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CAPITAL ONE FINANCIAL CORP - Quarter Report: 2019 March (Form 10-Q)



______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________
FORM 10-Q
____________________________________
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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
(Former name, former address and former fiscal year, if changed since last report)
(Not applicable)
____________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes ý  No ¨
Indicate by check mark whether the registrant has submitted electronically 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  ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
  
Accelerated filer
 
¨
Non-accelerated filer
 
¨
  
Smaller reporting company
 
¨
 
 
 
 
Emerging growth company
 
¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a Shell Company (as defined in Rule 12b-2 of the Exchange Act) Yes ¨No ý

As of March 31, 2019, there were 469,596,514 shares of the registrant’s Common Stock outstanding.
______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________



TABLE OF CONTENTS
 
 
Page
PART I—FINANCIAL INFORMATION
 
 
 
 
 
 
 
Note 1—Summary of Significant Accounting Policies
 
 
Note 3—Investment Securities
 
Note 4—Loans
 
Note 5—Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments
 
Note 6—Variable Interest Entities and Securitizations
 
Note 7—Goodwill and Intangible Assets
 
Note 8—Deposits and Borrowings
 
Note 9—Derivative Instruments and Hedging Activities
 
Note 10—Stockholders’ Equity
 
Note 11—Earnings Per Common Share
 
Note 12—Fair Value Measurement
 
Note 13—Business Segments and Revenue from Contracts with Customers
 
Note 14—Commitments, Contingencies, Guarantees and Others
 
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)
 
Introduction
 
 
Executive Summary and Business Outlook
 
Consolidated Results of Operations
 
Consolidated Balance Sheets Analysis
 
 
Business Segment Financial Performance
 
Critical Accounting Policies and Estimates
 
Accounting Changes and Developments
 
Capital Management
 
Risk Management
 
Credit Risk Profile
 
Liquidity Risk Profile
 
Market Risk Profile
 
 
 

 
 
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Capital One Financial Corporation (COF)


 
Glossary and Acronyms
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
Item 4.
Controls and Procedures
 
 
 
PART II—OTHER INFORMATION
 
 
 
SIGNATURES

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

 
 
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PART I—FINANCIAL INFORMATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)
 
This discussion contains forward-looking statements that are based upon management’s current expectations and are subject to significant uncertainties and changes in circumstances. Please review “MD&A—Forward-Looking Statements” for more information on the forward-looking statements in this Quarterly Report on Form 10-Q (“this Report”).Our actual results may differ materially from those included in these forward-looking statements due to a variety of factors including, but not limited to, those described in“Part II—Item 1A. Risk Factors” in this Report and in “Part I—Item 1A. Risk Factors” in our 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 March 31, 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 March 31, 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 type of customer served: Credit Card, Consumer Banking and Commercial Banking. The operations of acquired businesses have been integrated into our existing business segments. Certain activities that are not part of a segment, such as management of our corporate investment portfolio, 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.
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.

 
 
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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.
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.
SUMMARY OF SELECTED FINANCIAL DATA
The following table presents selected consolidated financial data and performance from our results of operations for the first quarters of 2019 and 2018 and selected comparative balance sheet data as of March 31, 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 March 31,
(Dollars in millions, except per share data and as noted)
 
2019
 
2018
 
Change
Income statement
 
 
 
 
 
 
Net interest income
 
$
5,791

 
$
5,718

 
1
 %
Non-interest income
 
1,292

 
1,191

 
8

Total net revenue
 
7,083

 
6,909

 
3

Provision for credit losses
 
1,693

 
1,674

 
1

Non-interest expense:
 
 
 
 
 
 
Marketing
 
517

 
414

 
25

Operating expenses
 
3,154

 
3,159

 

Total non-interest expense
 
3,671

 
3,573

 
3

Income from continuing operations before income taxes
 
1,719

 
1,662

 
3

Income tax provision
 
309

 
319

 
(3
)
Income from continuing operations, net of tax
 
1,410

 
1,343

 
5

Income from discontinued operations, net of tax
 
2

 
3

 
(33
)
Net income
 
1,412

 
1,346

 
5

Dividends and undistributed earnings allocated to participating securities
 
(12
)
 
(10
)
 
20

Preferred stock dividends
 
(52
)
 
(52
)
 

Net income available to common stockholders
 
$
1,348

 
$
1,284

 
5

Common share statistics
 
 
 
 
 
 
Basic earnings per common share:
 
 
 
 
 
 
Net income from continuing operations
 
$
2.87

 
$
2.63

 
9
 %
Income from discontinued operations
 

 
0.01

 
**

Net income per basic common share
 
$
2.87

 
$
2.64

 
9

Diluted earnings per common share:
 
 
 
 
 


Net income from continuing operations
 
$
2.86

 
$
2.61

 
10

Income from discontinued operations
 

 
0.01

 
**

Net income per diluted common share
 
$
2.86

 
$
2.62

 
9

 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
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Three Months Ended March 31,
(Dollars in millions, except per share data and as noted)
 
2019
 
2018
 
Change
Weighted-average common shares outstanding (in millions):
 
 
 
 
 
 
Basic
 
469.4

 
486.9

 
(4
)%
Diluted
 
471.6

 
490.8

 
(4
)
Common shares outstanding (period-end, in millions)
 
469.6

 
485.9

 
(3
)
Dividends declared and paid per common share
 
$
0.40

 
$
0.40

 

Tangible book value per common share (period-end)(1)
 
72.86

 
61.29

 
19

Balance sheet (average balances)
 
 
 
 
 
 
Loans held for investment
 
$
241,959

 
$
249,726

 
(3
)%
Interest-earning assets
 
337,793

 
330,183

 
2

Total assets
 
370,394

 
362,049

 
2

Interest-bearing deposits
 
227,572

 
219,670

 
4

Total deposits
 
251,410

 
245,270

 
3

Borrowings
 
53,055

 
54,588

 
(3
)
Common equity
 
48,359

 
44,670

 
8

Total stockholders’ equity
 
52,720

 
49,031

 
8

Selected performance metrics
 
 
 
 
 
 
Purchase volume(2)
 
$
93,197

 
$
86,545

 
8
 %
Total net revenue margin(3)
 
8.39
%
 
8.37
%
 
2
bps
Net interest margin(4)
 
6.86

 
6.93

 
(7
)
Return on average assets
 
1.52

 
1.48

 
4

Return on average tangible assets(5)
 
1.59

 
1.55

 
4

Return on average common equity(6)
 
11.13

 
11.47

 
(34
)
Return on average tangible common equity (“TCE”)(7)
 
