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CAPITAL ONE FINANCIAL CORP - Quarter Report: 2020 September (Form 10-Q)



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________
FORM 10-Q
____________________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File No. 001-13300
____________________________________
CAPITAL ONE FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter) 
____________________________________
Delaware 54-1719854
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
1680 Capital One Drive,
McLean,Virginia 22102
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (703) 720-1000
(Not applicable)
(Former name, former address and former fiscal year, if changed since last report)
____________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading Symbol(s)Name of Each Exchange on Which Registered
Common Stock (par value $.01 per share)COF
New York Stock Exchange
Depositary Shares, Each Representing a 1/40th Interest in a Share of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series FCOF PRF
New York Stock Exchange
Depositary Shares, Each Representing a 1/40th Interest in a Share of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series GCOF PRG
New York Stock Exchange
Depositary Shares, Each Representing a 1/40th Interest in a Share of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series HCOF PRH
New York Stock Exchange
Depositary Shares, Each Representing a 1/40th Interest in a Share of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series ICOF PRI
New York Stock Exchange
Depositary Shares, Each Representing a 1/40th Interest in a Share of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series JCOF PRJ
New York Stock Exchange
Depositary Shares, Each Representing a 1/40th Interest in a Share of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series KCOF PRK
New York Stock Exchange
0.800% Senior Notes Due 2024COF24
New York Stock Exchange
1.650% Senior Notes Due 2029COF29
New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   No 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer   Accelerated filer 
Non-accelerated filer 
  Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No 
As of September 30, 2020, there were 457,397,091 shares of the registrant’s Common Stock outstanding.



TABLE OF CONTENTS
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INDEX OF MD&A AND SUPPLEMENTAL TABLE
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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”). All statements that address operating performance, events or developments that we expect or anticipate will occur in the future, including those relating to operating results and the Cybersecurity Incident described in “MD&A—Introduction—Cybersecurity Incident” and “Note 13—Commitments, Contingencies, Guarantees and Others” as well as the potential impacts of the COVID-19 pandemic described in “MD&A—Introduction—Coronavirus Disease 2019 (COVID-19) Pandemic” are forward-looking statements. Our actual results may differ materially from those included in these forward-looking statements due to a variety of factors including, but not limited to, those described in “Part I—Item 1A. Risk Factors” in our 2019 Annual Report on Form 10-K (“2019 Form 10-K”) and “Part II—Item 1A. Risk Factors” in our Quarterly Report on Form 10-Q for the period ended March 31, 2020. Unless otherwise specified, references to notes to our consolidated financial statements refer to the notes to our consolidated financial statements as of September 30, 2020 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 2019 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 digital channels, branches, Cafés and other distribution channels. As of September 30, 2020, our principal subsidiaries included:
Capital One Bank (USA), National Association (“COBNA”), which offers credit and debit card products, other lending products and deposit products; and
Capital One, National Association (“CONA”), which offers a broad spectrum of banking products and financial services to consumers, small businesses and commercial clients.
The Company is hereafter collectively referred to as “we,” “us” or “our.” COBNA and CONA are collectively referred to as the “Banks.” Certain business terms used in this document are defined in the “MD&A—Glossary and Acronyms” and should be read in conjunction with the consolidated financial statements included in this Report.
Our consolidated total net revenues are derived primarily from lending to consumer, small business and commercial customers net of funding costs associated with interest on deposits, short-term borrowings and long-term debt. We also earn non-interest income which primarily consists of interchange income net of reward expenses, and service charges and other customer-related fees. Our expenses primarily consist of the provision for credit losses, operating expenses, marketing expenses and income taxes.
Our principal operations are organized for management reporting purposes into three major business segments, which are defined primarily based on the products and services provided or the types of customer served: Credit Card, Consumer Banking and Commercial Banking. The operations of acquired businesses have been integrated into our existing business segments. Certain activities that are not part of a segment, such as management of our corporate investment portfolio, asset/liability management by our centralized Corporate Treasury group and residual tax expense or benefit to arrive at the consolidated effective tax rate that is not assessed to our primary business segments, are included in the Other category.
Credit Card: Consists of our domestic consumer and small business card lending, and international card businesses in Canada and the United Kingdom (“U.K.”).
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Consumer Banking: Consists of our deposit gathering and lending activities for consumers and small businesses, 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.
Business Developments
We regularly explore and evaluate opportunities to acquire financial services and products as well as 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. We may issue equity or debt to fund our acquisitions. In addition, we regularly consider the potential disposition of certain assets, branches, partnership agreements or lines of business.
As of September 30, 2020, we transferred a partnership credit card loan portfolio of approximately $2.1 billion to held for sale, which resulted in an allowance release of $327 million, as we expect to sell this portfolio.
On September 24, 2019, we launched a new credit card issuance program with Walmart Inc. (“Walmart”) and are now the exclusive issuer of Walmart’s cobrand and private label credit card program in the United States of America (“U.S.”). On October 11, 2019, we completed the acquisition of the existing portfolio of Walmart’s cobrand and private label credit card receivables, which added approximately $8.1 billion to our domestic credit card loans held for investment portfolio as of the acquisition date.
Coronavirus Disease 2019 (COVID-19) Pandemic
The COVID-19 pandemic has resulted in a global public-health crisis, disrupting economies and introducing significant volatility into financial markets and uncertainty as to when economic and operating conditions will return to normalcy. This crisis continues to impact individuals, households and businesses in a multitude of ways. Companies in the U.S. and abroad have experienced unprecedented disruptions to normal business operations, including customer-facing interactions, supply chains, office closures, changes in demand for products and services, and others. Financial institutions, including us, have been deemed an essential service and exempted from the myriad of shutdowns across the country. We have transformed how we work in order to protect the well-being of our associates and our customers, serve our customers, support our communities, and position ourselves to navigate the challenges ahead.
