 
(258
)
 
(3,504
)
 
(803
)
 
—

 
(42
)
 
(845
)
 
(28
)
 
(8
)
 
(4,385
)
Recoveries(1)
 
759

 
108

 
867

 
413

 
1

 
10

 
424

 
16

 
1

 
1,308

Net charge-offs
 
(2,487
)
 
(150
)
 
(2,637
)
 
(390
)
 
1

 
(32
)
 
(421
)
 
(12
)
 
(7
)
 
(3,077
)
Provision (benefit) for loan and lease losses
 
2,474

 
153

 
2,627

 
331

 
(6
)
 
28

 
353

 
25

 
(48
)
 
2,957

Allowance build (release) for loan and lease losses
 
(13
)
 
3

 
(10
)
 
(59
)
 
(5
)
 
(4
)
 
(68
)
 
13

 
(55
)
 
(120
)
Other changes(2)(3)
 
—

 
(14
)
 
(14
)
 
—

 
(53
)
 
(1
)
 
(54
)
 
—

 
54

 
(14
)
Balance as of June 30, 2018
 
5,260

 
364

 
5,624

 
1,060

 
—

 
60

 
1,120

 
624

 
—

 
7,368

Reserve for unfunded lending commitments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2017
 
—

 
—

 
—

 
—

 
—

 
7

 
7

 
117

 
—

 
124

Benefit for losses on unfunded lending commitments
 
—

 
—

 
—

 
—

 
—

 
(2
)
 
(2
)
 
(5
)
 
—

 
(7
)
Balance as of June 30, 2018
 
—

 
—

 
—

 
—

 
—

 
5

 
5

 
112

 
—

 
117

Combined allowance and reserve as of June 30, 2018
 
$
5,260

 
$
364

 
$
5,624

 
$
1,060

 
$
—

 
$
65

 
$
1,125

 
$
736

 
$
—

 
$
7,485

__________
(1) 
The amount and timing of recoveries is impacted by our collection strategies, which are based on customer behavior and risk profile and include direct customer communications, repossession of collateral, the periodic sale of charged-off loans as well as additional strategies, such as litigation.
(2) 
Represents foreign currency translation adjustments and the net impact of loan transfers and sales where applicable.
(3) 
In 2018, we sold all of our consumer home loan portfolio.The impact included a benefit for credit losses of $46 million in the second quarter of 2018 which was reflected in the Other category.

 
 
45
Capital One Financial Corporation (COF)

Allowance coverage ratios are calculated based on the allowance for loan and lease losses for each specified portfolio segment divided by period-end loans held for investment within the specified loan category. Table 27 presents the allowance coverage ratios as of June 30, 2019 and December 31, 2018.
Table 27: Allowance Coverage Ratios
 
 
June 30, 2019
 
December 31, 2018
(Dollars in millions)
 
Allowance for loan and lease losses
 
Amount(1)
 
Allowance coverage ratio
 
Allowance for loan and lease losses
 
Amount(1)
 
Allowance coverage ratio
Credit Card
 
$
5,342

 
$
3,832

 
139.38
%
 
$
5,535

 
$
4,668

 
118.56
%
Consumer banking
 
1,055

 
3,865

 
27.30

 
1,048

 
4,360

 
24.04

Commercial banking
 
736

 
360

 
204.52

 
637

 
312

 
204.25

Total
 
$
7,133

 
244,460

 
2.92

 
$
7,220

 
245,899

 
2.94

__________
(1) 
Represents period-end 30+ day delinquent loans for our credit card and consumer banking loan portfolios, nonperforming loans for our commercial banking loan portfolio and total loans held for investment for the total ratio.
Our allowance for loan and lease losses decreased by $87 million to $7.1 billion and the allowance coverage ratio decreased by 2 basis points to 2.92% as of June 30, 2019 from December 31, 2018 primarily driven by an allowance release in our domestic credit card loan portfolio largely due to the strong economy, stable underlying credit performance and the impact of the sale of certain partnership receivables, partially offset by an allowance build in our commercial loan portfolio.
LIQUIDITY RISK PROFILE
We have established liquidity practices that are intended to ensure that we have sufficient asset-based liquidity to cover our funding requirements and maintain adequate reserves to withstand the potential impact of deposit attrition or diminished liquidity in the funding markets. In addition to our cash position, we maintain reserves in the form of available for sale securities, held to maturity securities and certain loans that are either readily-marketable or pledgeable.
Table 28 below presents the composition of our liquidity reserves as of June 30, 2019 and December 31, 2018.
Table 28: Liquidity Reserves
(Dollars in millions)
 
June 30, 2019
 
December 31, 2018
Cash and cash equivalents
 
$
15,111

 
$
13,186

Investment securities portfolio:
 
 
 
 
Investment securities available for sale, at fair value
 
45,658

 
46,150

Investment securities held to maturity, at fair value
 
36,541

 
36,619

Total investment securities portfolio
 
82,199

 
82,769

FHLB borrowing capacity secured by loans
 
8,699

 
10,003

Outstanding FHLB advances and letters of credit secured by loans
 
(353
)
 
(9,726
)
Investment securities encumbered for Public Funds and others
 
(6,112
)
 
(6,631
)
Total liquidity reserves
 
$
99,544

 
$
89,601

Our liquidity reserves increased by $9.9 billion to $99.5 billion as of June 30, 2019 from December 31, 2018 primarily driven by a decrease in our FHLB advances outstanding and an increase in our cash and cash equivalents. See “MD&A—Risk Management” in our 2018 Form 10-K for additional information on our management of liquidity risk.

 
 
46
Capital One Financial Corporation (COF)

Liquidity Coverage Ratio
We are subject to the Liquidity Coverage Ratio Rule (“LCR Rule”) as implemented by the Federal Reserve and OCC. The LCR Rule requires us to calculate our LCR daily and to publicly disclose, on a quarterly basis, our LCR, certain related quantitative liquidity metrics, and a qualitative discussion of our LCR. Our average LCR during the second quarter of 2019 exceeded the LCR Rule requirement of 100%. The calculation and the underlying components are based on our interpretations, expectations and assumptions of relevant regulations, as well as interpretations provided by our regulators, and are subject to change based on changes to future regulations and interpretations. See “Part I—Item 1. Business—Supervision and Regulation” in our 2018 Form 10-K for additional information.
Borrowing Capacity
We maintain a shelf registration with the SEC so that we may periodically offer and sell an indeterminate aggregate amount of senior or subordinated debt securities, preferred stock, depositary shares, common stock, purchase contracts, warrants and units. There is no limit under this shelf registration to the amount or number of such securities that we may offer and sell, subject to market conditions. In addition, we also maintain a shelf registration that allows us to periodically offer and sell up to $25 billion of securitized debt obligations from our credit card loan securitization trust and a shelf registration that allows us to periodically offer and sell up to $20 billion from our auto loan securitization trusts.
In addition to our issuance capacity under the shelf registration statements, we also have access to FHLB advances. The ability to draw down funding is based on membership status and the amount is dependent upon the Banks’ ability to post collateral. As of June 30, 2019, we pledged both loans and securities to FHLB to secure a maximum borrowing capacity of $17.7 billion, of which $17.4 billion was still available to us to borrow. Our FHLB membership is supported by our investment in FHLB stock of $30 million and $415 million as of June 30, 2019 and December 31, 2018, respectively, which was determined in part based on our outstanding advances. In addition, we have access to the Federal Reserve Discount Window through which we had a borrowing capacity of $6.4 billion as of June 30, 2019. Our membership with the Federal Reserve is supported by our investment in Federal Reserve stock, totaling $1.3 billion as of both June 30, 2019 and December 31, 2018.
Funding
Our primary source of funding comes from deposits, as they are a stable and relatively low cost source of funding. In addition to deposits, we raise funding through the issuance of senior and subordinated notes, securitized debt obligations, brokered deposits, federal funds purchased, securities loaned or sold under agreements to repurchase, and FHLB advances secured by certain portions of our loan and securities portfolios. A key objective in our use of these markets is to maintain access to a diversified mix of wholesale funding sources. See “MD&A—Consolidated Balance Sheets Analysis—Funding Sources Composition” for additional information on our primary sources of funding.

 
 
47
Capital One Financial Corporation (COF)

Deposits
Table 29 provides a comparison of average balances, interest expense and average deposit interest rates for the second quarter and first six months of 2019 and 2018.
Table 29: Deposits Composition and Average Deposits Interest Rates
 
 
Three Months Ended June 30,
 
 
2019
 
2018
(Dollars in millions)
 
Average
Balance
 
Interest
Expense
 
Average
Deposits
Interest Rate
 
Average
Balance
 
Interest
Expense
 
Average
Deposits
Interest Rate
Interest-bearing checking accounts(1)
 
$
34,780

 
$
77

 
0.89
%
 
$
40,329

 
$
60

 
0.60
%
Saving deposits(2)
 
154,524

 
526

 
1.37

 
150,150

 
378

 
1.01

Time deposits less than $100,000
 
26,214

 
182

 
2.78

 
25,604

 
153

 
2.40

Total interest-bearing core deposits
 
215,518

 
785

 
1.46

 
216,083

 
591

 
1.10

Time deposits of $100,000 or more
 
14,934

 
85

 
2.29

 
6,612

 
30

 
1.80

Foreign deposits
 
—

 
—

 
—

 
384

 
1

 
0.38

Total interest-bearing deposits
 
$
230,452

 
$
870

 
1.51

 
$
223,079

 
$
622

 
1.12

 
 
Six Months Ended June 30,
 
 
2019
 
2018
(Dollars in millions)
 
Average
Balance
 
Interest
Expense
 
Average
Deposits
Interest Rate
 
Average
Balance
 
Interest
Expense
 
Average
Deposits
Interest Rate
Interest-bearing checking accounts(1)
 
$
34,759

 
$
148

 
0.86
%
 
$
41,213

 
$
118

 
0.58
%
Saving deposits(2)
 
154,029

 
1,025

 
1.34

 
148,689

 
713

 
0.97

Time deposits less than $100,000
 
26,249

 
358

 
2.75

 
25,450

 
280

 
2.22

Total interest-bearing core deposits
 
215,037

 
1,531

 
1.44

 
215,352

 
1,111

 
1.04

Time deposits of $100,000 or more
 
13,983

 
156

 
2.25

 
5,648

 
49

 
1.74

Foreign deposits
 
—

 
—

 
—

 
384

 
1

 
0.41

Total interest-bearing deposits
 
$
229,020

 
$
1,687

 
1.47

 
$
221,384

 
$
1,161

 
1.05

__________
(1) 
Includes negotiable order of withdrawal accounts.
(2) 
Includes money market deposit accounts.
The FDIC limits the acceptance of brokered deposits by well-capitalized insured depository institutions and, with a waiver from the FDIC, by adequately-capitalized institutions. COBNA and CONA were well-capitalized, as defined under the federal banking regulatory guidelines, as of June 30, 2019 and December 31, 2018, respectively. See “Part I—Item 1. Business—Supervision and Regulation” in our 2018 Form 10-K for additional information. We provide additional information on the composition of deposits under “MD&A—Consolidated Balance Sheets Analysis—Funding Sources Composition” and in “Note 8—Deposits and Borrowings.”
Short-Term Borrowings and Long-Term Debt
We access the capital markets to meet our funding needs through the issuance of senior and subordinated notes, securitized debt obligations, and federal funds purchased and securities loaned or sold under agreements to repurchase. In addition, we may utilize short-term and long-term FHLB advances secured by certain of our investment securities, multifamily real estate loans, and commercial real estate loans.
Our short-term borrowings include those borrowings with an original contractual maturity of one year or less and do not include the current portion of long-term debt. The short-term borrowings, which consist of short-term FHLB advances and federal funds purchased, securities loaned or sold under agreements to repurchase, decreased by $9.0 billion to $359 million as of June 30, 2019 from December 31, 2018 driven by maturities of our short-term FHLB advances.

 
 
48
Capital One Financial Corporation (COF)

Our long-term debt, which primarily consists of securitized debt obligations, senior and subordinated notes, and long-term FHLB advances, decreased by $629 million to $48.9 billion as of June 30, 2019 from December 31, 2018, primarily driven by securitized debt maturities outpacing issuances. We provide more information on our securitization activity in “Note 6—Variable Interest Entities and Securitizations.”
The following table summarizes issuances of securitized debt obligations, senior and subordinated notes, and FHLB advances and their respective maturities or redemptions for the second quarter and first six months of 2019 and 2018.
Table 30: Long-Term Funding
 
 
Issuances
 
Maturities/Redemptions
 
 
Three Months Ended June 30,
 
Three Months Ended June 30,
(Dollars in millions)
 
2019
 
2018
 
2019
 
2018
Securitized debt obligations
 
$
1,123

 
$
1,000

 
$
3,537

 
$
—

Senior and subordinated notes
 
1,411

 
2,000

 
750

 
—

FHLB advances
 
—

 
—

 
1

 
2

Total
 
$
2,534

 
$
3,000

 
$
4,288

 
$
2

 
 
Issuances
 
Maturities/Redemptions
 
 
Six Months Ended June 30,
 
Six Months Ended June 30,
(Dollars in millions)
 
2019
 
2018
 
2019
 
2018
Securitized debt obligations
 
$
2,623

 
$
1,000

 
$
4,126

 
$
1,250

Senior and subordinated notes
 
2,661

 
5,250

 
2,500

 
2,600

FHLB advances
 
—

 
—

 
251

 
8,607

Total
 
$
5,284

 
$
6,250

 
$
6,877

 
$
12,457

Credit Ratings
Our credit ratings impact our ability to access capital markets and our borrowing costs. Rating agencies base their ratings on numerous factors, including liquidity, capital adequacy, asset quality, quality of earnings and the probability of systemic support. Significant changes in these factors could result in different ratings.
Table 31 provides a summary of the credit ratings for the senior unsecured long-term debt of Capital One Financial Corporation, COBNA and CONA as of June 30, 2019 and December 31, 2018.
Table 31: Senior Unsecured Long-Term Debt Credit Ratings
 
 
June 30, 2019
 
December 31, 2018
 
 
Capital One
Financial
Corporation
 
COBNA
 
CONA
 
Capital One
Financial
Corporation
 
COBNA
 
CONA
Moody’s
 
Baa1
 
Baa1
 
Baa1
 
Baa1
 
Baa1
 
Baa1
S&P
 
BBB
 
BBB+
 
BBB+
 
BBB
 
BBB+
 
BBB+
Fitch
 
A-
 
A-
 
A-
 
A-
 
A-
 
A-
As of July 24, 2019, Moody’s Investors Service (“Moody’s”), Standard & Poor’s (“S&P”) and Fitch Ratings (“Fitch”) have us on a stable outlook.
MARKET RISK PROFILE
Market risk is the risk of possible economic loss in the value of our financial instruments due to changes in market factors. Our primary market risk exposures include interest rate risk, foreign exchange risk and commodity pricing risk. We are exposed to market risk primarily from the following operations and activities:
•
Traditional banking activities of deposit gathering and lending;

 
 
49
Capital One Financial Corporation (COF)

•
Asset/liability management activities including the management of investment securities, short-term and long-term borrowings and derivatives;
•
Foreign operations in the U.K. and Canada within our Credit Card business; and
•
Customer accommodation activities within our Commercial Banking business.
We have enterprise-wide risk management policies and limits, approved by our Board of Directors, which govern our market risk management activities. Our objective is to manage our exposure to market risk in accordance with these policies and limits based on prevailing market conditions and long-term expectations. We provide additional information below about our primary sources of market risk , our market risk management strategies and the measures that we use to evaluate these exposures.
Interest Rate Risk
Interest rate risk represents exposure to financial instruments whose value vary with the level or volatility of interest rates. We are exposed to interest rate risk primarily from the differences in the timing between the maturities or re-pricing of assets and liabilities. We manage our interest rate risk primarily by entering into interest rate swaps and other derivative instruments, including caps, floors, options, futures and forward contracts.
We use various industry standard market risk measurement techniques and analyses to measure, assess and manage the impact of changes in interest rates on our net interest income and our economic value of equity and changes in foreign exchange rates on our non-dollar-denominated earnings and non-dollar equity investments in foreign operations.
Net Interest Income Sensitivity
Our net interest income sensitivity measure estimates the impact on our projected 12-month baseline interest rate-sensitive revenue resulting from movements in interest rates. Interest rate-sensitive revenue consists of net interest income and certain components of other non-interest income significantly impacted by movements in interest rates, including changes in the fair value of free-standing interest rate derivatives. In addition to our existing assets and liabilities, we incorporate expected future business growth assumptions, such as loan and deposit growth and pricing, and plans for projected changes in our funding mix in our baseline forecast. In measuring the sensitivity of interest rate movements on our projected interest rate-sensitive revenue, we assume a hypothetical instantaneous parallel shift in the level of interest rates detailed in Table 32 below. At the current level of interest rates, our net interest income remains largely unchanged in most scenarios and decreases in the -100 and -150 basis points scenarios.
Economic Value of Equity
Our economic value of equity sensitivity measure estimates the impact on the net present value of our assets and liabilities, including derivative hedging activity, resulting from movements in interest rates. Our economic value of equity sensitivity measure is calculated based on our existing assets and liabilities, including derivatives, and do not incorporate business growth assumptions or projected plans for funding mix changes. Key assumptions used in the calculation include projecting rate sensitive prepayments for mortgage securities, loans and other assets, term structure modeling of interest rates, discount spreads, and deposit volume and pricing assumptions. In measuring the sensitivity of interest rate movements on our economic value of equity, we assume a hypothetical instantaneous parallel shift in the level of interest rates detailed in Table 32 below. Our current economic value of equity sensitivity profile demonstrates that our economic value of equity generally decreases as interest rates increase or decrease from the current levels.

 
 
50
Capital One Financial Corporation (COF)

Table 32 shows the estimated percentage impact on our projected baseline net interest income and economic value of equity calculated under the methodology described above as of June 30, 2019 and December 31, 2018. Due to decreases in interest rates since December 31, 2018, we lowered our maximum declining interest rate scenario to -150 basis points from -200 basis points in our interest rate sensitivity analysis as of June 30, 2019. In instances where a 150 basis points decrease in rates would result in a rate less than 0%, we assume a rate of 0% in our 150 basis points decline scenario.
Table 32: Interest Rate Sensitivity Analysis
 
 
June 30,
2019
 
December 31,
2018
Estimated impact on projected baseline net interest income:
 
 
 
 
+200 basis points
 
0.5
 %
 
(0.8
)%
+100 basis points
 
0.7

 
(0.2
)
+50 basis points
 
0.4

 
0.0

–50 basis points
 
(0.8
)
 
(0.3
)
–100 basis points
 
(1.8
)
 
(1.0
)
–150 basis points
 
(3.3
)
 
(2.1
)
–200 basis points
 
N/A

 
(3.7
)
Estimated impact on economic value of equity:
 
 
 
 
+200 basis points
 
(3.6
)
 
(7.1
)
+100 basis points
 
(0.5
)
 
(2.9
)
+50 basis points
 
0.2

 
(1.2
)
–50 basis points
 
(1.8
)
 
0.2

–100 basis points
 
(5.6
)
 
(0.8
)
–150 basis points
 
(11.7
)
 
(3.5
)
–200 basis points
 
N/A

 
(8.0
)
In addition to these industry standard measures, we continue to factor into our internal interest rate risk management decisions, the potential impact of alternative interest rate scenarios, such as stressed rate shocks, as well as steepening and flattening yield curve scenarios.
Limitations of Market Risk Measures
The interest rate risk models that we use in deriving these measures incorporate contractual information, internally-developed assumptions and proprietary modeling methodologies, which project borrower and depositor behavior patterns in certain interest rate environments. Other market inputs, such as interest rates, market prices and interest rate volatility, are also critical components of our interest rate risk measures. We regularly evaluate, update and enhance these assumptions, models and analytical tools as we believe appropriate to reflect our best assessment of the market environment and the expected behavior patterns of our existing assets and liabilities.
There are inherent limitations in any methodology used to estimate the exposure to changes in market interest rates. The sensitivity analysis described above contemplates only certain movements in interest rates and is performed at a particular point in time based on the existing balance sheet and, in some cases, expected future business growth and funding mix assumptions. The strategic actions that management may take to manage our balance sheet may differ significantly from our projections, which could cause our actual earnings and economic value of equity sensitivities to differ substantially from the above sensitivity analysis.
For further information on our interest rate exposures, see “Note 9—Derivative Instruments and Hedging Activities.”
Foreign Exchange Risk
Foreign exchange risk represents exposure to changes in the values of current holdings and future cash flows denominated in other currencies. We are exposed to foreign exchange risk primarily from the intercompany funding denominated in the pound sterling (“GBP”) and the Canadian dollar (“CAD”) that we provide to our businesses in the U.K. and Canada and net equity investments in those businesses. We are also exposed to foreign exchange risk due to changes in the dollar-denominated value of future earnings and cash flows from our foreign operations and from our Euro-denominated (“EUR”) borrowings.

 
 
51
Capital One Financial Corporation (COF)

Our non-dollar denominated intercompany funding and EUR-denominated borrowings expose our earnings to foreign exchange transaction risk. We manage these transaction risks by using forward foreign currency derivatives and cross-currency swaps to hedge our exposures. We measure our foreign exchange transaction risk exposures by applying a 1% U.S. dollar appreciation shock against the value of the non-dollar denominated intercompany funding and EUR-denominated borrowings and their related hedges, which shows the impact to our earnings from foreign exchange risk. Our intercompany funding outstanding was 646 million GBP and 756 million GBP as of June 30, 2019 and December 31, 2018, respectively, and 6.4 billion CAD and 6.5 billion CAD as of June 30, 2019 and December 31, 2018, respectively. Our EUR-denominated borrowings outstanding were 1.25 billion EUR as of June 30, 2019.
Our non-dollar equity investments in foreign operations expose us to translation risk in our AOCI and capital ratios. We manage our AOCI exposure by entering into foreign currency derivatives designated as net investment hedges. We measure these exposures by applying a 30% U.S. dollar appreciation shock, which we believe approximates a significant adverse shock over a one-year time horizon, against the value of the net equity invested in our foreign operations related net investment hedges where applicable. Our gross equity exposures in our U.K. and Canadian operations were 1.7 billion GBP and 1.6 billion GBP as of June 30, 2019 and December 31, 2018, respectively, and 1.3 billion CAD and 1.2 billion CAD as of June 30, 2019 and December 31, 2018, respectively.
As a result of our derivative management activities, we believe our net exposure to foreign exchange risk is minimal.
Risk related to Customer Accommodation Derivatives
We offer interest rate, commodity and foreign currency derivatives as an accommodation to our customers within our Commercial Banking business. We offset the majority of the market risk of these customer accommodation derivatives by entering into offsetting derivatives transactions with other counterparties. We use value-at-risk (“VaR”) as the primary method to both measure the market risk in our customer accommodation derivative activities on a daily basis. VaR is a statistical risk measure used to estimate the potential loss from movements in the recent market environment. We employ a historical simulation approach using the most recent 500 business days and use a 99 percent confidence level and a holding period of one business day. As a result of offsetting our customer exposures with other counterparties, we believe that our net exposure to customer accommodation derivatives is minimal. For further information on our risk related to customer accommodation derivatives, see “Note 9—Derivative Instruments and Hedging Activities.”



 
 
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Capital One Financial Corporation (COF)

SUPERVISION AND REGULATION
In July 2019, the Federal Banking Agencies issued a final rule implementing limited changes to the Basel III Capital Rule, effective April 1, 2020. The changes are generally applicable only to organizations not subject to the Basel III Advanced Approaches. The rule includes revisions to the thresholds above which institutions must deduct certain assets from their common equity Tier 1 capital. These revisions would apply to us if we were no longer subject to the Basel III Advanced Approaches, as currently described in the October 2018 Tailoring Proposed Rule in our 2018 Form 10-K.
We provided additional information on our Supervision and Regulation in our 2018 Form 10-K under “Part I—Item 1. Business—Supervision and Regulation” and our Quarterly Report on Form 10-Q for the period ended March 31, 2019 under “MD&A—Supervision and Regulation.”
FORWARD-LOOKING STATEMENTS
From time to time, we have made and will make forward-looking statements, including those that discuss, among other things, strategies, goals, outlook or other non-historical matters; projections, revenues, income, returns, expenses, capital measures, capital allocation plans, accruals for claims in litigation and for other claims against us; earnings per share, efficiency ratio or other financial measures for us; future financial and operating results; our plans, objectives, expectations and intentions; and the assumptions that underlie these matters.
To the extent that any such information is forward-looking, it is intended to fit within the safe harbor for forward-looking information provided by the Private Securities Litigation Reform Act of 1995.
Numerous factors could cause our actual results to differ materially from those described in such forward-looking statements, including, among other things:
•
general economic and business conditions in the U.S., the U.K., Canada or our local markets, including conditions affecting employment levels, interest rates, tariffs, collateral values, consumer income, credit worthiness and confidence, spending and savings that may affect consumer bankruptcies, defaults, charge-offs and deposit activity;
•
an increase or decrease in credit losses, including increases due to a worsening of general economic conditions in the credit environment, and the impact of inaccurate estimates or inadequate reserves;
•
compliance with financial, legal, regulatory, tax or accounting changes or actions, including the impacts of the Tax Act, the Dodd-Frank Act, and other regulations governing bank capital and liquidity standards;
•
our ability to manage effectively our capital and liquidity;
•
developments, changes or actions relating to any litigation, governmental investigation or regulatory enforcement action or matter involving us;
•
the inability to sustain revenue and earnings growth;
•
increases or decreases in interest rates and uncertainty with respect to the interest rate environment;
•
our ability to access the capital markets at attractive rates and terms to capitalize and fund our operations and future growth;
•
increases or decreases in our aggregate loan balances or the number of customers and the growth rate and composition thereof, including increases or decreases resulting from factors such as shifting product mix, amount of actual marketing expenses we incur and attrition of loan balances;
•
the amount and rate of deposit growth;
•
changes in deposit costs;
•
our ability to execute on our strategic and operational plans;

 
 
53
Capital One Financial Corporation (COF)

•
restructuring activities or other charges;
•
our response to competitive pressures;
•
changes in retail distribution strategies and channels, including the emergence of new technologies and product delivery systems;
•
our success in integrating acquired businesses and loan portfolios, and our ability to realize anticipated benefits from announced transactions and strategic partnerships;
•
the success of our marketing efforts in attracting and retaining customers;
•
changes in the reputation of, or expectations regarding, the financial services industry or us with respect to practices, products or financial condition;
•
any significant disruption in our operations or in the technology platforms on which we rely, including cybersecurity, business continuity and related operational risks, as well as other security failures or breaches of our systems or those of our customers, partners, service providers or other third parties;
•
the potential impact to our business, operations and reputation from, and expenses and uncertainties associated with, the Cybersecurity Incident we announced on July 29, 2019, as discussed in “MD&A—Introduction—Cybersecurity Incident” and “Note 14—Commitments, Contingencies, Guarantees and Others”;
•
our ability to maintain a compliance and technology infrastructure suitable for the nature of our business;
•
our ability to develop and adapt to rapid changes in digital technology to address the needs of our customers and comply with applicable regulatory standards, including compliance with data protection and privacy standards;
•
the effectiveness of our risk management strategies;
•
our ability to control costs, including the amount of, and rate of growth in, our expenses as our business develops or changes or as it expands into new market areas;
•
the extensive use, reliability and accuracy of the models and data we rely on in our business;
•
our ability to recruit and retain talented and experienced personnel;
•
the impact from, and our ability to respond to, natural disasters and other catastrophic events;
•
changes in the labor and employment markets;
•
fraud or misconduct by our customers, employees, business partners or third parties;
•
merchants’ increasing focus on the fees charged by credit card networks; and
•
other risk factors identified from time to time in our public disclosures, including in the reports that we file with the SEC.
Forward-looking statements often use words such as “will,” “anticipate,” “target,” “expect,” “estimate,” “intend,” “plan,” “goal,” “believe,” “forecast,” “outlook” or other words of similar meaning. Any forward-looking statements made by us or on our behalf speak only as of the date they are made or as of the date indicated, and we do not undertake any obligation to update forward-looking statements as a result of new information, future events or otherwise. For additional information on factors that could materially influence forward-looking statements included in this Report, see the risk factors set forth under “Part II—Item 1A. Risk Factors” in this Report and the risk factors set forth under “Part I—Item 1A. Risk Factors” in our 2018 Form 10-K. You should carefully consider the factors discussed above, and in our Risk Factors or other disclosure, in evaluating these forward-looking statements.

 
 
54
Capital One Financial Corporation (COF)

SUPPLEMENTAL TABLE
Reconciliation of Non-GAAP Measures
The following non-GAAP measures consist of TCE, tangible assets and metrics computed using these amounts, which include tangible book value per common share, return on average tangible assets, return on average TCE and TCE ratio. We consider these metrics to be key financial performance measures that management uses in assessing capital adequacy and the level of returns generated. While these non-GAAP measures are widely used by investors, analysts and bank regulatory agencies to assess the capital position of financial services companies, they may not be comparable to similarly-titled measures reported by other companies. The following table presents reconciliations of these non-GAAP measures to the applicable amounts measured in accordance with GAAP.
Table A—Reconciliation of Non-GAAP Measures
(Dollars in millions, except as noted)
 
June 30, 2019
 
December 31, 2018
Tangible Common Equity (Period-End)
 
 
 
 
Stockholders’ equity
 
$
55,767

 
$
51,668

Goodwill and intangible assets(1)
 
(14,886
)
 
(14,941
)
Noncumulative perpetual preferred stock
 
(4,360
)
 
(4,360
)
Tangible common equity
 
$
36,521

 
$
32,367

Tangible Common Equity (Quarterly Average)
 
 
 
 
Stockholders’ equity
 
$
54,570

 
$
51,114

Goodwill and intangible assets(1)
 
(14,900
)
 
(14,953
)
Noncumulative perpetual preferred stock
 
(4,360
)
 
(4,360
)
Tangible common equity
 
$
35,310

 
$
31,801

Tangible Assets (Period-End)
 
 
 
 
Total assets
 
$
373,619

 
$
372,538

Goodwill and intangible assets(1)
 
(14,886
)
 
(14,941
)
Tangible assets
 
$
358,733

 
$
357,597

Tangible Assets (Quarterly Average)
 
 
 
 
Total assets
 
$
371,095

 
$
365,243

Goodwill and intangible assets(1)
 
(14,900
)
 
(14,953
)
Tangible assets
 
$
356,195

 
$
350,290

Non-GAAP Ratio
 
 
 
 
TCE(2)
 
10.2
%
 
9.1
%
__________
(1) 
Includes impact of related deferred taxes.
(2) 
TCE ratio is a non-GAAP measure calculated based on TCE divided by tangible assets.