16.11

 
17.32

 
(121
)
Equity-to-assets ratio(8)
 
14.23

 
13.54

 
69

Non-interest expense as a percentage of average loans held for investment
 
6.07

 
5.72

 
35

Efficiency ratio(9)
 
51.83

 
51.72

 
11

Operating efficiency ratio(10)
 
44.53

 
45.72

 
(119
)
Effective income tax rate from continuing operations
 
18.0

 
19.2

 
(120
)
Net charge-offs
 
$
1,599

 
$
1,618

 
(1
)%
Net charge-off rate(11)
 
2.64
%
 
2.59
%
 
5
bps
(Dollars in millions, except as noted)

March 31, 2019
 
December 31, 2018
 
Change
Balance sheet (period-end)
 
 
 
 
 
 
Loans held for investment
 
$
240,273

 
$
245,899

 
(2
)%
Interest-earning assets
 
340,071

 
341,293

 

Total assets
 
373,191

 
372,538

 

Interest-bearing deposits
 
230,199

 
226,281

 
2

Total deposits
 
255,107

 
249,764

 
2

Borrowings
 
50,358

 
58,905

 
(15
)
Common equity
 
49,120

 
47,307

 
4

Total stockholders’ equity
 
53,481

 
51,668

 
4

Credit quality metrics
 
 
 
 
 


Allowance for loan and lease losses
 
$
7,313

 
$
7,220

 
1
 %
Allowance as a percentage of loans held for investment (“allowance coverage ratio”)
 
3.04
%
 
2.94
%
 
10
bps
30+ day performing delinquency rate
 
3.23

 
3.62

 
(39
)
30+ day delinquency rate
 
3.40

 
3.84

 
(44
)
Capital ratios
 
 

 
 
 


Common equity Tier 1 capital(12)
 
11.9
%
 
11.2
%
 
70
bps
Tier 1 capital(12)
 
13.4

 
12.7

 
70

Total capital(12)
 
15.8

 
15.1

 
70

Tier 1 leverage(12)
 
11.0

 
10.7

 
30

Tangible common equity(13)
 
9.6

 
9.1

 
50

Supplementary leverage(12)
 
9.3

 
9.0

 
30

Other
 
 
 
 
 


Employees (period end, in thousands)
 
48.8

 
47.6

 
3
 %

 
 
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__________
(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.

 
 
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EXECUTIVE SUMMARY AND BUSINESS OUTLOOK
Financial Highlights
We reported net income of $1.4 billion ($2.86 per diluted common share) on total net revenue of $7.1 billion for the first quarter of 2019. In comparison, we reported net income of $1.3 billion ($2.62 per diluted common share) on total net revenue of $6.9 billion for the first quarter of 2018.
Our common equity Tier 1 capital ratio as calculated under the Basel III Standardized Approach was 11.9% and 11.2% as of March 31, 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. See “MD&A—Capital Management—Dividend Policy and Stock Purchases” for additional information.
Below are additional highlights of our performance in the first quarter of 2019. These highlights are generally based on a comparison between the results of the first quarters 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 March 31, 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 increased by $66 million to $1.4 billion in the first quarter of 2019 compared to the first quarter of 2018 primarily driven by:
higher non-interest income largely due to an increase in net interchange fees, driven by higher purchase volume and the impact of updated rewards cost estimates; and
higher net interest income due to growth in our domestic credit card, commercial and auto loans portfolios, partially offset by lower net interest margin as well as the reduction in net interest income from the sale of our consumer home loan portfolio.
These drivers were partially offset by increased marketing expense.
Loans Held for Investment:
Period-end loans held for investment decreased by $5.6 billion to $240.3 billion as of March 31, 2019 from December 31, 2018 primarily driven by expected seasonal paydowns in our domestic credit card loan portfolio.
Average loans held for investment decreased by $7.8 billion to $242.0 billion in the first quarter of 2019 compared to the first quarter of 2018 primarily driven by the sale of our consumer home loan portfolio, partially offset by the growth in our commercial, auto and domestic credit card loan portfolios.
Net Charge-Off and Delinquency Metrics: Our net charge-off rate increased by 5 basis points to 2.64% in the first quarter of 2019 compared to the first quarter 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, auto and domestic credit card loan portfolios.
Our 30+ day delinquency rate decreased by 44 basis points to 3.40% as of March 31, 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 increased by $93 million to $7.3 billion as of March 31, 2019 from December 31, 2018 primarily driven by an allowance build in our commercial loan portfolio due to isolated credit deterioration and portfolio growth.
The allowance coverage ratio increased by 10 basis points to 3.04% as of March 31, 2019 from December 31, 2018 primarily driven by expected seasonal paydowns in our domestic credit card loan portfolio.

 
 
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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; or
any changes in laws, regulations or regulatory interpretations, in each case after the date as of which such statements are made.
See “MD&A—Forward-Looking Statements” in this Report for more information on the forward-looking statements 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 increases in deposit costs will have a negative impact on our net interest margin throughout 2019.
Marketing and Efficiency:
We expect full-year marketing for 2019 to be modestly higher than full-year 2018 and to exhibit 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 in 2021 we expect our full-year operating efficiency ratio, net of adjustments, to improve to 42%.
We expect operating efficiency ratio improvements to drive significant improvement in our total efficiency ratio by 2021.
Capital:
We expect that our capital and earnings are sufficient to support growth, the Walmart portfolio acquisition later in 2019, the phased-in impact of adopting CECL on January 1, 2020, as well as a capital distribution request for the 2019 CCAR cycle meaningfully higher than 2018, subject to regulatory approval.
Business Segment Expectations
Domestic Card:
We estimate the acquired Walmart portfolio will be in the low $8 billion range at the time of close, and the initial allowance build for this portfolio to be around $100 million. The actual portfolio size will depend on program performance between this point and acquisition and the actual initial allowance build will depend on the amount and characteristics of the portfolio, as well as economic conditions and our loss forecasts at acquisition.
We continue to expect $225 million in one-time expenses in 2019 to launch the new originations programs and integrate the acquired portfolio during 2019.
Consumer Banking:
We expect further increases in average deposit interest rate, as faster growth in higher rate deposits continues to change our product mix.

 
 
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Over the longer-term, we continue to expect that the charge-off rate in our auto finance business will increase gradually.
CONSOLIDATED RESULTS OF OPERATIONS
The section below provides a comparative discussion of our consolidated financial performance for the first quarters 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.