Since the start of the COVID-19 pandemic, a significant majority of our associates across our workforce have transitioned to working remotely, relying on our technology infrastructure and systems that have been designed for resilience and security. The majority of our associates will continue to work remotely throughout 2020, as we continue to prioritize their safety while planning our return to the office. We have been able to continue serving customers, successfully managing critical functions and keeping our lines of business operating. We have implemented additional paid benefits and flexible attendance policies that are intended to enable our associates to care for their families and loved ones, including increased pay for branch associates working in open locations, associates that perform essential and time-sensitive banking activities that cannot be performed remotely, and other U.S.-based associates in roles instrumental to maintaining essential customer support. We continue to monitor and revise our safety precautions and policies at banking locations as government authorities continue to implement and modify measures to contain the further spread of COVID-19. In our Retail Banking business, we have re-opened nearly all of our cafes and branches across our network with increased safety precautions. We will continue to monitor local conditions to ensure the safety of our associates and customers while providing critical banking services.
We continue to offer a range of policies and programs to accommodate customer hardship across our lines of business. In our Credit Card and Auto Finance businesses, our customers can seek forbearance primarily in the form of short-term payment deferrals or extensions and fee waivers. In our Retail Banking business, we are waiving select fees for impacted customers and are offering short-term payment deferrals for our small business banking customers. We are also working with our Commercial Banking customers on a more customized basis. In addition, we have participated in the Paycheck Protection Program (“PPP”), established by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) enacted in March 2020 and implemented by the Small Business Administration. See “MD&A—Credit Risk Profile” for more information about our customer assistance programs and enrollment volumes.
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We reported net income of $148 million (which after considering preferred stock dividends and other items equated to a net loss of $0.20 per diluted common share) for the first nine months of 2020, which reflects $5.6 billion in allowance builds primarily due to expectations of economic worsening as a result of the COVID-19 pandemic. These allowance builds, in combination with the adoption impact of the Current Expected Credit Loss (“CECL”) standard, increased our allowance coverage ratio by 379 basis points to 6.50% as of September 30, 2020 from 2.71% as of December 31, 2019. For more information, see “MD&A—Executive Summary and Business Outlook” and “MD&A—Credit Risk Profile.” We have continued to evaluate the potential impact on our goodwill and have incorporated recent market events and trends into our fair value measurements. See more details in “MD&A—Critical Accounting Policies and Estimates,” “MD&A—Market Risk Profile” and “Note 8—Derivative Instruments and Hedging Activities.” See “MD&A—Liquidity Risk Profile” for information relating to our liquidity reserves as of September 30, 2020.
In the third quarter of 2020, the COVID-19 pandemic continued to impact the demand for our products and services. In our Domestic Card business, loan balances and revenue are down year-over-year, while purchase volume was relatively flat. In our Auto business, we saw an increase in origination volumes and loan growth from the sharp decline at the end of the first quarter. Our loan growth was driven by our relationship strategy and digital capabilities that we have developed. In our Retail Banking business, we have seen strong deposit growth throughout the year from increased consumer savings aided by the impact of government stimulus.
We are actively monitoring and responding to developments across the myriad of landscapes affected by the COVID-19 pandemic, including social, financial, legal, regulatory and governmental. As guidance is issued by governments and our regulators, we continue to assess the impacts on us. As government authorities continue to implement, modify and reinstate social distancing and reopening plans and other measures to contain the further spread of COVID-19, we will continue to adjust our business operations, policies and practices, keeping the best interests of our associates, customers and business partners at the forefront.
See “Part II—Item 1A. Risk Factors” in our Quarterly Report on Form 10-Q for the period ended March 31, 2020 for additional information regarding risks and the significant uncertainties relating to the COVID-19 pandemic.
Cybersecurity Incident
On July 29, 2019, we announced that on March 22 and 23, 2019 an outside individual gained unauthorized access to our systems. This individual obtained certain types of personal information relating to people who had applied for our credit card products and to our credit card customers (the “Cybersecurity Incident”). We retained a leading independent cybersecurity firm that confirmed we correctly identified and fixed the specific configuration vulnerability exploited in the Cybersecurity Incident. We continue to invest significantly in cybersecurity and related risk management activities and expect to make additional investments as we continue to assess our cybersecurity program.
During the third quarter of 2020, we incurred $13 million of incremental expenses related to the remediation of and response to the Cybersecurity Incident, offset by $7 million of insurance recoveries. To date, we have incurred $127 million of incremental expenses, offset by $67 million of insurance recoveries pursuant to the cyber risk insurance coverage we carry. These expenses mainly consist of customer notifications, credit monitoring, technology costs, and professional support. We expect total incremental costs through the end of 2020 will be at the high end of the $100 million to $150 million range previously disclosed. We carry insurance to cover certain costs associated with a cyber risk event. As the timing of recognizing insurance reimbursements may differ from the timing of recognizing the associated expenses, any such reimbursements are not considered in this range, though we continue to expect that a significant portion of these expenses will be covered by insurance. This insurance has a total coverage limit of $400 million and is subject to a $10 million deductible, which was met in the third quarter of 2019, as well as standard exclusions.
We continue to treat these expenses and insurance reimbursements as adjusting items as they relate to our financial results (“Cyber Adjusting Items”). Our reported results excluding adjusting items, including the Cyber Adjusting Items, represent non-GAAP measures which we believe help users of our financial information understand the impact of these adjusting items on our reported results as well as provide an alternate measurement of our operating performance.