 
 
55
Capital One Financial Corporation (COF)

Glossary and Acronyms
2018 Stock Repurchase Program: On June 28, 2018, we announced that our Board of Directors authorized the repurchase of up to $1.2 billion of shares of our common stock from the third quarter of 2018 through the end of the second quarter of 2019.
2019 Stock Repurchase Program: On June 27, 2019, we announced that our Board of Directors authorized the repurchase of up to $2.2 billion of shares of our common stock from the third quarter of 2019 through the end of the second quarter of 2020.
Annual Report: References to our “2018 Form 10-K” or “2018 Annual Report” are to our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
Banks: Refers to COBNA and CONA.
Basel Committee: The Basel Committee on Banking Supervision.
Basel III Advanced Approaches: The Basel III Advanced Approaches is mandatory for those institutions with consolidated total assets of $250 billion or more or consolidated total on-balance sheet foreign exposure of $10 billion or more. The Basel III Capital Rule modified the Advanced Approaches version of Basel II to create the Basel III Advanced Approaches.
Basel III Capital Rule: The Federal Banking Agencies issued a rule in July 2013 implementing the Basel III capital framework developed by the Basel Committee as well as certain Dodd-Frank Act and other capital provisions.
Basel III Standardized Approach: The Basel III Capital Rule modified Basel I to create the Basel III Standardized Approach, which requires for Basel III Advanced Approaches banking organizations that have yet to exit parallel run to use the Basel III Standardized Approach to calculate regulatory capital, including capital ratios, subject to transition provisions.
Capital One: Capital One Financial Corporation and its subsidiaries.
Carrying value (with respect to loans): The amount at which a loan is recorded on the consolidated balance sheets. For loans recorded at amortized cost, carrying value is the unpaid principal balance net of unamortized deferred loan origination fees and costs, and unamortized purchase premium or discount. For loans that are or have been on nonaccrual status, the carrying value is also reduced by any net charge-offs that have been recorded and the amount of interest payments applied as a reduction of principal under the cost recovery method. For credit card loans, the carrying value also includes interest that has been billed to the customer. For loans classified as held for sale, carrying value is the lower of carrying value as described in the sentences above, or fair value. For PCI loans, carrying value represents the present value of all expected cash flows including interest that has not yet been accrued, discounted at the effective interest rate, including any valuation allowance for impaired loans.
CECL: In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU requires an impairment model (known as the current expected credit loss (“CECL”) model) that is based on expected rather than incurred losses, with an anticipated result of more timely loss recognition. This guidance is effective for us on January 1, 2020, with early adoption permitted no earlier than January 1, 2019.
COBNA: Capital One Bank (USA), National Association, one of our fully owned subsidiaries, which offers credit and debit card products, other lending products and deposit products.
Common equity Tier 1 capital: Calculated as the sum of common equity, related surplus and retained earnings, and accumulated other comprehensive income net of applicable phase-ins, less goodwill and intangibles net of associated deferred tax liabilities and applicable phase-ins, less other deductions, as defined by regulators.
Company: Capital One Financial Corporation and its subsidiaries.
CONA: Capital One, National Association, one of our fully owned subsidiaries, which offers a broad spectrum of banking products and financial services to consumers, small businesses and commercial clients.
Credit risk: The risk of loss from an obligor’s failure to meet the terms of any contract or otherwise fail to perform as agreed.
Cybersecurity Incident: The unauthorized access by an outside individual who obtained certain types of personal information relating to people who had applied for our credit card products and to our credit card customers that we announced on July 29, 2019.
Derivative: A contract or agreement whose value is derived from changes in interest rates, foreign exchange rates, prices of securities or commodities, credit worthiness for credit default swaps or financial or commodity indices.

 
 
56
Capital One Financial Corporation (COF)

Discontinued operations: The operating results of a component of an entity, as defined by Accounting Standards Codification (“ASC”) 205, that are removed from continuing operations when that component has been disposed of or it is management’s intention to sell the component.
Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”): Regulatory reform legislation signed into law on July 21, 2010. This law broadly affects the financial services industry and contains numerous provisions aimed at strengthening the sound operation of the financial services sector.
Exchange Act: The Securities Exchange Act of 1934, as amended.
eXtensible Business Reporting Language (“XBRL”): A language for the electronic communication of business and financial data.
Federal Banking Agencies: The Federal Reserve, Office of the Comptroller of the Currency and Federal Deposit Insurance Corporation.
Federal Reserve: The Board of Governors of the Federal Reserve System.
FICO score: A measure of consumer credit risk provided by credit bureaus, typically produced from statistical modeling software created by FICO (formerly known as “Fair Isaac Corporation”) utilizing data collected by the credit bureaus.
Foreign currency derivative contracts: An agreement to exchange contractual amounts of one currency for another currency at one or more future dates.
Foreign exchange contracts: Contracts that provide for the future receipt or delivery of foreign currency at previously agreed-upon terms.
GSE or Agency: A government-sponsored enterprise or agency is a financial services corporation created by the United States Congress. Examples of U.S. government agencies include Federal National Mortgage Association (“Fannie Mae”), Federal Home Loan Mortgage Corporation (“Freddie Mac”), Government National Mortgage Association (“Ginnie Mae”) and the Federal Home Loan Banks (“FHLB”).
Impaired loans: A loan is considered impaired when, based on current information and events, it is probable that we will not be able to collect all amounts due from the borrower in accordance with the original contractual terms of the loan.
Interest rate sensitivity: The exposure to interest rate movements.
Interest rate swaps: Contracts in which a series of interest rate flows in a single currency are exchanged over a prescribed period. Interest rate swaps are the most common type of derivative contract that we use in our asset/liability management activities.
Investment grade: Represents Moody’s long-term rating of Baa3 or better; and/or a Standard & Poor’s or DBRS long-term rating of BBB- or better; or if unrated, an equivalent rating using our internal risk ratings. Instruments that fall below these levels are considered to be non-investment grade.
Investor entities: Entities that invest in community development entities (“CDE”) that provide debt financing to businesses and non-profit entities in low-income and rural communities.
LCR Rule: In September 2014, the Federal Banking Agencies issued final rules implementing the Basel III Liquidity Coverage Ratio in the United States. The LCR is calculated by dividing the amount of an institution’s high quality, unencumbered liquid assets by its estimated net cash outflow, as defined and calculated in accordance with Final LCR Rule.
Leverage ratio: Tier 1 capital divided by average assets after certain adjustments, as defined by the regulators.
Liquidity risk: The risk that the Company will not be able to meet its future financial obligations as they come due, or invest in future asset growth because of an inability to obtain funds at a reasonable price within a reasonable time period.
Loan-to-value (“LTV”) ratio: The relationship, expressed as a percentage, between the principal amount of a loan and the appraised value of the collateral securing the loan.
Managed presentation: A non-GAAP presentation of financial results that includes reclassifications to present revenue on a fully taxable-equivalent basis. Management uses this non-GAAP financial measure at the segment level, because it believes this provides information to enable investors to understand the underlying operational performance and trends of the particular business segment and facilitates a comparison of the business segment with the performance of competitors.

 
 
57
Capital One Financial Corporation (COF)

Market risk: The risk that an institution’s earnings or the economic value of equity could be adversely impacted by changes in interest rates, foreign exchange rates or other market factors.
Master netting agreement: An agreement between two counterparties that have multiple contracts with each other that provides for the net settlement of all contracts through a single payment in the event of default or termination of any one contract.
Mortgage-backed security (“MBS”): An asset-backed security whose cash flows are backed by the principal and interest payments of a set of mortgage loans.
Mortgage servicing rights (“MSR”): The right to service a mortgage loan when the underlying loan is sold or securitized. Servicing includes collections for principal, interest and escrow payments from borrowers and accounting for and remitting principal and interest payments to investors.
Net interest margin: The result of dividing net interest income by average interest-earning assets.
Nonperforming loans: Generally include loans that have been placed on nonaccrual status. We also do not report loans classified as held for sale as nonperforming.
Option-ARM loans: The option-ARM real estate loan product is an adjustable-rate mortgage (“ARM”) loan that initially provides the borrower with the monthly option to make a fully-amortizing, interest-only or minimum fixed payment. After the initial payment option period, usually five years, the recalculated minimum payment represents a fully-amortizing principal and interest payment that would effectively repay the loan by the end of its contractual term.
Other-than-temporary impairment (“OTTI”): An impairment charge taken on a security whose fair value has fallen below the carrying value on the balance sheet and whose value is not expected to recover through the holding period of the security.
Public Funds deposits: Deposits that are derived from a variety of political subdivisions such as school districts and municipalities.
Purchased credit-impaired (“PCI”) loans: Loans acquired in a business combination that were recorded at fair value at acquisition and subsequently accounted for based on cash flows expected to be collected in accordance with ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality.
Purchase volume: Consists of purchase transactions, net of returns, for the period, and excludes cash advance and balance transfer transactions.
Rating agency: An independent agency that assesses the credit quality and likelihood of default of an issue or issuer and assigns a rating to that issue or issuer.
Recorded investment: The amount of the investment in a loan which includes any direct write-down of the investment.
Repurchase agreement: An instrument used to raise short-term funds whereby securities are sold with an agreement for the seller to buy back the securities at a later date.
Restructuring charges: Charges associated with the realignment of resources supporting various businesses, primarily consisting of severance and related benefits pursuant to our ongoing benefit programs and impairment of certain assets related to business locations and activities being exited.
Return on average assets: Calculated based on income from continuing operations, net of tax, for the period divided by average total assets for the period.
Return on average common equity: Calculated based on (i) income from continuing operations, net of tax; (ii) less dividends and undistributed earnings allocated to participating securities; (iii) less preferred stock dividends, for the period, divided by average common equity. Our calculation of return on average common equity may not be comparable to similarly-titled measures reported by other companies.
Return on average tangible common equity: A non-GAAP financial measure calculated based on (i) income from continuing operations, net of tax; (ii) less dividends and undistributed earnings allocated to participating securities; (iii) less preferred stock dividends, for the period, divided by average tangible common equity. Our calculation of return on average tangible common equity may not be comparable to similarly-titled measures reported by other companies.
Risk-weighted assets: On- and off-balance sheet assets that are assigned to one of several broad risk categories and weighted by factors representing their risk and potential for default.
Securitized debt obligations: A type of asset-backed security and structured credit product constructed from a portfolio of fixed-income assets.

 
 
58
Capital One Financial Corporation (COF)

Subprime: For purposes of lending in our Credit Card business, we generally consider FICO scores of 660 or below, or other equivalent risk scores, to be subprime. For purposes of auto lending in our Consumer Banking business, we generally consider FICO scores of 620 or below to be subprime.
Tangible common equity (“TCE”): A non-GAAP financial measure. Common equity less goodwill and intangible assets adjusted for deferred tax liabilities associated with non-tax deductible intangible assets and tax deductible goodwill.
Tax Act: The Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018 enacted on December 22, 2017.
Troubled debt restructuring (“TDR”): A TDR is deemed to occur when the contractual terms of a loan agreement are modified by granting a concession to a borrower that is experiencing financial difficulty.
Unfunded commitments: Legally binding agreements to provide a defined level of financing until a specified future date.
U.K. PPI Reserve: U.K. payment protection insurance customer refund reserve.
U.S. GAAP: Accounting principles generally accepted in the United States of America. Accounting rules and conventions defining acceptable practices in preparing financial statements in the U.S.
Variable interest entity (“VIE”): An entity that (i) lacks enough equity investment at risk to permit the entity to finance its activities without additional financial support from other parties; (ii) has equity owners that lack the right to make significant decisions affecting the entity’s operations; and/or (iii) has equity owners that do not have an obligation to absorb or the right to receive the entity’s losses or return.

 
 
59
Capital One Financial Corporation (COF)

Acronyms
AML: Anti-money laundering
AOCI: Accumulated other comprehensive income
ASU: Accounting Standards Update
ASC: Accounting Standards Codification
AWS: Amazon Web Services, Inc.
BHC: Bank holding company
bps: Basis points
CAD: Canadian dollar
CCAR: Comprehensive Capital Analysis and Review
CCP: Central Counterparty Clearinghouse, or Central Clearinghouse
CDE: Community development entities
CECL: Current expected credit loss
CEO: Chief Executive Officer
CFPB: Consumer Financial Protection Bureau
CMBS: Commercial mortgage-backed securities
CME: Chicago Mercantile Exchange
COEP: Capital One (Europe) plc
COF: Capital One Financial Corporation
CVA: Credit valuation adjustment
DVA: Debit valuation adjustment
EU: European Union
Fannie Mae: Federal National Mortgage Association
FASB: Financial Accounting Standards Board
FCA: U.K. Financial Conduct Authority
FCM: Futures commission merchant
FDIC: Federal Deposit Insurance Corporation
FHLB: Federal Home Loan Banks
FinCEN: Financial Crimes Enforcement Network
Fitch: Fitch Ratings
FOS: Financial Ombudsman Service
Freddie Mac: Federal Home Loan Mortgage Corporation
FVC: Fair Value Committee
GAAP: Generally accepted accounting principles in the U.S.
GBP: Great British pound
GDPR: General Data Protection Regulation
Ginnie Mae: Government National Mortgage Association
GSE or Agency: Government-sponsored enterprise
IRM: Independent Risk Management
LCH: LCH Group
LCR: Liquidity coverage ratio
LIBOR: London Interbank Offered Rate
Moody’s: Moody’s Investors Service
MSR: Mortgage servicing rights

 
 
60
Capital One Financial Corporation (COF)

OCC: Office of the Comptroller of the Currency
OCI: Other comprehensive income
OTC: Over-the-counter
OTTI: Other-than-temporary impairment
PCA: Prompt corrective action
PCI: Purchased credit-impaired
PCCR: Purchased credit card relationship
PIPEDA: Personal Information Protection and Electronic Documents Act
PPI: Payment protection insurance
REO: Real estate owned
RMBS: Residential mortgage-backed securities
S&P: Standard & Poor’s
SEC: U.S. Securities and Exchange Commission
TCE: Tangible common equity
TDR: Troubled debt restructuring
U.K.: United Kingdom
U.S.: United States of America
VAC: Valuations Advisory Committee

 
 
61
Capital One Financial Corporation (COF)

Item 1. Financial Statements and Notes
 
Page
Consolidated Financial Statements
63
Consolidated Statements of Income
63
Consolidated Statements of Comprehensive Income
64
Consolidated Balance Sheets
65
Consolidated Statements of Changes in Stockholders’ Equity
66
Consolidated Statements of Cash Flows
67
Notes to Consolidated Financial Statements
68
Note  1—Summary of Significant Accounting Policies
68
Note  2—Leases
71
Note  3—Investment Securities
73
Note  4—Loans
79
Note  5—Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments
91
Note  6—Variable Interest Entities and Securitizations
95
Note  7—Goodwill and Intangible Assets
99
Note  8—Deposits and Borrowings
101
Note 9—Derivative Instruments and Hedging Activities
102
Note 10—Stockholders’ Equity
111
Note 11—Earnings Per Common Share
115
Note 12—Fair Value Measurement
116
Note 13—Business Segments and Revenue from Contracts with Customers
123
Note 14—Commitments, Contingencies, Guarantees and Others
127
Note 15—Subsequent Events
131

 
 
62
Capital One Financial Corporation (COF)


CAPITAL ONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Dollars in millions, except per share-related data)
 
2019
 
2018
 
2019
 
2018
Interest income:
 
 
 
 
 
 
 
 
Loans, including loans held for sale
 
$
6,383

 
$
5,989

 
$
12,751

 
$
12,123

Investment securities
 
629

 
539

 
1,284

 
991

Other
 
64

 
68

 
133

 
119

Total interest income
 
7,076

 
6,596

 
14,168

 
13,233

Interest expense:
 
 
 
 
 
 
 
 
Deposits
 
870

 
622

 
1,687

 
1,161

Securitized debt obligations
 
139

 
124

 
282

 
231

Senior and subordinated notes
 
310

 
289

 
624

 
540

Other borrowings
 
11

 
10

 
38

 
32

Total interest expense
 
1,330

 
1,045

 
2,631

 
1,964

Net interest income
 
5,746

 
5,551

 
11,537

 
11,269

Provision for credit losses
 
1,342

 
1,276

 
3,035

 
2,950

Net interest income after provision for credit losses
 
4,404

 
4,275

 
8,502

 
8,319

Non-interest income:
 
 
 
 
 
 
 
 
Interchange fees, net
 
820

 
723

 
1,578

 
1,366

Service charges and other customer-related fees
 
352

 
391

 
705

 
823

Net securities gains (losses)
 
15

 
(1
)
 
39

 
7

Other
 
191

 
528

 
348

 
636

Total non-interest income
 
1,378

 
1,641

 
2,670

 
2,832

Non-interest expense:
 
 
 
 
 
 
 
 
Salaries and associate benefits
 
1,558

 
1,430

 
3,131

 
2,950

Occupancy and equipment
 
521

 
503

 
1,014

 
993

Marketing
 
546

 
425

 
1,063

 
839

Professional services
 
314

 
234

 
605

 
444

Communications and data processing
 
329

 
317

 
632

 
623

Amortization of intangibles
 
29

 
43

 
59

 
87

Other
 
482

 
472

 
946

 
1,061

Total non-interest expense
 
3,779

 
3,424

 
7,450

 
6,997

Income from continuing operations before income taxes
 
2,003

 
2,492

 
3,722

 
4,154

Income tax provision
 
387

 
575

 
696

 
894

Income from continuing operations, net of tax
 
1,616

 
1,917

 
3,026

 
3,260

Income (loss) from discontinued operations, net of tax
 
9

 
(11
)
 
11

 
(8
)
Net income
 
1,625

 
1,906

 
3,037

 
3,252

Dividends and undistributed earnings allocated to participating securities
 
(12
)
 
(12
)
 
(24
)
 
(23
)
Preferred stock dividends
 
(80
)
 
(80
)
 
(132
)
 
(132
)
Net income available to common stockholders
 
$
1,533

 
$
1,814

 
$
2,881

 
$
3,097

Basic earnings per common share:
 
 
 
 
 
 
 
 
Net income from continuing operations
 
$
3.24

 
$
3.76

 
$
6.11

 
$
6.39

Income (loss) from discontinued operations
 
0.02

 
(0.02
)
 
0.02

 
(0.02
)
Net income per basic common share
 
$
3.26

 
$
3.74

 
$
6.13

 
$
6.37

Diluted earnings per common share:
 
 
 
 
 
 
 
 
Net income from continuing operations
 
$
3.22

 
$
3.73

 
$
6.08

 
$
6.35

Income (loss) from discontinued operations
 
0.02

 
(0.02
)
 
0.02

 
(0.02
)
Net income per diluted common share
 
$
3.24

 
$
3.71

 
$
6.10

 
$
6.33


 
 
63
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Table of Contents

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

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Dollars in millions)
 
2019
 
2018
 
2019
 
2018
Net income
 
$
1,625

 
$
1,906

 
$
3,037

 
$
3,252

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Net unrealized gains (losses) on securities available for sale
 
272

 
(65
)
 
564

 
(650
)
Net changes in securities held to maturity
 
6

 
8

 
12

 
433

Net unrealized gains (losses) on hedging relationships
 
537

 
(113
)
 
814

 
(431
)
Foreign currency translation adjustments
 
15

 
(24
)
 
45

 
(17
)
Other
 
0

 
0

 
(2
)
 
(1
)
Other comprehensive income (loss), net of tax
 
830

 
(194
)
 
1,433

 
(666
)
Comprehensive income
 
$
2,455

 
$
1,712

 
$
4,470

 
$
2,586


































See Notes to Consolidated Financial Statements.
 
64
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CAPITAL ONE FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Dollars in millions, except per share-related data)
 
June 30,
2019
 
December 31,
2018
Assets:
 
 
 
 
Cash and cash equivalents:
 
 
 
 
Cash and due from banks
 
$
5,184

 
$
4,768

Interest-bearing deposits and other short-term investments
 
9,927

 
8,418

Total cash and cash equivalents
 
15,111

 
13,186

Restricted cash for securitization investors
 
710

 
303

Investment securities:
 
 
 
 
Securities available for sale
 
45,658

 
46,150

Securities held to maturity
 
35,475

 
36,771

Total investment securities
 
81,133

 
82,921

Loans held for investment:
 
 
 
 
Unsecuritized loans held for investment
 
211,556

 
211,702

Loans held in consolidated trusts
 
32,904

 
34,197

Total loans held for investment
 
244,460

 
245,899

Allowance for loan and lease losses
 
(7,133
)
 
(7,220
)
Net loans held for investment
 
237,327

 
238,679

Loans held for sale, at lower of cost or fair value
 
1,829

 
1,192

Premises and equipment, net
 
4,243

 
4,191

Interest receivable
 
1,544

 
1,614

Goodwill
 
14,545

 
14,544

Other assets
 
17,177

 
15,908

Total assets
 
$
373,619

 
$
372,538

 
 
 
 
 
Liabilities:
 
 
 
 
Interest payable
 
$
437

 
$
458

Deposits:
 
 
 
 
Non-interest-bearing deposits
 
23,374

 
23,483

Interest-bearing deposits
 
231,161

 
226,281

Total deposits
 
254,535

 
249,764

Securitized debt obligations
 
16,959

 
18,307

Other debt:
 
 
 
 
Federal funds purchased and securities loaned or sold under agreements to repurchase
 
359

 
352

Senior and subordinated notes
 
31,822

 
30,826

Other borrowings
 
93

 
9,420

Total other debt
 
32,274

 
40,598

Other liabilities
 
13,647

 
11,743

Total liabilities
 
317,852

 
320,870

Commitments, contingencies and guarantees (see Note 14)
 

 
 
Stockholders’ equity:
 
 
 
 
Preferred stock (par value $.01 per share; 50,000,000 shares authorized; 4,475,000 shares issued and outstanding as of both June 30, 2019 and December 31, 2018)
 
0

 
0

Common stock (par value $.01 per share; 1,000,000,000 shares authorized; 671,406,101 and 667,969,069 shares issued as of June 30, 2019 and December 31, 2018, respectively, 470,333,041 and 467,717,306 shares outstanding as of June 30, 2019 and December 31, 2018, respectively)
 
7

 
7

Additional paid-in capital, net
 
32,262

 
32,040

Retained earnings
 
38,386

 
35,875

Accumulated other comprehensive income (loss)
 
170

 
(1,263
)
Treasury stock, at cost (par value $.01 per share; 201,073,060 and 200,251,763 shares as of June 30, 2019 and December 31, 2018, respectively)
 
(15,058
)
 
(14,991
)
Total stockholders’ equity
 
55,767

 
51,668

Total liabilities and stockholders’ equity
 
$
373,619

 
$
372,538


See Notes to Consolidated Financial Statements.
 
65
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CAPITAL ONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

(Dollars in millions)
 
Preferred Stock
 
Common Stock
 
Additional
Paid-In
Capital
 
Retained Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Treasury
Stock
 
Total
Stockholders’
Equity
Shares
 
Amount
 
Shares
 
Amount
 
Balance as of December 31, 2018
 
4,475,000

 
$
0

 
667,969,069

 
$
7

 
$
32,040

 
$
35,875

 
$
(1,263
)
 
$
(14,991
)
 
$
51,668

Cumulative effects from adoption of new lease standard
 
 
 
 
 
 
 
 
 
 
 
(11
)
 


 
 
 
(11
)
Comprehensive income
 
 
 
 
 


 

 


 
1,412

 
603

 
 
 
2,015

Dividends—common stock(1)
 
 
 
 
 
32,700

 
0
 
3

 
(194
)
 
 
 
 
 
(191
)
Dividends—preferred stock
 
 
 
 
 
 
 
 
 
 
 
(52
)
 
 
 


 
(52
)
Purchases of treasury stock
 
 
 
 
 


 

 


 
 
 
 
 
(65
)
 
(65
)
Issuances of common stock and restricted stock, net of forfeitures
 
 
 
 
 
2,641,635

 
0
 
52

 
 
 
 
 
 
 
52

Exercises of stock options
 


 

 
5,000

 
0
 
0

 
 
 
 
 
 
 
0

Compensation expense for restricted stock units and stock options
 
 
 
 
 
 
 
 
 
65

 
 
 
 
 
 
 
65

Balance as of March 31, 2019
 
4,475,000

 
$
0

 
670,648,404

 
$
7

 
$
32,160

 
$
37,030

 
$
(660
)
 
$
(15,056
)
 
$
53,481

Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
1,625

 
830

 
 
 
2,455

Dividends—common stock(1)
 
 
 
 
 
8,680

 
0
 
1

 
(189
)
 
 
 
 
 
(188
)
Dividends—preferred stock
 
 
 
 
 
 
 
 
 
 
 
(80
)
 
 
 
 
 
(80
)
Purchases of treasury stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(2
)
 
(2
)
Issuances of common stock and restricted stock, net of forfeitures
 
 
 
 
 
745,017

 
0
 
46

 
 
 
 
 
 
 
46

Exercises of stock options
 
 
 
 
 
4,000

 
0
 
0

 
 
 
 
 
 
 
0

Compensation expense for restricted stock units and stock options
 
 
 
 
 
 
 
 
 
55

 
 
 
 
 
 
 
55

Balance as of June 30, 2019
 
4,475,000

 
$
0

 
671,406,101

 
$
7

 
$
32,262

 
$
38,386

 
$
170

 
$
(15,058
)
 
$
55,767


(Dollars in millions)
 
Preferred Stock
 
Common Stock
 
Additional
Paid-In
Capital
 
Retained Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Treasury
Stock
 
Total
Stockholders’
Equity
Shares
 
Amount
 
Shares
 
Amount
 
Balance as of December 31, 2017
 
4,475,000

 
$
0

 
661,724,927

 
$
7

 
$
31,656

 
$
30,700

 
$
(926
)
 
$
(12,707
)
 
$
48,730

Cumulative effects from adoption of new accounting standards
 
 
 
 
 
 
 
 
 
 
 
201

 
(201
)
 
 
 
0

Comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
1,346

 
(472
)
 
 
 
874

Dividends—common stock(1)
 
 
 
 
 
22,467

 
0
 
2

 
(199
)
 
 
 
 
 
(197
)
Dividends—preferred stock
 
 
 
 
 
 
 
 
 
 
 
(52
)
 
 
 
 
 
(52
)
Purchases of treasury stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(273
)
 
(273
)
Issuances of common stock and restricted stock, net of forfeitures
 
 
 
 
 
2,452,786

 
0
 
49

 
 
 
 
 
 
 
49

Exercises of stock options and warrants
 
 
 
 
 
675,871

 
0
 
14

 
 
 
 
 
 
 
14

Compensation expense for restricted stock awards, restricted stock units and stock options
 
 
 
 
 
 
 
 
 
58

 
 
 
 
 
 
 
58

Balance as of March 31, 2018
 
4,475,000

 
$
0

 
664,876,051

 
$
7

 
$
31,779

 
$
31,996

 
$
(1,599
)
 
$
(12,980
)
 
$
49,203

Comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
1,906

 
(194
)
 
 
 
1,712

Dividends—common stock(1)
 
 
 
 
 
4,371

 
0
 
0

 
(196
)
 
 
 
 
 
(196
)
Dividends—preferred stock
 
 
 
 
 
 
 
 
 
 
 
(80
)
 
 
 
 
 
(80
)
Purchases of treasury stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(802
)
 
(802
)
Issuances of common stock and restricted stock, net of forfeitures
 
 
 
 
 
571,514

 
0
 
41

 
 
 
 
 
 
 
41

Exercises of stock options and warrants
 
 
 
 
 
403,835

 
0
 
6

 
 
 
 
 
 
 
6

Compensation expense for restricted stock awards, restricted stock units and stock options
 
 
 
 
 
 
 
 
 
42

 
 
 
 
 
 
 
42

Balance as of June 30, 2018
 
4,475,000

 
$
0

 
665,855,771

 
$
7

 
$
31,868

 
$
33,626

 
$
(1,793
)
 
$
(13,782
)
 
$
49,926

__________
(1) 
We declared dividend per share on our common stock of $0.40 in the second quarter of 2019 and 2018, and $0.80 in the first six months of 2019 and 2018.

See Notes to Consolidated Financial Statements.
 
66
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CAPITAL ONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 
 
Six Months Ended June 30,
(Dollars in millions)
 
2019
 
2018
Operating activities:
 
 
 
 
Income from continuing operations, net of tax
 
$
3,026

 
$
3,260

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

 
(8
)
Net income
 
3,037

 
3,252

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
 
Provision for credit losses
 
3,035

 
2,950

Depreciation and amortization, net
 
1,585

 
1,132

Deferred tax provision (benefit)
 
(15
)
 
95

Net securities gains
 
(39
)
 
(7
)
Gain on sales of loans
 
(57
)
 
(433
)
Stock-based compensation expense
 
129

 
108

Loans held for sale:
 
 
 
 
Originations and purchases
 
(5,371
)
 
(3,838
)
Proceeds from sales and paydowns
 
4,869

 
3,574

Changes in operating assets and liabilities:
 
 
 
 
Changes in interest receivable
 
70

 
43

Changes in other assets
 
1,251

 
(110
)
Changes in interest payable
 
(21
)
 
37

Changes in other liabilities
 
634

 
(1,116
)
Net cash from operating activities
 
9,107

 
5,687

Investing activities:
 
 
 
 
Securities available for sale:
 
 
 
 
Purchases
 
(5,674
)
 
(9,460
)
Proceeds from paydowns and maturities
 
3,362

 
3,763

Proceeds from sales
 
3,983

 
1,058

Securities held to maturity:
 
 
 
 
Purchases
 
(396
)
 
(14,586
)
Proceeds from paydowns and maturities
 
1,657

 
1,199

Loans:
 
 
 
 
Net changes in loans held for investment
 
(3,395
)
 
13,896

Principal recoveries of loans previously charged off
 
1,323

 
1,308

Net purchases of premises and equipment
 
(396
)
 
(429
)
Net cash from other investing activities
 
(589
)
 
(364
)
Net cash from investing activities
 
(125
)
 
(3,615
)
 
 
 
 
 
 
 
Six Months Ended June 30,
(Dollars in millions)
 
2019
 
2018
Financing activities:
 
 
 
 
Deposits and borrowings:
 
 
 
 
Changes in deposits
 
$
4,513

 
$
4,691

Issuance of securitized debt obligations
 
2,617

 
997

Maturities and paydowns of securitized debt obligations
 
(4,126
)
 
(1,250
)
Issuance of senior and subordinated notes and long-term FHLB advances
 
2,646

 
5,227

Maturities and paydowns of senior and subordinated notes and long-term FHLB advances
 
(2,751
)
 
(11,207
)
Changes in other borrowings
 
(9,069
)
 
(96
)
Common stock:
 
 
 
 
Net proceeds from issuances
 
98

 
90

Dividends paid
 
(379
)
 
(393
)
Preferred stock:
 
 
 
 
Dividends paid
 
(132
)
 
(132
)
Purchases of treasury stock
 
(67
)
 
(1,075
)
Proceeds from share-based payment activities
 
0

 
20

Net cash from financing activities
 
(6,650
)
 
(3,128
)
Changes in cash, cash equivalents and restricted cash for securitization investors
 
2,332

 
(1,056
)
Cash, cash equivalents and restricted cash for securitization investors, beginning of the period
 
13,489

 
14,352

Cash, cash equivalents and restricted cash for securitization investors, end of the period
 
$
15,821

 
$
13,296

Supplemental cash flow information:
 
 
 
 
Non-cash items:
 
 
 
 
Net transfers from loans held for investment to loans held for sale
 
$
1,428

 
$
663

Interest paid
 
2,411

 
1,796

Income tax paid
 
181

 
171


See Notes to Consolidated Financial Statements.
 
67
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Capital One Financial Corporation, a Delaware Corporation established in 1994 and headquartered in McLean, Virginia, is a diversified financial services holding company with banking and non-banking subsidiaries. Capital One Financial Corporation and its subsidiaries (the “Company”) offer a broad array of financial products and services to consumers, small businesses and commercial clients through branches, the internet and other distribution channels. As of June 30, 2019, 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.”
We also offer products outside of the United States of America (“U.S.”) principally through Capital One (Europe) plc (“COEP”), an indirect subsidiary of COBNA organized and located in the United Kingdom (“U.K.”), and through a branch of COBNA in Canada. COEP has authority, among other things, to provide credit card loans. Our branch of COBNA in Canada also has the authority to provide credit card loans.
Our principal operations are organized for management reporting purposes into three major business segments, which are defined primarily based on the products and services provided or the types of customer served: Credit Card, Consumer Banking and Commercial Banking. We provide details on our business segments, the integration of recent acquisitions, if any, into our business segments and the allocation methodologies and accounting policies used to derive our business segment results in “Note 13—Business Segments and Revenue from Contracts with Customers.”
Basis of Presentation and Use of Estimates
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the U.S. (“U.S. GAAP”). The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and in the related disclosures. These estimates are based on information available as of the date of the consolidated financial statements. While management makes its best judgments, actual amounts or results could differ from these estimates. In the opinion of management, all normal, recurring adjustments have been included for a fair statement of this interim financial information. Certain prior period amounts have been reclassified to conform to the current period presentation.
These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements, and related notes thereto, included in Capital One Financial Corporation’s 2018 Annual Report on Form 10-K (“2018 Form 10-K”).