 
 
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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 first quarters 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 March 31,
 
 
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
 
$
111,456

 
$
4,395

 
15.77
%
 
$
109,502

 
$
4,173

 
15.24
 %
Consumer banking
 
59,065

 
1,203

 
8.15

 
75,104

 
1,286

 
6.85

Commercial banking(2)
 
72,362

 
833

 
4.61

 
65,975

 
683

 
4.14

Other
 
46

 
(63
)
 
**

 
325

 
(8
)
 
(9.85
)
Total loans, including loans held for sale
 
242,929

 
6,368

 
10.49

 
250,906

 
6,134

 
9.78

Investment securities
 
83,679

 
655

 
3.13

 
69,576

 
452

 
2.60

Cash equivalents and other interest-earning assets
 
11,185

 
69

 
2.47

 
9,701

 
51

 
2.10

Total interest-earning assets
 
337,793

 
7,092

 
8.40

 
330,183

 
6,637

 
8.04

Cash and due from banks
 
4,287

 
 
 
 
 
3,826

 
 
 
 
Allowance for loan and lease losses
 
(7,230
)
 
 
 
 
 
(7,503
)
 
 
 
 
Premises and equipment, net
 
4,280

 
 
 
 
 
4,139

 
 
 
 
Other assets
 
31,264

 
 
 
 
 
31,404

 
 
 
 
Total assets
 
$
370,394

 
 
 
 
 
$
362,049

 
 
 
 
Liabilities and stockholders’ equity:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits
 
$
227,572

 
$
817

 
1.44
%
 
$
219,670

 
$
539

 
0.98
 %
Securitized debt obligations
 
18,747

 
143

 
3.05

 
19,698

 
107

 
2.17

Senior and subordinated notes
 
30,836

 
314

 
4.07

 
30,430

 
251

 
3.30

Other borrowings and liabilities
 
4,684

 
27

 
2.34

 
6,849

 
22

 
1.28

Total interest-bearing liabilities
 
281,839

 
1,301

 
1.85

 
276,647

 
919

 
1.33

Non-interest-bearing deposits
 
23,838

 
 
 
 
 
25,600

 
 
 
 
Other liabilities
 
11,997

 
 
 
 
 
10,771

 
 
 
 
Total liabilities
 
317,674

 
 
 
 
 
313,018

 
 
 
 
Stockholders’ equity
 
52,720

 
 
 
 
 
49,031

 
 
 
 
Total liabilities and stockholders’ equity
 
$
370,394

 
 
 
 
 
$
362,049

 
 
 
 
Net interest income/spread
 
$
5,791

 
6.55

 
 
 
$
5,718

 
6.71

Impact of non-interest-bearing funding
 
0.31

 
 
 
 
 
0.22

Net interest margin
 
6.86
%
 
 
 
 
 
6.93
 %
__________
(1) 
Past due fees included in interest income totaled approximately $395 million and $403 million in the first quarters of 2019 and 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 banking loans totaled approximately $21 million and $20 million in the first quarters of 2019 and 2018, respectively, with corresponding reductions to the Other category.
**    Not meaningful.

 
 
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Net interest income increased by $73 million to $5.8 billion in the first quarter of 2019 compared to the first quarter of 2018, primarily driven by growth in our domestic credit card, commercial and auto loans portfolios, partially offset by lower net interest margin as well as the reduction in net interest income from the sale of our consumer home loan portfolio.
Net interest margin decreased by 7 basis points to 6.86% in the first quarter of 2019 compared to the first quarter of 2018, driven by an increase on the average deposit rate paid due to deposit mix changes.
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 March 31,
 
 
2019 vs. 2018
(Dollars in millions)
 
Total Variance
 
Volume
 
Rate
Interest income:
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
Credit card
 
$
222

 
$
75

 
$
147

Consumer banking
 
(83
)
 
(275
)
 
192

Commercial banking(2)
 
150

 
69

 
81

Other(2)
 
(55
)
 
55

 
(110
)
Total loans, including loans held for sale
 
234

 
(76
)
 
310

Investment securities
 
203

 
100

 
103

Cash equivalents and other interest-earning assets
 
18

 
8

 
10

Total interest income
 
455

 
32

 
423

Interest expense:
 
 
 
 
 
 
Interest-bearing deposits
 
278

 
20

 
258

Securitized debt obligations
 
36

 
(5
)
 
41

Senior and subordinated notes
 
63

 
3

 
60

Other borrowings and liabilities
 
5

 
(7
)
 
12

Total interest expense
 
382

 
11

 
371

Net interest income
 
$
73

 
$
21

 
$
52

__________
(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.

 
 
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Non-Interest Income
Table 4 displays the components of non-interest income for the first quarters of 2019 and 2018.
Table 4: Non-Interest Income
 
 
Three Months Ended March 31,
(Dollars in millions)
 
2019
 
2018
Interchange fees, net
 
$
758

 
$
643

Service charges and other customer-related fees
 
353

 
432

Net securities gains
 
24

 
8

Other non-interest income:
 
 
 
 
Mortgage banking revenue
 
46

 
38

Treasury and other investment income
 
56

 
8

Other
 
55

 
62

Total other non-interest income
 
157

 
108

Total non-interest income
 
$
1,292

 
$
1,191

Non-interest income increased by $101 million to $1.3 billion in the first quarter of 2019 compared to the first quarter of 2018 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 higher treasury and other investment income, partially offset by lower service charges and other customer-related fees.
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 remained flat at $1.7 billion in the first quarter of 2019 compared to the first quarter of 2018 as higher provision in our commercial loan portfolio due to isolated credit deterioration and portfolio growth was largely offset by lower provision in our credit card loan portfolio as a result of a smaller allowance build. The provision for credit losses as a percentage of net interest income was 29.2% and 29.3% in the first quarters of 2019 and 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.

 
 
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Non-Interest Expense
Table 5 displays the components of non-interest expense for the first quarters of 2019 and 2018.
Table 5: Non-Interest Expense
 
 
Three Months Ended March 31,
(Dollars in millions)
 
2019
 
2018
Salaries and associate benefits
 
$
1,573

 
$
1,520

Occupancy and equipment
 
493

 
490

Marketing
 
517

 
414

Professional services
 
291

 
210

Communications and data processing
 
303

 
306

Amortization of intangibles
 
30

 
44

Other non-interest expense:
 
 
 