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Although the ultimate magnitude and timing of expenses or other impacts to our business or reputation related to the Cybersecurity Incident are uncertain, they may be significant, and some of the costs may not be covered by insurance. However, we do not believe that this incident will materially impact our strategy or our long-term financial health. For more information, see “Note 13—Commitments, Contingencies, Guarantees and Others.”
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SELECTED FINANCIAL DATA
The following table presents selected consolidated financial data and performance from our results of operations for the third quarter and first nine months of 2020 and 2019 and selected comparative balance sheet data as of September 30, 2020 and December 31, 2019. We also provide selected key metrics we use in evaluating our performance, including certain metrics that are computed using non-GAAP measures. We consider these metrics to be key financial measures that management uses in assessing our operating performance, capital adequacy and the level of returns generated. 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 September 30,Nine Months Ended September 30,
(Dollars in millions, except per share data and as noted)20202019Change20202019Change
Income statement
Net interest income$5,555 $5,737 (3)%$17,040 $17,274 (1)%
Non-interest income1,826 1,222 49 4,146 3,892 
Total net revenue7,381 6,959 21,186 21,166 — 
Provision for credit losses331 1,383 (76)10,000 4,418 126 
Non-interest expense:
Marketing283 501 (44)1,047 1,564 (33)
Operating expense3,265 3,371 (3)10,000 9,758 
Total non-interest expense3,548 3,872 (8)11,047 11,322 (2)
Income from continuing operations before income taxes3,502 1,704 106 139 5,426 (97)
Income tax provision (benefit)1,096 375 192 (10)1,071 **
Income from continuing operations, net of tax2,406 1,329 81 149 4,355 (97)
Income (loss) from discontinued operations, net of tax **(1)15 **
Net income2,406 1,333 80 148 4,370 (97)
Dividends and undistributed earnings allocated to participating securities(20)(10)100 (5)(34)(85)
Preferred stock dividends(67)(53)26 (212)(185)15 
Issuance cost for redeemed preferred stock — — (22)— **
Net income (loss) available to common stockholders$2,319 $1,270 83 $(91)$4,151 **
Common share statistics 
Basic earnings per common share:
Net income (loss) from continuing operations$5.07 $2.70 88 %$(0.20)$8.80 **
Income from discontinued operations 0.01 ** 0.03 **
Net income (loss) per basic common share$5.07 $2.71 87 $(0.20)$8.83 **
Diluted earnings per common share:
Net income (loss) from continuing operations$5.06 $2.68 89 %$(0.20)$8.76 **
Income from discontinued operations 0.01 ** 0.03 **
Net income (loss) per diluted common share$5.06 $2.69 88 $(0.20)$8.79 **
Weighted-average common shares outstanding (in millions):
Basic 457.8 469.5 (2)%457.4 469.9 (3)%
Diluted458.5 471.8 (3)457.4 472.1 (3)
Common shares outstanding (period-end, in millions)457.4 465.7 (2)457.4 465.7 (2)
Dividends declared and paid per common share$0.10 $0.40 (75)$0.90 $1.20 (25)
Tangible book value per common share (period-end)(1)
83.67 80.46 83.67 80.46 
Balance sheet (average balances)
Loans held for investment$249,511 $246,147 %$255,232 $243,602 %
Interest-earning assets391,451 340,949 15 375,041 338,936 11 
Total assets422,854 374,905 13 408,233 372,148 10 
Interest-bearing deposits276,339 232,063 19 259,631 230,045 13 
Total deposits305,516 255,082 20 286,242 253,389 13 
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Three Months Ended September 30,Nine Months Ended September 30,
(Dollars in millions, except per share data and as noted)20202019Change20202019Change
Borrowings$44,161 $49,413 (11)%$48,577 $50,804 (4)%
Common equity51,995 52,566 (1)52,529 50,393 
Total stockholders’ equity57,223 57,245 — 57,802 54,861 
Selected performance metrics 
Purchase volume$107,102 $108,034 (1)%$297,171 $308,134 (4)%
Total net revenue margin(2)
7.54 %8.16 %(62)bps7.53 %8.33 %(80)bps
Net interest margin5.68 6.73 (105)6.06 6.80 (74)
Return on average assets(3)
2.28 1.42 86 0.05 1.56 (151)
Return on average tangible assets(4)
2.36 1.48 88 0.05 1.63 (158)
Return on average common equity(5)
17.84 9.63 %(0.23)10.94 **
Return on average tangible common equity(6)
24.98 13.45 12 (0.32)15.54 **
Equity-to-assets ratio(7)
13.53 15.27 (174)bps14.16 14.74 (58)bps
Non-interest expense as a percentage of average loans held for investment5.69 6.29 (60)5.77 6.20 (43)
Efficiency ratio(8)
48.07 55.64 (8)%52.14 53.49 (135)
Operating efficiency ratio(9)
44.24 48.44 (4)47.20 46.10 110 
Effective income tax rate from continuing operations31.3 22.0 (7.2)19.7 (27)%
Net charge-offs$1,073 $1,462 (27)$4,369 $4,569 (4)
Net charge-off rate1.72 %2.38 %(66)bps2.28 %2.50 %(22)bps

(Dollars in millions, except as noted)September 30, 2020December 31, 2019Change
Balance sheet (period-end)  
Loans held for investment$248,223 $265,809 (7)%
Interest-earning assets390,040 355,202 10 
Total assets421,883 390,365 
Interest-bearing deposits276,092 239,209 15 
Total deposits305,725 262,697 16 
Borrowings42,795 55,697 (23)
Common equity53,093 53,157 — 
Total stockholders’ equity58,424 58,011 
Credit quality metrics  
Allowance for credit losses$16,129 $7,208 124 %
Allowance as a percentage of loans held for investment (“allowance coverage ratio”)6.50 %2.71 %379 bps
30+ day performing delinquency rate1.97 3.51 (154)
30+ day delinquency rate2.22 3.74 (152)
Capital ratios  
Common equity Tier 1 capital(10)
13.0 %12.2 %80 bps
Tier 1 capital(10)
14.8 13.7 110 
Total capital(10)
17.3 16.1 120 
Tier 1 leverage(10)
10.6 11.7 (110)
Tangible common equity(11)
9.4 10.2 (80)
Supplementary leverage(10)
10.2 9.9 30 
Other
Employees (period end, in thousands)52.5 51.9 %
__________
(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)Total net revenue margin is calculated based on annualized total net revenue for the period divided by average interest-earning assets for the period.