 
 
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Newly Adopted Accounting Standards
Standard
 
Guidance
 
Adoption Timing and Financial Statements Impacts
Premium Amortization on Callable Debt
Accounting Standards Update (“ASU”) No. 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities
Issued March 2017
 
Shortens the amortization period from the contractual life to the earliest call date for certain purchased callable debt securities held at a premium.

 
We adopted this guidance in the first quarter of 2019 using the modified retrospective method of adoption.
Our adoption of this standard did not have a material impact on our consolidated financial statements.
 
 
 
 
 
Leases
ASU No. 2016-02, Leases (Topic 842)
Issued February 2016
 
Requires lessees to recognize right of use assets and lease liabilities on their consolidated balance sheets and disclose key information about all their leasing arrangements, with certain practical expedients.
 
We adopted this guidance in the first quarter of 2019, using the modified retrospective method of adoption without restating prior periods.
We elected the practical expedients that permitted us to not reassess the lease classification of existing leases, whether existing contracts contain a lease or the treatment of initial direct costs on existing leases.
Upon adoption, we recorded a lease liability of $1.9 billion and right of use asset of $1.6 billion, which is net of other lease-related balances.
Accounting Standards Issued but Not Adopted as of June 30, 2019
Standard
 
Guidance
 
Adoption Timing and Financial Statements Impacts
Cloud Computing
ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
Issued August 2018
 
Aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license).

 
Effective January 1, 2020, with early adoption permitted, using either the retrospective or prospective method of adoption.
We plan to adopt the standard on its effective date using the prospective method of adoption. We do not expect such adoption to have a material impact on our consolidated financial statements.
 
 
 
 
 
Goodwill Impairment Test Simplification
ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
Issued January 2017
 
Eliminates the second step from the current goodwill impairment test.
Under the current guidance, the first step compares a reporting unit’s carrying value to its fair value. If the carrying value exceeds fair value, an entity performs the second step, which assigns the reporting unit’s fair value to its assets and liabilities, including unrecognized assets and liabilities, in the same manner as required in purchase accounting.
Under the new guidance, any impairment of a reporting unit’s goodwill is determined based on the amount by which the reporting unit’s carrying value exceeds its fair value, limited to the amount of goodwill allocated to the reporting unit.
 
Effective January 1, 2020, with early adoption permitted, using the prospective method of adoption.
We plan to adopt the standard on its effective date and do not expect such adoption to have a material impact on our consolidated financial statements.


 
 
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Standard
 
Guidance
 
Adoption Timing and Financial Statements Impacts
Current Expected Credit Loss (“CECL”)
ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
Issued June 2016
 
Requires the use of current expected credit loss model that is based on expected rather than incurred losses to determine our allowance for credit losses on financial assets measured at amortized cost, certain net investments in leases and certain off-balance sheet arrangements.
Replaces current accounting for purchased credit-impaired (“PCI”) and impaired loans.
Amends the other-than-temporary impairment model for available for sale debt securities to require that credit losses (and subsequent recoveries) be recorded through an allowance approach, rather than through permanent write-downs for credit losses and subsequent accretion of positive changes through interest income over time.
 
Effective January 1, 2020, with early adoption permitted no earlier than January 1, 2019, using the modified retrospective method of adoption.

We plan to adopt the standard on its effective date.
We have established a company-wide, cross-functional governance structure for our implementation of this standard. We continue to evaluate industry accounting interpretations, data requirements and necessary changes to our credit loss estimation methods, processes, systems and controls. We have made significant progress in accounting policy documentation and model development. We continue to perform model validations, which we expect to complete during 2019. We also continue to perform limited parallel testing and expect to conduct multiple tests of our full end-to-end allowance process prior to adopting the standard.

We continue to assess the potential impact of this standard on our consolidated financial statements, related disclosures and regulatory capital.

We currently expect our adoption of this guidance will result in an increase to our reserves for credit losses on financial instruments due to the requirement to record expected losses over the remaining contractual lives of our financial instruments; however, the actual impact will depend on the characteristics of our financial instruments, economic conditions, and our economic and loss forecasts at the adoption date.
 
 
 
 
 


 
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2—LEASES
Leases
In the first quarter of 2019, we adopted ASU No. 2016-02, Leases (Topic 842), see “Note 1—Summary of Significant Accounting Policies” for the impacts upon adoption. Our primary involvement with leases is in the capacity as a lessee where we lease premises to support our business. A majority of our leases are operating leases of office space, retail bank branches and Cafés. For real estate leases, we have elected to account for the lease and non-lease components together as a single lease component. Our operating leases expire at various dates through 2071, and many of them require variable lease payments by us, of property taxes, insurance premiums, common area maintenance and other costs. Certain of these leases also have extension or termination options, and we assess the likelihood of exercising such options. If it is reasonably certain that we will exercise the options, we include the impact in the measurement of our right-of-use assets and lease liabilities.
Our right-of-use assets and lease liabilities for operating leases are included in other assets and other liabilities on our consolidated balance sheets. As most of our operating leases do not provide an implicit rate, we use our incremental borrowing rate in determining the present value of lease payments. Our operating lease expense is included in occupancy and equipment within non-interest expense in our consolidated statements of income. Total operating lease expense consists of operating lease cost, which is recognized on a straight-line basis over the lease term, and variable lease cost, which is recognized based on actual amounts incurred. We also sublease certain premises and sublease income is included in other non-interest income.
The following tables present information about our operating lease portfolio and the related lease costs as of and for the three and six months ended June 30, 2019.
Table 2.1 Operating Lease Portfolio
(Dollars in millions)
 
June 30, 2019
Right-of-use assets
 
$
1,490

Lease liabilities
 
1,786

Weighted average remaining lease term
 
9.1 years

Weighted average discount rate
 
3.3
%
Table 2.2 Total Operating Lease Expense and Other Information
(Dollars in millions)
 
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
Operating lease cost
 
$
82

 
$
147

Variable lease cost
 
9

 
20

Total lease cost
 
91

 
167

Sublease income
 
(6
)
 
(12
)
Net lease cost
 
$
85

 
$
155

Cash paid for amounts included in the measurement of lease liabilities
 
$
80

 
$
162

Right-of-use assets obtained in exchange for lease liabilities
 
11

 
26

Right-of-use assets recognized upon adoption of new lease standard
 
0

 
1,601



 
 
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The following table presents a maturity analysis of our operating leases and a reconciliation of the undiscounted cash flows to our lease liabilities as of June 30, 2019.
Table 2.3 Maturities of Operating Leases and Reconciliation to Lease Liabilities
(Dollars in millions)
 
June 30, 2019
2019
 
$
155

2020
 
299

2021
 
268

2022
 
242

2023
 
214

Thereafter
 
932

Total undiscounted lease payments
 
2,110

Less: Imputed interest
 
(324
)
Total lease liabilities
 
$
1,786


As of June 30, 2019, we had approximately $88 million and $93 million of right-of-use assets and lease liabilities, respectively, for finance leases with a weighted average remaining lease term of 6.2 years. These right-of-use assets and lease liabilities are included in premises and equipment, net and other borrowings, respectively, on our consolidated balance sheets. We recognized $6 million and $11 million of total finance lease expense for the three and six months ended June 30, 2019, respectively.

 
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3—INVESTMENT SECURITIES
Our investment securities 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 commercial mortgage-backed securities (“CMBS”); and other securities. Agency securities include Government National Mortgage Association (“Ginnie Mae”) guaranteed securities, Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”) issued securities. The carrying value of our investments in U.S. Treasury and Agency securities represented 96% of our total investment securities portfolio as of both June 30, 2019 and December 31, 2018.
We classify investment securities as either available for sale or held to maturity. As of June 30, 2019 and December 31, 2018, we had investment securities available for sale of $45.7 billion and $46.2 billion, respectively, and securities held to maturity of $35.5 billion and $36.8 billion, respectively.
The table below presents the amortized cost, gross unrealized gains and losses, and fair value of securities available for sale as of June 30, 2019 and December 31, 2018.
Table 3.1: Investment Securities Available for Sale
 
 
June 30, 2019
(Dollars in millions)
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Investment securities available for sale:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
4,226

 
$
3

 
$
(10
)
 
$
4,219

RMBS:
 
 
 
 
 
 
 
 
Agency
 
33,183

 
177

 
(328
)
 
33,032

Non-agency
 
1,362

 
314

 
(1
)
 
1,675

Total RMBS
 
34,545

 
491

 
(329
)
 
34,707

Agency CMBS
 
5,380

 
37

 
(28
)
 
5,389

Other securities(1)
 
1,343

 
2

 
(2
)
 
1,343

Total investment securities available for sale
 
$
45,494

 
$
533

 
$
(369
)
 
$
45,658

 
 
December 31, 2018
(Dollars in millions)
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Investment securities available for sale:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
6,146

 
$
15

 
$
(17
)
 
$
6,144

RMBS:
 
 
 
 
 
 
 
 
Agency
 
32,710

 
62

 
(869
)
 
31,903

Non-agency
 
1,440

 
304

 
(2
)
 
1,742

Total RMBS
 
34,150

 
366

 
(871
)
 
33,645

Agency CMBS
 
4,806

 
11

 
(78
)
 
4,739

Other securities(1)
 
1,626

 
2

 
(6
)
 
1,622

Total investment securities available for sale
 
$
46,728

 
$
394

 
$
(972
)
 
$
46,150

__________
(1) 
Includes primarily supranational bonds, foreign government bonds and other asset-backed securities.

 
 
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The table below presents the amortized cost, carrying value, gross unrealized gains and losses, and fair value of securities held to maturity as of June 30, 2019 and December 31, 2018.
Table 3.2: Investment Securities Held to Maturity
 
 
June 30, 2019
(Dollars in millions)
 
Amortized
Cost
 
Unrealized Losses Recorded in AOCI
 
Carrying Value
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Agency RMBS
 
$
31,857

 
$
(222
)
 
$
31,635

 
$
991

 
$
(44
)
 
$
32,582

Agency CMBS
 
3,853

 
(13
)
 
3,840

 
125

 
(6
)
 
3,959

Total investment securities held to maturity
 
$
35,710

 
$
(235
)
 
$
35,475

 
$
1,116

 
$
(50
)
 
$
36,541

 
 
December 31, 2018
(Dollars in millions)
 
Amortized
Cost
 
Unrealized Losses Recorded in AOCI
 
Carrying Value
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Agency RMBS
 
$
33,299

 
$
(238
)
 
$
33,061

 
$
293

 
$
(377
)
 
$
32,977

Agency CMBS
 
3,723

 
(13
)
 
3,710

 
21

 
(89
)
 
3,642

Total investment securities held to maturity
 
$
37,022

 
$
(251
)
 
$
36,771

 
$
314

 
$
(466
)
 
$
36,619


Investment Securities in a Gross Unrealized Loss Position
The table below provides, by major security type, information about our securities available for sale in a gross unrealized loss position and the length of time that individual securities have been in a continuous unrealized loss position as of June 30, 2019 and December 31, 2018.
Table 3.3: Securities in a Gross Unrealized Loss Position
 
 
June 30, 2019
 
 
Less than 12 Months
 
12 Months or Longer
 
Total
(Dollars in millions)
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
Investment securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
2,646

 
$
(10
)
 
$
350

 
$
0

 
$
2,996

 
$
(10
)
RMBS:
 
 
 
 
 
 
 
 
 
 
 
 
Agency
 
1,547

 
(7
)
 
17,950

 
(321
)
 
19,497

 
(328
)
Non-agency
 
35

 
(1
)
 
9

 
0

 
44

 
(1
)
Total RMBS
 
1,582

 
(8
)
 
17,959

 
(321
)
 
19,541

 
(329
)
Agency CMBS
 
889

 
(2
)
 
1,863

 
(26
)
 
2,752

 
(28
)
Other securities
 
267

 
(1
)
 
363

 
(1
)
 
630

 
(2
)
Total investment securities available for sale in a gross unrealized loss position
 
$
5,384

 
$
(21
)
 
$
20,535

 
$
(348
)
 
$
25,919

 
$
(369
)

 
 
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December 31, 2018
 
 
Less than 12 Months
 
12 Months or Longer
 
Total
(Dollars in millions)
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
Investment securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
2,543

 
$
(3
)
 
$
1,076

 
$
(14
)
 
$
3,619

 
$
(17
)
RMBS:
 
 
 
 
 
 
 
 
 
 
 
 
Agency
 
7,863

 
(260
)
 
18,118

 
(609
)
 
25,981

 
(869
)
Non-agency
 
89

 
(2
)
 
10

 
0

 
99

 
(2
)
Total RMBS
 
7,952

 
(262
)
 
18,128

 
(609
)
 
26,080

 
(871
)
Agency CMBS
 
2,004

 
(31
)
 
1,540

 
(47
)
 
3,544

 
(78
)
Other securities
 
244

 
(1
)
 
678

 
(5
)
 
922

 
(6
)
Total investment securities available for sale in a gross unrealized loss position
 
$
12,743

 
$
(297
)
 
$
21,422

 
$
(675
)
 
$
34,165

 
$
(972
)

As of June 30, 2019, the amortized cost of approximately 860 securities available for sale exceeded their fair value by $369 million, of which $348 million related to securities that had been in a loss position for 12 months or longer. As of June 30, 2019, the carrying value of approximately 120 securities classified as held to maturity exceeded their fair value by $50 million.

 
 
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Maturities and Yields of Investment Securities
The table below summarizes, by major security type, the contractual maturities and weighted-average yields of our investment securities as of June 30, 2019. Because borrowers may have the right to call or prepay certain obligations, the expected maturities of our securities are likely to differ from the scheduled contractual maturities presented below. The weighted-average yield below represents the effective yield for the investment securities and is calculated based on the amortized cost of each security.
Table 3.4: Contractual Maturities and Weighted-Average Yields of Securities
 
 
June 30, 2019
(Dollars in millions)
 
Due in
1 Year or Less
 
Due > 1 Year
through
5 Years
 
Due > 5 Years
through
10 Years
 
Due > 10 Years
 
Total
Fair value of securities available for sale:
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
350

 
$
754

 
$
3,115

 
$
0

 
$
4,219

RMBS(1):
 
 
 
 
 
 
 
 
 
 
Agency
 
3

 
21

 
763

 
32,245

 
33,032

Non-agency
 
0

 
0

 
0

 
1,675

 
1,675

Total RMBS
 
3

 
21

 
763

 
33,920

 
34,707

Agency CMBS(1)
 
10

 
1,699

 
2,245

 
1,435

 
5,389

Other securities
 
486

 
561

 
296

 
0

 
1,343

Total securities available for sale
 
$
849

 
$
3,035

 
$
6,419

 
$
35,355

 
$
45,658

Amortized cost of securities available for sale
 
$
850

 
$
3,034

 
$
6,408

 
$
35,202

 
$
45,494

Weighted-average yield for securities available for sale
 
1.62
%
 
2.48
%
 
2.73
%
 
3.22
%
 
3.07
%
Carrying value of securities held to maturity:
Agency RMBS(1)
 
$
0

 
$
0

 
$
87

 
$
31,548

 
$
31,635

Agency CMBS(1)
 
0

 
65

 
780

 
2,995

 
3,840

Total securities held to maturity
 
$
0

 
$
65

 
$
867

 
$
34,543

 
$
35,475

Fair value of securities held to maturity
 
$
0

 
$
68

 
$
903

 
$
35,570

 
$
36,541

Weighted-average yield for securities held to maturity
 
N/A

 
3.62
%
 
3.12
%
 
3.30
%
 
3.30
%
__________
(1) 
As of June 30, 2019, the weighted-average expected maturities of RMBS and Agency CMBS are 5.4 years and 5.5 years, respectively.
Other-Than-Temporary Impairment
We evaluate all securities in an unrealized loss position at least quarterly, and more often as market conditions require, to assess whether the impairment is other-than-temporary. Our other-than-temporary impairment (“OTTI”) assessment is based on a discounted cash flow analysis which requires careful use of judgments and assumptions. A number of qualitative and quantitative criteria may be considered in our assessment, as applicable, including the size and the nature of the portfolio; historical and projected performance such as prepayment, default and loss severity for the RMBS portfolio; recent credit events specific to the issuer and/or industry to which the issuer belongs; the payment structure of the security; external credit ratings of the issuer and any failure or delay of the issuer to make scheduled interest or principal payments; the value of underlying collateral; our intent and ability to hold the security; and current and projected market and macro-economic conditions.
If we intend to sell a security in an unrealized loss position or it is more likely than not that we will be required to sell the security prior to recovery of its amortized cost basis, the entire difference between the amortized cost basis of the security and its fair value is recognized in earnings. As of June 30, 2019, we had sold all securities previously designated with the intent to sell, and did not intend to sell, nor believe that we will be required to sell, any other security in an unrealized loss position prior to the recovery of its amortized cost basis.

 
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For those securities that we do not intend to sell nor expect to be required to sell, an analysis is performed to determine if any of the impairment is due to credit-related factors or whether it is due to other factors, such as interest rates. Credit-related impairment is recognized in earnings, with the remaining unrealized non-credit-related impairment recorded in AOCI. We determine the credit component based on the difference between the security’s amortized cost basis and the present value of its expected cash flows, discounted at the security’s effective yield.
Realized Gains and Losses on Securities and OTTI Recognized in Earnings
The following table presents the gross realized gains or losses and proceeds from the sale of securities available for sale for the three and six months ended June 30, 2019 and 2018. We did not recognize any OTTI and did not sell any investment securities that were classified as held to maturity for the three and six months ended June 30, 2019 and 2018.
Table 3.5: Realized Gains and Losses on Securities
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Dollars in millions)
 
2019
 
2018
 
2019
 
2018
Realized gains (losses):
 
 
 
 
 
 
 
 
Gross realized gains
 
$
15

 
$
0

 
$
39

 
$
8

Gross realized losses
 
0

 
(1
)
 
0

 
(1
)
Net securities gains (losses)
 
$
15

 
$
(1
)
 
$
39

 
$
7

Total proceeds from sales
 
$
909

 
$
0

 
$
3,983

 
$
1,058

The cumulative credit loss component of the OTTI losses that have been recognized in our consolidated statements of income related to the securities that we do not intend to sell was $140 million as of both June 30, 2019 and December 31, 2018.
Securities Pledged and Received
We pledged securities available for sale and held to maturity totaling $15.5 billion and $16.3 billion as of June 30, 2019 and December 31, 2018, respectively. These securities are pledged to primarily secure Federal Home Loan Banks (“FHLB”) advances and Public Funds deposits, as well as for other purposes as required or permitted by law. We accepted pledges of securities with a fair value of approximately $1 million as of both June 30, 2019 and December 31, 2018, related to our derivative transactions.
Purchased Credit-Impaired Debt Securities
The table below presents the outstanding balance and carrying value of the purchased credit-impaired debt securities as of June 30, 2019 and December 31, 2018.
Table 3.6: Outstanding Balance and Carrying Value of Purchased Credit-Impaired Debt Securities
(Dollars in millions)
 
June 30, 2019
 
December 31, 2018
Outstanding balance
 
$
1,653

 
$
1,784

Carrying value
 
1,484

 
1,537


 
 
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Changes in Accretable Yield of Purchased Credit-Impaired Debt Securities
The following table presents changes in the accretable yield related to the purchased credit-impaired debt securities for the three and six months ended June 30, 2019 and 2018.
Table 3.7: Changes in the Accretable Yield of Purchased Credit-Impaired Debt Securities
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Dollars in millions)
 
2019
 
2018
 
2019
 
2018
Accretable yield, beginning of period
 
$
636

 
$
794

 
$
698

 
$
826

Accretion recognized in earnings
 
(44
)
 
(39
)
 
(87
)
 
(78
)
Reduction due to payoffs, disposals, transfers and other
 
(2
)
 
(2
)
 
(3
)
 
(3
)
Net reclassifications (to) from nonaccretable difference
 
1

 
15

 
(17
)
 
23

Accretable yield, end of period
 
$
591

 
$
768

 
$
591

 
$
768



 
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4—LOANS

Loan Portfolio Composition
Our loan portfolio consists of loans held for investment, including loans held in our consolidated trusts, and loans held for sale, and is divided into three portfolio segments: credit card, consumer banking and commercial banking. Credit card loans consist of domestic and international credit card loans. Consumer banking loans consist of auto and retail banking loans and in prior periods also consisted of home loans. Commercial banking loans primarily consist of commercial and multifamily real estate as well as commercial and industrial loans. We sold all of our consumer home loan portfolio and the related servicing during 2018. The information presented in this section excludes loans held for sale, which are carried at lower of cost or fair value.
Credit Quality
We closely monitor economic conditions and loan performance trends to manage and evaluate our exposure to credit risk. Trends in delinquency rates are an indicator, among other considerations, of credit risk within our loan portfolio. The level of nonperforming loans represents another indicator of the potential for future credit losses. Accordingly, key metrics we track and use in evaluating the credit quality of our loan portfolio include delinquency and nonperforming loan rates, as well as net charge-off rates and our internal risk ratings of commercial loans.
The table below presents the composition and an aging analysis of our loans held for investment as of June 30, 2019 and December 31, 2018. The delinquency aging includes all past due loans, both performing and nonperforming.
Table 4.1: Loan Portfolio Composition and Aging Analysis
 
 
June 30, 2019
(Dollars in millions)
 
Current
 
30-59
Days
 
60-89
Days
 
> 90
Days
 
Total
Delinquent
Loans
 
PCI
Loans
 
Total
Loans
Credit Card:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Domestic credit card
 
$
99,456

 
$
1,126

 
$
733

 
$
1,644

 
$
3,503

 
$
0

 
$
102,959

International card businesses
 
8,853

 
132

 
72

 
125

 
329

 
0

 
9,182

Total credit card
 
108,309

 
1,258

 
805

 
1,769

 
3,832

 
0

 
112,141

Consumer Banking:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Auto
 
53,736

 
2,384

 
1,158

 
278

 
3,820

 
0

 
57,556

Retail banking
 
2,724

 
22

 
7

 
16

 
45

 
2

 
2,771

Total consumer banking
 
56,460

 
2,406

 
1,165

 
294

 
3,865

 
2

 
60,327

Commercial Banking:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and multifamily real estate
 
29,789

 
15

 
21

 
14

 
50

 
22

 
29,861

Commercial and industrial
 
41,684

 
199

 
146

 
87

 
432

 
9

 
42,125

Total commercial lending
 
71,473

 
214

 
167

 
101

 
482

 
31

 
71,986

Small-ticket commercial real estate
 
2

 
0

 
0

 
4

 
4

 
0

 
6

Total commercial banking
 
71,475

 
214

 
167

 
105

 
486

 
31

 
71,992

Total loans(1)
 
$
236,244

 
$
3,878

 
$
2,137

 
$
2,168

 
$
8,183

 
$
33

 
$
244,460

% of Total loans
 
96.6
%
 
1.6
%
 
0.9
%
 
0.9
%
 
3.4
%
 
0.0
%
 
100.0
%

 
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
 
December 31, 2018
(Dollars in millions)
 
Current
 
30-59
Days
 
60-89
Days
 
> 90
Days
 
Total
Delinquent
Loans
 
PCI Loans
 
Total
Loans
Credit Card:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Domestic credit card
 
$
103,014

 
$
1,270

 
$
954

 
$
2,111

 
$
4,335

 
$
1

 
$
107,350

International card businesses
 
8,678

 
127

 
78

 
128

 
333

 
0

 
9,011

Total credit card
 
111,692

 
1,397

 
1,032

 
2,239

 
4,668

 
1

 
116,361

Consumer Banking:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Auto
 
52,032

 
2,624

 
1,326

 
359

 
4,309

 
0

 
56,341

Retail banking
 
2,809

 
23

 
8

 
20

 
51

 
4

 
2,864

Total consumer banking
 
54,841

 
2,647

 
1,334

 
379

 
4,360

 
4

 
59,205

Commercial Banking:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and multifamily real estate
 
28,737

 
101

 
20

 
19

 
140

 
22

 
28,899

Commercial and industrial
 
40,704

 
135

 
43

 
101

 
279

 
108

 
41,091

Total commercial lending
 
69,441

 
236

 
63

 
120

 
419

 
130

 
69,990

Small-ticket commercial real estate
 
336

 
2

 
1

 
4

 
7

 
0

 
343

Total commercial banking
 
69,777

 
238

 
64

 
124

 
426

 
130

 
70,333

Total loans(1)
 
$
236,310

 
$
4,282

 
$
2,430

 
$
2,742

 
$
9,454

 
$
135

 
$
245,899

% of Total loans
 
96.1
%
 
1.7
%
 
1.0
%
 
1.1
%
 
3.8
%
 
0.1
%
 
100.0
%
__________
(1) 
Loans, other than PCI loans, include unamortized premiums and discounts, and unamortized deferred fees and costs totaling $933 million and $818 million as of June 30, 2019 and December 31, 2018, respectively.
We pledged loan collateral of $13.8 billion and $15.8 billion to secure a portion of our FHLB borrowing capacity of $17.7 billion and $19.3 billion as of June 30, 2019 and December 31, 2018, respectively. We also pledged loan collateral of $7.7 billion and $9.2 billion to secure our Federal Reserve Discount Window borrowing capacity of $6.4 billion and $7.6 billion as of June 30, 2019 and December 31, 2018, respectively. In addition to loans pledged, we securitized a portion of our credit card and auto loans. See “Note 6—Variable Interest Entities and Securitizations” for additional information.
The following table presents the outstanding balance of loans 90 days or more past due that continue to accrue interest and loans classified as nonperforming as of June 30, 2019 and December 31, 2018. Nonperforming loans generally include loans that have been placed on nonaccrual status. PCI loans are excluded from the table below. See “Note 1—Summary of Significant Accounting Policies” in our 2018 Form 10-K for additional information on our policies for nonperforming loans and accounting for PCI loans.
Table 4.2: 90+ Day Delinquent Loans Accruing Interest and Nonperforming Loans
 
 
June 30, 2019
 
December 31, 2018
(Dollars in millions)
 
> 90 Days and Accruing
 
Nonperforming
Loans
 
> 90 Days and Accruing
 
Nonperforming
Loans
Credit Card:
 
 
 
 
 
 
 
 
Domestic credit card
 
$
1,644

 
N/A

 
$
2,111

 
N/A

International card businesses
 
119

 
$
23

 
122

 
$
22

Total credit card
 
1,763

 
23

 
2,233

 
22

Consumer Banking:
 
 
 
 
 
 
 
 
Auto
 
0

 
369

 
0

 
449

Retail banking
 
0

 
28

 
0

 
30

Total consumer banking
 
0

 
397

 
0

 
479



 
 
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June 30, 2019
 
December 31, 2018
(Dollars in millions)
 
> 90 Days and Accruing
 
Nonperforming
Loans
 
> 90 Days and Accruing
 
Nonperforming
Loans
Commercial Banking:
 
 
 
 
 
 
 
 
Commercial and multifamily real estate
 
$
5

 
$
43

 
$
0

 
$
83

Commercial and industrial
 
1

 
311

 
0

 
223

Total commercial lending
 
6

 
354

 
0

 
306

Small-ticket commercial real estate
 
0

 
6

 
0

 
6

Total commercial banking
 
6

 
360

 
0

 
312

Total
 
$
1,769

 
$
780

 
$
2,233

 
$
813

% of Total loans held for investment
 
0.7
%
 
0.3
%
 
0.9
%
 
0.3
%

Credit Card
Our credit card loan portfolio is highly diversified across millions of accounts and numerous geographies without significant individual exposure. We therefore generally manage credit risk based on portfolios with common risk characteristics. The risk in our credit card loan portfolio correlates to broad economic trends, such as unemployment rates and home values, as well as consumers’ financial condition, all of which can have a material effect on credit performance. The primary indicators we assess in monitoring the credit quality and risk of our credit card loan portfolio are delinquency and charge-off trends, including an analysis of loan migration between delinquency categories over time.
The table below displays the geographic profile of our credit card loan portfolio as of June 30, 2019 and December 31, 2018.
Table 4.3: Credit Card Risk Profile by Geographic Region
 
 
June 30, 2019
 
December 31, 2018
(Dollars in millions)
 
Amount
 
% of
Total
 
Amount
 
% of
Total
Domestic credit card:
 
 
 
 
 
 
 
 
California
 
$
11,114

 
9.9
%
 
$
11,591

 
10.0
%
Texas
 
7,881

 
7.0

 
8,173

 
7.0

New York
 
7,055

 
6.3

 
7,400

 
6.4

Florida
 
6,831

 
6.1

 
7,086

 
6.1

Illinois
 
4,513

 
4.0

 
4,761

 
4.1

Pennsylvania
 
4,335

 
3.9

 
4,575

 
3.9

Ohio
 
3,760

 
3.4

 
3,967

 
3.4

New Jersey
 
3,468

 
3.1

 
3,641

 
3.1

Michigan
 
3,367

 
3.0

 
3,544

 
3.0

Other
 
50,635

 
45.1

 
52,612

 
45.3

Total domestic credit card
 
102,959

 
91.8

 
107,350

 
92.3

International card businesses:
 
 
 
 
 
 
 
 
Canada
 
6,275

 
5.6

 
6,023

 
5.1

United Kingdom
 
2,907

 
2.6

 
2,988

 
2.6

Total international card businesses
 
9,182

 
8.2

 
9,011

 
7.7

Total credit card
 
$
112,141

 
100.0
%
 
$
116,361

 
100.0
%


 
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The table below presents net charge-offs for the three and six months ended June 30, 2019 and 2018.
Table 4.4: Credit Card Net Charge-Offs
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2019
 
2018
 
2019
 
2018
(Dollars in millions)
 
Amount
 
Rate(1)
 
Amount
 
Rate(1)
 
Amount
 
Rate(1)
 
Amount
 
Rate(1)
Net charge-offs:(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Domestic credit card
 
$
1,240

 
4.86
%
 
$
1,166

 
4.72
%
 
$
2,534

 
4.95
%
 
$
2,487

 
4.99
%
International card businesses
 
80

 
3.63

 
94

 
4.14

 
150

 
3.41

 
150

 
3.32

Total credit card
 
$
1,320

 
4.76

 
$
1,260

 
4.67

 
$
2,684

 
4.83

 
$
2,637

 
4.85

__________
(1) 
Net charge-offs consist of the unpaid principal balance of loans held for investment that we determine to be uncollectible, net of recovered amounts. Net charge-off rate is calculated by dividing annualized net charge-offs by average loans held for investment for the period for each loan category. Net charge-offs and the net charge-off rates are impacted periodically by fluctuations in recoveries, including loan sales.
Consumer Banking
Our consumer banking loan portfolio consists of auto and retail banking loans. Similar to our credit card loan portfolio, the risk in our consumer banking loan portfolio correlates to broad economic trends, such as unemployment rates, gross domestic product and home values, as well as consumers’ financial condition, all of which can have a material effect on credit performance. Delinquency, nonperforming loans and charge-off trends are key indicators we assess in monitoring the credit quality and risk of our consumer banking loan portfolio.