 
Bankcard, regulatory and other fee assessments
 
87

 
169

Collections
 
95

 
108

Fraud losses
 
103

 
97

Other
 
179

 
215

Total other non-interest expense
 
464

 
589

Total non-interest expense
 
$
3,671

 
$
3,573

Non-interest expense increased by $98 million to $3.7 billion in the first quarter of 2019 compared to the first quarter of 2018 primarily due to higher marketing expense as well as higher operating expenses associated with continued investments in technology and infrastructure, partially offset by lower bankcard, regulatory and other fee assessments.
Income Taxes
We recorded income tax provisions of $309 million (18.0% effective income tax rate) and $319 million (19.2% effective income tax rate) in the first quarters of 2019 and 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 first quarter of 2019 compared to the first quarter of 2018 was primarily due to higher tax credits and lower non-deductible expenses relative to our income, partially offset by lower discrete tax benefits.
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.
CONSOLIDATED BALANCE SHEETS ANALYSIS
Total assets increased by $653 million to $373.2 billion as of March 31, 2019 from December 31, 2018 driven by an increase in cash and cash equivalents as well as restricted cash for securitization investors, largely offset by a decrease in loans held for investment primarily due to the expected seasonal paydowns in our domestic credit card loan portfolio.
Total liabilities decreased by $1.2 billion to $319.7 billion as of March 31, 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 $1.8 billion to $53.5 billion as of March 31, 2019 from December 31, 2018 primarily due to our net income of $1.4 billion and $603 million of other comprehensive income in the first quarter 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 quarter of 2019. Period-end balance sheet amounts may vary from average balance sheet amounts due to liquidity and balance sheet

 
 
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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 portfolio, as of both March 31, 2019 and December 31, 2018.
The fair value of our available for sale securities portfolio decreased by $262 million to $45.9 billion as of March 31, 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 increased by $336 million to $37.0 billion as of March 31, 2019 from December 31, 2018 primarily driven by fair value gains as a result of changes in interest rates.
Table 6 presents the amortized cost, carrying value and fair value for the major categories of our investment securities portfolio as of March 31, 2019 and December 31, 2018.
Table 6: Investment Securities
 
 
March 31, 2019
 
December 31, 2018
(Dollars in millions)
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Investment securities available for sale:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
4,136

 
$
4,127

 
$
6,146

 
$
6,144

RMBS:
 
 
 
 
 
 
 
 
Agency
 
33,621

 
33,145

 
32,710

 
31,903

Non-agency
 
1,404

 
1,720

 
1,440

 
1,742

Total RMBS
 
35,025

 
34,865

 
34,150

 
33,645

Agency CMBS
 
5,346

 
5,322

 
4,806

 
4,739

Other securities(1)
 
1,575

 
1,574

 
1,626

 
1,622

Total investment securities available for sale
 
$
46,082

 
$
45,888

 
$
46,728

 
$
46,150

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in millions)
 
Carrying Value
 
Fair
Value
 
Carrying Value
 
Fair
Value
Investment securities held to maturity:
 
 
 
 
 
 
 
 
Agency RMBS
 
$
32,668

 
$
33,107

 
$
33,061

 
$
32,977

Agency CMBS
 
3,835

 
3,848

 
3,710

 
3,642

Total investment securities held to maturity
 
$
36,503

 
$
36,955

 
$
36,771

 
$
36,619

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

 
 
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Loans Held for Investment
Total loans held for investment consists of both unsecuritized loans and loans held in our consolidated trusts. Table 7 summarizes the carrying value of our portfolio of loans held for investment by portfolio segment, the allowance for loan and lease losses, and net loan balance as of March 31, 2019 and December 31, 2018.
Table 7: Loans Held for Investment
 
 
March 31, 2019
 
December 31, 2018
(Dollars in millions)
 
Loans
 
Allowance
 
Net Loans
 
Loans
 
Allowance
 
Net Loans
Credit Card
 
$
109,836

 
$
5,568

 
$
104,268

 
$
116,361

 
$
5,535

 
$
110,826

Consumer Banking
 
59,248

 
1,062

 
58,186

 
59,205

 
1,048

 
58,157

Commercial Banking
 
71,189

 
683

 
70,506

 
70,333

 
637

 
69,696

Total
 
$
240,273

 
$
7,313

 
$
232,960

 
$
245,899

 
$
7,220

 
$
238,679

Loans held for investment decreased by $5.6 billion to $240.3 billion as of March 31, 2019 from December 31, 2018 primarily driven by expected seasonal paydowns in our domestic credit card loan portfolio.
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.”
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 March 31, 2019 and December 31, 2018.
Table 8: Funding Sources Composition
 
 
March 31, 2019
 
December 31, 2018
(Dollars in millions)
 
Amount
 
% of Total
 
Amount
 
% of Total
Deposits:(1)
 
 
 
 
 
 
 
 
Consumer Banking
 
$
205,439

 
68
%
 
$
198,607

 
64
%
Commercial Banking
 
31,248

 
10

 
29,480

 
10

Other
 
18,420

 
6

 
21,677

 
7

Total deposits
 
255,107

 
84

 
249,764

 
81

Securitized debt obligations
 
19,273

 
6

 
18,307

 
6

Other debt
 
31,085

 
10

 
40,598

 
13

Total funding sources
 
$
305,465

 
100
%
 
$
308,669

 
100
%
__________
(1) 
Includes brokered deposits of $17.9 billion and $21.2 billion as of March 31, 2019 and December 31, 2018, respectively.
Total deposits increased by $5.3 billion to $255.1 billion as of March 31, 2019 from December 31, 2018 primarily driven by strong growth in our deposit products as a result of our national banking growth strategy in our Consumer Banking business.
Securitized debt obligations increased by $1.0 billion to $19.3 billion as of March 31, 2019 from December 31, 2018 as debt issuances outpaced maturities in the first quarter of 2019.
Other debt decreased by $9.5 billion to $31.1 billion as of March 31, 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.”

 
 
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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 type of customer served: Credit Card, Consumer Banking and Commercial Banking. The operations of acquired businesses have been integrated into our existing business segments. Certain activities that are not part of a segment, such as management of our corporate investment portfolio, 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.
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 first quarters 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 March 31, 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 first quarters of 2019 and 2018.
Table 9: Business Segment Results
 
 
Three Months Ended March 31,
 
 
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
 
$
4,540

 
64
%
 
$
751

 
53
%
 
$
4,415

 
64
%
 
$
707

 
52
 %
Consumer Banking
 
1,839

 
26

 
468

 
33

 
1,789

 
26

 
426

 
32

Commercial Banking(3)(4)
 
676

 
10

 
146

 
11

 
693

 
10

 
233

 
17

Other(3)(4)
 
28

 

 
45

 
3

 
12

 

 
(23
)
 
(1
)
Total
 
$
7,083

 
100
%
 
$
1,410

 
100
%
 
$
6,909

 
100
%
 
$
1,343

 
100
 %

 
 