(3)Return on average assets is calculated based on annualized income from continuing operations, net of tax, for the period divided by average total assets for the period.
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(4)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.
(5)Return on average common equity is calculated based on annualized net income available to common stockholders less income (loss) from discontinued operations, net of tax, 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.
(6)Return on average tangible common equity is a non-GAAP measure calculated based on annualized net income available to common stockholders less income (loss) from discontinued operations, net of tax, for the period, divided by average tangible common equity (“TCE”). Our calculation of return on average TCE may not be comparable to similarly-titled measures reported by other companies. See “MD&A—Table A—Reconciliation of Non-GAAP Measures” for additional information on non-GAAP measures.
(7)Equity-to-assets ratio is calculated based on average stockholders’ equity for the period divided by average total assets for the period.
(8)Efficiency ratio is calculated based on non-interest expense for the period divided by total net revenue for the period.
(9)Operating efficiency ratio is calculated based on operating expense for the period divided by total net revenue for the period.
(10)Capital ratios are calculated based on the Basel III Standardized Approach framework, see “MD&A—Capital Management” for additional information.
(11)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 $2.4 billion (net income of $5.06 per diluted common share) on total net revenue of $7.4 billion and net income of $148 million (which after considering preferred stock dividends and other items equated to a net loss of $0.20 per diluted common share) on total net revenue of $21.2 billion for the third quarter and first nine months of 2020, respectively. In comparison, we reported net income of $1.3 billion (net income of $2.69 per diluted common share) on total net revenue of $7.0 billion and net income of $4.4 billion (net income of $8.79 per diluted common share) on total net revenue of $21.2 billion for the third quarter and first nine months of 2019, respectively.
Our common equity Tier 1 capital ratio as calculated under the Basel III Standardized Approach was 13.0% and 12.2% as of September 30, 2020 and December 31, 2019, respectively. See “MD&A—Capital Management” for additional information.
On June 27, 2019, we announced that our Board of Directors authorized the repurchase of up to $2.2 billion of shares of our common stock (“2019 Stock Repurchase Program”) beginning in the third quarter of 2019 through the end of the second quarter of 2020. During the first quarter of 2020, we repurchased approximately $312 million of shares of our common stock under the 2019 Stock Repurchase Program before suspending further repurchases on March 13, 2020 in response to the COVID-19 pandemic through the program's expiration at the end of the second quarter of 2020. See “MD&A—Capital Management—Dividend Policy and Stock Purchases” for additional information.
Below are additional highlights of our performance in the third quarter and first nine months of 2020. These highlights are based on a comparison between the results of the third quarter and first nine months of 2020 and 2019, except as otherwise noted. The changes in our financial condition and credit performance are generally based on our financial condition and credit performance as of September 30, 2020 compared to December 31, 2019. 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 $1.1 billion to $2.4 billion in the third quarter of 2020 primarily driven by:
lower provision for credit losses driven by an allowance release due to lower loan balances in Domestic Card and Commercial Banking, including a $327 million release for credit card loans moved to held-for-sale; and
higher non-interest income due to a gain of $470 million on our equity investment in Snowflake Inc., which recently completed its initial public offering.
Our net income decreased $4.2 billion to $148 million in the first nine months of 2020 primarily driven by:
higher provision for credit losses in the first nine months of 2020 driven by allowance builds in the first and second quarters of 2020 due to expectations of economic worsening as a result of the COVID-19 pandemic; and
lower net interest income due to lower yields and lower outstanding balances in Domestic Card;
Partially offset by lower marketing expense.
Loans Held for Investment:
Period-end loans held for investment decreased by $17.6 billion to $248.2 billion as of September 30, 2020 from December 31, 2019 primarily due to a decline in purchase volume and higher payments in Domestic Card driven by the customer response to the COVID-19 pandemic, partially offset by growth in our auto and commercial loan portfolios.
Average loans held for investment increased by $3.4 billion to $249.5 billion in the third quarter of 2020 compared to the third quarter of 2019 primarily driven by growth in our auto and commercial loan portfolios, partially offset by a decline in purchase volume and higher payments in Domestic Card. Average loans held for investment increased by $11.6 billion to $255.2 billion in the first nine months of 2020 compared to the first nine
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months of 2019 primarily driven by growth in our commercial, auto and domestic credit card loan portfolios, including the Walmart portfolio acquired in the fourth quarter of 2019.
Net Charge-Off and Delinquency Metrics: Our net charge-off rate decreased by 66 basis points to 1.72% in the third quarter of 2020 compared to the third quarter of 2019 and decreased by 22 basis points to 2.28% in the first nine months of 2020 compared to the first nine months of 2019, primarily driven by the impact of short-term payment extensions offered to affected auto borrowers in response to the COVID-19 pandemic and strong credit performance in Domestic Card due to consumer payment behavior and the related impacts from government stimulus, partially offset by isolated charge offs in our commercial loan portfolio.
Our 30+ day delinquency rate decreased by 152 basis points to 2.22% as of September 30, 2020 from December 31, 2019 driven by strong credit performance in Domestic Card due to consumer payment behavior and the related impact from government stimulus, and short-term payment extensions offered to affected auto borrowers in response to the COVID-19 pandemic.