 
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The table below displays the geographic profile of our consumer banking loan portfolio as of June 30, 2019 and December 31, 2018.
Table 4.5: Consumer Banking Risk Profile by Geographic Region
 
 
June 30, 2019
 
December 31, 2018
(Dollars in millions)
 
Amount
 
% of Total
 
Amount
 
% of
Total
Auto:
 
 
 
 
 
 
 
 
Texas
 
$
7,337

 
12.1
%
 
$
7,264

 
12.3
%
California
 
6,587

 
10.9

 
6,352

 
10.7

Florida
 
4,741

 
7.9

 
4,623

 
7.8

Georgia
 
2,648

 
4.4

 
2,665

 
4.5

Ohio
 
2,574

 
4.3

 
2,502

 
4.2

Pennsylvania
 
2,207

 
3.7

 
2,167

 
3.7

Illinois
 
2,170

 
3.6

 
2,171

 
3.7

Louisiana
 
2,113

 
3.5

 
2,174

 
3.7

Other
 
27,179

 
45.0

 
26,423

 
44.6

Total auto
 
57,556

 
95.4

 
56,341

 
95.2

Retail banking:
 
 
 
 
 
 
 
 
New York
 
818

 
1.4

 
837

 
1.4

Louisiana
 
735

 
1.2

 
772

 
1.3

Texas
 
613

 
1.0

 
647

 
1.1

New Jersey
 
193

 
0.3

 
201

 
0.3

Maryland
 
158

 
0.3

 
161

 
0.3

Virginia
 
131

 
0.2

 
137

 
0.2

Other
 
123

 
0.2

 
109

 
0.2

Total retail banking
 
2,771

 
4.6

 
2,864

 
4.8

Total consumer banking
 
$
60,327

 
100.0
%
 
$
59,205

 
100.0
%


 
 
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The table below presents net charge-offs in our consumer banking loan portfolio for the three and six months ended June 30, 2019 and 2018, as well as nonperforming loans as of June 30, 2019 and December 31, 2018.
Table 4.6: Consumer Banking Net Charge-Offs (Recoveries) and Nonperforming Loans
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2019
 
2018
 
2019
 
2018
(Dollars in millions)
 
Amount
 
Rate(1)
 
Amount
 
Rate(1)
 
Amount
 
Rate(1)
 
Amount
 
Rate(1)
Net charge-offs (recoveries):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Auto
 
$
155

 
1.09
%
 
$
182

 
1.32
%
 
$
358

 
1.26
%
 
$
390

 
1.42
 %
Retail banking
 
17

 
2.42

 
16

 
2.07

 
35

 
2.49

 
32

 
1.97

Home loan
 
0

 
0.00

 
0

 
0.00

 
0

 
0.00

 
(1
)
 
(0.02
)
Total consumer banking
 
$
172

 
1.15

 
$
198

 
1.19

 
$
393

 
1.32

 
$
421

 
1.19

 
 
June 30, 2019
 
December 31, 2018
(Dollars in millions)
 
Amount
 
Rate(2)
 
Amount
 
Rate(2)
Nonperforming loans:
 
 
 
 
 
 
 
 
Auto
 
$
369

 
0.64
%
 
$
449

 
0.80
%
Retail banking
 
28

 
1.02

 
30

 
1.04

Total consumer banking
 
$
397

 
0.66

 
$
479

 
0.81

__________
(1) 
Net charge-off (recovery) rates are calculated by dividing annualized net charge-offs (recoveries) by average loans held for investment for the period for each loan category.
(2) 
Nonperforming loan rates are calculated based on nonperforming loans for each category divided by period-end total loans held for investment for each respective category.
Commercial Banking
We evaluate the credit risk of commercial loans using a risk rating system. We assign internal risk ratings to loans based on relevant information about the ability of the borrowers to repay their debt. In determining the risk rating of a particular loan, some of the factors considered are the borrower’s current financial condition, historical and projected future credit performance, prospects for support from financially responsible guarantors, the estimated realizable value of any collateral and current economic trends. The scale based on our internal risk rating system is as follows:
•
Noncriticized: Loans that have not been designated as criticized, frequently referred to as “pass” loans.
•
Criticized performing: Loans in which the financial condition of the obligor is stressed, affecting earnings, cash flows or collateral values. The borrower currently has adequate capacity to meet near-term obligations; however, the stress, left unabated, may result in deterioration of the repayment prospects at some future date.
•
Criticized nonperforming: Loans that are not adequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, if any. Loans classified as criticized nonperforming have a well-defined weakness, or weaknesses, which jeopardize the full repayment of the debt. These loans are characterized by the distinct possibility that we will sustain a credit loss if the deficiencies are not corrected and are generally placed on nonaccrual status.
We use our internal risk rating system for regulatory reporting, determining the frequency of credit exposure reviews, and evaluating and determining the allowance for loan and lease losses for commercial loans. Generally, loans that are designated as criticized performing and criticized nonperforming are reviewed quarterly by management to determine if they are appropriately classified/rated and whether any impairment exists. Noncriticized loans are also generally reviewed, at least annually, to determine the appropriate risk rating. In addition, we evaluate the risk rating during the renewal process of any loan or if a loan becomes past due.

 
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents the geographic concentration and internal risk ratings of our commercial loan portfolio as of June 30, 2019 and December 31, 2018.
Table 4.7: Commercial Banking Risk Profile by Geographic Region and Internal Risk Rating
 
 
June 30, 2019
(Dollars in millions)
 
Commercial
and
Multifamily
Real Estate
 
% of
Total
 
Commercial
and
Industrial
 
% of
Total
 
Small-Ticket
Commercial
Real Estate
 
% of
Total 
 
Total
Commercial Banking
 
% of
Total 
Geographic concentration:(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Northeast
 
$
15,954

 
53.4
%
 
$
7,522

 
17.9
%
 
$
4

 
66.7
%
 
$
23,480

 
32.6
%
Mid-Atlantic
 
3,308

 
11.1

 
5,060

 
12.0

 
0

 
0.0

 
8,368

 
11.6

South
 
4,675

 
15.7

 
15,325

 
36.3

 
0

 
0.0

 
20,000

 
27.8

Other
 
5,924

 
19.8

 
14,218

 
33.8

 
2

 
33.3

 
20,144

 
28.0

Total
 
$
29,861

 
100.0
%
 
$
42,125

 
100.0
%
 
$
6

 
100.0
%
 
$
71,992

 
100.0
%
Internal risk rating:(2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Noncriticized
 
$
28,991

 
97.1
%
 
$
40,399

 
96.0
%
 
$
0

 
0.0
%
 
$
69,390

 
96.4
%
Criticized performing
 
805

 
2.7

 
1,406

 
3.3

 
0

 
0.0

 
2,211

 
3.1

Criticized nonperforming
 
43

 
0.1

 
311

 
0.7

 
6

 
100.0

 
360

 
0.5

PCI loans
 
22

 
0.1

 
9

 
0.0

 
0

 
0.0

 
31

 
0.0

Total
 
$
29,861

 
100.0
%
 
$
42,125

 
100.0
%
 
$
6

 
100.0
%
 
$
71,992

 
100.0
%
 
 
December 31, 2018
(Dollars in millions)
 
Commercial
and
Multifamily
Real Estate
 
% of
Total
 
Commercial
and
Industrial
 
% of
Total
 
Small-Ticket
Commercial
Real Estate
 
% of
Total 
 
Total
Commercial Banking
 
% of
Total 
Geographic concentration:(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Northeast
 
$
15,562

 
53.8
%
 
$
7,573

 
18.4
%
 
$
213

 
62.1
%
 
$
23,348

 
33.2
%
Mid-Atlantic
 
3,410

 
11.8

 
4,710

 
11.5

 
12

 
3.5

 
8,132

 
11.6

South
 
4,247

 
14.7

 
15,367

 
37.4

 
20

 
5.8

 
19,634

 
27.9

Other
 
5,680

 
19.7

 
13,441

 
32.7

 
98

 
28.6

 
19,219

 
27.3

Total
 
$
28,899

 
100.0
%
 
$
41,091

 
100.0
%
 
$
343

 
100.0
%
 
$
70,333

 
100.0
%
Internal risk rating:(2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Noncriticized
 
$
28,239

 
97.7
%
 
$
39,468

 
96.1
%
 
$
336

 
98.0
%
 
$
68,043

 
96.8
%
Criticized performing
 
555

 
1.9

 
1,292

 
3.1

 
1

 
0.3

 
1,848

 
2.6

Criticized nonperforming
 
83

 
0.3

 
223

 
0.5

 
6

 
1.7

 
312

 
0.4

PCI loans
 
22

 
0.1

 
108

 
0.3

 
0

 
0.0

 
130

 
0.2

Total
 
$
28,899

 
100.0
%
 
$
41,091

 
100.0
%
 
$
343

 
100.0
%
 
$
70,333

 
100.0
%
__________
(1) 
Geographic concentration is generally determined by the location of the borrower’s business or the location of the collateral associated with the loan. Northeast consists of CT, MA, ME, NH, NJ, NY, PA and VT. Mid-Atlantic consists of DC, DE, MD, VA and WV. South consists of AL, AR, FL, GA, KY, LA, MO, MS, NC, SC, TN and TX.
(2) 
Criticized exposures correspond to the “Special Mention,” “Substandard” and “Doubtful” asset categories defined by bank regulatory authorities.
Impaired Loans
The following table presents information on our impaired loans as of June 30, 2019 and December 31, 2018, and for the three and six months ended June 30, 2019 and 2018. Impaired loans include loans modified in troubled debt restructurings (“TDRs”), all nonperforming commercial loans and nonperforming home loans with a specific impairment. Impaired loans without an allowance generally represent loans that have been charged down to the fair value of the underlying collateral for which we believe no additional losses have been incurred, or where the fair value of the underlying collateral meets or exceeds the loan’s amortized cost. PCI loans are excluded from the following table.

 
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Table 4.8: Impaired Loans
 
 
June 30, 2019
(Dollars in millions)
 
With an
Allowance
 
Without
an
Allowance
 
Total
Recorded
Investment
 
Related
Allowance
 
Net
Recorded
Investment
 
Unpaid
Principal
Balance
Credit Card:
 
 
 
 
 
 
 
 
 
 
 
 
Domestic credit card
 
$
632

 
$
0

 
$
632

 
$
165

 
$
467

 
$
621

International card businesses
 
194

 
0

 
194

 
90

 
104

 
189

Total credit card(1)
 
826

 
0

 
826

 
255

 
571

 
810

Consumer Banking:
 
 
 
 
 
 
 
 
 
 
 
 
Auto
 
294

 
40

 
334

 
28

 
306

 
442

Retail banking
 
56

 
0

 
56

 
4

 
52

 
62

Total consumer banking
 
350

 
40

 
390

 
32

 
358

 
504

Commercial Banking:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and multifamily real estate
 
37

 
42

 
79

 
1

 
78

 
80

Commercial and industrial
 
454

 
99

 
553

 
81

 
472

 
674

Total commercial lending
 
491

 
141

 
632

 
82

 
550

 
754

Small-ticket commercial real estate
 
0

 
6

 
6

 
0

 
6

 
9

Total commercial banking
 
491

 
147

 
638

 
82

 
556

 
763

Total
 
$
1,667

 
$
187

 
$
1,854

 
$
369

 
$
1,485

 
$
2,077

 
 
December 31, 2018
(Dollars in millions)
 
With an
Allowance
 
Without
an
Allowance
 
Total
Recorded
Investment
 
Related
Allowance
 
Net
Recorded
Investment
 
Unpaid
Principal
Balance
Credit Card:
 
 
 
 
 
 
 
 
 
 
 
 
Domestic credit card
 
$
666

 
$
0

 
$
666

 
$
186

 
$
480

 
$
654

International card businesses
 
189

 
0

 
189

 
91

 
98

 
183

Total credit card(1)
 
855

 
0

 
855

 
277

 
578

 
837

Consumer Banking:
 
 
 
 
 
 
 
 
 
 
 
 
Auto(2)
 
301

 
38

 
339

 
22

 
317

 
420

Retail banking
 
42

 
12

 
54

 
5

 
49

 
60

Total consumer banking
 
343

 
50

 
393

 
27

 
366

 
480

Commercial Banking:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and multifamily real estate
 
92

 
28

 
120

 
5

 
115

 
121

Commercial and industrial
 
301

 
169

 
470

 
29

 
441

 
593

Total commercial lending
 
393

 
197

 
590

 
34

 
556

 
714

Small-ticket commercial real estate
 
0

 
6

 
6

 
0

 
6

 
9

Total commercial banking
 
393

 
203

 
596

 
34

 
562

 
723

Total
 
$
1,591

 
$
253

 
$
1,844

 
$
338

 
$
1,506

 
$
2,040




 
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2019
 
2018
 
2019
 
2018
(Dollars in millions)
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
Credit Card:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Domestic credit card
 
$
646

 
$
14

 
$
653

 
$
16

 
$
652

 
$
29

 
$
648

 
$
32

International card businesses
 
196

 
3

 
183

 
3

 
194

 
7

 
180

 
6

Total credit card(1)
 
842

 
17

 
836

 
19

 
846

 
36

 
828

 
38

Consumer Banking:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Auto(2)
 
339

 
9

 
408

 
11

 
339

 
19

 
432

 
24

Home loan
 
0

 
0

 
112

 
0

 
0

 
0

 
153

 
1

Retail banking
 
55

 
1

 
61

 
1

 
55

 
1

 
61

 
1

Total consumer banking
 
394

 
10

 
581

 
12

 
394

 
20

 
646

 
26

Commercial Banking:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and multifamily real estate
 
93

 
1

 
60

 
0

 
102

 
1

 
86

 
1

Commercial and industrial
 
561

 
4

 
679

 
4

 
531

 
8

 
690

 
10

Total commercial lending
 
654

 
5

 
739

 
4

 
633

 
9

 
776

 
11

Small-ticket commercial real estate
 
6

 
0

 
5

 
0

 
6

 
0

 
6

 
0

Total commercial banking
 
660

 
5

 
744

 
4

 
639

 
9

 
782

 
11

Total
 
$
1,896

 
$
32

 
$
2,161

 
$
35

 
$
1,879

 
$
65

 
$
2,256

 
$
75

__________
(1) 
The period-end and average recorded investments of credit card loans include finance charges and fees.
(2) 
2018 amounts include certain TDRs that were recorded as other assets on our consolidated balance sheets.
Troubled Debt Restructurings
Total recorded TDRs were $1.6 billion as of both June 30, 2019 and December 31, 2018. TDRs classified as performing in our credit card and consumer banking loan portfolios totaled $1.1 billion and $1.2 billion as of June 30, 2019 and December 31, 2018, respectively. TDRs classified as performing in our commercial banking loan portfolio totaled $278 million and $282 million as of June 30, 2019 and December 31, 2018, respectively. Commitments to lend additional funds on loans modified in TDRs totaled $378 million and $256 million as of June 30, 2019 and December 31, 2018, respectively.
Loans Modified in TDRs
As part of our loan modification programs to borrowers experiencing financial difficulty, we may provide multiple concessions to minimize our economic loss and improve long-term loan performance and collectability. The following tables present the major modification types, recorded investment amounts and financial effects of loans modified in TDRs during the three and six months ended June 30, 2019 and 2018.

 
 
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Table 4.9: Troubled Debt Restructurings
 
 
Total Loans
Modified(1)
 
Three Months Ended June 30, 2019
 
 
Reduced Interest Rate
 
Term Extension
(Dollars in millions)
 
% of
TDR
Activity(2)
 
Average
Rate
Reduction
 
% of
TDR
Activity(2)
 
Average
Term
Extension
(Months)
Credit Card:
 
 
 
 
 
 
 
 
 
 
Domestic credit card
 
$
74

 
100
%
 
16.60
%
 
0
%
 
0
International card businesses
 
40

 
100

 
27.25

 
0

 
0
Total credit card
 
114

 
100

 
20.32

 
0

 
0
Consumer Banking:
 
 
 
 
 
 
 
 
 
 
Auto
 
52

 
46

 
3.78

 
89

 
8
Retail banking
 
5

 
9

 
10.55

 
57

 
3
Total consumer banking
 
57

 
42

 
3.93

 
86

 
8
Commercial Banking:
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
14

 
0

 
0.00

 
100

 
3
Total commercial lending
 
14

 
0

 
0.00

 
100

 
3
Small-ticket commercial real estate
 
1

 
0

 
0.00

 
0

 
0
Total commercial banking
 
15

 
0

 
0.00

 
98

 
3
Total
 
$
186

 
75

 
17.45

 
34

 
7
 
 
Total Loans
Modified(1)
 
Six Months Ended June 30, 2019
 
 
Reduced Interest Rate
 
Term Extension
(Dollars in millions)
 
% of
TDR
Activity(2)
 
Average
Rate
Reduction
 
% of
TDR
Activity(2)
 
Average
Term
Extension
(Months)
Credit Card:
 
 
 
 
 
 
 
 
 
 
Domestic credit card
 
$
172

 
100
%
 
16.50
%
 
0
%
 
0
International card businesses
 
87

 
100

 
27.44

 
0

 
0
Total credit card
 
259

 
100

 
20.17

 
0

 
0
Consumer Banking:
 
 
 
 
 
 
 
 
 
 
Auto
 
124

 
41

 
3.81

 
90

 
7
Retail banking
 
6

 
10

 
10.91

 
61

 
3
Total consumer banking
 
130

 
39

 
3.90

 
89

 
7
Commercial Banking:
 
 
 
 
 
 
 
 
 
 
Commercial and multifamily real estate
 
34

 
100

 
0.00

 
0

 
0
Commercial and industrial
 
35

 
0

 
0.00

 
40

 
1
Total commercial lending
 
69

 
49

 
0.00

 
20

 
1
Small-ticket commercial real estate
 
1

 
0

 
0.00

 
0

 
0
Total commercial banking
 
70

 
49

 
0.00

 
20

 
0
Total
 
$
459

 
75

 
15.78

 
28

 
6


 
 
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Total Loans
Modified(1)
 
Three Months Ended June 30, 2018
 
 
Reduced Interest Rate
 
Term Extension
 
Balance Reduction
(Dollars in millions)
 
% of
TDR
Activity(2)
 
Average
Rate
Reduction
 
% of
TDR
Activity(2)
 
Average
Term
Extension
(Months)
 
% of
TDR
Activity(2)
 
Gross
Balance
Reduction
Credit Card:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Domestic credit card
 
$
96

 
100
%
 
15.90
 
0
%
 
0
 
0
%
 
$
0

International card businesses
 
43

 
100

 
26.79
 
0

 
0
 
0

 
0

Total credit card
 
139

 
100

 
19.22
 
0

 
0
 
0

 
0

Consumer Banking:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Auto(3)
 
44

 
64

 
4.10
 
85

 
9
 
1

 
1

Retail banking
 
4

 
12

 
11.56
 
34

 
6
 
0

 
0

Total consumer banking
 
48

 
60

 
4.22
 
81

 
9
 
1

 
1

Commercial Banking:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and multifamily real estate
 
17

 
0

 
0.00
 
100

 
8
 
0

 
0

Commercial and industrial
 
86

 
0

 
2.00
 
61

 
17
 
0

 
0

Total commercial lending
 
103

 
0

 
2.00
 
67

 
15
 
0

 
0

Small-ticket commercial real estate
 
0

 
0

 
0.00
 
0

 
0
 
0

 
0

Total commercial banking
 
103

 
0

 
2.00
 
67

 
15
 
0

 
0

Total
 
$
290

 
58

 
16.63
 
37

 
13
 
0

 
$
1

 
 
Total Loans
Modified(1)
 
Six Months Ended June 30, 2018
 
Reduced Interest Rate
 
Term Extension
 
Balance Reduction
(Dollars in millions)
% of
TDR
Activity(2)
 
Average
Rate
Reduction
 
% of
TDR
Activity(2)
 
Average
Term
Extension
(Months)
 
% of
TDR
Activity(2)
 
Gross
Balance
Reduction
Credit Card:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Domestic credit card
 
$
209

 
100
%
 
15.81
%
 
0
%
 
0
 
0
%
 
$
0

International card businesses
 
93

 
100

 
26.82

 
0

 
0
 
0

 
0

Total credit card
 
302

 
100

 
19.19

 
0

 
0
 
0

 
0

Consumer Banking:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Auto(3)
 
106

 
57

 
3.92

 
88

 
8
 
1

 
1

Home loan
 
6

 
28

 
1.78

 
83

 
214
 
0

 
0

Retail banking
 
6

 
12

 
11.11

 
49

 
5
 
0

 
0

Total consumer banking
 
118

 
53

 
3.94

 
86

 
18
 
0

 
1

Commercial Banking:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and multifamily real estate
 
19

 
0

 
0.00

 
100

 
8
 
0

 
0

Commercial and industrial
 
97

 
0

 
1.79

 
65

 
17
 
0

 
0

Total commercial lending
 
116

 
0

 
1.79

 
71

 
15
 
0

 
0

Small-ticket commercial real estate
 
2

 
0

 
0.00

 
0

 
0
 
0

 
0

Total commercial banking
 
118

 
0

 
1.79

 
69

 
15
 
0

 
0

Total
 
$
538

 
68

 
16.56

 
34

 
16
 
0

 
$
1

__________
(1) 
Represents the recorded investment of total loans modified in TDRs at the end of the quarter in which they were modified. As not every modification type is included in the table above, the total percentage of TDR activity may not add up to 100%. Some loans may receive more than one type of concession as part of the modification.
(2) 
Due to multiple concessions granted to some troubled borrowers, percentages may total more than 100% for certain loan types.

 
 
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(3) 
Includes certain TDRs that are recorded as other assets on our consolidated balance sheets.
Subsequent Defaults of Completed TDR Modifications
The following table presents the type, number and recorded investment of loans modified in TDRs that experienced a default during the period and had completed a modification event in the twelve months prior to the default. A default occurs if the loan is either 90 days or more delinquent, has been charged off as of the end of the period presented or has been reclassified from accrual to nonaccrual status.
Table 4.10: TDRs—Subsequent Defaults
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2019
 
2018
 
2019
 
2018
(Dollars in millions)
 
Number of
Contracts
 
Amount
 
Number of
Contracts
 
Amount
 
Number of
Contracts
 
Amount
 
Number of
Contracts
 
Amount
Credit Card:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Domestic credit card
 
11,581

 
$
26

 
14,206

 
$
30

 
25,608

 
$
55

 
30,545

 
$
64

International card businesses
 
18,185

 
28

 
15,354

 
27

 
34,891

 
56

 
29,293

 
53

Total credit card
 
29,766

 
54

 
29,560

 
57

 
60,499

 
111

 
59,838

 
117

Consumer Banking:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Auto
 
1,312

 
16

 
1,793

 
21

 
2,417

 
29

 
3,600

 
42

Home loan
 
0

 
0

 
0

 
0

 
0

 
0

 
3

 
1

Retail banking
 
4

 
1

 
1

 
0

 
12

 
1

 
9

 
0

Total consumer banking
 
1,316

 
17

 
1,794

 
21

 
2,429

 
30

 
3,612

 
43

Commercial Banking:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
0

 
0

 
7

 
10

 
0

 
0

 
13

 
45

Total commercial lending
 
0

 
0

 
7

 
10

 
0

 
0

 
13

 
45

Total commercial banking
 
0

 
0

 
7

 
10

 
0

 
0

 
13

 
45

Total
 
31,082

 
$
71

 
31,361

 
$
88

 
62,928

 
$
141

 
63,463

 
$
205





 
 
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NOTE 5—ALLOWANCE FOR LOAN AND LEASE LOSSES AND RESERVE FOR UNFUNDED LENDING COMMITMENTS
Our allowance for loan and lease losses represents management’s best estimate of incurred loan and lease losses inherent in our loans held for investment as of each balance sheet date. In addition to the allowance for loan and lease losses, we also estimate probable losses related to unfunded lending commitments, such as letters of credit, financial guarantees and binding unfunded loan commitments. The provision for losses on unfunded lending commitments is included in the provision for credit losses in our consolidated statements of income and the related reserve for unfunded lending commitments is included in other liabilities on our consolidated balance sheets. See “Note 1—Summary of Significant Accounting Policies” in our 2018 Form 10-K for further discussion of the methodology and policy for determining our allowance for loan and lease losses for each of our loan portfolio segments, as well as information on our reserve for unfunded lending commitments.
Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments Activity
The table below summarizes changes in the allowance for loan and lease losses and reserve for unfunded lending commitments by portfolio segment for the three and six months ended June 30, 2019 and 2018.
Table 5.1: Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments Activity
 
 
Three Months Ended June 30, 2019
(Dollars in millions)
 
Credit Card
 
Consumer
Banking
 
Commercial Banking
 
Total
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
Balance as of March 31, 2019
 
$
5,568

 
$
1,062

 
$
683

 
$
7,313

Charge-offs
 
(1,711
)
 
(423
)
 
(23
)
 
(2,157
)
Recoveries(1)
 
391

 
251

 
7

 
649

Net charge-offs
 
(1,320
)
 
(172
)
 
(16
)
 
(1,508
)
Provision for loan and lease losses
 
1,095

 
165

 
69

 
1,329

Allowance build (release) for loan and lease losses
 
(225
)
 
(7
)
 
53

 
(179
)
Other changes(2)
 
(1
)
 
0

 
0

 
(1
)
Balance as of June 30, 2019
 
5,342

 
1,055

 
736

 
7,133

Reserve for unfunded lending commitments:
 
 
 
 
 
 
 
 
Balance as of March 31, 2019
 
0

 
4

 
127

 
131

Provision for losses on unfunded lending commitments
 
0

 
0

 
13

 
13

Balance as of June 30, 2019
 
0

 
4

 
140

 
144

Combined allowance and reserve as of June 30, 2019
 
$
5,342

 
$
1,059

 
$
876

 
$
7,277

 
 
Six Months Ended June 30, 2019
(Dollars in millions)
 
Credit Card
 
Consumer
Banking
 
Commercial Banking
 
Total
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
Balance as of December 31, 2018
 
$
5,535

 
$
1,048

 
$
637

 
$
7,220

Charge-offs
 
(3,493
)
 
(894
)
 
(43
)
 
(4,430
)
Recoveries(1)
 
809

 
501

 
13

 
1,323

Net charge-offs
 
(2,684
)
 
(393
)
 
(30
)
 
(3,107
)
Provision for loan and lease losses
 
2,484

 
400

 
129

 
3,013

Allowance build (release) for loan and lease losses
 
(200
)
 
7

 
99

 
(94
)
Other changes(2)
 
7

 
0

 
0

 
7

Balance as of June 30, 2019
 
5,342

 
1,055

 
736

 
7,133

Reserve for unfunded lending commitments:
 
 
 
 
 
 
 
 
Balance as of December 31, 2018
 
0

 
4

 
118

 
122

Provision for losses on unfunded lending commitments
 
0

 
0

 
22

 
22

Balance as of June 30, 2019
 
0

 
4

 
140

 
144

Combined allowance and reserve as of June 30, 2019
 
$
5,342

 
$
1,059

 
$
876

 
$
7,277


 
 
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Three Months Ended June 30, 2018
(Dollars in millions)
 
Credit Card
 
Consumer
Banking(3)
 
Commercial Banking
 
Other(3)
 
Total
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
Balance as of March 31, 2018
 
$
5,726

 
$
1,253

 
$
587

 
$
1

 
$
7,567

Charge-offs
 
(1,679
)
 
(414
)
 
(7
)
 
(9
)
 
(2,109
)
Recoveries(1)
 
419

 
216

 
14

 
1

 
650

Net charge-offs
 
(1,260
)
 
(198
)
 
7

 
(8
)
 
(1,459
)
Provision (benefit) for loan and lease losses
 
1,171

 
119

 
30

 
(47
)
 
1,273

Allowance build (release) for loan and lease losses
 
(89
)
 
(79
)
 
37

 
(55
)
 
(186
)
Other changes(2)(3)
 
(13
)
 
(54
)
 
0

 
54

 
(13
)
Balance as of June 30, 2018
 
5,624

 
1,120

 
624

 
0

 
7,368

Reserve for unfunded lending commitments:
 
 
 
 
 
 
 
 
 
 
Balance as of March 31, 2018
 
0

 
6

 
108

 
0

 
114

Provision (benefit) for losses on unfunded lending commitments
 
0

 
(1
)
 
4

 
0

 
3

Balance as of June 30, 2018
 
0

 
5

 
112

 
0

 
117

Combined allowance and reserve as of June 30, 2018
 
$
5,624

 
$
1,125

 
$
736

 
$
0

 
$
7,485

 
 
Six Months Ended June 30, 2018
(Dollars in millions)
 
Credit Card
 
Consumer
Banking(3)
 
Commercial Banking
 
Other(3)
 
Total
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2017
 
$
5,648

 
$
1,242

 
$
611

 
$
1

 
$
7,502

Charge-offs
 
(3,504
)
 
(845
)
 
(28
)
 
(8
)
 
(4,385
)
Recoveries(1)
 
867

 
424

 
16

 
1

 
1,308

Net charge-offs
 
(2,637
)
 
(421
)
 
(12
)
 
(7
)
 
(3,077
)
Provision (benefit) for loan and lease losses
 
2,627

 
353

 
25

 
(48
)
 
2,957

Allowance build (release) for loan and lease losses
 
(10
)
 
(68
)
 
13

 
(55
)
 
(120
)
Other changes(2)(3)
 
(14
)
 
(54
)
 
0

 
54

 
(14
)
Balance as of June 30, 2018
 
5,624

 
1,120

 
624

 
0

 
7,368

Reserve for unfunded lending commitments:
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2017
 
0

 
7

 
117

 
0

 
124

Benefit for losses on unfunded lending commitments
 
0

 
(2
)
 
(5
)
 
0

 
(7
)
Balance as of June 30, 2018
 
0

 
5

 
112

 
0

 
117

Combined allowance and reserve as of June 30, 2018
 
$
5,624

 
$
1,125

 
$
736

 
$
0

 
$
7,485

__________
(1) 
The amount and timing of recoveries is impacted by our collection strategies, which are based on customer behavior and risk profile and include direct customer communications, repossession of collateral, the periodic sale of charged-off loans as well as additional strategies, such as litigation.
(2) 
Represents foreign currency translation adjustments and the net impact of loan transfers and sales where applicable.
(3) 
In 2018, we sold all of our consumer home loan portfolio.The impact included a benefit for credit losses of $46 million in the second quarter of 2018 which was reflected in the Other category.

 
 
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Components of Allowance for Loan and Lease Losses by Impairment Methodology
The table below presents the components of our allowance for loan and lease losses by portfolio segment and impairment methodology as of June 30, 2019 and December 31, 2018. See “Note 1—Summary of Significant Accounting Policies” in our 2018 Form 10-K for further discussion of allowance methodologies for each of the loan portfolios.
Table 5.2: Components of Allowance for Loan and Lease Losses by Impairment Methodology
 
 
June 30, 2019
(Dollars in millions)
 
Credit
Card
 
Consumer Banking
 
Commercial Banking
 
Total
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
Collectively evaluated
 
$
5,087

 
$
1,023

 
$
654

 
$
6,764

Asset-specific
 
255

 
32

 
82

 
369

Total allowance for loan and lease losses
 
$
5,342

 
$
1,055

 
$
736

 
$
7,133

Loans held for investment:
 
 
 
 
 
 
 
 
Collectively evaluated
 
$
111,315

 
$
59,935

 
$
71,323

 
$
242,573

Asset-specific
 
826

 
390

 
638

 
1,854

PCI loans
 
0

 
2

 
31

 
33

Total loans held for investment
 
$
112,141

 
$
60,327

 
$
71,992

 
$
244,460

Allowance coverage ratio(1)
 
4.76
%
 
1.75
%
 
1.02
%
 
2.92
%
 
 
December 31, 2018
(Dollars in millions)
 
Credit
Card
 
Consumer Banking
 
Commercial Banking
 
Total
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
Collectively evaluated
 
$
5,258

 
$
1,021

 
$
603

 
$
6,882

Asset-specific
 
277

 
27

 
34

 
338

Total allowance for loan and lease losses
 
$
5,535

 
$
1,048

 
$
637

 
$
7,220

Loans held for investment:
 
 
 
 
 
 
 
 
Collectively evaluated
 
$
115,505

 
$
58,808

 
$
69,607

 
$
243,920

Asset-specific
 
855

 
393

 
596

 
1,844

PCI loans
 
1

 
4

 
130

 
135

Total loans held for investment
 
$
116,361

 
$
59,205

 
$
70,333

 
$
245,899

Allowance coverage ratio(1)
 
4.76
%
 
1.77
%
 
0.91
%
 
2.94
%
__________
(1) 
Allowance coverage ratio is calculated by dividing the period-end allowance for loan and lease losses by period-end loans held for investment within the specified loan category.
We have certain credit card partnership agreements that are presented within our consolidated financial statements on a net basis, in which our partner agrees to share a portion of the credit losses on the underlying loan portfolio. The expected reimbursements from these partners, which are netted against our allowance for loan and lease losses, result in reductions to net charge-offs and provision for credit losses. See “Note 1—Summary of Significant Accounting Policies” in our 2018 Form 10-K for further discussion of our credit card partnership agreements.