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__________
(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 $30 million for the first quarter 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 $751 million and $707 million in the first quarters of 2019 and 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 March 31,
(Dollars in millions, except as noted)
 
2019
 
2018
 
Change
Selected income statement data:
 
 
 
 
 
 
Net interest income
 
$
3,590

 
$
3,558

 
1
 %
Non-interest income
 
950

 
857

 
11

Total net revenue(1)
 
4,540

 
4,415

 
3

Provision for credit losses
 
1,389

 
1,456

 
(5
)
Non-interest expense
 
2,171

 
2,039

 
6

Income from continuing operations before income taxes
 
980

 
920

 
7

Income tax provision
 
229

 
213

 
8

Income from continuing operations, net of tax
 
$
751

 
$
707

 
6

Selected performance metrics:
 
 
 
 
 
 
Average loans held for investment(2)
 
$
111,456

 
$
109,502

 
2

Average yield on loans held for investment(3)
 
15.77
%
 
15.24
%
 
53
bps
Total net revenue margin(4)
 
16.29

 
16.13

 
16

Net charge-offs
 
$
1,364

 
$
1,377

 
(1
)%
Net charge-off rate
 
4.90
%
 
5.03
%
 
(13
)bps
Purchase volume(5)
 
$
93,197

 
$
86,545

 
8
 %
 
 
 
 
 
 
 
(Dollars in millions, except as noted)
 
March 31, 2019
 
December 31, 2018
 
Change
Selected period-end data:
 
 
 
 
 
 
Loans held for investment(2)
 
$
109,836

 
$
116,361

 
(6
)%
30+ day performing delinquency rate
 
3.71
%
 
4.00
%
 
(29
)bps
30+ day delinquency rate
 
3.72

 
4.01

 
(29
)
Nonperforming loan rate(6)
 
0.02

 
0.02

 

Allowance for loan and lease losses
 
$
5,568

 
$
5,535

 
1
 %
Allowance coverage ratio
 
5.07
%
 
4.76
%
 
31
bps
__________
(1) 
We recognize billed finance charges and fee income on open-ended loans in accordance with the contractual provisions of the credit arrangements and estimate the uncollectible amount on a quarterly basis. The estimated uncollectible amount of billed finance charges and fees is reflected as a reduction in revenue and is not included in our net charge-offs. Total net revenue was reduced by $376 million and $335 million in the first quarters of 2019 and 2018, respectively, for the estimated uncollectible amount of billed finance charges and fees and related losses. The finance charge and fee reserve totaled $461 million and $468 million as of March 31, 2019 and December 31, 2018, respectively.

 
 
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(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 first quarter of 2019 compared to the first quarter of 2018, and changes in financial condition and credit performance between March 31, 2019 and December 31, 2018 include the following:
Net Interest Income: Net interest income increased by $32 million to $3.6 billion in the first quarter of 2019 primarily driven by growth in our domestic credit card loan portfolio.
Non-Interest Income: Non-interest income increased by $93 million to $950 million in the first quarter of 2019 primarily due to an increase in net interchange fees, driven by higher purchase volume and the impact of updated rewards cost estimates.
Provision for Credit Losses: The provision for credit losses decreased by $67 million to $1.4 billion in the first quarter of 2019 primarily driven by smaller allowance build as compared to the the first quarter of 2018.
Non-Interest Expense: Non-interest expense increased by $132 million to $2.2 billion in the first quarter of 2019, primarily driven by increased marketing expense as well as Walmart partnership and related expenses.
Loans Held for Investment:
Period-end loans held for investment decreased by $6.5 billion to $109.8 billion as of March 31, 2019 from December 31, 2018 primarily due to expected seasonal paydowns.
Average loans held for investment increased by $2.0 billion to $111.5 billion in the first quarter of 2019 compared to the first quarter of 2018 primarily due to growth in our domestic credit card loan portfolio.
Net Charge-Off and Delinquency Metrics: The net charge-off rate decreased by 13 basis points to 4.90% in the first quarter of 2019 compared to the first quarter of 2018 primarily driven by favorability realized from portfolio seasoning.
The 30+ day delinquency rate decreased by 29 basis points to 3.72% as of March 31, 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 $695 million and $607 million in the first quarters of 2019 and 2018, respectively. In the first quarters of 2019 and 2018, Domestic Card accounted for greater than 90% of total net revenue of our Credit Card business.

 
 
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Table 10.1 summarizes the financial results for Domestic Card and displays selected key metrics for the periods indicated.
Table 10.1: Domestic Card Business Results
 
 
Three Months Ended March 31,
(Dollars in millions, except as noted)
 
2019
 
2018
 
Change
Selected income statement data:
 
 
 
 
 
 
Net interest income
 
$
3,273

 
$
3,229

 
1
 %
Non-interest income
 
873

 
774

 
13

Total net revenue(1)
 
4,146

 
4,003

 
4

Provision for credit losses
 
1,291

 
1,380

 
(6
)
Non-interest expense
 
1,949

 
1,832

 
6

Income from continuing operations before income taxes
 
906

 
791

 
15

Income tax provision
 
211

 
184

 
15

Income from continuing operations, net of tax
 
$
695

 
$
607

 
14

Selected performance metrics:
 
 
 
 
 
 
Average loans held for investment(2)
 
$
102,667

 
$
100,450

 
2

Average yield on loans held for investment(3)
 
15.69
%
 
15.10
%
 
59
bps
Total net revenue margin(4)
 
16.15

 
15.94

 
21

Net charge-offs
 
$
1,294

 
$
1,321

 
(2
)%
Net charge-off rate
 
5.04
%
 
5.26
%
 
(22
)bps
Purchase volume(5)
 
$
85,738

 
$
79,194

 
8
 %
 
 
 
 
 
 
 
(Dollars in millions, except as noted)
 
March 31, 2019
 
December 31, 2018
 
Change
Selected period-end data:
 
 
 
 
 
 
Loans held for investment(2)
 
$
101,052

 
$
107,350

 
(6
)%
30+ day delinquency rate
 
3.72
%
 
4.04
%
 
(32
)bps
Allowance for loan and lease losses
 
$
5,141

 
$
5,144

 

Allowance coverage ratio
 
5.09
%
 
4.79
%
 
30
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 increased in the first quarter of 2019 compared to the first quarter 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;
lower provision for credit losses due to a small allowance release as compared to an allowance build; and
higher net interest income due to portfolio growth.
These drivers were partially offset by increased marketing expense as well as Walmart partnership and related expenses.