Allowance for Credit Losses: Our allowance for credit losses increased by $8.9 billion to $16.1 billion, and our allowance coverage ratio increased by 379 basis points to 6.50% as of September 30, 2020 from December 31, 2019, driven by the allowance builds in the first and second quarters of 2020 from expectations of economic worsening and uncertainty as a result of the COVID-19 pandemic as well as the adoption of the CECL standard in the first quarter of 2020.
Business Outlook
We discuss in this Report our expectations as of the time this Report was filed 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 Report 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 December 31, 2019 Form 10-K. Certain statements are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those in our forward-looking statements. Except as otherwise disclosed, forward-looking statements do not reflect:
any change in current dividend or repurchase strategies;
the effect of any acquisitions, divestitures or similar transactions that have not been previously disclosed;
any changes in laws, regulations or regulatory interpretations, in each case after the date as of which such statements are made;
the potential impact on our business, operations and reputation from, and expenses and uncertainties associated with, the Cybersecurity Incident, other than the incremental costs related to the incident we expect to incur in 2020 which will be separately reported as an adjusting item as it relates to the Company’s financial results; or
Moreover, this Report reflects certain assumptions regarding the potential effects of the COVID-19 pandemic on our business, results of operations, and financial condition. The extent to which the COVID-19 pandemic ultimately impacts our business, results of operations, and financial condition will depend on future developments, which are still uncertain and cannot be predicted, including the scope and duration of the COVID-19 pandemic and actions taken by governmental authorities and other third parties in response to the COVID-19 pandemic.
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 2019 Form 10-K and “Part II—Item 1A. Risk Factors” in our Quarterly Report on Form 10-Q for the period ended March 31, 2020 for factors that could materially influence our results.
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Total Company Expectations
In the third quarter of 2020, marketing in our Domestic Card business increased from unusually low levels, with most of the increase weighted toward the end of the quarter. We expect a significant sequential increase in total company marketing in the fourth quarter of 2020, driven by the normal seasonal increase between the third and fourth quarters, plus the impact of a full quarter of increased Domestic Card marketing.
CONSOLIDATED RESULTS OF OPERATIONS
The section below provides a comparative discussion of our consolidated financial performance for the third quarter and first nine months of 2020 and 2019. We provide a discussion of our business segment results in the following section, “MD&A—Business Segment Financial Performance.” This section should be read 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 interest income, including certain fees, earned on our interest-earning assets and the interest expense incurred 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 the average outstanding balance, interest income earned, interest expense incurred and average yield for the third quarter and first nine months of 2020 and 2019 for each major category of our interest-earning assets and interest-bearing liabilities. Nonperforming loans are included in the average loan balances below.
Table 2: Average Balances, Net Interest Income and Net Interest Margin
 Three Months Ended September 30,
 20202019
(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$105,390 $3,644 13.83 %$112,484 $4,369 15.54 %
Consumer banking67,822 1,417 8.36 61,271 1,297 8.47 
Commercial banking(2)
77,313 544 2.82 73,664 820 4.45 
Other(3)
 153 **— (57)**
Total loans, including loans held for sale250,525 5,758 9.19 247,419 6,429 10.39 
Investment securities91,777 443 1.93 80,762 583 2.88 
Cash equivalents and other interest-earning assets49,149 14 0.11 12,768 63 2.00 
Total interest-earning assets391,451 6,215 6.35 340,949 7,075 8.30 
Cash and due from banks4,697 4,376 
Allowance for credit losses(16,839)(7,125)
Premises and equipment, net4,319 4,279 
Other assets39,226 32,426 
Total assets$422,854 $374,905 
Liabilities and stockholders’ equity:
Interest-bearing liabilities:
Interest-bearing deposits$276,339 $476 0.69 %$232,063 $901 1.55 %
Securitized debt obligations15,032 43 1.14 16,750 123 2.94 
Senior and subordinated notes28,497 132 1.86 31,220 299 3.84 
Other borrowings and liabilities2,119 9 1.77 2,698 15 2.14 
Total interest-bearing liabilities321,987 660 0.82 282,731 1,338 1.89 
Non-interest-bearing deposits29,177 23,019 
Other liabilities14,467 11,910 
Total liabilities365,631 317,660 
Stockholders’ equity57,223 57,245 
Total liabilities and stockholders’ equity$422,854 $374,905 
Net interest income/spread$5,555 5.53 $5,737 6.41 
Impact of non-interest-bearing funding0.15 0.32 
Net interest margin5.68 %6.73 %

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 Nine Months Ended September 30,
 20202019
(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$112,305 $11,812 14.02 %$111,584 $13,103 15.66 %
Consumer banking65,457 4,128 8.41 60,072 3,751 8.33 
Commercial banking(2)
78,403 1,898 3.23 73,066 2,517 4.59 
Other(3)
 282 **21 (191)**
Total loans, including loans held for sale256,165 18,120 9.43 244,743 19,180 10.45 
Investment securities83,724 1,455 2.32 82,264 1,867 3.03 
Cash equivalents and other interest-earning assets35,152 67 0.25 11,929 196 2.19 
Total interest-earning assets375,041 19,642 6.98 338,936 21,243 8.36 
Cash and due from banks4,913 4,281 
Allowance for credit losses(13,796)(7,221)
Premises and equipment, net4,332 4,275 
Other assets37,743 31,877 
Total assets$408,233 $372,148 
Liabilities and stockholders’ equity:
Interest-bearing liabilities:
Interest-bearing deposits$259,631 $1,818 0.93 %$230,045 $2,588 1.50 %
Securitized debt obligations16,500 198 1.60 17,912 405 3.02 
Senior and subordinated notes30,371 551 2.42 30,897 923 3.98 
Other borrowings and liabilities3,147 35 1.50 3,228 53 2.19 
Total interest-bearing liabilities309,649 2,602 1.12 282,082 3,969 1.88 
Non-interest-bearing deposits26,611 23,344 
Other liabilities14,171 11,861 
Total liabilities350,431 317,287 
Stockholders’ equity57,802 54,861 
Total liabilities and stockholders’ equity$408,233 $372,148 
Net interest income/spread$17,040 5.86 $17,274 6.48 
Impact of non-interest-bearing funding0.20 0.32 
Net interest margin6.06 %6.80 %
__________
(1)Past due fees included in interest income totaled approximately $277 million and $933 million in the third quarter and first nine months of 2020, respectively, and $423 million and $1.2 billion in the third quarter and first nine months of 2019, respectively.