 
 
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The table below summarizes the changes in the estimated reimbursements from these partners for the three and six months ended June 30, 2019 and 2018.
Table 5.3: Summary of Loss Sharing Arrangements Impacts
 
 
Three Months Ended June 30,
(Dollars in millions)
 
2019
 
2018
Estimated reimbursements from partners, beginning of period
 
$
442

 
$
388

Amounts due from partners which reduced net charge-offs
 
(105
)
 
(92
)
Amounts estimated to be charged to partners which reduced provision for credit losses
 
77

 
96

Estimated reimbursements from partners, end of period
 
$
414

 
$
392

 
 
Six Months Ended June 30,
(Dollars in millions)
 
2019
 
2018
Estimated reimbursements from partners, beginning of period
 
$
379

 
$
380

Amounts due from partners which reduced net charge-offs
 
(213
)
 
(189
)
Amounts estimated to be charged to partners which reduced provision for credit losses
 
248

 
201

Estimated reimbursements from partners, end of period
 
$
414

 
$
392



 
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6—VARIABLE INTEREST ENTITIES AND SECURITIZATIONS
In the normal course of business, we enter into various types of transactions with entities that are considered to be VIEs. Our primary involvement with VIEs has been related to our securitization transactions in which we transferred assets to securitization trusts. We have primarily securitized credit card and auto loans, which have provided a source of funding for us and enabled us to transfer a certain portion of the economic risk of the loans or related debt securities to third parties.
The entity that has a controlling financial interest in a VIE is referred to as the primary beneficiary and is required to consolidate the VIE. The majority of the VIEs in which we are involved have been consolidated in our financial statements.
Summary of Consolidated and Unconsolidated VIEs
The assets of our consolidated VIEs primarily consist of cash, loan receivables and the related allowance for loan and lease losses, which we report on our consolidated balance sheets under restricted cash for securitization investors, loans held in consolidated trusts and allowance for loan and lease losses, respectively. The assets of a particular VIE are the primary source of funds to settle its obligations. Creditors of these VIEs typically do not have recourse to our general credit. Liabilities primarily consist of debt securities issued by the VIEs, which we report under securitized debt obligations on our consolidated balance sheets. For unconsolidated VIEs, we present the carrying amount of assets and liabilities reflected on our consolidated balance sheets and our maximum exposure to loss. Our maximum exposure to loss is estimated based on the unlikely event that all of the assets in the VIEs become worthless and we are required to meet our maximum remaining funding obligations.
The tables below present a summary of VIEs in which we had continuing involvement or held a variable interest, aggregated based on VIEs with similar characteristics as of June 30, 2019 and December 31, 2018. We separately present information for consolidated and unconsolidated VIEs.
Table 6.1: Carrying Amount of Consolidated and Unconsolidated VIEs
 
 
June 30, 2019
 
 
Consolidated
 
Unconsolidated
(Dollars in millions)
 
Carrying
Amount
of Assets
 
Carrying
Amount of
Liabilities
 
Carrying
Amount
of Assets
 
Carrying
Amount of
Liabilities
 
Maximum 
Exposure to
Loss
Securitization-Related VIEs:
 
 
 
 
 
 
 
 
 
 
Credit card loan securitizations(1)
 
$
31,509

 
$
16,179

 
$
0

 
$
0

 
$
0

Auto loan securitizations
 
1,239

 
1,082

 
0

 
0

 
0

Home loan securitizations
 
0

 
0

 
177

 
1

 
479

Total securitization-related VIEs
 
32,748

 
17,261

 
177

 
1

 
479

Other VIEs:(2)
 
 
 
 
 
 
 
 
 
 
Affordable housing entities
 
241

 
11

 
4,350

 
1,230

 
4,350

Entities that provide capital to low-income and rural communities
 
1,779

 
87

 
0

 
0

 
0

Other
 
0

 
0

 
523

 
0

 
523

Total other VIEs
 
2,020

 
98

 
4,873

 
1,230

 
4,873

Total VIEs
 
$
34,768

 
$
17,359

 
$
5,050

 
$
1,231

 
$
5,352




 
 
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December 31, 2018
 
 
Consolidated
 
Unconsolidated
(Dollars in millions)
 
Carrying
Amount
of Assets
 
Carrying
Amount of
Liabilities
 
Carrying
Amount
of Assets
 
Carrying
Amount of
Liabilities
 
Maximum
Exposure to
Loss
Securitization-Related VIEs:
 
 
 
 
 
 
 
 
 
 
Credit card loan securitizations(1)
 
$
33,574

 
$
18,885

 
$
0

 
$
0

 
$
0

Home loan securitizations
 
0

 
0

 
211

 
74

 
554

Total securitization-related VIEs
 
33,574

 
18,885

 
211

 
74

 
554

Other VIEs:(2)
 
 
 
 
 
 
 
 
 
 
Affordable housing entities 
 
243

 
17

 
4,238

 
1,303

 
4,238

Entities that provide capital to low-income and rural communities
 
1,739

 
117

 
0

 
0

 
0

Other
 
0

 
0

 
353

 
0

 
353

Total other VIEs
 
1,982

 
134

 
4,591

 
1,303

 
4,591

Total VIEs
 
$
35,556

 
$
19,019

 
$
4,802

 
$
1,377

 
$
5,145

__________
(1) 
Represents the carrying amount of assets and liabilities owned by the VIE, which includes the seller’s interest and repurchased notes held by other related parties.
(2) 
In certain investment structures, we consolidate a VIE which in turn holds as its primary asset an investment in an unconsolidated VIE. In these instances, we disclose the carrying amount of assets and liabilities on our consolidated balance sheets as unconsolidated VIEs to avoid duplicating our exposure, as the unconsolidated VIEs are generally the operating entities generating the exposure. The carrying amount of assets and liabilities included in the unconsolidated VIE columns above related to these investment structures were $2.3 billion of assets and $795 million of liabilities as of June 30, 2019 and $2.3 billion of assets and $811 million of liabilities as of December 31, 2018.
Securitization-Related VIEs
In a securitization transaction, assets are transferred to a trust, which generally meets the definition of a VIE. We engage in securitization activities as an issuer and an investor. Our primary securitization issuance activity includes credit card and auto securitizations, conducted through securitization trusts which we consolidate. Our continuing involvement in these securitization transactions mainly consists of acting as the primary servicer and holding certain retained interests.
We also transfer multifamily commercial loans that we originate to the government-sponsored enterprises (“GSEs”) and retain the right to service the transferred loans pursuant to the guidelines set forth by the GSEs. Subsequent to such transfers, these loans are commonly securitized into CMBS by the GSEs. As an investor, we hold these RMBS and CMBS in our investment securities portfolio, which represent an interest in the respective securitization trusts employed in the transactions under which those securities were issued.
We do not consolidate the securitization trusts employed in these transactions as we do not have the power to direct the activities that most significantly impact the economic performance of these securitization trusts. Our maximum exposure to loss as a result of our involvement with these VIEs is the carrying value of MSRs and investment securities on our consolidated balance sheets. See “Note 7—Goodwill and Intangible Assets” for information related to our MSRs associated with these multifamily commercial loan securitizations and “Note 3—Investment Securities” for more information on the securities held in our investment securities portfolio. We exclude these VIEs from the tables within this note because we do not consider our continuing involvement with these VIEs to be significant as we either invest in securities issued by the VIE and were not involved in the design of the VIE or no transfers have occurred between the VIE and us. In addition, where we have certain lending arrangements in the normal course of business with entities that could be VIEs, we have also excluded these VIEs from the tables presented in this note. See “Note 4—Loans” for additional information regarding our lending arrangements in the normal course of business.

 
 
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The table below presents our continuing involvement in certain securitization-related VIEs as of June 30, 2019 and December 31, 2018.
Table 6.2: Continuing Involvement in Securitization-Related VIEs
(Dollars in millions)
 
Credit
Card
 
Auto
 
Mortgages
June 30, 2019:
 
 
 
 
 
 
Securities held by third-party investors
 
$
15,878

 
$
1,081

 
$
1,096

Receivables in the trust
 
31,710

 
1,194

 
1,145

Cash balance of spread or reserve accounts
 
0

 
3

 
121

Retained interests
 
Yes

 
Yes

 
Yes

Servicing retained
 
Yes

 
Yes

 
Yes(1)

December 31, 2018:
 
 
 
 
 
 
Securities held by third-party investors
 
$
18,307

 
N/A

 
$
1,276

Receivables in the trust
 
34,197

 
N/A

 
1,305

Cash balance of spread or reserve accounts
 
0

 
N/A

 
116

Retained interests
 
Yes

 
N/A

 
Yes

Servicing retained
 
Yes

 
N/A

 
Yes(1)

__________
(1) 
We retain servicing on a portion of our remaining mortgage loans in mortgage securitizations.
Credit Card Securitizations
We securitize a portion of our credit card loans which provides a source of funding for us. Credit card securitizations involve the transfer of credit card receivables from our balance sheet to securitization trusts. These trusts then issue debt securities collateralized by the transferred receivables to third-party investors. We hold certain retained interests in our credit card securitizations and continue to service the receivables in these trusts. We consolidate these trusts because we are deemed to be the primary beneficiary as we have the power to direct the activities that most significantly impact the economic performance of the trusts, and the right to receive benefits or the obligation to absorb losses that could potentially be significant to the trusts.
Auto Securitization
In the second quarter of 2019, we securitized approximately $1.2 billion of auto loans. Auto securitization involves the transfer of auto loans from our balance sheet to securitization trusts. The trust then issues debt securities collateralized by the transferred loans to third-party investors. We hold certain retained interests and continue to service the loans in the trust. We consolidate this trust because we are deemed to be the primary beneficiary as we have the power to direct the activities that most significantly impact the economic performance of the trust, and the right to receive benefits or the obligation to absorb losses that could potentially be significant to the trust.
Mortgage Securitizations
We had previously securitized mortgage loans by transferring these loans to securitization trusts that had issued mortgage-backed securities to investors. These mortgage trusts consist of option-adjustable rate mortgage (“option-ARM”) securitizations and securitizations from our discontinued operations which include the mortgage origination operations of our wholesale mortgage banking unit, GreenPoint Mortgage Funding, Inc. (“GreenPoint”) and the manufactured housing operations of GreenPoint Credit, LLC, a subsidiary of GreenPoint (collectively “GreenPoint securitizations”).
We continue to service a portion of the remaining mortgage loans in the option-ARM securitizations and also retain rights to certain future cash flows arising from these securitizations. We also retain servicing on a portion of the remaining mortgage loans in the GreenPoint securitizations and have the right to receive any funds remaining in the pre-funded letters of credit after the securities are released. We do not consolidate the mortgage securitizations because we do not have the right to receive the benefits nor the obligation to absorb losses that could potentially be significant to the trusts or we do not have the power to direct the activities that most significantly impact the economic performance of the trusts.

 
 
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Other VIEs
Affordable Housing Entities
As part of our community reinvestment initiatives, we invest in private investment funds that make equity investments in multifamily affordable housing properties. We receive affordable housing tax credits for these investments. The activities of these entities are financed with a combination of invested equity capital and debt. We account for certain of our investments in qualified affordable housing projects using the proportional amortization method if certain criteria are met. The proportional amortization method amortizes the cost of the investment over the period in which the investor expects to receive tax credits and other tax benefits, and the resulting amortization is recognized as a component of income tax expense attributable to continuing operations. For the six months ended June 30, 2019 and 2018, we recognized amortization of $279 million and $250 million, respectively, and tax credits of $355 million and $321 million, respectively, associated with these investments within income tax provision. The carrying value of our equity investments in these qualified affordable housing projects was $4.3 billion and $4.2 billion as of June 30, 2019 and December 31, 2018, respectively. We are periodically required to provide additional financial or other support during the period of the investments. Our liability for these unfunded commitments was $1.4 billion and $1.5 billion as of June 30, 2019 and December 31, 2018, respectively, and is largely expected to be paid from 2019 to 2021.
For those investment funds considered to be VIEs, we are not required to consolidate them if we do not have the power to direct the activities that most significantly impact the economic performance of those entities. We record our interests in these unconsolidated VIEs in loans held for investment, other assets and other liabilities on our consolidated balance sheets. Our maximum exposure to these entities is limited to our variable interests in the entities which consisted of assets of approximately $4.4 billion and $4.2 billion as of June 30, 2019 and December 31, 2018, respectively. The creditors of the VIEs have no recourse to our general credit and we do not provide additional financial or other support other than during the period that we are contractually required to provide it. The total assets of the unconsolidated VIE investment funds were approximately $10.7 billion and $10.8 billion as of June 30, 2019 and December 31, 2018, respectively.
Entities that Provide Capital to Low-Income and Rural Communities
We hold variable interests in entities (“Investor Entities”) that invest in community development entities (“CDEs”) that provide debt financing to businesses and non-profit entities in low-income and rural communities. Variable interests in the CDEs held by the consolidated Investor Entities are also our variable interests. The activities of the Investor Entities are financed with a combination of invested equity capital and debt. The activities of the CDEs are financed solely with invested equity capital. We receive federal and state tax credits for these investments. We consolidate the VIEs in which we have the power to direct the activities that most significantly impact the VIE’s economic performance and where we have the obligation to absorb losses or right to receive benefits that could be potentially significant to the VIE. We have also consolidated other investments and CDEs that are not considered to be VIEs, but where we hold a controlling financial interest. The assets of the VIEs that we consolidated, which totaled approximately $1.8 billion and $1.7 billion as of June 30, 2019 and December 31, 2018, respectively, are reflected on our consolidated balance sheets in cash, loans held for investment, and other assets. The liabilities are reflected in other liabilities. The creditors of the VIEs have no recourse to our general credit. We have not provided additional financial or other support other than during the period that we are contractually required to provide it.
Other
Other VIEs include variable interests that we hold in companies that promote renewable energy sources and other equity method investments. We were not required to consolidate these entities because we do not have the power to direct the activities that most significantly impact their economic performance. Our maximum exposure to these entities is limited to the investment on our consolidated balance sheets of $523 million and $353 million as of June 30, 2019 and December 31, 2018, respectively. The creditors of the other VIEs have no recourse to our general credit. We have not provided additional financial or other support other than during the period that we are contractually required to provide it.

 
 
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NOTE 7—GOODWILL AND INTANGIBLE ASSETS
The table below presents our goodwill, intangible assets and MSRs as of June 30, 2019 and December 31, 2018. Goodwill is presented separately, while intangible assets and MSRs are included in other assets on our consolidated balance sheets.
Table 7.1: Components of Goodwill, Intangible Assets and MSRs
 
 
June 30, 2019
(Dollars in millions)
 
Carrying
Amount of
Assets
 
Accumulated Amortization
 
Net
Carrying
Amount
Goodwill
 
$
14,545

 
N/A

 
$
14,545

Intangible assets:
 
 
 
 
 
 
Purchased credit card relationship (“PCCR”) intangibles
 
2,102

 
$
(1,995
)
 
107

Other(1)
 
218

 
(131
)
 
87

Total intangible assets
 
2,320

 
(2,126
)
 
194

Total goodwill and intangible assets
 
$
16,865

 
$
(2,126
)
 
$
14,739

Commercial MSRs(2)
 
$
501

 
$
(215
)
 
$
286

 
 
 
 
 
 
 
 
 
December 31, 2018
(Dollars in millions)
 
Carrying
Amount of
Assets
 
Accumulated Amortization
 
Net
Carrying
Amount
Goodwill
 
$
14,544

 
N/A

 
$
14,544

Intangible assets:
 
 
 
 
 
 
PCCR intangibles
 
2,102

 
$
(1,952
)
 
150

Core deposit intangibles
 
1,149

 
(1,148
)
 
1

Other(1)
 
271

 
(168
)
 
103

Total intangible assets
 
3,522

 
(3,268
)
 
254

Total goodwill and intangible assets
 
$
18,066

 
$
(3,268
)
 
$
14,798

Commercial MSRs(2)
 
$
459

 
$
(185
)
 
$
274

__________
(1) 
Primarily consists of intangibles for sponsorship relationships, partnership and other contract intangibles and trade name intangibles.
(2) 
Commercial MSRs are accounted for under the amortization method on our consolidated balance sheets.
Amortization expense for amortizable intangible assets, which is presented separately in our consolidated statements of income, totaled $29 million and $59 million for the three and six months ended June 30, 2019, respectively, and $43 million and $87 million for the three and six months ended June 30, 2018, respectively.


 
 
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Goodwill
The following table presents changes in the carrying amount of goodwill by each of our business segments as of June 30, 2019 and December 31, 2018.
Table 7.2: Goodwill by Business Segments
(Dollars in millions)
 
Credit
Card
 
Consumer
Banking
 
Commercial Banking
 
Total
Balance as of December 31, 2018
 
$
5,060

 
$
4,600

 
$
4,884

 
$
14,544

Acquisitions
 
2

 
0

 
0

 
2

Reductions in goodwill related to divestitures
 
0

 
(1
)
 
0

 
(1
)
Balance as of June 30, 2019
 
$
5,062

 
$
4,599

 
$
4,884

 
$
14,545

 
 
 


 
 
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NOTE 8—DEPOSITS AND BORROWINGS
Our deposits represent our largest source of funding for our assets and operations, which include checking accounts, money market deposits, negotiable order of withdrawals, savings deposits and time deposits. We also use a variety of other funding sources including short-term borrowings, senior and subordinated notes, securitized debt obligations and other borrowings. In addition, we utilize FHLB advances, which are secured by certain portions of our loan and investment securities portfolios. Securitized debt obligations are presented separately on our consolidated balance sheets, as they represent obligations of consolidated securitization trusts, while federal funds purchased and securities loaned or sold under agreements to repurchase, senior and subordinated notes and other borrowings, including FHLB advances, are included in other debt on our consolidated balance sheets.
Our total short-term borrowings generally consist of federal funds purchased, securities loaned or sold under agreements to repurchase, and short-term FHLB advances. Our long-term debt consists of borrowings with an original contractual maturity of greater than one year. The following tables summarize the components of our deposits, short-term borrowings and long-term debt as of June 30, 2019 and December 31, 2018. The carrying value presented below for these borrowings includes unamortized debt premiums and discounts, net of debt issuance costs and fair value hedge accounting adjustments.
Table 8.1: Components of Deposits, Short-Term Borrowings and Long-Term Debt
(Dollars in millions)
 
June 30,
2019
 
December 31,
2018
Deposits:
 
 
 
 
Non-interest-bearing deposits
 
$
23,374

 
$
23,483

Interest-bearing deposits(1)
 
231,161

 
226,281

Total deposits
 
$
254,535

 
$
249,764

Short-term borrowings:
 
 
 
 
Federal funds purchased and securities loaned or sold under agreements to repurchase
 
$
359

 
$
352

FHLB advances
 
0

 
9,050

Total short-term borrowings
 
$
359

 
$
9,402

 
 
June 30, 2019
 
December 31,
2018
(Dollars in millions)
 
Maturity
Dates
 
Stated Interest Rates
 
Weighted-
Average
Interest Rate
 
Carrying Value
 
Carrying Value
Long-term debt:
 
 
 
 
 
 
 
 
 
 
Securitized debt obligations
 
2019-2025

 
1.33% - 3.15%

 
2.37
%
 
$
16,959

 
$
18,307

Senior and subordinated notes:
 
 
 
 
 
 
 
 
 
 
Fixed unsecured senior debt(2)
 
2019-2029

 
0.80 - 4.75

 
3.04

 
24,076

 
23,290

Floating unsecured senior debt
 
2019-2023

 
2.94 - 3.73

 
3.32

 
2,994

 
2,993

Total unsecured senior debt
 
3.07

 
27,070

 
26,283

Fixed unsecured subordinated debt
 
2019-2026

 
3.38 - 8.80

 
4.09

 
4,752

 
4,543

Total senior and subordinated notes
 
31,822

 
30,826

Other long-term borrowings:
 
 
 
 
 
 
 
 
 
 
FHLB advances
 
—

 
—

 
—

 
0

 
251

Other borrowings
 
2019-2035

 
2.50 - 12.86

 
4.30

 
93

 
119

Total other long-term borrowings
 
93

 
370

Total long-term debt
 
$
48,874

 
$
49,503

Total short-term borrowings and long-term debt
 
$
49,233

 
$
58,905

__________
(1) 
Includes $5.6 billion and $4.0 billion of time deposits in denominations in excess of the $250,000 federal insurance limit as of June 30, 2019 and December 31, 2018, respectively.
(2) 
Includes $1.4 billion of EUR-denominated unsecured notes as of June 30, 2019.

 
 
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NOTE 9—DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Use of Derivatives and Accounting for Derivatives
We regularly enter into derivative transactions to support our overall risk management activities. Our primary market risks stem from the impact on our earnings and economic value of equity due to changes in interest rates and, to a lesser extent, changes in foreign exchange rates. We manage our interest rate sensitivity by employing several techniques, which include changing the duration and re-pricing characteristics of various assets and liabilities by using interest rate derivatives. We also use foreign currency derivatives to limit our earnings and capital exposures to foreign exchange risk by hedging exposures denominated in foreign currencies. In addition to interest rate and foreign currency derivatives, we may also use a variety of other derivative instruments, including caps, floors, options, futures and forward contracts, to manage our interest rate and foreign exchange risks. We designate these risk management derivatives as either qualifying accounting hedges or free-standing derivatives. Qualifying accounting hedges are further designated as fair value hedges, cash flow hedges or net investment hedges. Free-standing derivatives are economic hedges that do not qualify for hedge accounting.
We also offer various interest rate, commodity and foreign currency derivatives as accommodation to our customers within our Commercial Banking business. We enter into these derivatives with our customers primarily to help them manage interest rate risks, hedge their energy and other commodities exposures, and manage foreign currency fluctuations. We then enter into offsetting derivative contracts with counterparties to economically hedge the majority of our subsequent exposures.
See below for additional information on our use of derivatives and how we account for them:
•
Fair Value Hedges: We designate derivatives as fair value hedges when they are used to manage our exposure to changes in the fair value of certain financial assets and liabilities, which fluctuate in value as a result of movements in interest rates. Changes in the fair value of derivatives designated as fair value hedges are presented in the same line item on our consolidated statements of income as the earnings effect of the hedged items. Our fair value hedges primarily consist of interest rate swaps that are intended to modify our exposure to interest rate risk on various fixed-rate financial assets and liabilities.
•
Cash Flow Hedges: We designate derivatives as cash flow hedges when they are used to manage our exposure to variability in cash flows related to forecasted transactions. Changes in the fair value of derivatives designated as cash flow hedges are recorded as a component of AOCI. Those amounts are reclassified into earnings in the same period during which the forecasted transactions impact earnings and presented in the same line item on our consolidated statements of income as the earnings effect of the hedged items. Our cash flow hedges use interest rate swaps and floors that are intended to hedge the variability in interest receipts or interest payments on some of our variable-rate financial assets or liabilities. We also enter into foreign currency forward contracts to hedge our exposure to variability in cash flows related to intercompany borrowings denominated in foreign currencies.
•
Net Investment Hedges: We use net investment hedges to manage the foreign currency exposure related to our net investments in foreign operations that have functional currencies other than the U.S. dollar. Changes in the fair value of net investment hedges are recorded in the translation adjustment component of AOCI, offsetting the translation gain or loss from those foreign operations. We execute net investment hedges using foreign currency forward contracts to hedge the translation exposure of the net investment in our foreign operations under the forward method.
•
Free-Standing Derivatives: Our free-standing derivatives primarily consist of our customer accommodation derivatives and other economic hedges. The customer accommodation derivatives and the related offsetting contracts are mainly interest rate, commodity and foreign currency contracts. The other free-standing derivatives are primarily used to economically hedge the risk of changes in the fair value of our commercial mortgage loan origination and purchase commitments as well as other interests held. Changes in the fair value of free-standing derivatives are recorded in earnings as a component of other non-interest income.


 
 
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Derivatives Counterparty Credit Risk
Counterparty Types
Derivative instruments contain an element of credit risk that arises from the potential failure of a counterparty to perform according to the terms of the contract. We execute our derivative contracts primarily in over-the-counter (“OTC”) markets. We also execute minimal amounts of interest rate and commodity futures in the exchange-traded derivative markets. Our OTC derivatives consist of both centrally cleared and uncleared bilateral contracts. In our centrally cleared contracts, our counterparties are central counterparty clearinghouses (“CCPs”), such as the Chicago Mercantile Exchange (“CME”) and the LCH Group (“LCH”). In our uncleared bilateral contracts, we enter into agreements directly with our derivative counterparties.
Counterparty Credit Risk Management
We manage the counterparty credit risk associated with derivative instruments by entering into legally enforceable master netting arrangements, where possible, and exchanging collateral with our counterparties, typically in the form of cash or high-quality liquid securities. The amount of collateral exchanged is dependent upon the fair value of the derivative instruments as well as the fair value of the pledged collateral. When valuing collateral, an estimate of the variation in price and liquidity over time is subtracted in the form of a “haircut” to discount the value of the collateral pledged. Our exposure to derivative counterparty credit risk, at any point in time, is equal to the amount reported as a derivative asset on our balance sheet. The fair value of our derivatives is adjusted on an aggregate basis to take into consideration the effects of legally enforceable master netting agreements and any associated cash collateral received or pledged. See Table 9.3 for our net exposure associated with derivatives.
The terms under which we collateralize our exposures differ between cleared exposures and uncleared bilateral exposures.
•
CCPs: We clear eligible OTC derivatives with CCPs as part of our regulatory requirements. Futures commission merchants (“FCMs”) serve as the intermediary between CCPs and us. CCPs require that we post initial and variation margin through our FCMs to mitigate the risk of non-payment or default. Initial margin is required upfront by CCPs as collateral against potential losses on our cleared derivative contracts. Variation margin is exchanged on a daily basis to account for mark-to-market changes in the derivative contracts. For CME and LCH-cleared OTC derivatives, we characterize variation margin cash payments as settlements. Our FCM agreements governing these derivative transactions include provisions that may require us to post additional collateral under certain circumstances.
•
Bilateral Counterparties: We enter into legally enforceable master netting agreements and collateral agreements, where possible, with bilateral derivative counterparties to mitigate the risk of default. We review our collateral positions on a daily basis and exchange collateral with our counterparties in accordance with these agreements. These bilateral agreements typically provide the right to offset exposure with the same counterparty and require the party in a net liability position to post collateral. Agreements with certain bilateral counterparties require both parties to maintain collateral in the event the fair values of derivative instruments exceed established exposure thresholds. Certain of these bilateral agreements include provisions requiring that our debt maintain a credit rating of investment grade or above by each of the major credit rating agencies. In the event of a downgrade of our debt credit rating below investment grade, some of our counterparties would have the right to terminate their derivative contract and close out existing positions.
Credit Risk Valuation Adjustments
We record counterparty credit valuation adjustments (“CVAs”) on our derivative assets to reflect the credit quality of our counterparties. We consider collateral and legally enforceable master netting agreements that mitigate our credit exposure to each counterparty in determining CVAs, which may be adjusted in future periods due to changes in the fair values of the derivative contracts, collateral, and creditworthiness of the counterparty. We also record debit valuation adjustments (“DVAs”) to adjust the fair values of our derivative liabilities to reflect the impact of our own credit quality.

 
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Balance Sheet Presentation
The following table summarizes the notional amounts and fair values of our derivative instruments as of June 30, 2019 and December 31, 2018, which are segregated by derivatives that are designated as accounting hedges and those that are not, and are further segregated by type of contract within those two categories. The total derivative assets and liabilities are adjusted on an aggregate basis to take into consideration the effects of legally enforceable master netting agreements and any associated cash collateral received or pledged. Derivative assets and liabilities are included in other assets and other liabilities, respectively, on our consolidated balance sheets and their related gains or losses are included in operating activities as changes in other assets and other liabilities in the consolidated statements of cash flows.
Table 9.1: Derivative Assets and Liabilities at Fair Value
 
 
June 30, 2019
 
December 31, 2018
 
 
Notional or
Contractual
Amount
 
Derivative(1)
 
Notional or
Contractual
Amount
 
Derivative(1)
(Dollars in millions)
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Derivatives designated as accounting hedges:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts:
 
 
 
 
 
 
 
 
 
 
 
 
Fair value hedges
 
$
55,397

 
$
28

 
$
55

 
$
53,413

 
$
64

 
$
28

Cash flow hedges
 
85,600

 
334

 
18

 
81,200

 
83

 
70

Total interest rate contracts
 
140,997

 
362

 
73

 
134,613

 
147

 
98

Foreign exchange contracts:
 
 
 
 
 
 
 
 
 
 
 
 
Fair value hedges
 
1,421

 
20

 
0

 
0

 
0

 
0

Cash flow hedges
 
5,741

 
6

 
91

 
5,745

 
184

 
2

Net investment hedges
 
2,660

 
99

 
5

 
2,607

 
178

 
0

Total foreign exchange contracts
 
9,822

 
125

 
96

 
8,352

 
362

 
2

Total derivatives designated as accounting hedges
 
150,819

 
487

 
169

 
142,965

 
509

 
100

Derivatives not designated as accounting hedges:
 
 
 
 
 
 
 
 
 
 
 
 
Customer accommodation:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
55,113

 
541

 
133

 
49,386

 
190

 
256

Commodity contracts
 
12,838

 
775

 
719

 
10,673

 
797

 
786

Foreign exchange and other contracts
 
2,352

 
18

 
18

 
1,418

 
12

 
11

Total customer accommodation
 
70,303

 
1,334

 
870

 
61,477

 
999

 
1,053

Other interest rate exposures(2)
 
7,208

 
44

 
47

 
6,427

 
29

 
36

Other contracts
 
1,412

 
0

 
10

 
1,636

 
2

 
12

Total derivatives not designated as accounting hedges
 
78,923

 
1,378

 
927

 
69,540

 
1,030

 
1,101

Total derivatives
 
$
229,742

 
$
1,865

 
$
1,096

 
$
212,505

 
$
1,539

 
$
1,201

Less: netting adjustment(3)
 
(856
)
 
(456
)
 
 
 
(1,079
)
 
(287
)
Total derivative assets/liabilities
 
$
1,009

 
$
640

 
 
 
$
460

 
$
914

__________
(1) 
Derivative assets and liabilities presented above exclude valuation adjustments related to non-performance risk. As of June 30, 2019 and December 31, 2018, the cumulative CVA balances were $11 million and $3 million, respectively. The cumulative DVA balance were approximately $1 million as of both June 30, 2019 and December 31, 2018.
(2) 
Other interest rate exposures include commercial mortgage-related derivatives and interest rate swaps.
(3) 
Represents balance sheet netting of derivative assets and liabilities, and related payables and receivables for cash collateral held or placed with the same counterparty.