 
 
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Consumer Banking Business
The primary sources of revenue for our Consumer Banking business are net interest income from loans and deposits and non-interest income from service charges and customer-related fees. Expenses primarily consist of the provision for credit losses, operating costs and marketing expenses.
Our Consumer Banking business generated net income from continuing operations of $468 million and $426 million in the first quarters of 2019 and 2018, respectively.
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 March 31,
(Dollars in millions, except as noted)
 
2019
 
2018
 
Change
Selected income statement data:
 
 
 
 
 
 
Net interest income
 
$
1,679

 
$
1,615

 
4
 %
Non-interest income
 
160

 
174

 
(8
)
Total net revenue
 
1,839

 
1,789

 
3

Provision for credit losses
 
235

 
233

 
1

Non-interest expense
 
994

 
1,000

 
(1
)
Income from continuing operations before income taxes
 
610

 
556

 
10

Income tax provision
 
142

 
130

 
9

Income from continuing operations, net of tax
 
$
468

 
$
426

 
10

Selected performance metrics:
 
 
 
 
 
 
Average loans held for investment:
 
 
 
 
 
 
Auto
 
$
56,234

 
$
54,344

 
3

Home loan(1)
 

 
17,224

 
**

Retail banking
 
2,831

 
3,429

 
(17
)
Total consumer banking
 
$
59,065

 
$
74,997

 
(21
)
Average yield on loans held for investment(2)
 
8.15
%
 
6.86
%
 
129
bps
Average deposits
 
$
201,072

 
$
187,785

 
7
 %
Average deposits interest rate
 
1.18
%
 
0.80
%
 
38
bps
Net charge-offs
 
$
221

 
$
223

 
(1
)%
Net charge-off rate
 
1.49
%
 
1.19
%
 
30
bps
Auto loan originations
 
$
6,222

 
$
6,707

 
(7
)%
 
 
 
 
 
 
 
(Dollars in millions, except as noted)
 
March 31, 2019
 
December 31, 2018
 
Change
Selected period-end data:
 
 
 
 
 
 
Loans held for investment:
 
 
 
 
 
 
Auto
 
$
56,444

 
$
56,341

 

Retail banking
 
2,804

 
2,864

 
(2
)%
Total consumer banking
 
$
59,248

 
$
59,205

 

30+ day performing delinquency rate
 
5.55
%
 
6.67
%
 
(112
)bps
30+ day delinquency rate
 
6.02

 
7.36

 
(134
)
Nonperforming loan rate
 
0.59

 
0.81

 
(22
)
Nonperforming asset rate(3)
 
0.68

 
0.90

 
(22
)
Allowance for loan and lease losses
 
$
1,062

 
$
1,048

 
1
 %
Allowance coverage ratio
 
1.79
%
 
1.77
%
 
2
bps
Deposits
 
$
205,439

 
$
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.

 
 
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(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 consist of nonperforming loans 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, real estate owned (“REO”) and other foreclosed assets.
** 
Not meaningful.
Key factors affecting the results of our Consumer Banking business for the first quarter of 2019 compared to the first quarter of 2018, and changes in financial condition and credit performance between March 31, 2019 and December 31, 2018 include the following:
Net Interest Income: Net interest income increased by $64 million to $1.7 billion in the first quarter 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 129 basis points to 8.15% in the first quarter of 2019 compared to the first quarter of 2018. The increase was primarily driven by:
changes in product mix as a result of the sale of our consumer home loan portfolio; and
higher yields as a result of higher interest rates.
Non-Interest Income: Non-interest income decreased by $14 million to $160 million in the first quarter 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 was substantially flat at $235 million in the first quarter of 2019.
Non-Interest Expense: Non-interest expense was substantially flat at $1.0 billion in the first quarter of 2019 primarily driven by lower operating expense due to our decision to cease new originations of home loan lending products in the fourth quarter of 2017, largely offset by higher marketing expense.
Loans Held for Investment: Period-end loans held for investment remained flat at $59.2 billion as of March 31, 2019 compared to December 31, 2018. Average loans held for investment decreased by $15.9 billion to $59.1 billion in the first quarter of 2019 compared to the first quarter 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 $6.8 billion to $205.4 billion as of March 31, 2019 from December 31, 2018 driven by strong growth in our deposit products as a result of our national banking growth strategy.
Net Charge-Off and Delinquency Metrics: The net charge-off rate increased by 30 basis points to 1.49% in the first quarter of 2019 compared to the first quarter of 2018 primarily driven by lower loan balances due to the sale of our consumer home loan portfolio.
The 30+ day delinquency rate decreased by 134 basis points to 6.02% as of March 31, 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 $146 million and $233 million in the first quarters of 2019 and 2018, respectively.

 
 
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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 March 31,
(Dollars in millions, except as noted)
 
2019
 
2018
 
Change
Selected income statement data:
 
 
 
 
 
 
Net interest income
 
$
489

 
$
506

 
(3
)%
Non-interest income
 
187

 
187

 

Total net revenue (1)(2)
 
676

 
693

 
(2
)
Provision (benefit) for credit losses(3)
 
69

 
(14
)
 
**

Non-interest expense
 
417

 
403

 
3

Income from continuing operations before income taxes
 
190

 
304

 
(38
)
Income tax provision
 
44

 
71

 
(38
)
Income from continuing operations, net of tax
 
$
146

 
$
233

 
(37
)
Selected performance metrics:
 
 
 
 
 
 
Average loans held for investment:
 
 
 
 
 
 
Commercial and multifamily real estate
 
$
29,034

 
$
26,542

 
9

Commercial and industrial
 
42,132

 
38,246

 
10

Total commercial lending
 
71,166

 
64,788

 
10

Small-ticket commercial real estate
 
272

 
393

 
(31
)
Total commercial banking
 
$
71,438

 
$
65,181

 
10

Average yield on loans held for investment(1)(4)
 
4.62
%
 
4.16
%
 
46
bps
Average deposits
 
$
30,816

 
$
34,057

 
(10
)%
Average deposits interest rate
 
1.11
%
 
0.52
%
 
59
bps
Net charge-offs
 
$
14

 
$
19

 
(26
)%
Net charge-off rate
 
0.08
%
 
0.11
%
 
(3
)bps
 
 
 
 
 
 
 
(Dollars in millions, except as noted)
 
March 31, 2019
 
December 31, 2018
 
Change
Selected period-end data:
 
 
 
 
 
 
Loans held for investment:
 
 
 
 
 
 
Commercial and multifamily real estate
 
$
28,984

 
$
28,899

 

Commercial and industrial
 
42,197

 
41,091

 
3
 %
Total commercial lending
 
71,181

 
69,990

 
2

Small-ticket commercial real estate
 
8

 
343

 
(98
)
Total commercial banking
 
$
71,189

 
$
70,333

 
1

Nonperforming loan rate
 
0.53
%
 
0.44
%
 
9
bps
Nonperforming asset rate(5)
 
0.53

 
0.45

 
8

Allowance for loan and lease losses(3)
 
$
683

 
$
637

 
7
 %
Allowance coverage ratio
 
0.96
%
 
0.91
%
 
5
bps
Deposits
 
$
31,248

 
$
29,480

 
6
 %
Loans serviced for others
 
34,398

 
32,588

 
6

__________
(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 $30 million for the first quarter of 2018, with an offsetting increase in the Other category.  