(2)Some of our commercial loans generate tax-exempt income. Accordingly, we present our Commercial Banking interest income and yields on a taxable-equivalent basis, calculated using the federal statutory rate of 21% and state taxes where applicable, with offsetting reductions to the Other category. Taxable-equivalent adjustments included in the interest income and yield computations for our commercial loans totaled approximately $20 million and $61 million in the third quarter and first nine months of 2020, respectively, and $21 million and $62 million in the third quarter and first nine months of 2019, respectively, with corresponding reductions to the Other category.
(3)Interest income/expense of Other represents the impact of hedge accounting on our loan portfolios and the offsetting reduction of the taxable-equivalent adjustments of our commercial loans as described above.
**    Not meaningful.
Net interest income decreased by $182 million to $5.6 billion in the third quarter of 2020 compared to the third quarter of 2019, and decreased by $234 million to $17.0 billion in the first nine months of 2020 compared to the first nine months of 2019 primarily driven by lower outstanding balances and lower yields in Domestic Card, partially offset by lower interest expense on interest-bearing liabilities.
Net interest margin decreased by 105 basis points to 5.68% in the third quarter of 2020 compared to the third quarter of 2019, and decreased by 74 basis points to 6.06% in the first nine months of 2020 compared to the first nine months of 2019 primarily
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driven by a shift in our asset mix with cash balances representing a greater proportion of total average interest-earning assets as compared to loans, partially offset by the lower interest rate paid on interest-bearing deposits.
Table 3 displays the change in our net interest income between periods and the extent to which the variance is attributable to:
changes in the volume of our interest-earning assets and interest-bearing liabilities; or
changes in the interest rates related to these assets and liabilities.
Table 3: Rate/Volume Analysis of Net Interest Income(1)
Three Months Ended September 30,Nine Months Ended September 30,
 2020 vs. 20192020 vs. 2019
(Dollars in millions)Total VarianceVolumeRateTotal VarianceVolumeRate
Interest income:
Loans:
Credit card$(725)$(264)$(461)$(1,291)$76 $(1,367)
Consumer banking120 137 (17)377 339 38 
Commercial banking(2)
(276)26 (302)(619)129 (748)
Other(3)
210  210 473  473 
Total loans, including loans held for sale(671)(101)(570)(1,060)544 (1,604)
Investment securities(140)53 (193)(412)25 (437)
Cash equivalents and other interest-earning assets(49)10 (59)(129)45 (174)
Total interest income(860)(38)(822)(1,601)614 (2,215)
Interest expense:
Interest-bearing deposits(425)76 (501)(770)207 (977)
Securitized debt obligations(80)(11)(69)(207)(30)(177)
Senior and subordinated notes(167)(24)(143)(372)(15)(357)
Other borrowings and liabilities(6)(3)(3)(18)(1)(17)
Total interest expense(678)38 (716)(1,367)161 (1,528)
Net interest income$(182)$(76)$(106)$(234)$453 $(687)
__________
(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.
(3)Interest income/expense of Other represents the impact of hedge accounting on our loan portfolios and the offsetting reduction of the taxable-equivalent adjustments of our commercial loans as described above.
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Non-Interest Income
Table 4 displays the components of non-interest income for the third quarter and first nine months of 2020 and 2019.
Table 4: Non-Interest Income
 Three Months Ended September 30,Nine Months Ended September 30,
(Dollars in millions)2020201920202019
Interchange fees, net$775 $790 $2,199 $2,368 
Service charges and other customer-related fees320 283 905 988 
Net securities gains25 25 44 
Other non-interest income:(1)
Mortgage banking revenue66 48 172 127 
Treasury and other investment income516 36 572 139 
Other124 60 273 226 
Total other non-interest income706 144 1,017 492 
Total non-interest income$1,826 $1,222 $4,146 $3,892 
________
(1)Includes gains of $19 million and $4 million on deferred compensation plan investments for the third quarter and first nine months of 2020, respectively, and gains of $1 million and $39 million for the third quarter and first nine months of 2019, respectively.
Non-interest income increased by $604 million to $1.8 billion in the third quarter of 2020 compared to the third quarter of 2019 and increased by $254 million to $4.1 billion in the first nine months of 2020 compared to the first nine months of 2019 primarily driven by a gain of $470 million on our equity investment in Snowflake Inc., which recently completed its initial public offering.
Provision for Credit Losses
Our provision for credit losses in each period is driven by net charge-offs, changes to the allowance for credit losses and changes to the reserve for unfunded lending commitments. Beginning in the first quarter of 2020, our allowance for credit losses and reserve for unfunded lending commitments are measured under the CECL standard.
Our provision for credit losses decreased by $1.1 billion to $331 million in the third quarter of 2020 compared to the third quarter of 2019 primarily driven by an allowance release due to lower loan balances in Domestic Card and Commercial Banking, including a $327 million release for credit card loans moved to held-for-sale. Our provision increased by $5.6 billion to $10.0 billion in the first nine months of 2020 compared to the first nine months of 2019 primarily driven by allowance builds in the first and second quarters of 2020 due to expectations of economic worsening as a result of the COVID-19 pandemic.