 
 
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The following table summarizes the carrying value of our hedged assets and liabilities in fair value hedges and the associated cumulative basis adjustments included in those carrying values as of June 30, 2019 and December 31, 2018.
Table 9.2: Hedged Items in Fair Value Hedging Relationships
 
 
June 30, 2019
 
December 31, 2018
 
 
Carrying Amount
Assets/(Liabilities)
 
Cumulative Amount of Basis Adjustments Included in the Carrying Amount
 
Carrying Amount
Assets/(Liabilities)
 
Cumulative Amount of Basis Adjustments Included in the Carrying Amount
(Dollars in millions)
 
 
Total
Assets/(Liabilities)
 
Discontinued-Hedging Relationships
 
 
Total
Assets/(Liabilities)
 
Discontinued-Hedging Relationships
Line item on our consolidated balance sheets in which the hedged item is included:
 
 
 
 
 
 
 
 
 
 
 
 
Investment securities available for sale(1)(2)
 
$
13,217

 
$
319

 
$
7

 
$
14,067

 
$
(6
)
 
$
(2
)
Interest-bearing deposits
 
(14,000
)
 
4

 
0

 
(13,101
)
 
247

 
0

Securitized debt obligations
 
(7,510
)
 
9

 
95

 
(5,887
)
 
168

 
143

Senior and subordinated notes
 
(27,047
)
 
(514
)
 
323

 
(23,572
)
 
315

 
392

__________
(1) 
These amounts include the amortized cost basis of our investment securities designated in hedging relationships for which the hedged item is the last layer expected to be remaining at the end of the hedging relationship. The amortized cost basis of this portfolio was $8.7 billion and $8.3 billion, the amount of the designated hedged items was $4.2 billion and $4.0 billion, and the cumulative basis adjustment associated with these hedges was $133 million and $26 million as of June 30, 2019 and December 31, 2018, respectively.
(2) 
Carrying value represents amortized cost.
Balance Sheet Offsetting of Financial Assets and Liabilities
Derivative contracts and repurchase agreements that we execute bilaterally in the OTC market are generally governed by enforceable master netting arrangements where we generally have the right to offset exposure with the same counterparty. Either counterparty can generally request to net settle all contracts through a single payment upon default on, or termination of, any one contract. We elect to offset the derivative assets and liabilities under netting arrangements for balance sheet presentation where a right of setoff exists. For derivative contracts entered into under master netting arrangements for which we have not been able to confirm the enforceability of the setoff rights, or those not subject to master netting arrangements, we do not offset our derivative positions for balance sheet presentation.

 
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents the gross and net fair values of our derivative assets, derivative liabilities, repurchase agreements and the related offsetting amounts permitted under U.S. GAAP as of June 30, 2019 and December 31, 2018. The table also includes cash and non-cash collateral received or pledged in accordance with such arrangements. The amount of collateral presented, however, is limited to the amount of the related net derivative fair values or outstanding balances; therefore, instances of over-collateralization are excluded.
Table 9.3: Offsetting of Financial Assets and Financial Liabilities
 
 
Gross
Amounts
 
Gross Amounts Offset in the Balance Sheet
 
Net Amounts as Recognized
 
Securities Collateral Held Under Master Netting Agreements
 
 
(Dollars in millions)
 
 
Financial
Instruments
 
Cash Collateral Received
 
 
 
Net
Exposure
As of June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
Derivative assets(1)
 
$
1,865

 
$
(326
)
 
$
(530
)
 
$
1,009

 
$
0

 
$
1,009

As of December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
Derivative assets(1)
 
1,539

 
(205
)
 
(874
)
 
460

 
0

 
460

 
 
Gross
Amounts
 
Gross Amounts Offset in the Balance Sheet
 
Net Amounts as Recognized
 
Securities Collateral Pledged Under Master Netting Agreements
 
 
(Dollars in millions)
 
 
Financial
Instruments
 
Cash Collateral Pledged
 
 
 
Net
Exposure
As of June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities(1)
 
$
1,096

 
$
(326
)
 
$
(130
)
 
$
640

 
$
0

 
$
640

Repurchase agreements(2)
 
359

 
0

 
0

 
359

 
(359
)
 
0

As of December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities(1)
 
1,201

 
(205
)
 
(82
)
 
914

 
0

 
914

Repurchase agreements(2)
 
352

 
0

 
0

 
352

 
(352
)
 
0

__________
(1) 
We received cash collateral from derivative counterparties totaling $586 million and $925 million as of June 30, 2019 and December 31, 2018, respectively. We also received securities from derivative counterparties with a fair value of approximately $1 million as of both June 30, 2019 and December 31, 2018, which we have the ability to re-pledge. We posted $707 million and $633 million of cash collateral as of June 30, 2019 and December 31, 2018, respectively.
(2) 
Represents customer repurchase agreements that mature the next business day. As of June 30, 2019 and December 31, 2018, we pledged collateral with a fair value of $366 million and $359 million, respectively, under these customer repurchase agreements, which were primarily agency RMBS securities.
Income Statement and AOCI Presentation
Fair Value and Cash Flow Hedges
The net gains (losses) recognized in our consolidated statements of income related to derivatives in fair value and cash flow hedging relationships are presented below for the three and six months ended June 30, 2019 and 2018.

 
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Table 9.4: Effects of Fair Value and Cash Flow Hedge Accounting
 
 
Three Months Ended June 30, 2019
 
 
Net Interest Income
 
Non-Interest Income
(Dollars in millions)
 
Investment Securities
 
Loans, Including Loans Held for Sale
 
Other
 
Interest-bearing Deposits
 
Securitized Debt Obligations
 
Senior and Subordinated Notes
 
Other
Total amounts presented in our consolidated statements of income
 
$
629

 
$
6,383

 
$
64

 
$
(870
)
 
$
(139
)
 
$
(310
)
 
$
191

Fair value hedging relationships:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate and foreign exchange contracts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest recognized on derivatives
 
$
(1
)
 
$
0

 
$
0

 
$
(33
)
 
$
(6
)
 
$
(10
)
 
$
0

Gains (losses) recognized on derivatives
 
(175
)
 
0

 
0

 
154

 
79

 
471

 
11

Gains (losses) recognized on hedged items(1)
 
174

 
0

 
0

 
(151
)
 
(102
)
 
(511
)
 
(10
)
Net income (expense) recognized on fair value hedges
 
$
(2
)
 
$
0

 
$
0

 
$
(30
)
 
$
(29
)
 
$
(50
)
 
$
1

Cash flow hedging relationships:(2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Realized losses reclassified from AOCI into net income
 
$
(3
)
 
$
(59
)
 
$
0

 
$
0

 
$
0

 
$
0

 
$
0

Foreign exchange contracts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Realized gains (losses) reclassified from AOCI into net income(3)
 
0

 
0

 
13

 
0

 
0

 
0

 
(1
)
Net income (expense) recognized on cash flow hedges
 
$
(3
)
 
$
(59
)
 
$
13

 
$
0

 
$
0

 
$
0

 
$
(1
)

 
 
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Six Months Ended June 30, 2019
 
 
Net Interest Income
 
Non-Interest Income
(Dollars in millions)
 
Investment Securities
 
Loans, Including Loans Held for Sale
 
Other
 
Interest-bearing Deposits
 
Securitized Debt Obligations
 
Senior and Subordinated Notes
 
Other
Total amounts presented in our consolidated statements of income
 
$
1,284

 
$
12,751

 
$
133

 
$
(1,687
)
 
$
(282
)
 
$
(624
)
 
$
348

Fair value hedging relationships:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate and foreign exchange contracts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest recognized on derivatives
 
$
1

 
$
0

 
$
0

 
$
(69
)
 
$
(12
)
 
$
(21
)
 
$
0

Gains (losses) recognized on derivatives
 
(286
)
 
0

 
0

 
249

 
112

 
752

 
11

Gains (losses) recognized on hedged items(1)
 
284

 
0

 
0

 
(243
)
 
(159
)
 
(831
)
 
(10
)
Net income (expense) recognized on fair value hedges
 
$
(1
)
 
$
0

 
$
0

 
$
(63
)
 
$
(59
)
 
$
(100
)
 
$
1

Cash flow hedging relationships:(2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Realized losses reclassified from AOCI into net income
 
$
(7
)
 
$
(115
)
 
$
0

 
$
0

 
$
0

 
$
0

 
$
0

Foreign exchange contracts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Realized gains (losses) reclassified from AOCI into net income(3)
 
0

 
0

 
25

 
0

 
0

 
0

 
(1
)
Net income (expense) recognized on cash flow hedges
 
$
(7
)
 
$
(115
)
 
$
25

 
$
0

 
$
0

 
$
0

 
$
(1
)

 
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
 
Three Months Ended June 30, 2018
 
 
Net Interest Income
(Dollars in millions)
 
Investment Securities
 
Loans, Including Loans Held for Sale
 
Other
 
Interest-bearing Deposits
 
Securitized Debt Obligations
 
Senior and Subordinated Notes
Total amounts presented in our consolidated statements of income
 
$
539

 
$
5,989

 
$
68

 
$
(622
)
 
$
(124
)
 
$
(289
)
Fair value hedging relationships:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts:
 
 
 
 
 
 
 
 
 
 
 
 
Interest recognized on derivatives
 
$
(9
)
 
$
0

 
$
0

 
$
(21
)
 
$
(18
)
 
$
4

Gains (losses) recognized on derivatives
 
83

 
0

 
0

 
(37
)
 
(17
)
 
(154
)
Gains (losses) recognized on hedged items(1)
 
(81
)
 
0

 
0

 
32

 
15

 
129

Net income (expense) recognized on fair value hedges
 
$
(7
)
 
$
0

 
$
0

 
$
(26
)
 
$
(20
)
 
$
(21
)
Cash flow hedging relationships:(2)
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts:
 
 
 
 
 
 
 
 
 
 
 
 
Realized losses reclassified from AOCI into net income
 
$
(2
)
 
$
(17
)
 
$
0

 
$
0

 
$
0

 
$
0

Foreign exchange contracts:
 
 
 
 
 
 
 
 
 
 
 
 
Realized gains reclassified from AOCI into net income(3)
 
0

 
0

 
11

 
0

 
0

 
0

Net income (expense) recognized on cash flow hedges
 
$
(2
)
 
$
(17
)
 
$
11

 
$
0

 
$
0

 
$
0

 
 
Six Months Ended June 30, 2018
 
 
Net Interest Income
(Dollars in millions)
 
Investment Securities
 
Loans, Including Loans Held for Sale
 
Other
 
Interest-bearing Deposits
 
Securitized Debt Obligations
 
Senior and Subordinated Notes
Total amounts presented in our consolidated statements of income
 
$
991

 
$
12,123

 
$
119

 
$
(1,161
)
 
$
(231
)
 
$
(540
)
Fair value hedging relationships:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts:
 
 
 
 
 
 
 
 
 
 
 
 
Interest recognized on derivatives
 
$
(17
)
 
$
0

 
$
0

 
$
(23
)
 
$
(23
)
 
$
14

Gains (losses) recognized on derivatives
 
183

 
0

 
0

 
(197
)
 
(118
)
 
(511
)
Gains (losses) recognized on hedged items(1)
 
(180
)
 
0

 
0

 
187

 
113

 
474

Net income (expense) recognized on fair value hedges
 
$
(14
)
 
$
0

 
$
0

 
$
(33
)
 
$
(28
)
 
$
(23
)
Cash flow hedging relationships:(2)
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts:
 
 
 
 
 
 
 
 
 
 
 
 
Realized losses reclassified from AOCI into net income
 
$
(4
)
 
$
(9
)
 
$
0

 
$
0

 
$
0

 
$
0

Foreign exchange contracts:
 
 
 
 
 
 
 
 
 
 
 
 
Realized gains reclassified from AOCI into net income(3)
 
0

 
0

 
19

 
0

 
0

 
0

Net income (expense) recognized on cash flow hedges
 
$
(4
)
 
$
(9
)
 
$
19

 
$
0

 
$
0

 
$
0



 
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

__________
(1) 
Includes amortization expense of $56 million and $117 million for the three and six months ended June 30, 2019, respectively, and amortization expense of $16 million and $6 million for the three and six months ended June 30, 2018, respectively, related to basis adjustments on discontinued hedges.
(2) 
See “Note 10—Stockholders’ Equity” for the effects of cash flow and net investment hedges on AOCI and amounts reclassified to net income, net of tax.
(3) 
We recognized a loss of $123 million and $295 million for the three and six months ended June 30, 2019, respectively, and a gain of $101 million and $176 million for the three and six months ended June 30, 2018, respectively, on foreign exchange contracts reclassified from AOCI. These amounts were largely offset by the foreign currency transaction gains (losses) on our foreign currency denominated intercompany funding included other non-interest income.
In the next 12 months, we expect to reclassify to earnings net after-tax losses of $36 million recorded in AOCI as of June 30, 2019. These amounts will offset the cash flows associated with the hedged forecasted transactions. The maximum length of time over which forecasted transactions were hedged was approximately 7 years as of June 30, 2019. The amount we expect to reclassify into earnings may change as a result of changes in market conditions and ongoing actions taken as part of our overall risk management strategy.
Free-Standing Derivatives
The net impacts to our consolidated statements of income related to free-standing derivatives are presented below for the three and six months ended June 30, 2019 and 2018. These gains or losses are recognized in other non-interest income in our consolidated statements of income.
Table 9.5: Gains (Losses) on Free-Standing Derivatives
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Dollars in millions)
 
2019
 
2018
 
2019
 
2018
Gains (losses) recognized in other non-interest income:
 
 
 
 
 
 
 
 
Customer accommodation:
 
 
 
 
 
 
 
 
Interest rate contracts
 
$
4

 
$
10

 
$
10

 
$
14

Commodity contracts
 
7

 
4

 
9

 
8

Foreign exchange and other contracts
 
4

 
2

 
7

 
4

Total customer accommodation
 
15

 
16

 
26

 
26

Other interest rate exposures
 
(14
)
 
9

 
(14
)
 
21

Other contracts
 
0

 
0

 
(2
)
 
(20
)
Total
 
$
1

 
$
25

 
$
10

 
$
27



 
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10—STOCKHOLDERS’ EQUITY
Preferred Stock
The following table summarizes our preferred stock outstanding as of June 30, 2019 and December 31, 2018.
Table 10.1: Preferred Stock Outstanding(1)
 
 
 
 
 
 
Redeemable by Issuer Beginning
 
Per Annum Dividend Rate
 
Dividend Frequency
 
Liquidation Preference per Share
 
 
 
Carrying Value
(in millions)
Series
 
Description
 
Issuance Date
 
 
 
 
 
Total Shares Outstanding
 
June 30, 2019
 
December 31, 2018
Series B
 
6.00%
Non-Cumulative
 
August 20, 2012
 
September 1, 2017
 
6.00%
 
Quarterly
 
$
1,000

 
875,000

 
$
853

 
$
853

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

 
500,000

 
484

 
484

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

 
500,000

 
485

 
485

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

 
1,000,000

 
988

 
988

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

 
500,000

 
484

 
484

Series G
 
5.20%
Non-Cumulative
 
July 29, 2016
 
December 1, 2021
 
5.20
 
Quarterly
 
1,000

 
600,000

 
583

 
583

Series H
 
6.00%
Non-Cumulative
 
November 29, 2016
 
December 1, 2021
 
6.00
 
Quarterly
 
1,000

 
500,000

 
483

 
483

Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
4,360

 
$
4,360

__________
(1) 
Except for Series E, ownership is held in the form of depositary shares, each representing a 1/40th interest in a share of fixed-rate non-cumulative perpetual preferred stock.
Accumulated Other Comprehensive Income
Accumulated other comprehensive income primarily consists of accumulated net unrealized gains or losses associated with securities available for sale and securities held to maturity, changes in fair value of derivatives in hedging relationships, and foreign currency translation adjustments. Unrealized gains or losses for securities held to maturity are amortized over the remaining life of the security with no expected impact on future net income as amortization of these gains or losses will be offset by the amortization of the premium or discount created from the transfer of securities from available to sale to held to maturity.

 
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table includes the AOCI impacts from the adoption of accounting standards and the changes in AOCI by component for the three and six months ended June 30, 2019 and 2018.
Table 10.2: Accumulated Other Comprehensive Income (Loss)
 
 
Three Months Ended June 30, 2019
(Dollars in millions)
 
Securities
Available
for Sale
 
Securities Held to Maturity
 
Hedging Relationships(1)
 
Foreign
Currency
Translation Adjustments(2)
 
Other
 
Total
AOCI as of March 31, 2019
 
$
(147
)
 
$
(184
)
 
$
(141
)
 
$
(147
)
 
$
(41
)
 
$
(660
)
Other comprehensive income before reclassifications
 
284

 
0

 
406

 
15

 
0

 
705

Amounts reclassified from AOCI into earnings
 
(12
)
 
6

 
131

 
0

 
0

 
125

Other comprehensive income, net of tax
 
272

 
6

 
537

 
15

 
0

 
830

AOCI as of June 30, 2019
 
$
125

 
$
(178
)
 
$
396

 
$
(132
)
 
$
(41
)
 
$
170

 
 
Six Months Ended June 30, 2019
(Dollars in millions)
 
Securities
Available
for Sale
 
Securities Held to Maturity
 
Hedging Relationships(1)
 
Foreign
Currency
Translation Adjustments(2)
 
Other
 
Total
AOCI as of December 31, 2018
 
$
(439
)
 
$
(190
)
 
$
(418
)
 
$
(177
)
 
$
(39
)
 
$
(1,263
)
Other comprehensive income (loss) before reclassifications
 
594

 
0

 
517

 
45

 
(1
)
 
1,155

Amounts reclassified from AOCI into earnings
 
(30
)
 
12

 
297

 
0

 
(1
)
 
278

Other comprehensive income (loss), net of tax
 
564

 
12

 
814

 
45

 
(2
)
 
1,433

AOCI as of June 30, 2019
 
$
125

 
$
(178
)

$
396


$
(132
)

$
(41
)

$
170

 
 
Three Months Ended June 30, 2018
(Dollars in millions)
 
Securities
Available
for Sale
 
Securities Held to Maturity
 
Cash Flow Hedges
 
Foreign
Currency
Translation Adjustments(2)
 
Other
 
Total
AOCI as of March 31, 2018
 
$
(565
)
 
$
(212
)
 
$
(662
)
 
$
(131
)
 
$
(29
)
 
$
(1,599
)
Other comprehensive income (loss) before reclassifications
 
(65
)
 
0

 
(41
)
 
(24
)
 
1

 
(129
)
Amounts reclassified from AOCI into earnings
 
0

 
8

 
(72
)
 
0

 
(1
)
 
(65
)
Other comprehensive income (loss), net of tax
 
(65
)
 
8

 
(113
)
 
(24
)
 
0

 
(194
)
AOCI as of June 30, 2018
 
$
(630
)
 
$
(204
)
 
$
(775
)
 
$
(155
)
 
$
(29
)
 
$
(1,793
)
 
 
Six Months Ended June 30, 2018
(Dollars in millions)
 
Securities
Available
for Sale
 
Securities Held to Maturity
 
Cash Flow Hedges
 
Foreign
Currency
Translation Adjustments(2)
 
Other
 
Total
AOCI as of December 31, 2017
 
$
17

 
$
(524
)
 
$
(281
)
 
$
(138
)
 
$
0

 
$
(926
)
Cumulative effects from adoption of new accounting standards
 
3

 
(113
)
 
(63
)
 
0

 
(28
)
 
(201
)
Transfer of securities held to maturity to available for sale(3)
 
(325
)
 
407

 
0

 
0

 
0

 
82

Other comprehensive income (loss) before reclassifications
 
(319
)
 
0

 
(292
)
 
(17
)
 
1

 
(627
)
Amounts reclassified from AOCI into earnings
 
(6
)
 
26

 
(139
)
 
0

 
(2
)
 
(121
)
Other comprehensive income (loss), net of tax
 
(650
)
 
433

 
(431
)
 
(17
)
 
(1
)
 
(666
)
AOCI as of June 30, 2018
 
$
(630
)
 
$
(204
)
 
$
(775
)
 
$
(155
)
 
$
(29
)
 
$
(1,793
)
__________
(1) 
Includes amounts related to cash flow hedges as well as the excluded component of cross-currency swaps designated as fair value hedges where changes in cross-currency basis spreads are excluded from the assessment of hedge effectiveness.
(2) 
Includes other comprehensive gains of $53 million and $123 million for the three months ended June 30, 2019 and 2018, respectively, and other comprehensive gains of $19 million and $63 million for the six months ended June 30, 2019 and 2018, respectively, from hedging instruments designated as net investment hedges.

 
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(3) 
In the first quarter of 2018, we made a one-time transfer of held to maturity securities with a carrying value of $9.0 billion to available for sale as a result of our adoption of ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This transfer resulted in an after-tax gain of $82 million ($107 million pre-tax) to AOCI.
The following table presents amounts reclassified from each component of AOCI to our consolidated statements of income for the three and six months ended June 30, 2019 and 2018.
Table 10.3: Reclassifications from AOCI
(Dollars in millions)
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
AOCI Components
 
Affected Income Statement Line Item
 
2019
 
2018
 
2019
 
2018
Securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
Non-interest income
 
$
15

 
$
0

 
$
39

 
$
8

 
 
Income tax provision
 
3

 
0

 
9

 
2

 
 
Net income
 
12

 
0

 
30

 
6

Securities held to maturity:(1)
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
 
(8
)
 
(10
)
 
(16
)
 
(34
)
 
 
Income tax provision
 
(2
)
 
(2
)
 
(4
)
 
(8
)
 
 
Net income
 
(6
)
 
(8
)
 
(12
)
 
(26
)
Hedging relationships:
 
 
 
 
 
 
 
 
 
 
Interest rate contracts:
 
Interest income
 
(62
)
 
(19
)
 
(122
)
 
(13
)
Foreign exchange contracts:
 
Interest income
 
13

 
12

 
25

 
20

 
 
Non-interest income
 
(123
)
 
101

 
(295
)
 
176

 
 
Income from continuing operations before income taxes
 
(172
)
 
94

 
(392
)
 
183

 
 
Income tax provision
 
(41
)
 
22

 
(95
)
 
44

 
 
Net income
 
(131
)
 
72

 
(297
)
 
139

Other:
 
 
 
 
 
 
 
 
 
 
 
 
Non-interest income and non-interest expense
 
0

 
1

 
1

 
2

 
 
Income tax provision
 
0

 
0

 
0

 
0

 
 
Net income
 
0

 
1

 
1

 
2

Total reclassifications
 
$
(125
)
 
$
65

 
$
(278
)
 
$
121

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

 
 
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The table below summarizes other comprehensive income (loss) activity and the related tax impact for the three and six months ended June 30, 2019 and 2018.
Table 10.4: Other Comprehensive Income (Loss)
 
 
Three Months Ended June 30,
 
 
2019
 
2018
(Dollars in millions)
 
Before
Tax
 
Provision
(Benefit)
 
After
Tax
 
Before
Tax
 
Provision
(Benefit)
 
After
Tax
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
Net unrealized gains (losses) on securities available for sale
 
$
358

 
$
86

 
$
272

 
$
(86
)
 
$
(21
)
 
$
(65
)
Net changes in securities held to maturity
 
9

 
3

 
6

 
10

 
2

 
8

Net unrealized gains (losses) on hedging relationships
 
708

 
171

 
537

 
(149
)
 
(36
)
 
(113
)
Foreign currency translation adjustments(1)
 
33

 
18

 
15

 
15

 
39

 
(24
)
Other
 
(1
)
 
(1
)
 
0

 
(1
)
 
(1
)
 
0

Other comprehensive income (loss)
 
$
1,107

 
$
277

 
$
830

 
$
(211
)
 
$
(17
)
 
$
(194
)

 
 
Six Months Ended June 30,
 
 
2019
 
2018
(Dollars in millions)
 
Before
Tax
 
Provision
(Benefit)
 
After
Tax
 
Before
Tax
 
Provision
(Benefit)
 
After
Tax
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
Net unrealized gains (losses) on securities available for sale
 
$
742

 
$
178

 
$
564

 
$
(857
)
 
$
(207
)
 
$
(650
)
Net changes in securities held to maturity
 
16

 
4

 
12

 
569

 
136

 
433

Net unrealized gains (losses) on hedging relationships
 
1,073

 
259

 
814

 
(567
)
 
(136
)
 
(431
)
Foreign currency translation adjustments(1)
 
52

 
7

 
45

 
3

 
20

 
(17
)
Other
 
(3
)
 
(1
)
 
(2
)
 
(2
)
 
(1
)
 
(1
)
Other comprehensive income (loss)
 
$
1,880

 
$
447

 
$
1,433

 
$
(854
)
 
$
(188
)
 
$
(666
)
__________
(1) 
Includes the impact of hedging instruments designated as net investment hedges.


 
 
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11—EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per common share.
Table 11.1: Computation of Basic and Diluted Earnings per Common Share
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Dollars and shares in millions, except per share data)
 
2019
 
2018
 
2019
 
2018
Income from continuing operations, net of tax
 
$
1,616

 
$
1,917

 
$
3,026

 
$
3,260

Income (loss) from discontinued operations, net of tax
 
9

 
(11
)
 
11

 
(8
)
Net income
 
1,625

 
1,906

 
3,037

 
3,252

Dividends and undistributed earnings allocated to participating securities
 
(12
)
 
(12
)
 
(24
)
 
(23
)
Preferred stock dividends
 
(80
)
 
(80
)
 
(132
)
 
(132
)
Net income available to common stockholders
 
$
1,533

 
$
1,814

 
$
2,881

 
$
3,097

 
 
 
 
 
 
 
 
 
Total weighted-average basic shares outstanding
 
470.8

 
485.1

 
470.1

 
485.9

Effect of dilutive securities:
 
 
 
 
 
 
 
 
Stock options
 
1.3

 
1.6

 
1.2

 
1.9

Other contingently issuable shares
 
0.9

 
1.0

 
1.0

 
1.1

Warrants(1)
 
0.0

 
0.6

 
0.0

 
0.7

Total effect of dilutive securities
 
2.2

 
3.2

 
2.2

 
3.7

Total weighted-average diluted shares outstanding
 
473.0

 
488.3

 
472.3

 
489.6

Basic earnings per common share:
 
 
 
 
 
 
 
 
Net income from continuing operations
 
$
3.24

 
$
3.76

 
$
6.11

 
$
6.39

Income (loss) from discontinued operations
 
0.02

 
(0.02
)
 
0.02

 
(0.02
)
Net income per basic common share
 
$
3.26

 
$
3.74

 
$
6.13

 
$
6.37

Diluted earnings per common share:(2)
 
 
 
 
 
 
 
 
Net income from continuing operations
 
$
3.22

 
$
3.73

 
$
6.08

 
$
6.35

Income (loss) from discontinued operations
 
0.02

 
(0.02
)
 
0.02

 
(0.02
)
Net income per diluted common share
 
$
3.24

 
$
3.71

 
$
6.10

 
$
6.33

__________
(1) 
Represents warrants issued as part of the U.S. Department of Treasury’s Troubled Assets Relief Program which had all been exercised or expired on November 14, 2018.
(2) 
No shares were excluded form the computation of diluted earnings per share for the three months ended June 30, 2019. Excluded from the computation of diluted earnings per share were 137 thousand shares related to options with an exercise price of $86.34 for the six months ended June 30, 2019, and 24 thousand shares and 65 thousand shares related to awards for the three and six months ended June 30, 2018, respectively, because their inclusion would be anti-dilutive.


 
 
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12—FAIR VALUE MEASUREMENT
Fair value, also referred to as an exit price, is defined as the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The fair value accounting guidance provides a three-level fair value hierarchy for classifying financial instruments. This hierarchy is based on the markets in which the assets or liabilities trade and whether the inputs to the valuation techniques used to measure fair value are observable or unobservable. The fair value measurement of a financial asset or liability is assigned a level based on the lowest level of any input that is significant to the fair value measurement in its entirety. The three levels of the fair value hierarchy are described below:
Level 1:
 
Valuation is based on quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2:
 
Valuation is based on observable market-based inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3:
 
Valuation is generated from techniques that use significant assumptions not observable in the market. Valuation techniques include pricing models, discounted cash flow methodologies or similar techniques.
The accounting guidance for fair value measurements requires that we maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value. The accounting guidance provides for the irrevocable option to elect, on a contract-by-contract basis, to measure certain financial assets and liabilities at fair value at inception of the contract and record any subsequent changes in fair value in earnings. We have not made any material fair value option elections as of or for the periods disclosed herein.
The determination and classification of financial instruments in the fair value hierarchy is performed at the end of each reporting period. We consider all available information, including observable market data, indications of market liquidity and orderliness, and our understanding of the valuation techniques and significant inputs. For additional information on the valuation techniques used in estimating the fair value of our financial assets and liabilities on a recurring basis, see “Note 17—Fair Value Measurement” in our 2018 Form 10-K.
Fair Value Governance and Control
We have a governance framework and a number of key controls that are intended to ensure that our fair value measurements are appropriate and reliable. Our governance framework provides for independent oversight and segregation of duties. Our control processes include review and approval of new transaction types, price verification, and review of valuation judgments, methods, models, process controls and results.
Groups independent of our trading and investing functions participate in the review and validation process. Tasks performed by these groups include periodic verification of fair value measurements to determine if assigned fair values are reasonable, including comparing prices from vendor pricing services to other available market information.
Our Fair Value Committee (“FVC”), which includes representation from business areas, Risk Management and Finance, provides guidance and oversight to ensure an appropriate valuation control environment. The FVC regularly reviews and approves our fair valuations to ensure that our valuation practices are consistent with industry standards and adhere to regulatory and accounting guidance.
We have a model policy, established by an independent Model Risk Office, which governs the validation of models and related supporting documentation to ensure the appropriate use of models for pricing and fair value measurements. The Model Risk Office validates all models and provides ongoing monitoring of their performance.
The fair value governance process is set up in a manner that allows the Chairperson of the FVC to escalate valuation disputes that cannot be resolved by the FVC to a more senior committee called the Valuations Advisory Committee (“VAC”) for resolution. The VAC is chaired by the Chief Financial Officer and includes other members of senior management. The VAC convenes to review escalated valuation disputes.

 
 
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table displays our assets and liabilities measured on our consolidated balance sheets at fair value on a recurring basis as of June 30, 2019 and December 31, 2018.
Table 12.1: Assets and Liabilities Measured at Fair Value on a Recurring Basis
 
 
June 30, 2019
 
 
Fair Value Measurements Using
 
Netting Adjustments(1)
 
 
(Dollars in millions)
 
Level 1
 
Level 2
 
Level 3
 
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
4,219

 
$
0

 
$
0

 
—

 
$
4,219

RMBS
 
0

 
34,192

 
515

 
—

 
34,707

CMBS
 
0

 
5,380

 
9

 
—

 
5,389

Other securities
 
195

 
1,148

 
0

 
—

 
1,343

Total securities available for sale
 
4,414

 
40,720

 
524

 
—

 
45,658

Other assets:
 
 
 
 
 
 
 
 
 
 
Derivative assets(2)
 
6

 
1,789

 
70

 
$
(856
)
 
1,009

Other(3)
 
318

 
0

 
177

 
—

 
495

Total assets
 
$
4,738

 
$
42,509

 
$
771

 
$
(856
)
 
$
47,162

Liabilities:
 
 
 
 
 
 
 
 
 
 
Other liabilities:
 
 
 
 
 
 
 
 
 
 
Derivative liabilities(2)
 
$
7

 
$
1,025

 
$
64

 
$
(456
)
 
$
640

Total liabilities
 
$
7

 
$
1,025

 
$
64

 
$
(456
)
 
$
640

 
 
December 31, 2018
 
 
Fair Value Measurements Using
 
Netting Adjustments(1)
 
 
(Dollars in millions)
 
Level 1
 
Level 2
 
Level 3
 
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
6,144

 
$
0

 
$
0

 
—

 
$
6,144

RMBS
 
0

 
33,212

 
433

 
—

 
33,645

CMBS
 
0

 
4,729

 
10

 
—

 
4,739

Other securities
 
219

 
1,403

 
0

 
—

 
1,622

Total securities available for sale
 
6,363

 
39,344

 
443

 
—

 
46,150

Other assets:
 
 
 
 
 
 
 
 
 
 
Derivative assets(2)
 
0

 
1,501

 
38

 
$
(1,079
)
 
460

Other(3)
 
265

 
0

 
158

 
—

 
423

Total assets
 
$
6,628

 
$
40,845

 
$
639

 
$
(1,079
)
 
$
47,033

Liabilities:
 
 
 
 
 
 
 
 
 
 
Other liabilities:
 
 
 
 
 
 
 
 
 
 
Derivative liabilities(2)
 
$
0

 
$
1,153

 
$
48

 
$
(287
)
 
$
914

Total liabilities
 
$
0

 
$
1,153

 
$
48

 
$
(287
)
 
$
914

__________
(1) 
Represents balance sheet netting of derivative assets and liabilities, and related payables and receivables for cash collateral held or placed with the same counterparty. See “Note 9—Derivative Instruments and Hedging Activities” for additional information.
(2) 
Does not reflect $10 million and $2 million recognized as a net valuation allowance on derivative assets and liabilities for non-performance risk as of June 30, 2019 and December 31, 2018, respectively. Non-performance risk is included in derivative assets and liabilities, which are part of other assets and liabilities on the consolidated balance sheets, and is offset through non-interest income in the consolidated statements of income.