 
 
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(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 $127 million and $118 million as of March 31, 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, 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 first quarter of 2019 compared to the first quarter of 2018, and changes in financial condition and credit performance between March 31, 2019 and December 31, 2018 include the following:
Net Interest Income: Net interest income decreased by $17 million to $489 million in the first quarter of 2019 primarily driven by lower average deposit balances and lower loan margins, partially offset by growth across our commercial loan portfolios.
Non-Interest Income: Non-interest income remained flat at $187 million in the first quarter of 2019 compared to the first quarter of 2018.
Provision for Credit Losses: Provision for credit losses increased to $69 million in the first quarter of 2019 compared to a benefit of $14 million in the first quarter of 2018, primarily driven by an allowance build associated with some isolated credit deterioration and portfolio growth.
Non-Interest Expense: Non-interest expense increased by $14 million to $417 million in the first quarter 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 $856 million to $71.2 billion as of March 31, 2019 from December 31, 2018, and average loans held for investment increased by $6.3 billion to $71.4 billion in the first quarter of 2019 compared to the first quarter of 2018, both primarily driven by growth across our commercial loan portfolios.
Deposits: Period-end deposits increased by $1.8 billion to $31.2 billion as of March 31, 2019, from December 31, 2018 primarily driven by new business growth.
Net Charge-Off and Nonperforming Metrics: The net charge-off rate decreased by 3 basis points to 0.08% in the first quarter of 2019 compared to the first quarter of 2018. The nonperforming loan rate increased by 9 basis points to 0.53% as of March 31, 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.


 
 
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Table 13 summarizes the financial results of our Other category for the periods indicated.
Table 13: Other Category Results
 
 
Three Months Ended March 31,
(Dollars in millions)
 
2019
 
2018
 
Change
Selected income statement data:
 
 
 
 
 
 
Net interest income
 
$
33

 
$
39

 
(15
)%
Non-interest losses
 
(5
)
 
(27
)
 
(81
)
Total net revenue(1)(2)
 
28

 
12

 
133

Benefit for credit losses
 

 
(1
)
 
**

Non-interest expense
 
89

 
131

 
(32
)
Loss from continuing operations before income taxes
 
(61
)
 
(118
)
 
(48
)
Income tax benefit
 
(106
)
 
(95
)
 
12

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

 
$
(23
)
 
**

__________
(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 $30 million for the first quarter of 2018, with an offsetting increase in the Other category.
**
Not meaningful.
Net income from continuing operations recorded in the Other category was $45 million in the first quarter of 2019 compared to net loss of $23 million in the first quarter of 2018, primarily driven by the gains from the sale of investment securities and the absence of restructuring charges.
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&ACritical Accounting Policies and Estimates.”

 
 
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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 March 31, 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 Federal Banking Agencies, including the Basel III Capital Rule. 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 remain subject to the Basel III Advanced Approaches, and 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 March 31, 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.

 
 
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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 March 31, 2019 and December 31, 2018.
Table 14: Capital Ratios under Basel III(1)(2)
 
 
March 31, 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)
 
11.9
%
 
4.5
%
 
N/A

 
11.2
%
 
4.5
%
 
N/A

Tier 1 capital(4)
 
13.4

 
6.0

 
6.0
%
 
12.7

 
6.0

 
6.0
%
Total capital(5) 
 
15.8

 
8.0

 
10.0

 
15.1

 
8.0

 
10.0

Tier 1 leverage(6)
 
11.0

 
4.0

 
N/A

 
10.7

 
4.0

 
N/A

Supplementary leverage(7)
 
9.3

 
3.0

 
N/A

 
9.0

 
3.0

 
N/A

COBNA:
 


 
 
 
 
 
 
 
 
 
 
Common equity Tier 1 capital(3)
 
16.4

 
4.5

 
6.5

 
15.3

 
4.5

 
6.5

Tier 1 capital(4)
 
16.4

 
6.0

 
8.0

 
15.3

 
6.0

 
8.0

Total capital(5) 
 
18.5

 
8.0

 
10.0

 
17.6

 
8.0

 
10.0

Tier 1 leverage(6)
 
14.5

 
4.0

 
5.0

 
14.0

 
4.0

 
5.0

Supplementary leverage(7)
 
11.8

 
3.0

 
N/A

 
11.5

 
3.0

 
N/A

CONA:
 


 
 
 
 
 
 
 
 
 
 
Common equity Tier 1 capital(3)
 
13.5

 
4.5

 
6.5

 
13.0

 
4.5

 
6.5

Tier 1 capital(4)
 
13.5

 
6.0

 
8.0

 
13.0

 
6.0

 
8.0

Total capital(5) 
 
14.7

 
8.0

 
10.0

 
14.2

 
8.0

 
10.0

Tier 1 leverage(6)
 
9.1

 
4.0

 
5.0

 
9.1

 
4.0

 
5.0

Supplementary leverage(7)
 
8.1

 
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 March 31, 2019 are preliminary. As we continue to validate our data, the calculations are subject to change until we file our March 31, 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.

 
 
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Table 15 presents regulatory capital under the Basel III Standardized Approach and regulatory capital metrics as of March 31, 2019 and December 31, 2018 respectively.
Table 15: Regulatory Risk-Based Capital Components and Regulatory Capital Metrics
(Dollars in millions)
 
March 31, 2019
 
December 31, 2018
Regulatory Capital Under Basel III Standardized Approach
 
 
 
 
Common equity excluding AOCI
 
$
49,781

 
$
48,570

Adjustments:
 
 
 
 
AOCI(1)
 
(660
)
 
(1,263
)
Goodwill, net of related deferred tax liabilities
 
(14,369
)
 
(14,373
)
Intangible assets, net of related deferred tax liabilities
 
(223
)
 
(254
)
Other
 
113

 
391

Common equity Tier 1 capital
 
34,642

 
33,071

Tier 1 capital instruments
 
4,360

 
4,360

Tier 1 capital
 
39,002

 
37,431

Tier 2 capital instruments
 
3,351

 
3,483

Qualifying allowance for loan and lease losses
 
3,689

 
3,731

Tier 2 capital
 
7,040

 
7,214

Total capital
 
$
46,042

 
$
44,645

 
 
 
 
 
Regulatory Capital Metrics
 
 
 
 
Risk-weighted assets
 
$
291,483

 
$
294,950

Adjusted average assets
 
355,781

 
350,606

Total leverage exposure
 
420,341

 
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 March 31, 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 March 31, 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 March 31, 2019, the Company and each of the Banks were all above the applicable combined thresholds.
Capital Planning and Regulatory Stress Testing
On April 5, 2019, we submitted our capital plan to the Federal Reserve as part of the 2019 CCAR cycle. The stress testing results are expected to be released by the Federal Reserve before June 30, 2019.