We provide additional information on the provision for credit losses and changes in the allowance for credit losses within “MD&A—Credit Risk Profile” and “Note 4—Allowance for Credit 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.”
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Non-Interest Expense
Table 5 displays the components of non-interest expense for the third quarter and first nine months of 2020 and 2019.
Table 5: Non-Interest Expense
Three Months Ended September 30,Nine Months Ended September 30,
(Dollars in millions)2020201920202019
Salaries and associate benefits(1)
$1,719 $1,605 $5,050 $4,736 
Occupancy and equipment506 519 1,546 1,533 
Marketing283 501 1,047 1,564 
Professional services327 314 918 919 
Communications and data processing310 312 920 944 
Amortization of intangibles14 25 52 84 
Other non-interest expense:
Bankcard, regulatory and other fee assessments69 100 210 273 
Collections74 100 255 291 
Fraud losses56 101 206 301 
Other(2)
190 295 843 677 
Total other non-interest expense389 596 1,514 1,542 
Total non-interest expense$3,548 $3,872 $11,047 $11,322 
_________
(1)Includes expense of $19 million and $4 million for the third quarter and first nine months of 2020, respectively, and $1 million and $39 million related to our deferred compensation plan investments for the third quarter and first nine months of 2019, respectively. These amounts have corresponding offsets in other non-interest income.
(2)Includes legal reserve builds of $40 million and $350 million, and net Cybersecurity Incident expenses of $6 million and $21 million in the third quarter and first nine months of 2020, respectively.
Non-interest expense decreased by $324 million to $3.5 billion in the third quarter of 2020 compared to the third quarter of 2019 and decreased by $275 million to $11.0 billion in the first nine months of 2020 compared to the first nine months of 2019 primarily driven by lower marketing expense.
Income Taxes
We recorded income tax expense of $1.1 billion (31.3% effective income tax rate) and an income tax benefit of $10 million (negative 7.2% effective income tax rate) in the third quarter and first nine months of 2020, respectively, compared to income tax expense of $375 million (22.0% effective income tax rate) and $1.1 billion (19.7% effective income tax rate) in the third quarter and first nine months of 2019, respectively. Our effective income tax rate decreased for the nine months ended September, 30, 2020 as compared to the same period in 2019 primarily driven by the relationship of our tax credits and discrete tax benefits in proportion to our pre-tax earnings. Our third quarter effective income tax rate increased in 2020 as compared to 2019 primarily driven by changes in expectations of pre-tax income due to the impacts of the COVID-19 pandemic.
We provide additional information on items affecting our income taxes and effective tax rate in “Note 1—Summary of Significant Accounting Policies” in this Report and “Note 15—Income Taxes” in our 2019 Form 10-K.
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CONSOLIDATED BALANCE SHEETS ANALYSIS
Total assets increased by $31.5 billion to $421.9 billion as of September 30, 2020 from December 31, 2019 primarily driven by an increase in our cash balances from deposit growth due to increased consumer savings aided by the impact of government stimulus, partially offset by a decline in loan balances.
Total liabilities increased by $31.1 billion to $363.5 billion as of September 30, 2020 from December 31, 2019 primarily driven by deposit growth from increased consumer savings aided by the impact of government stimulus.
Stockholders’ equity increased by $413 million to $58.4 billion as of September 30, 2020 from December 31, 2019 primarily driven by a $2.7 billion increase in accumulated other comprehensive income from an increase in the fair value of our investment securities and derivatives driven by the decline in interest rates, offset by the $2.2 billion impact on retained earnings for the adoption of the CECL standard in the first quarter of 2020.
The following is a discussion of material changes in the major components of our assets and liabilities during the first nine months of 2020. Period-end balance sheet amounts may vary from average balance sheet amounts due to liquidity and balance sheet management activities that are intended to support the adequacy of capital while managing our liquidity requirements, our customers and our market risk exposure in accordance with our risk appetite.
Investment Securities
Our investment securities portfolio consists of the following: U.S. Treasury securities, U.S. government-sponsored enterprise or agency (“Agency”) and non-agency residential mortgage-backed securities (“RMBS”), Agency commercial mortgage-backed securities (“CMBS”) and other securities. Agency securities include Government National Mortgage Association (“Ginnie Mae”) guaranteed securities, Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”) issued securities. The carrying value of our investments in U.S. Treasury and Agency securities represented 96% of our total investment securities portfolio, as of both September 30, 2020 and December 31, 2019.
The fair value of our available for sale securities portfolio increased by $20.6 billion to $99.9 billion as of September 30, 2020 from December 31, 2019, primarily driven by net purchases. See “Note 2—Investment Securities” for more information.
Table 6 presents the amortized cost and fair value for the major security types in our available for sale securities portfolio as of September 30, 2020 and December 31, 2019.
Table 6: Investment Securities
September 30, 2020December 31, 2019
(Dollars in millions)Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Investment securities available for sale:
U.S. Treasury securities$9,331 $9,345 $4,122 $4,124 
RMBS:
Agency72,948 75,366 62,003 62,839 
Non-agency1,093 1,293 1,235 1,499 
Total RMBS74,041 76,659 63,238 64,338 
Agency CMBS10,953 11,435 9,303 9,426 
Other securities(1)
2,410 2,414 1,321 1,325 
Total investment securities available for sale$96,735 $99,853 $77,984 $79,213 
__________
(1)Includes $1.5 billion and $117 million of asset-backed securities as of September 30, 2020, and December 31, 2019, respectively. The remaining amount is primarily comprised of supranational bonds and foreign government bonds.