 
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(3) 
As of June 30, 2019 and December 31, 2018, other includes retained interests in securitizations of $177 million and $158 million, deferred compensation plan assets of $314 million and $264 million, and equity securities of $4 million and $1 million, respectively.
Level 3 Recurring Fair Value Rollforward
The table below presents a reconciliation for all assets and liabilities measured and recognized at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2019 and 2018. Generally, transfers into Level 3 were primarily driven by the usage of unobservable assumptions in the pricing of these financial instruments as evidenced by wider pricing variations among pricing vendors and transfers out of Level 3 were primarily driven by the usage of assumptions corroborated by market observable information as evidenced by tighter pricing among multiple pricing sources.
Table 12.2: Level 3 Recurring Fair Value Rollforward
 
 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
 
Three Months Ended June 30, 2019
 
 
 
 
Total Gains (Losses)
(Realized/Unrealized)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Unrealized
Gains (Losses)
Included in Net
Income Related to Assets and
Liabilities Still Held as of
June 30, 2019(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in millions)
 
Balance,
April 1,
2019
 
Included
in Net
Income(1)
 
Included in OCI
 
Purchases
 
Sales
 
Issuances
 
Settlements
 
Transfers
Into
Level 3
 
Transfers
Out of
Level 3
 
Balance,
June 30,
2019
 
Securities available for sale:(2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
RMBS
 
$
434

 
$
9

 
$
2

 
$
0

 
$
0

 
$
0

 
$
(13
)
 
$
97

 
$
(14
)
 
$
515

 
$
10

CMBS
 
9

 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
9

 
0

Total securities available for sale
 
443

 
9

 
2

 
0

 
0

 
0

 
(13
)
 
97

 
(14
)
 
524

 
10

Other assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Retained interest in securitizations
 
155

 
22

 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
177

 
22

Net derivative assets (liabilities)(3)
 
6

 
0

 
0

 
0

 
0

 
(7
)
 
8

 
0

 
(1
)
 
6

 
(2
)
 
 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
 
Six Months Ended June 30, 2019
 
 
 
 
Total Gains (Losses)
(Realized/Unrealized)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Unrealized
Gains (Losses)
Included in Net
Income Related to Assets and
Liabilities Still Held as of
June 30, 2019(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in millions)
 
Balance,
January 1,
2019
 
Included
in Net
Income(1)
 
Included in OCI
 
Purchases
 
Sales
 
Issuances
 
Settlements
 
Transfers
Into
Level 3
 
Transfers
Out of
Level 3
 
Balance,
June 30,
2019
 
Securities available for sale:(2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
RMBS
 
$
433

 
$
17

 
$
13

 
$
0

 
$
0

 
$
0

 
$
(25
)
 
$
114

 
$
(37
)
 
$
515

 
$
20

CMBS
 
10

 
0

 
0

 
0

 
0

 
0

 
(1
)
 
0

 
0

 
9

 
0

Total securities available for sale
 
443

 
17


13

 
0

 
0

 
0

 
(26
)
 
114

 
(37
)
 
524

 
20

Other assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Retained interest in securitizations
 
158

 
19

 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
177

 
19

Net derivative assets (liabilities)(3)
 
(10
)
 
5

 
0

 
0

 
0

 
(13
)
 
27

 
0

 
(3
)
 
6

 
4


 
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
 
Three Months Ended June 30, 2018
 
 
 
 
Total Gains (Losses)
(Realized/Unrealized)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Unrealized
Gains (Losses)
Included in Net
Income Related to Assets and
Liabilities Still Held as of
June 30, 2018(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in millions)
 
Balance,
April 1,
2018
 
Included
in Net
Income(1)
 
Included in OCI
 
Purchases
 
Sales
 
Issuances
 
Settlements
 
Transfers
Into
Level 3
 
Transfers
Out of
Level 3
 
Balance,
June 30,
2018
 
Securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
RMBS
 
$
614

 
$
9

 
$
9

 
$
0

 
$
0

 
$
0

 
$
(21
)
 
$
4

 
$
(173
)
 
$
442

 
$
7

CMBS
 
13

 
0

 
0

 
0

 
0

 
0

 
(2
)
 
0

 
0

 
11

 
0

Other securities
 
5

 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
5

 
0

Total securities available for sale
 
632

 
9

 
9

 
0

 
0

 
0

 
(23
)
 
4

 
(173
)
 
458

 
7

Other assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Retained interests in securitizations
 
176

 
(12
)
 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
164

 
(12
)
Net derivative assets (liabilities)(3)
 
(9
)
 
(2
)
 
0

 
0

 
0

 
6

 
(1
)
 
0

 
1

 
(5
)
 
(2
)
 
 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
 
Six Months Ended June 30, 2018
 
 
 
 
Total Gains (Losses)
(Realized/Unrealized)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Unrealized
Gains (Losses)
Included in Net
Income Related to Assets and
Liabilities Still Held as of
June 30, 2018(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in millions)
 
Balance,
January 1,
2018
 
Included
in Net
Income(1)
 
Included in OCI
 
Purchases
 
Sales
 
Issuances
 
Settlements
 
Transfers
Into
Level 3
 
Transfers
Out of
Level 3
 
Balance,
June 30,
2018
 
Securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
RMBS
 
$
614

 
$
18

 
$
7

 
$
0

 
$
0

 
$
0

 
$
(42
)
 
$
65

 
$
(220
)
 
$
442

 
$
13

CMBS
 
14

 
0

 
0

 
0

 
0

 
0

 
(3
)
 
0

 
0

 
11

 
0

Other securities
 
5

 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
5

 
0

Total securities available for sale
 
633

 
18

 
7

 
0

 
0

 
0

 
(45
)
 
65

 
(220
)
 
458

 
13

Other assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer MSRs
 
92

 
3

 
0

 
0

 
(97
)
 
2

 
0

 
0

 
0

 
0

 
0

Retained interests in securitizations
 
172

 
(8
)
 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
164

 
(8
)
Net derivative assets (liabilities)(3)
 
13

 
(24
)
 
0

 
0

 
0

 
7

 
(2
)
 
0

 
1

 
(5
)
 
(24
)
__________
(1) 
Realized gains (losses) on securities available for sale are included in net securities gains (losses), and retained interests in securitizations are reported as a component of non-interest income in our consolidated statements of income. Gains (losses) on derivatives are included as a component of net interest income or non-interest income in our consolidated statements of income.
(2) 
For the three and six months ended June 30, 2019, net unrealized gains included in other comprehensive income related to Level 3 securities available for sale still held as of June 30, 2019 were $3 million and $13 million, respectively.
(3) 
Includes derivative assets and liabilities of $70 million and $64 million, respectively, as of June 30, 2019, and $43 million and $48 million, respectively, as of June 30, 2018.
Significant Level 3 Fair Value Asset and Liability Inputs
Generally, uncertainties in fair value measurements of financial instruments, such as changes in unobservable inputs, may have a significant impact on fair value. Certain of these unobservable inputs will, in isolation, have a directionally consistent impact on the fair value of the instrument for a given change in that input. Alternatively, the fair value of the instrument may move in an opposite direction for a given change in another input. In general, an increase in the discount rate, default rates, loss severity and credit spreads, in isolation, would result in a decrease in the fair value measurement. In addition, an increase in default rates would generally be accompanied by a decrease in recovery rates, slower prepayment rates and an increase in liquidity spreads.

 
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Techniques and Inputs for Level 3 Fair Value Measurements
The following table presents the significant unobservable inputs used to determine the fair values of our Level 3 financial instruments on a recurring basis. We utilize multiple vendor pricing services to obtain fair value for our securities. Several of our vendor pricing services are only able to provide unobservable input information for a limited number of securities due to software licensing restrictions. Other vendor pricing services are able to provide unobservable input information for all securities for which they provide a valuation. As a result, the unobservable input information for the securities available for sale presented below represents a composite summary of all information we are able to obtain. The unobservable input information for all other Level 3 financial instruments is based on the assumptions used in our internal valuation models.
Table 12.3: Quantitative Information about Level 3 Fair Value Measurements
 
 
Quantitative Information about Level 3 Fair Value Measurements
(Dollars in millions)
 
Fair Value at June 30,
2019
 
Significant
Valuation
Techniques
 
Significant
Unobservable
Inputs
 
Range
 
Weighted
Average(1)
Securities available for sale:
 
 
 
 
 
 
 
 
 
 
RMBS
 
$
515

 
Discounted cash flows (vendor pricing)
 
Yield
Voluntary prepayment rate
Default rate
Loss severity
 
2-15%
0-15%
0-7%
0-85%
 
4%
7%
3%
68%
CMBS
 
9

 
Discounted cash flows (vendor pricing)
 
Yield
 
3%
 
3%
Other assets:
 
 
 
 
 
 
 
 
 
 
Retained interests in securitization(2)
 
177

 
Discounted cash flows
 
Life of receivables (months)
Voluntary prepayment rate
Discount rate
Default rate
Loss severity
 
2-54
3-15%
3-6%
2-3%
53-105%
 
N/A
Net derivative assets (liabilities)
 
6

 
Discounted cash flows
 
Swap rates
 
2%
 
2%
 
 
Quantitative Information about Level 3 Fair Value Measurements
(Dollars in millions)
 
Fair Value at
December 31,
2018
 
Significant
Valuation
Techniques
 
Significant
Unobservable
Inputs
 
Range
 
Weighted
Average(1)
Securities available for sale:
 
 
 
 
 
 
 
 
 
 
RMBS
 
$
433

 
Discounted cash flows (vendor pricing)
 
Yield
Voluntary prepayment rate
Default rate
Loss severity
 
3-11%
0-17%
0-7%
0-75%
 
5%
5%
3%
65%
CMBS
 
10

 
Discounted cash flows (vendor pricing)
 
Yield
 
3%
 
3%
Other assets:
 
 
 
 
 
 
 
 
 
 
Retained interests in securitization(2)
 
158

 
Discounted cash flows
 
Life of receivables (months)
Voluntary prepayment rate
Discount rate
Default rate
Loss severity
 
3-56
3-14%
4-6%
2-4%
50-104%
 
N/A
Net derivative assets (liabilities)
 
(10
)
 
Discounted cash flows
 
Swap rates
 
3%
 
3%
__________
(1) 
Weighted averages are calculated by using the product of the input multiplied by the relative fair value of the instruments.
(2) 
Due to the nature of the various mortgage securitization structures in which we have retained interests, it is not meaningful to present a consolidated weighted average for the significant unobservable inputs.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
We are required to measure and recognize certain assets at fair value on a nonrecurring basis on the consolidated balance sheets. These assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, from the application of lower of cost or fair value accounting or when we evaluate for impairment).

 
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents the carrying value of the assets measured at fair value on a nonrecurring basis and still held as of June 30, 2019 and December 31, 2018, and for which a nonrecurring fair value measurement was recorded during six and twelve months then ended.
Table 12.4: Nonrecurring Fair Value Measurements
 
 
June 30, 2019
 
 
Estimated Fair Value Hierarchy
 
Total
(Dollars in millions)
 
Level 2
 
Level 3
 
Loans held for investment
 
$
0

 
$
191

 
$
191

Loans held for sale
 
180

 
0

 
180

Other assets(1)
 
0

 
83

 
83

Total
 
$
180

 
$
274

 
$
454

 
 
December 31, 2018
 
 
Estimated Fair Value Hierarchy
 
Total
(Dollars in millions)
 
Level 2
 
Level 3
 
Loans held for investment
 
$
0

 
$
129

 
$
129

Loans held for sale
 
38

 
0

 
38

Other assets(1)
 
0

 
100

 
100

Total
 
$
38

 
$
229

 
$
267

__________
(1) 
As of June 30, 2019, other assets included equity investments accounted for under the measurement alternative of $16 million, repossessed assets of $53 million and long-lived assets held for sale of $14 million. As of December 31, 2018, other assets included equity investments accounted for under the measurement alternative of $24 million, foreclosed property and repossessed assets of $57 million and long-lived assets held for sale of $19 million.
In the above table, loans held for investment are generally valued based in part on the estimated fair value of the underlying collateral and the non-recoverable rate, which is considered to be a significant unobservable input. The non-recoverable rate ranged from 0% to 61%, with a weighted average of 4%, and from 0% to 84%, with a weighted average of 33%, as of June 30, 2019 and December 31, 2018, respectively. The weighted average non-recoverable rate is calculated based on the estimated market value of the underlying collateral. The significant unobservable inputs and related quantitative information related to fair value of the other assets are not meaningful to disclose as they vary significantly across properties and collateral.
The following table presents total nonrecurring fair value measurements for the period, included in earnings, attributable to the change in fair value relating to assets that are still held at June 30, 2019 and 2018.
Table 12.5: Nonrecurring Fair Value Measurements Included in Earnings
 
 
Total Gains (Losses)
 
 
Six Months Ended June 30,
(Dollars in millions)
 
2019
 
2018
Loans held for investment
 
$
(132
)
 
$
(65
)
Loans held for sale
 
(1
)
 
(3
)
Other assets(1)
 
(57
)
 
(47
)
Total
 
$
(190
)
 
$
(115
)
__________
(1) 
Other assets include fair value adjustments related to equity investments accounted for under the measurement alternative, repossessed assets and long-lived assets held for sale.

 
 
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Fair Value of Financial Instruments
The following table presents the carrying value and estimated fair value, including the level within the fair value hierarchy, of our financial instruments that are not measured at fair value on a recurring basis on our consolidated balance sheets as of June 30, 2019 and December 31, 2018.
Table 12.6: Fair Value of Financial Instruments
 
 
June 30, 2019
 
 
Carrying
Value
 
Estimated
Fair Value
 
Estimated Fair Value Hierarchy
(Dollars in millions)
 
 
 
Level 1
 
Level 2
 
Level 3
Financial assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
15,111

 
$
15,111

 
$
5,184

 
$
9,927

 
$
0

Restricted cash for securitization investors
 
710

 
710

 
710

 
0

 
0

Securities held to maturity
 
35,475

 
36,541

 
0

 
36,510

 
31

Net loans held for investment
 
237,327

 
239,295

 
0

 
0

 
239,295

Loans held for sale
 
1,829

 
1,846

 
0

 
1,846

 
0

Interest receivable
 
1,544

 
1,544

 
0

 
1,544

 
0

Other investments(1)
 
1,341

 
1,341

 
0

 
1,341

 
0

Financial liabilities:
 
 
 
 
 
 
 
 
 
 
Deposits with defined maturities
 
42,291

 
42,383

 
0

 
42,383

 
0

Securitized debt obligations
 
16,959

 
17,071

 
0

 
17,071

 
0

Senior and subordinated notes
 
31,822

 
32,259

 
0

 
32,259

 
0

Federal funds purchased and securities loaned or sold under agreements to repurchase
 
359

 
359

 
0

 
359

 
0

Interest payable
 
437

 
437

 
0

 
437

 
0

 
 
December 31, 2018
 
 
Carrying
Value
 
Estimated
Fair Value
 
Estimated Fair Value Hierarchy
(Dollars in millions)
 
 
 
Level 1
 
Level 2
 
Level 3
Financial assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
13,186

 
$
13,186

 
$
4,768

 
$
8,418

 
$
0

Restricted cash for securitization investors
 
303

 
303

 
303

 
0

 
0

Securities held to maturity
 
36,771

 
36,619

 
0

 
36,513

 
106

Net loans held for investment
 
238,679

 
241,556

 
0

 
0

 
241,556

Loans held for sale
 
1,192

 
1,218

 
0

 
1,218

 
0

Interest receivable
 
1,614

 
1,614

 
0

 
1,614

 
0

Other investments(1)
 
1,725

 
1,725

 
0

 
1,725

 
0

Financial liabilities:
 
 
 
 
 
 
 
 
 
 
Deposits with defined maturities
 
38,471

 
38,279

 
0

 
38,279

 
0

Securitized debt obligations
 
18,307

 
18,359

 
0

 
18,359

 
0

Senior and subordinated notes
 
30,826

 
30,635

 
0

 
30,635

 
0

Federal funds purchased and securities loaned or sold under agreements to repurchase
 
352

 
352

 
0

 
352

 
0

Other borrowings(2)
 
9,354

 
9,354

 
0

 
9,354

 
0

Interest payable
 
458

 
458

 
0

 
458

 
0

__________
(1) 
Other investments include FHLB and Federal Reserve stock. These investments are included in other assets on our consolidated balance sheets.
(2) 
Other borrowings excludes finance lease liabilities.

 
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13—BUSINESS SEGMENTS AND REVENUE FROM CONTRACTS WITH CUSTOMERS
Our principal operations are organized into three major business segments, which are defined primarily based on the products and services provided or the types 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 and residual tax expense or benefit to arrive at the consolidated effective tax rate that is not assessed to our primary business segments, are included in the Other category.
Basis of Presentation
We report the results of each of our business segments on a continuing operations basis. The results of our individual businesses reflect the manner in which management evaluates performance and makes decisions about funding our operations and allocating resources.
Business Segment Reporting Methodology
The results of our business segments are intended to present each segment as if it were a stand-alone business. Our internal management and reporting process used to derive our segment results employs various allocation methodologies, including funds transfer pricing, to assign certain balance sheet assets, deposits and other liabilities and their related revenue and expenses directly or indirectly attributable to each business segment. Our funds transfer pricing process provides a funds credit for sources of funds, such as deposits generated by our Consumer Banking and Commercial Banking businesses, and a funds charge for the use of funds by each segment. Due to the integrated nature of our business segments, estimates and judgments have been made in allocating certain revenue and expense items. Transactions between segments are based on specific criteria or approximate third-party rates. We regularly assess the assumptions, methodologies and reporting classifications used for segment reporting, which may result in the implementation of refinements or changes in future periods. We provide additional information on the allocation methodologies used to derive our business segment results in “Note 18—Business Segments and Revenue from Contracts with Customers” in our 2018 Form 10-K.
Segment Results and Reconciliation
We may periodically change our business segments or reclassify business segment results based on modifications to our management reporting methodologies or changes in organizational alignment. In the first quarter of 2019, we made a change in how revenue is measured in our Commercial Banking business by revising the allocation of tax benefits on certain tax-advantaged investments. As such, prior period results have been recast to conform with the current period presentation. The result of this measurement change reduced the previously reported total net revenue in our Commercial Banking business by $32 million and $62 million for the three and six months ended June 30, 2018, with an offsetting increase in the Other category. This change in measurement of our Commercial Banking revenue did not have any impact to the consolidated financial statements.

 
 
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents our business segment results for the three and six months ended June 30, 2019 and 2018, selected balance sheet data as of June 30, 2019 and 2018, and a reconciliation of our total business segment results to our reported consolidated income from continuing operations, loans held for investment and deposits.
Table 13.1: Segment Results and Reconciliation
 
 
Three Months Ended June 30, 2019
(Dollars in millions)
 
Credit
Card
 
Consumer
Banking
 
Commercial
Banking(1)(2)
 
Other(1)(2)
 
Consolidated
Total
Net interest income (loss)
 
$
3,531

 
$
1,709

 
$
514

 
$
(8
)
 
$
5,746

Non-interest income (loss)
 
1,038

 
166

 
200

 
(26
)
 
1,378

Total net revenue (loss)
 
4,569

 
1,875

 
714

 
(34
)
 
7,124

Provision for credit losses
 
1,095

 
165

 
82

 
0

 
1,342

Non-interest expense
 
2,253

 
1,002

 
427

 
97

 
3,779

Income (loss) from continuing operations before income taxes
 
1,221

 
708

 
205

 
(131
)
 
2,003

Income tax provision (benefit)
 
283

 
165

 
48

 
(109
)
 
387

Income (loss) from continuing operations, net of tax
 
$
938

 
$
543

 
$
157

 
$
(22
)
 
$
1,616

Loans held for investment
 
$
112,141

 
$
60,327

 
$
71,992

 
$
0

 
$
244,460

Deposits
 
0

 
205,220

 
30,761

 
18,554

 
254,535

 
 
Six Months Ended June 30, 2019
(Dollars in millions)
 
Credit
Card
 
Consumer
Banking
 
Commercial
Banking(1)(2)
 
Other(1)(2)
 
Consolidated
Total
Net interest income
 
$
7,121

 
$
3,388

 
$
1,003

 
$
25

 
$
11,537

Non-interest income (loss)
 
1,988

 
326

 
387

 
(31
)
 
2,670

Total net revenue (loss)
 
9,109

 
3,714

 
1,390

 
(6
)
 
14,207

Provision for credit losses
 
2,484

 
400

 
151

 
0

 
3,035

Non-interest expense
 
4,424

 
1,996

 
844

 
186

 
7,450

Income (loss) from continuing operations before income taxes
 
2,201

 
1,318

 
395

 
(192
)
 
3,722

Income tax provision (benefit)
 
512

 
307

 
92

 
(215
)
 
696

Income from continuing operations, net of tax
 
$
1,689

 
$
1,011

 
$
303

 
$
23

 
$
3,026

Loans held for investment
 
$
112,141

 
$
60,327

 
$
71,992

 
$
0

 
$
244,460

Deposits
 
0

 
205,220

 
30,761

 
18,554

 
254,535

 
 
Three Months Ended June 30, 2018
(Dollars in millions)
 
Credit
Card
 
Consumer
Banking
 
Commercial
Banking(1)(2)
 
Other(1)(2)
 
Consolidated
Total
Net interest income
 
$
3,396

 
$
1,609

 
$
517

 
$
29

 
$
5,551

Non-interest income
 
884

 
175

 
209

 
373

 
1,641

Total net revenue
 
4,280

 
1,784

 
726

 
402

 
7,192

Provision (benefit) for credit losses
 
1,171

 
118

 
34

 
(47
)
 
1,276

Non-interest expense
 
1,904

 
963

 
409

 
148

 
3,424

Income from continuing operations before income taxes
 
1,205

 
703

 
283

 
301

 
2,492

Income tax provision
 
282

 
164

 
66

 
63

 
575

Income from continuing operations, net of tax
 
$
923

 
$
539

 
$
217

 
$
238

 
$
1,917

Loans held for investment
 
$
109,777

 
$
58,727

 
$
67,609

 
$
11

 
$
236,124

Deposits
 
0

 
194,962

 
31,078

 
22,185

 
248,225




 
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


 
 
Six Months Ended June 30, 2018
(Dollars in millions)
 
Credit
Card
 
Consumer
Banking
 
Commercial
Banking(1)(2)
 
Other(1)(2)
 
Consolidated
Total
Net interest income
 
$
6,954

 
$
3,224

 
$
1,023

 
$
68

 
$
11,269

Non-interest income
 
1,741

 
349

 
396

 
346

 
2,832

Total net revenue
 
8,695

 
3,573

 
1,419

 
414

 
14,101

Provision (benefit) for credit losses
 
2,627

 
351

 
20

 
(48
)
 
2,950

Non-interest expense
 
3,943

 
1,963

 
812

 
279

 
6,997

Income from continuing operations before income taxes
 
2,125

 
1,259

 
587

 
183

 
4,154

Income tax provision (benefit)
 
495

 
294

 
137

 
(32
)
 
894

Income from continuing operations, net of tax
 
$
1,630

 
$
965

 
$
450

 
$
215

 
$
3,260

Loans held for investment
 
$
109,777

 
$
58,727

 
$
67,609

 
$
11

 
$
236,124

Deposits
 
0

 
194,962

 
31,078

 
22,185

 
248,225

__________    
(1) 
Some of our commercial investments generate tax-exempt income, tax credits or other tax benefits. Accordingly, we present our Commercial Banking revenue and yields on a taxable-equivalent basis, calculated using the federal statutory tax rate of 21% and state taxes where applicable, with offsetting reductions to the Other category.
(2) 
In the first quarter of 2019, we made a change in how revenue is measured in our Commercial Banking business by revising the allocation of tax benefits on certain tax-advantaged investments. As such, prior period results have been recast to conform with the current period presentation. The result of this measurement change reduced the previously reported total net revenue in our Commercial Banking business by $32 million and $62 million for the three and six months ended June 30, 2018, with an offsetting increase in the Other category.
 
 
 
 
 
 
 
 
 
 
 

Revenue from Contracts with Customers
The majority of our revenue from contracts with customers consists of interchange fees in our Credit Card business, service charges and other customer-related fees, and other contract revenue in our Consumer Banking and Commercial Banking businesses. Interchange fees are primarily from our Credit Card business and are recognized upon settlement with the interchange networks, net of rewards earned by customers. Service charges and other customer-related fees within our Consumer Banking business are primarily related to fees earned on consumer deposit accounts for account maintenance and various transaction-based services such as overdrafts and ATM usage. Service charges and other customer-related fees within our Commercial Banking business are mostly related to fees earned on treasury management and capital markets services. Other contract revenue consists primarily of revenue earned on certain marketing and promotional events from our auto dealers within our Consumer Banking business. Revenue from contracts with customers is included in non-interest income in our consolidated statements of income.
The following table presents revenue from contracts with customers and a reconciliation to non-interest income by business segment for the three and six months ended June 30, 2019 and 2018.
Table 13.2: Revenue from Contracts with Customers and Reconciliation to Segments Result
 
 
Three Months Ended June 30, 2019
(Dollars in millions)
 
Credit
Card
 
Consumer
Banking
 
Commercial
Banking(1)
 
Other(1)
 
Consolidated
Total
Contract revenue:
 
 
 
 
 
 
 
 
 
 
Interchange fees, net(2)
 
$
757

 
$
52

 
$
13

 
$
(2
)
 
$
820

Service charges and other customer-related fees
 
0

 
74

 
28

 
0

 
102

Other
 
20

 
26

 
1

 
0

 
47

Total contract revenue
 
777

 
152

 
42

 
(2
)
 
969

Revenue from other sources
 
261

 
14

 
158

 
(24
)
 
409

Total non-interest income
 
$
1,038

 
$
166

 
$
200

 
$
(26
)
 
$
1,378


 
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
 
Six Months Ended June 30, 2019
(Dollars in millions)
 
Credit
Card
 
Consumer
Banking
 
Commercial
Banking(1)
 
Other(1)
 
Consolidated
Total
Contract revenue:
 
 
 
 
 
 
 
 
 
 
Interchange fees, net(2)
 
$
1,459

 
$
98

 
$
24

 
$
(3
)
 
$
1,578

Service charges and other customer-related fees
 
0

 
149

 
53

 
0

 
202

Other
 
32

 
50

 
1

 
0

 
83

Total contract revenue
 
1,491

 
297

 
78

 
(3
)
 
1,863

Revenue from other sources
 
497

 
29

 
309

 
(28
)
 
807

Total non-interest income
 
$
1,988

 
$
326

 
$
387

 
$
(31
)
 
$
2,670

 
 
Three Months Ended June 30, 2018
(Dollars in millions)
 
Credit
Card
 
Consumer
Banking
 
Commercial
Banking(1)
 
Other(1)
 
Consolidated
Total
Contract revenue:
 
 
 
 
 
 
 
 
 
 
Interchange fees, net(2)
 
$
669

 
$
47

 
$
8

 
$
(1
)
 
$
723

Service charges and other customer-related fees
 
0

 
95

 
34

 
(1
)
 
128

Other
 
2

 
28

 
1

 
0

 
31

Total contract revenue
 
671

 
170

 
43

 
(2
)
 
882

Revenue from other sources
 
213

 
5

 
166

 
375

 
759

Total non-interest income
 
$
884

 
$
175

 
$
209

 
$
373

 
$
1,641

 
 
Six Months Ended June 30, 2018
(Dollars in millions)
 
Credit
Card
 
Consumer
Banking
 
Commercial
Banking(1)
 
Other(1)
 
Consolidated
Total
Contract revenue:
 
 
 
 
 
 
 
 
 
 
Interchange fees, net(2)
 
$
1,263

 
$
89

 
$
15

 
$
(1
)
 
$
1,366

Service charges and other customer-related fees
 
0

 
193

 
66

 
(1
)
 
258

Other
 
4

 
57

 
1

 
0

 
62

Total contract revenue
 
1,267

 
339

 
82

 
(2
)
 
1,686

Revenue from other sources
 
474

 
10

 
314

 
348

 
1,146

Total non-interest income
 
$
1,741

 
$
349

 
$
396

 
$
346

 
$
2,832

__________
(1) 
Some of our commercial investments generate tax-exempt income, tax credits or other tax benefits. Accordingly, we present our Commercial Banking revenue and yields on a taxable-equivalent basis, calculated using the federal statutory tax rate of 21% and state taxes where applicable, with offsetting reclassifications to the Other category.
(2) 
Interchange fees are presented net of customer rewards expenses.


 
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14—COMMITMENTS, CONTINGENCIES, GUARANTEES AND OTHERS
Commitments to Lend
Our unfunded lending commitments primarily consist of credit card lines, loan commitments to customers of both our Commercial Banking and Consumer Banking businesses, as well as standby and commercial letters of credit. These commitments, other than credit card lines, are legally binding conditional agreements that have fixed expirations or termination dates and specified interest rates and purposes. The contractual amount of these commitments represents the maximum possible credit risk to us should the counterparty draw upon the commitment. We generally manage the potential risk of unfunded lending commitments by limiting the total amount of arrangements, monitoring the size and maturity structure of these portfolios, and applying the same credit standards for all of our credit activities.
For unused credit card lines, we have not experienced and do not anticipate that all of our customers will access their entire available line at any given point in time. Commitments to extend credit other than credit card lines generally require customers to maintain certain credit standards. Collateral requirements and loan-to-value (“LTV”) ratios are the same as those for funded transactions and are established based on management’s credit assessment of the customer. These commitments may expire without being drawn upon; therefore, the total commitment amount does not necessarily represent future funding requirements.
We also issue letters of credit, such as financial standby, performance standby and commercial letters of credit, to meet the financing needs of our customers. Standby letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party in a borrowing arrangement. Commercial letters of credit are short-term commitments issued primarily to facilitate trade finance activities for customers and are generally collateralized by the goods being shipped to the client. These collateral requirements are similar to those for funded transactions and are established based on management’s credit assessment of the customer. Management conducts regular reviews of all outstanding letters of credit and the results of these reviews are considered in assessing the adequacy of reserves for unfunded lending commitments.
The following table presents the contractual amount and carrying value of our unfunded lending commitments as of June 30, 2019 and December 31, 2018. The carrying value represents our reserve and deferred revenue on legally binding commitments.
Table 14.1: Unfunded Lending Commitments: Contractual Amount and Carrying Value
 
 
Contractual Amount
 
Carrying Value
(Dollars in millions)
 
June 30,
2019
 
December 31,
2018
 
June 30,
2019
 
December 31,
2018
Credit card lines
 
$
347,314

 
$
346,186

 
N/A

 
N/A

Other loan commitments(1)
 
34,768

 
34,449

 
$
117

 
$
95

Standby letters of credit and commercial letters of credit(2)
 
1,698

 
1,792

 
29

 
29

Total unfunded lending commitments
 
$
383,780

 
$
382,427

 
$
146

 
$
124

__________
(1) 
Includes $1.5 billion and $1.3 billion of advised lines of credit as of June 30, 2019 and December 31, 2018, respectively.
(2) 
These financial guarantees have expiration dates ranging from 2019 to 2025 as of June 30, 2019.
Loss Sharing Agreements
Within our Commercial Banking business, we originate multifamily commercial real estate loans with the intent to sell them to the GSEs. We enter into loss sharing agreements with the GSEs upon the sale of the loans. At inception, we record a liability representing the fair value of our obligation which is subsequently amortized as we are released from risk of payment under the loss sharing agreement. If payment under the loss sharing agreement becomes probable and estimable, an additional liability may be recorded on the consolidated balance sheets and a non-interest expense may be recognized in the consolidated statements of income. The liability recognized on our consolidated balance sheets for these loss sharing agreements was $66 million and $59 million as of June 30, 2019 and December 31, 2018, respectively.