 
 
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On June 28, 2018, the Federal Reserve informed us that they had “no objection” to our CCAR 2018 Capital Plan submission. As a result of this non-objection to our capital plan, the Board of Directors authorized the repurchase of up to $1.2 billion of shares of our common stock beginning in the third quarter of 2018 through the end of the second quarter of 2019, which we completed in the fourth quarter of 2018. The Board of Directors also authorized the quarterly dividend on our common stock of $0.40 per share. 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 quarter of 2019, we declared and paid common stock dividends of $194 million, or $0.40 per share, and preferred stock dividends of $52 million. The following table summarizes the dividends paid per share on our various preferred stock series in the first quarter of 2019.
Table 16: Preferred Stock Dividends Paid Per Share
Series
 
Description
 
Issuance Date
 
Per Annum Dividend Rate
 
Dividend Frequency
 
Q1
 
2019
Series B
 
6.00%
Non-Cumulative
 
August 20, 2012
 
6.00%
 
Quarterly
 
$15.00
Series C
 
6.25%
Non-Cumulative
 
June 12, 2014
 
6.25
 
Quarterly
 
15.63
Series D
 
6.70%
Non-Cumulative
 
October 31, 2014
 
6.70
 
Quarterly
 
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
 
Series F
 
6.20%
Non-Cumulative
 
August 24, 2015
 
6.20
 
Quarterly
 
15.50
Series G
 
5.20%
Non-Cumulative
 
July 29, 2016
 
5.20
 
Quarterly
 
13.00
Series H
 
6.00%
Non-Cumulative
 
November 29, 2016
 
6.00
 
Quarterly
 
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 March 31, 2019, funds available for dividend payments from COBNA and CONA were $2.6 billion and $3.8 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. BusinessSupervision and Regulation—Dividends, Stock Repurchases and Transfers of Funds” in our 2018 Form 10-K.
RISK MANAGEMENT
Risk Framework
We use a risk framework to provide an overall enterprise-wide approach for effectively managing risk. We execute against our risk framework with the “Three Lines of Defense” risk management model to demonstrate and structure the roles, responsibilities and accountabilities in the organization for taking and managing risk.

 
 
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The “First Line of Defense” is comprised of the business areas that through their day-to-day business activities take risk on our behalf. As the business owner, the first line is responsible for identifying, assessing, managing and controlling that risk. This principle places ultimate accountability for the management of risks and ownership of risk decisions with the CEO and business heads. The “Second Line of Defense” provides oversight of first line risk taking and management, and is primarily comprised of our Risk Management organization. The second line assists in determining risk appetite and the strategies, policies and structures for managing risks. The second line is both an “expert advisor” to the first line and an “effective challenger” of first line risk activities. The “Third Line of Defense” is comprised of our Internal Audit and Credit Review functions. The third line provides independent and objective assurance to senior management and to the Board of Directors that first and second line risk management and internal control systems and its governance processes are well-designed and working as intended.
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 eight elements that comprise the risk framework:
Establish Governance Processes, Accountabilities and Risk Appetites
Identify and Assess Risks and Ownership
Develop and Operate Controls, Monitoring and Mitigation Plans
Test and Detect Control Gaps and Perform Corrective Action
Escalate Key Risks and Gaps to Executive Management and, when Appropriate, the Board of Directors
Calculate and Allocate Capital in Alignment with Risk Management and Measurement Processes (including Stress Testing)
Support with the Right Culture, Talent and Skills
Enabled by the Right Data, Infrastructure and Programs
We provide additional discussion of our risk management principles, roles and responsibilities, framework and risk appetite under “MD&A—Risk Management” in our 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 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.”

 
 
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Loans Held for Investment Portfolio Composition
We provide a variety of lending products. Our primary products include credit cards, auto loans 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. Table 17 presents the composition of our portfolio of loans held for investment by portfolio segment as of March 31, 2019 and December 31, 2018. Table 17 and the credit metrics presented in this section exclude loans held for sale, which are carried at lower of cost or fair value and totaled $905 million and $1.2 billion as of March 31, 2019 and December 31, 2018, respectively.
Table 17: Loans Held for Investment Portfolio Composition
 
 
March 31, 2019
 
December 31, 2018
(Dollars in millions)
 
Loans
 
% of Total
 
Loans
 
% of Total
Credit Card:
 
 
 
 
 
 
 
 
Domestic credit card
 
$
101,052

 
42.0
%
 
$
107,350

 
43.6
%
International card businesses
 
8,784

 
3.7

 
9,011

 
3.7

Total credit card
 
109,836

 
45.7

 
116,361

 
47.3

Consumer Banking:
 
 
 
 
 
 
 
 
Auto
 
56,444

 
23.5

 
56,341

 
22.9

Retail banking
 
2,804

 
1.2

 
2,864

 
1.2

Total consumer banking
 
59,248

 
24.7

 
59,205

 
24.1

Commercial Banking:
 
 
 
 
 
 
 
 
Commercial and multifamily real estate
 
28,984

 
12.0

 
28,899

 
11.8

Commercial and industrial
 
42,197

 
17.6

 
41,091

 
16.7

Total commercial lending
 
71,181

 
29.6

 
69,990

 
28.5

Small-ticket commercial real estate
 
8

 

 
343

 
0.1

Total commercial banking
 
71,189

 
29.6

 
70,333

 
28.6

Total loans held for investment
 
$
240,273

 
100.0
%
 
$
245,899

 
100.0
%

 
 
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Commercial Loans
Table 18 summarizes our commercial loans held for investment portfolio by industry classification as of March 31, 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)
 
March 31,
2019
 
December 31,
2018
Real estate
 
39
%
 
40
%
Finance
 
16

 
16

Healthcare
 
12

 
12

Business services
 
6

 
5

Oil and gas
 
5

 
5

Public administration
 
4

 
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