 
 
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.K. Payment Protection Insurance
In the U.K., we previously sold payment protection insurance (“PPI”). In response to an elevated level of customer complaints across the industry, heightened media coverage and pressure from consumer advocacy groups, the U.K. Financial Conduct Authority (“FCA”), formerly the Financial Services Authority, investigated and raised concerns about the way the industry has handled complaints related to the sale of these insurance policies. For the past several years, the U.K.’s Financial Ombudsman Service (“FOS”) has been adjudicating customer complaints relating to PPI, escalated to it by consumers who disagree with the rejection of their complaint by firms, leading to customer remediation payments by us and others within the industry. On March 2, 2017, the FCA issued a statement that sets out final rules and guidance on the PPI complaints deadline, which has been set as August 29, 2019. The statement also provides clarity on how to handle PPI complaints under s.140A of the Consumer Credit Act, including guidance on how redress for such complaints should be calculated. The final rules and guidance came into force on August 29, 2017.
In determining our best estimate of incurred losses for future remediation payments, management considers numerous factors, including (i) the number of customer complaints we expect in the future; (ii) our expectation of upholding those complaints; (iii) the expected number of complaints customers escalate to the FOS; (iv) our expectation of the FOS upholding such escalated complaints; (v) the number of complaints that fall under s.140A of the Consumer Credit Act; (vi) the number of litigation claims being pursued under s.140A of the Consumer Credit Act; and (vii) the estimated remediation payout to customers. We monitor these factors each quarter and adjust our reserves to reflect the latest data.
Management’s best estimate of U.K. PPI reserve totaled $71 million and $133 million as of June 30, 2019 and December 31, 2018, respectively. For the six months ended June 30, 2019, no additions were made to our reserve. Other movements to the reserve were a combination of utilization of the reserve through customer payments and foreign exchange movements. Our best estimate of reasonably possible future losses beyond our reserve as of June 30, 2019 is approximately $100 million.
Cybersecurity Incident
On July 29, 2019, we announced that on July 19, 2019, we determined there was unauthorized access by an outside individual who obtained certain types of personal information relating to people who had applied for our credit card products and to our credit card customers (the “Cybersecurity Incident”). The Cybersecurity Incident occurred on March 22 and 23, 2019. We believe that a highly sophisticated individual was able to exploit a specific configuration vulnerability in our infrastructure. The configuration vulnerability was reported to us by an external security researcher on July 17, 2019. We then began our own internal investigation, leading to the July 19, 2019, determination that the Cybersecurity Incident occurred. We immediately fixed the configuration vulnerability that this individual exploited and verified there are no other instances in our environment. Among other things, we also augmented our routine automated scanning to look for this issue on a continuous basis. We promptly began working with federal law enforcement. The person responsible was arrested by the Federal Bureau of Investigation on July 29, 2019 and federal prosecution of the responsible person commenced. Based on our analysis to date, we believe it is unlikely that the information was used for fraud or disseminated by this individual. Our assessment of the incident is ongoing and analysis is subject to change.
We expect to notify affected individuals through a variety of channels and make free credit monitoring and identity protection available to everyone affected. We have retained a leading independent cybersecurity firm to conduct a comprehensive assessment to confirm the scope of the access and the specific data impacted.
We are subject to private civil litigation relating to the Cybersecurity Incident and expect that future litigation may be filed. At this time, it is not possible to estimate an amount or a range of reasonably possible losses, if any, from these or any other claims.
We carry insurance to cover certain costs associated with a cyber risk event. This insurance is subject to a $10 million deductible and standard exclusions and carries a total coverage limit of $400 million. We expect that our insurance coverage will cover certain costs associated with the Cybersecurity Incident; however, there can be no assurance that our insurance coverage is sufficient to cover any losses arising from the incident. The timing of recognition of costs may differ from the timing of recognition of any insurance reimbursement. For more information, see “MD&A—Introduction—Cybersecurity Incident.”

 
 
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Litigation
In accordance with the current accounting standards for loss contingencies, we establish reserves for litigation related matters that arise from the ordinary course of our business activities when it is probable that a loss associated with a claim or proceeding has been incurred and the amount of the loss can be reasonably estimated. None of the amounts we currently have recorded individually or in the aggregate are considered to be material to our financial condition. Litigation claims and proceedings of all types are subject to many uncertain factors that generally cannot be predicted with assurance. Below we provide a description of potentially material legal proceedings and claims.
For some of the matters disclosed below, we are able to estimate reasonably possible losses above existing reserves, and for other disclosed matters, such an estimate is not possible at this time. For those matters below where an estimate is possible, management currently estimates the reasonably possible future losses beyond our reserves as of June 30, 2019 are approximately $1.1 billion. Our reserve and reasonably possible loss estimates involve considerable judgment and reflect that there is still significant uncertainty regarding numerous factors that may impact the ultimate loss levels. Notwithstanding our attempt to estimate a reasonably possible range of loss beyond our current accrual levels for some litigation matters based on current information, it is possible that actual future losses will exceed both the current accrual level and the range of reasonably possible losses disclosed here. Given the inherent uncertainties involved in these matters, especially those involving governmental agencies, and the very large or indeterminate damages sought in some of these matters, there is significant uncertainty as to the ultimate liability we may incur from these litigation matters and an adverse outcome in one or more of these matters could be material to our results of operations or cash flows for any particular reporting period.
Interchange
In 2005, a putative class of retail merchants filed antitrust lawsuits against MasterCard and Visa and several issuing banks, including Capital One, seeking both injunctive relief and monetary damages for an alleged conspiracy by defendants to fix the level of interchange fees. Other merchants have asserted similar claims in separate lawsuits, and while these separate cases did not name any issuing banks, Visa, MasterCard and issuers, including Capital One, have entered settlement and judgment sharing agreements allocating the liabilities of any judgment or settlement arising from all interchange-related cases.
The lawsuits were consolidated before the U.S. District Court for the Eastern District of New York for certain purposes and were settled in 2012. The class settlement, however, was invalidated by the United States Court of Appeals for the Second Circuit in June 2016, and the suit was separated into separate class actions seeking injunctive and monetary relief, respectively. In addition, numerous merchant groups opted out of the 2012 settlement and have pursued their own claims. The claims by the injunctive relief class have not been resolved, but the parties reached a new settlement agreement with the monetary damages class in August 2018, whereby the class would receive up to approximately $6.2 billion collectively from the defendants in exchange for a release of their claims, depending on the percentage of class plaintiffs who opt out. The trial court preliminarily approved the settlement in January 2019. Visa and MasterCard have also settled several of the opt-out cases, which required non-material payments from issuing banks, including Capital One. Visa created a litigation escrow account following its initial public offering of stock in 2008 that funds settlements for its member banks, and any settlements related to MasterCard-allocated losses have either already been paid or are reflected in our reserves.
Mortgage Representation and Warranty
We face residual exposure related to subsidiaries that originated residential mortgage loans and sold these loans to various purchasers, including purchasers who created securitization trusts. In connection with their sales of mortgage loans, these subsidiaries entered into agreements containing varying representations and warranties about, among other things, the ownership of the loan, the validity of the lien securing the loan, the loan’s compliance with any applicable criteria established by the purchaser, including underwriting guidelines and the existence of mortgage insurance, and the loan’s compliance with applicable federal, state and local laws. Each of these subsidiaries may be required to repurchase mortgage loans or indemnify certain purchasers and others against losses they incur in the event of certain breaches of these representations and warranties.
The substantial majority of our representation and warranty exposure has been resolved through litigation, and our remaining representation and warranty exposure is almost entirely litigation-related. Accordingly, we establish litigation reserves for representation and warranty losses that we consider to be both probable and reasonably estimable. The reserve process relies heavily on estimates, which are inherently uncertain, and requires the application of judgment. Our reserves and estimates of

 
 
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

reasonably possible losses could be impacted by claims which may be brought by securitization trustees and sponsors, bond-insurers, investors, and GSEs, as well as claims brought by governmental agencies.
Anti-Money Laundering
We are subject to an open consent order with the Office of the Comptroller of the Currency (“OCC”) dated July 10, 2015 relating to our anti-money laundering (“AML”) program. In October 2018, we paid a civil monetary penalty of $100 million to resolve the monetary component of the AML consent order. 
The Department of Justice and the New York District Attorney’s Office recently advised us that they have closed their investigations into certain former check casher clients of the Commercial Banking business and our AML program.  We are in discussions with the Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Department of Treasury to explore a potential regulatory resolution of its investigation into our AML program, which could include a monetary penalty.
Other Pending and Threatened Litigation
In addition, we are commonly subject to various pending and threatened legal actions relating to the conduct of our normal business activities. In the opinion of management, the ultimate aggregate liability, if any, arising out of all such other pending or threatened legal actions, is not expected to be material to our consolidated financial position or our results of operations.

 
 
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15—SUBSEQUENT EVENTS
On July 29, 2019, we announced the Cybersecurity Incident. For more information, see “MD&A—Introduction—Cybersecurity Incident” and “Note 14—Commitments, Contingencies, Guarantees and Others.”

 
 
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Item 3. Quantitative and Qualitative Disclosures about Market Risk
For a discussion of the quantitative and qualitative disclosures about market risk, see “MD&A—Market Risk Profile.”
Item 4. Controls and Procedures    
Overview
We are required under applicable laws and regulations to maintain controls and procedures, which include disclosure controls and procedures as well as internal control over financial reporting, as further described below.
(a) Disclosure Controls and Procedures
Disclosure controls and procedures refer to controls and other procedures designed to provide reasonable assurance that information required to be disclosed in our financial reports is recorded, processed, summarized and reported within the time periods specified by the U.S. Securities and Exchange Commission (“SEC”) rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding our required disclosure. In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and we must apply judgment in evaluating and implementing possible controls and procedures.
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15 of the Securities Exchange Act of 1934 (“Exchange Act”), our management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of June 30, 2019, the end of the period covered by this Report on Form 10-Q. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2019, at a reasonable level of assurance, in recording, processing, summarizing and reporting information required to be disclosed within the time periods specified by the SEC rules and forms.
(b) Changes in Internal Control Over Financial Reporting
We regularly review our disclosure controls and procedures and make changes intended to ensure the quality of our financial reporting. There were no changes in internal control over financial reporting that occurred in the second quarter of 2019 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 
 
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings
The information required by Item 103 of Regulation S-K is included in “Note 14—Commitments, Contingencies, Guarantees and Others.”
Item 1A. Risk Factors
We are not aware of any material changes from the risk factors set forth under “Part I—Item 1A. Risk Factors” in our 2018 Form 10-K other than in connection with the Cybersecurity Incident we announced on July 29, 2019, as reflected in the risk factors below:
We Face Risks Related To Our Operational, Technological And Organizational Infrastructure.
Our ability to retain and attract new customers depends on our ability to develop and maintain necessary operational, technological and organizational infrastructure and to adapt to rapid technological advances involving such infrastructure. In addition, our businesses are dependent on our ability to process, record and monitor a large number of complex transactions. Digital technology, data and software development are deeply embedded into our business model and how we work.
Similar to other large corporations, we are exposed to operational risk that can manifest itself in many ways, such as errors related to failed or inadequate processes, inaccurate models, faulty or disabled computer systems, fraud by employees or persons outside of our company and exposure to external events. In addition, we are heavily dependent on the security, capability and continuous availability of the technology systems that we use to manage our internal financial and other systems, monitor risk and compliance with regulatory requirements, provide services to our customers, develop and offer new products and communicate with stakeholders.
If we are unable to maintain the necessary operational, technological and organizational infrastructure to operate our business, including to maintain the security of that infrastructure, our business and reputation could be materially adversely affected. We may also be subject to disruptions to our operating systems arising from events that are wholly or partially beyond our control, which may include, for example, computer viruses, electrical or telecommunications outages, design flaws in foundational components or platforms, availability and quality of vulnerability patches from key vendors, cyber-attacks (including Distributed Denial of Service (“DDOS”) and other attacks on our infrastructure as discussed below), natural disasters, other damage to property or physical assets, or events arising from local or larger scale politics, including terrorist acts. Any failure to maintain our infrastructure or disruption of our operating systems could diminish our ability to operate our businesses, service customer accounts and protect customers’ information, or result in potential liability to customers, reputational damage, regulatory intervention and customers’ loss of confidence in our businesses, any of which could result in a material adverse effect. Our assessment is ongoing, and the impact on our business, operations and reputation from, and expenses and uncertainties associated with, the Cybersecurity Incident are difficult to predict and could be material.
We also rely on the business infrastructure and systems of third parties with which we do business and to whom we outsource the operation, maintenance and development of our information technology and communications systems. We have migrated substantially all, and intend to migrate all, of our core information technology systems and customer-facing applications to third-party cloud infrastructure platforms, principally AWS. If we do not complete the transition or fail to administer these new environments in a well-managed, secure and effective manner, or if AWS platforms become unavailable for any reason, we may experience unplanned service disruption or unforeseen costs which could result in material harm to our business and operating results. We must successfully implement information, financial reporting, data-protection and other controls adapted to our reliance on outside platforms and providers. In addition, AWS, or other service providers, could experience system breakdowns or failures, outages, downtime, cyber-attacks, adverse changes to financial condition, bankruptcy, or other adverse conditions, which could have a material adverse effect on our business and reputation. Thus, the substantial amount of our infrastructure that we outsource to the cloud or to other third parties may increase our risk exposure.
Any disruptions, failures or inaccuracies of our operational and technology systems and models, including those associated with improvements or modifications to such systems and models, could cause us to be unable to market and manage our products and services, manage our risk, meet our regulatory obligations or report our financial results in a timely and accurate manner, all of

 
 
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which could have a negative impact on our results of operations. In addition, our ongoing investments in infrastructure, which are necessary to maintain a competitive business, integrate acquisitions and establish scalable operations, may increase our expenses. As our business develops, changes or expands, additional expenses can arise as a result of a reevaluation of business strategies, management of outsourced services, asset purchases or other acquisitions, structural reorganization, compliance with new laws or regulations, or the integration of newly acquired businesses, or the occurrence of incidents such as the Cybersecurity Incident. If we are unable to successfully manage our expenses, our financial results will be negatively affected.
Increased Costs, Reductions In Revenue, Reputational Damage And Business Disruptions Can Result From The Theft, Loss Or Misuse Of Information, Including As A Result Of A Cyber-Attack.
On July 29, 2019, we announced that on July 19, 2019, we determined there was unauthorized access by an outside individual who obtained certain types of personal information relating to people who had applied for our credit card products and to our credit card customers. We may incur significant costs in connection with the Cybersecurity Incident and any future cybersecurity incidents, including infrastructure investments or remediation efforts. For more information regarding the Cybersecurity Incident, see “Part I—Item 2. MD&A—Introduction–Cybersecurity Incident” and “Part I—Item 1. Notes to Consolidated Financial Statements—Note 14. Commitments, Contingencies, Guarantees and Others.”
Our products and services involve the gathering, authentication, management, processing, storage and transmission of sensitive and confidential information regarding our customers and their accounts, our employees and third parties with which we do business. Our ability to provide such products and services, many of which are web-based, depends upon the management and safeguarding of information, software, methodologies and business secrets. To provide these products and services to, as well as communicate with, our customers, we rely on information systems and infrastructure, including digital technologies, computer and email systems, software, networks and other web-based technologies, that we and third-party service providers operate. We also have arrangements in place with third parties through which we share and receive information about their customers who are or may become our customers.
Technologies, systems, networks and devices of Capital One or our customers, employees, service providers or other third parties with whom we interact continue to be the subject of attempted unauthorized access, mishandling or misuse of information, denial-of-service attacks, computer viruses, website defacement, hacking, malware, ransomware, phishing or other forms of social engineering, and other forms of cyber-attacks designed to obtain confidential information, destroy data, disrupt or degrade service, sabotage systems or cause other damage, and other events. These threats, such as the Cybersecurity Incident that we announced on July 29, 2019, may derive from human error, fraud or malice on the part of our employees, insiders or third parties or may result from accidental technological failure. Any of these parties may also attempt to fraudulently induce employees, customers, or other third-party users of our systems to disclose sensitive information in order to gain access to our data or that of our customers or third parties with whom we interact. Further, cyber and information security risks for large financial institutions like us have generally increased in recent years in part because of the proliferation of new technologies, the use of the internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, perpetrators of fraud, hackers, terrorists, activists, formal and informal instrumentalities of foreign governments and other external parties. In addition, our customers access our products and services using computers, smartphones, tablets, and other mobile devices that are beyond our security control systems.
The methods and techniques employed by perpetrators of fraud and others to attack, disable, degrade or sabotage platforms, systems and applications change frequently, are increasingly sophisticated and often are not fully recognized or understood until after they have occurred, and some techniques could occur and persist for an extended period of time before being detected. For example, although we immediately fixed the configuration vulnerability that was exploited in the Cybersecurity Incident once we discovered the unauthorized access, a period of time elapsed between the occurrence of the unauthorized access and the time when we discovered it. In other circumstances, we and our third-party service providers and partners may be unable to anticipate or identify certain attack methods in order to implement effective preventative measures or mitigate or remediate the damages caused in a timely manner. We may also be unable to hire and develop talent capable of detecting, mitigating or remediating these risks. Although we seek to maintain a robust suite of authentication and layered information security controls, including our cyber threat analytics, data encryption and tokenization technologies, anti-malware defenses and vulnerability management program, any one or combination of these controls could fail to detect, mitigate or remediate these risks in a timely manner. We will likely face an increasing number of attempted cyber-attacks as we expand our mobile- and other internet-based products and services, as well as our usage of mobile and cloud technologies and as we provide more of these services to a greater number of retail clients.
A disruption or breach, including as a result of a cyber-attack such as the Cybersecurity Incident, or media reports of perceived security vulnerabilities at Capital One or at third-party service providers, could result in significant legal and financial exposure,

 
 
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regulatory intervention, remediation costs, card reissuance, supervisory liability, damage to our reputation or loss of confidence in the security of our systems, products and services that could adversely affect our business. We and other U.S. financial services providers continue to be targeted with evolving and adaptive cybersecurity threats from sophisticated third parties. We are continuing to assess the impact of the Cybersecurity Incident and there can be no assurance that additional unauthorized access or cyber incidents will not occur or that we will not suffer material losses in the future. Unauthorized access or cyber incidents could occur more frequently and on a more significant scale. If future attacks like these are successful or if customers are unable to access their accounts online for other reasons, it could adversely impact our ability to service customer accounts or loans, complete financial transactions for our customers or otherwise operate any of our businesses or services. In addition, a breach or attack affecting one of our third-party service providers or partners could harm our business even if we do not control the service that is attacked.
In addition, the increasing prevalence and the evolution of cyber-attacks and other efforts to breach or disrupt our systems or those of our partners, retailers or other market participants has led, and will likely continue to lead, to increased costs to us with respect to preventing, mitigating and remediating these risks, as well as any related attempted fraud. We are still assessing the impact of the Cybersecurity Incident and in order to address ongoing and future risks, we may be required to expend significant additional resources to continue to modify or strengthen our protective security measures, investigate and remediate any vulnerabilities of our information systems and infrastructure or invest in new technology designed to mitigate security risks. For example, various retailers have continued to be victims of cyber-attacks in which customer data, including debit and credit card information, was obtained. In these situations, we incur a variety of costs, including those associated with replacing the compromised cards and remediating fraudulent transaction activity. Further, the Cybersecurity Incident, or successful cyber-attacks at other large financial institutions or other market participants (whether or not we are impacted), could lead to a general loss of customer confidence in financial institutions that could negatively affect us, including harming the market perception of the effectiveness of our security measures or the financial system in general which could result in reduced use of our financial products. We have insurance against some cyber-risks and attacks, including insurance that is expected to cover certain costs associated with the Cybersecurity Incident; nonetheless, our insurance coverage may not be sufficient to offset the impact of a material loss event, and such insurance may increase in cost or cease to be available on commercial terms in the future.
Potential Data Protection And Privacy Incidents, And Our Required Compliance With Regulations Related To These Areas, May Increase Our Costs, Reduce Our Revenue And Limit Our Ability To Pursue Business Opportunities.
We are continuing to assess the effects of the Cybersecurity Incident and the impact on our business, results of operations and reputation remain uncertain. In addition, if other information systems or infrastructure or those of our customers, partners, service providers or other market participants experience a significant disruption or breach, it could lead, depending on the nature of the disruption or breach, to the unauthorized access to and release, gathering, monitoring, misuse, loss or destruction of personal or confidential data about our customers, employees or other third parties in our possession. Any party that obtains this personal or confidential data through a breach or disruption may use this information for ransom, to be paid by us or a third-party, as part of a fraudulent activity that is part of a broader criminal activity, or for other illicit purposes. Further, such disruption or breach could also result in unauthorized access to our proprietary information, intellectual property, software, methodologies and business secrets and in unauthorized transactions in Capital One accounts or unauthorized access to personal or confidential information maintained by those entities. There has been a significant proliferation of consumer information available on the internet resulting from breaches of third-party entities, including personal information, log-in credentials and authentication data. While we were not directly involved in these third-party breach events, the stolen information can create a vulnerability for our customers if their Capital One log-in credentials are the same as or similar to the credentials that have been compromised on other sites. This vulnerability could include the risk of unauthorized account access, data loss and fraud. The use of artificial intelligence, “bots” or other automation software, can increase the velocity and efficacy of these types of attacks.
We are continuing to assess the impact of the Cybersecurity Incident; however, this incident or other future data protection incidents, or media reports of perceived security vulnerabilities at Capital One or at third-party service providers, could result in significant legal and financial exposure, regulatory intervention, remediation costs, card reissuance, supervisory liability, damage to our reputation or loss of confidence in the security of our systems, products and services that could adversely affect our business.
We regularly move data across national borders to conduct our operations, and consequently are subject to a variety of continuously evolving and developing laws and regulations in the United States and abroad regarding privacy, data protection and data security, including those related to the collection, storage, handling, use, disclosure, transfer and security of personal data. Significant uncertainty exists as privacy and data protection laws may be interpreted and applied differently from country to country and may create inconsistent or conflicting requirements. For example, in Canada we are subject to the Personal Information Protection and Electronic Documents Act (“PIPEDA”). In addition, the GDPR applies EU data protection law to all companies processing data of EU residents, regardless of the company’s location. These laws impose strict requirements regarding the handling and retention

 
 
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of personal data, with severe monetary penalties for violations. Our efforts to comply with PIPEDA, GDPR and other privacy and data protection laws entail substantial expenses, may divert resources from other initiatives and projects, and could limit the services we are able to offer. Furthermore, enforcement actions and investigations by regulatory authorities related to data security incidents and privacy violations continue to increase. The enactment of more restrictive laws, rules, regulations, or future enforcement actions or investigations could impact us through increased costs or restrictions on our business, and noncompliance could result in monetary or other penalties and significant legal liability.
Our Businesses Are Subject To The Risk Of Increased Litigation, Government Investigations And Regulatory Enforcement.
Our businesses are subject to increased litigation, government investigations and other regulatory enforcement risks as a result of a number of factors and from various sources, including the highly regulated nature of the financial services industry, the focus of state and federal prosecutors on banks and the financial services industry and the structure of the credit card industry. Given the inherent uncertainties involved in litigation, government investigations and regulatory enforcement decisions, and the very large or indeterminate damages sought in some matters asserted against us, there can be significant uncertainty as to the ultimate liability we may incur from these kinds of matters. The finding, or even the assertion, of substantial legal liability against us could have a material adverse effect on our business and financial condition and could cause significant reputational harm to us, which could seriously harm our business. Although we are continuing to assess the impact of the Cybersecurity Incident, this incident may expose us to the risk of litigation, government investigation and other regulatory enforcement risks.
In addition, financial institutions, such as ourselves, face significant regulatory scrutiny, which can lead to public enforcement actions. We and our subsidiaries are subject to comprehensive regulation and periodic examination by the Federal Reserve, the SEC, OCC, FDIC and CFPB. We have been subject to enforcement actions by many of these and other regulators and may continue to be involved in such actions, including governmental inquiries, investigations and enforcement proceedings, including by the OCC, Department of Justice, Financial Crimes Enforcement Network (“FinCEN”) and state Attorneys General.
We expect that regulators and governmental enforcement bodies will continue taking formal enforcement actions against financial institutions in addition to addressing supervisory concerns through non-public supervisory actions or findings, which could involve restrictions on our activities, among other limitations that could adversely affect our business. In addition, a violation of law or regulation by another financial institution is likely to give rise to an investigation by regulators and other governmental agencies of the same or similar practices by us. In addition, a single event may give rise to numerous and overlapping investigations and proceedings. These and other initiatives from governmental authorities and officials may subject us to further judgments, settlements, fines or penalties, or cause us to restructure our operations and activities or to cease offering certain products or services, all of which could harm our reputation or lead to higher operational costs. Litigation, government investigations and other regulatory actions could involve restrictions on our activities, generally subject us to significant fines, increased expenses, restrictions on our activities and damage to our reputation and our brand, and could adversely affect our business, financial condition and results of operations. For additional information regarding legal and regulatory proceedings that we are subject to, see “Note 19—Commitments, Contingencies, Guarantees and Others.”
Reputational Risk And Social Factors May Impact Our Results And Damage Our Brand.
Our ability to originate and maintain accounts is highly dependent upon the perceptions of consumer and commercial borrowers and deposit holders and other external perceptions of our business and compliance practices or our financial health. In addition, our brand has historically been, and we expect it to continue to be, very important to us. Maintaining and enhancing our brand will depend largely on our ability to continue to provide high-quality products and services. Adverse perceptions regarding our reputation in the consumer, commercial and funding markets, including as a result of the Cybersecurity Incident, could lead to difficulties in generating and maintaining accounts as well as in financing them. In particular, negative public perceptions regarding our reputation, including negative perceptions regarding our ability to maintain the security of our technology systems and protect customer data, could lead to decreases in the levels of deposits that consumer and commercial customers and potential customers choose to maintain with us or significantly increase the costs of attracting and retaining customers. In addition, negative perceptions regarding certain industries, partners or clients could also prompt us to cease business activities associated with those entities.
Negative public opinion or damage to our brand could also result from actual or alleged conduct in any number of activities or circumstances, including lending practices, regulatory compliance, security breaches (including the use and protection of customer information, such as a result of the Cybersecurity Incident), corporate governance and sales and marketing, and from actions taken by regulators or other persons in response to such conduct. Such conduct could fall short of our customers’ and the public’s heightened expectations of companies of our size with rigorous data, privacy and compliance practices, and could further harm our reputation. In addition, our cobrand and private label partners or other third parties with whom we have important relationships

 
 
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Capital One Financial Corporation (COF)

may take actions over which we have limited control that could negatively impact perceptions about us or the financial services industry. The proliferation of social media may increase the likelihood that negative public opinion from any of the events discussed above will impact our reputation and business.
In addition, a variety of social factors may cause changes in borrowing activity, including credit card use, payment patterns and the rate of defaults by account holders and borrowers domestically and internationally. These social factors include changes in consumer confidence levels, the public’s perception regarding the banking industry and consumer debt, including credit card use, and changing attitudes about the stigma of bankruptcy. If consumers develop or maintain negative attitudes about incurring debt, or if consumption trends decline or if we fail to maintain and enhance our brand, or we incur significant expenses in this effort, our business and financial results could be materially and negatively affected.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table presents information related to repurchases of shares of our common stock for each calendar month in the second quarter of 2019. Commission costs are excluded from the amounts presented below.
 
 
Total
Number
of Shares
Purchased(1)
 
Average
Price Paid
per Share
April
 
1,845

 
$
85.31

May
 
19,325

 
92.61

June
 
—

 
—

Total
 
21,170

 
91.97

__________
(1) 
Represents shares withheld to cover taxes on restricted stock units whose restrictions have lapsed.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
An index to exhibits has been filed as part of this Report and is incorporated herein by reference.

 
 
137
Capital One Financial Corporation (COF)

EXHIBIT INDEX
The following exhibits are incorporated by reference or filed herewith. Reference to the “2003 Form 10-K” is to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, filed on March 5, 2004.
Exhibit No.
 
Description
3.1
 
Restated Certificate of Incorporation of Capital One Financial Corporation (as restated April 30, 2015) (incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K, filed on May 4, 2015).
3.2
 
Amended and Restated Bylaws of Capital One Financial Corporation, dated October 5, 2015 (incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K, filed on October 5, 2015).
3.3.1
 
Certificate of Designations of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series B, dated August 16, 2012 (incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K, filed on August 20, 2012).
3.3.2
 
Certificate of Designations of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series C, dated June 11, 2014 (incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K, filed June 12, 2014).
3.3.3
 
Certificate of Designations of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series D, dated October 29, 2014 (incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K, filed October 31, 2014).
3.3.4
 
Certificate of Designations of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series E, dated May 12, 2015 (incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K, filed May 14, 2015).
3.3.5
 
Certificate of Designations of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series F, dated August 20, 2015 (incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K, filed August 24, 2015).
3.3.6
 
Certificate of Designations of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series G, dated July 28, 2016 (incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K, filed July 29, 2016).
3.3.7
 
Certificate of Designations of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series H, dated November 28, 2016 (incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K, filed on November 29, 2016).
4.1.1
 
Specimen certificate representing the common stock of Capital One Financial Corporation (incorporated by reference to Exhibit 4.1 of the 2003 Form 10-K).
4.1.2
 
Warrant Agreement, dated December 3, 2009, between Capital One Financial Corporation and Computershare Trust Company, N.A. (incorporated by reference to the Exhibit 4.1 of the Form 8-A, filed on December 4, 2009).
4.1.3
 
Deposit Agreement, dated August 20, 2012 (incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K, filed on August 20, 2012).
4.2
 
Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, copies of instruments defining the rights of holders of long-term debt are not filed. The Company agrees to furnish a copy thereof to the SEC upon request.
10.1+
 
Fifth Amended and Restated 2004 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K, filed May 3, 2019).
10.2+*
 
Form of Restricted Stock Unit Award Agreement granted to our directors under the Fifth Amended and Restated 2004 Stock Incentive Plan.
31.1*
 
Certification of Richard D. Fairbank.
31.2*
 
Certification of R. Scott Blackley.
32.1**
 
Certification of Richard D. Fairbank.
32.2**
 
Certification of R. Scott Blackley.
101.INS
 
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH*
 
XBRL Taxonomy Extension Schema Document.
101.CAL*
 
XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*
 
XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*
 
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*
 
XBRL Taxonomy Extension Presentation Linkbase Document.
104*
 
The cover page of Capital One Financial Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, formatted in Inline XBRL (included within the Exhibit 101 attachments).
__________
+
Represents a management contract or compensatory plan or arrangement.
*
Indicates a document being filed with this Form 10-Q.
**
Indicates a document being furnished with this Form 10-Q. Information in this Form 10-Q furnished herewith shall not be deemed to be “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section. Such exhibit shall not be deemed incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.

 
 
138
Capital One Financial Corporation (COF)

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
CAPITAL ONE FINANCIAL CORPORATION
 
 
 
 
 
 
 
Date: July 30, 2019
 
By:
 
/s/ R. SCOTT BLACKLEY
 
 
 
 
 
R. Scott Blackley
 
 
 
 
 
Chief Financial Officer
 


 
 
139
Capital One Financial Corporation (COF)

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