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Loans Held for Investment
Total loans held for investment consist of both unsecuritized loans and loans held in our consolidated trusts. Table 7 summarizes the carrying value of our loans held for investment by portfolio segment, the allowance for credit losses and net loan balance as of September 30, 2020 and December 31, 2019.
Table 7: Loans Held for Investment
 September 30, 2020December 31, 2019
(Dollars in millions)LoansAllowanceNet LoansLoansAllowanceNet Loans
Credit Card$103,641 $11,612 $92,029 $128,236 $5,395 $122,841 
Consumer Banking68,688 2,747 65,941 63,065 1,038 62,027 
Commercial Banking75,894 1,770 74,124 74,508 775 73,733 
Total$248,223 $16,129 $232,094 $265,809 $7,208 $258,601 
Loans held for investment decreased by $17.6 billion to $248.2 billion as of September 30, 2020 from December 31, 2019 primarily driven by a decline in purchase volume and higher payments in Domestic Card driven by the customer response to the COVID-19 pandemic, partially offset by growth in our auto and commercial loan portfolios.
We provide additional information on the composition of our loan portfolio and credit quality below in “MD&A—Credit Risk Profile,” “MD&A—Consolidated Results of Operations” and “Note 3—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 raise funding through the issuance of senior and subordinated notes, securitized debt obligations, federal funds purchased, securities loaned or sold under agreements to repurchase, and Federal Home Loan Banks (“FHLB”) advances secured by certain portions of our loan and securities portfolios.
Table 8 provides the composition of our primary sources of funding as of September 30, 2020 and December 31, 2019.
Table 8: Funding Sources Composition
September 30, 2020December 31, 2019
(Dollars in millions)Amount% of TotalAmount% of Total
Deposits:
Consumer Banking$249,684 71 %$213,099 67 %
Commercial Banking36,783 11 32,134 10 
Other(1)
19,258 6 17,464 
Total deposits305,725 88 262,697 82 
Securitized debt obligations13,566 4 17,808 
Other debt29,229 8 37,889 12 
Total funding sources$348,520 100 %$318,394 100 %
__________
(1)Includes brokered deposits of $18.3 billion and $16.7 billion as of September 30, 2020 and December 31, 2019, respectively.
Total deposits increased by $43.0 billion to $305.7 billion as of September 30, 2020 from December 31, 2019 primarily driven by deposit growth from increased consumer savings aided by the impact of government stimulus.
Securitized debt obligations decreased by $4.2 billion to $13.6 billion as of September 30, 2020 from December 31, 2019 primarily driven by net maturities in our credit card securitization program, partially offset by net issuances in our auto securitization program.
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Other debt decreased by $8.7 billion to $29.2 billion as of September 30, 2020 from December 31, 2019 primarily driven by maturities of our short-term FHLB advances and the repurchase of a portion of our senior unsecured debt.
We provide additional information on our funding sources in “MD&A—Liquidity Risk Profile” and “Note 7—Deposits and Borrowings.”
OFF-BALANCE SHEET ARRANGEMENTS
In the ordinary course of business, we engage in certain activities that are not reflected on our consolidated balance sheets, generally referred to as off-balance sheet arrangements. These activities typically involve transactions with unconsolidated variable interest entities (“VIEs”) as well as other arrangements, such as letters of credit, loan commitments and guarantees, to meet the financing needs of our customers and support their ongoing operations. We provide additional information regarding these types of activities in “Note 5—Variable Interest Entities and Securitizations” and “Note 13—Commitments, Contingencies, Guarantees and Others.”
BUSINESS SEGMENT FINANCIAL PERFORMANCE
Our principal operations are organized for management reporting purposes into three major business segments, which are defined primarily based on the products and services provided or the types of customer served: Credit Card, Consumer Banking and Commercial Banking. The operations of acquired businesses have been integrated into our existing business segments. Certain activities that are not part of a segment, such as management of our corporate investment portfolio and asset/liability management by our centralized Corporate Treasury group and residual tax expense or benefit to arrive at the consolidated effective tax rate that is not assessed to our primary business segments, are included in the Other category.
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 may periodically change our business segments or reclassify business segment results based on modifications to our management reporting methodologies and changes in organizational alignment. Our business segment results are intended to reflect each segment as if it were a stand-alone business. We use an internal management and reporting process to derive our business segment results. Our internal management and reporting process employs various allocation methodologies, including funds transfer pricing, to assign certain balance sheet assets, deposits and other liabilities and their related revenue and expenses directly or indirectly attributable to each business segment. Total interest income and non-interest income are directly attributable to the segment in which they are reported. The net interest income of each segment reflects the results of our funds transfer pricing process, which is primarily based on a matched funding concept that takes into consideration market interest rates. Our funds transfer pricing process provides a funds credit for sources of funds, such as deposits generated by our Consumer Banking and Commercial Banking businesses, and a charge for the use of funds by each segment. The allocation process is unique to each business segment and acquired business. We regularly assess the assumptions, methodologies and reporting classifications used for segment reporting, which may result in the implementation of refinements or changes in future periods. We provide additional information on the allocation methodologies used to derive our business segment results in “Note 17—Business Segments and Revenue from Contracts with Customers” in our 2019 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 third quarter and first nine months of 2020 and 2019 and provide a comparative discussion of these results, as well as changes in our financial condition and credit performance metrics as of September 30, 2020 compared to December 31, 2019. We provide a reconciliation of our total business segment results to our reported consolidated results in “Note 12—Business Segments and Revenue from Contracts with Customers.”
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Business Segment Financial Performance
Table 9 summarizes our business segment results, which we report based on revenue and income (loss) from continuing operations, for the third quarter and first nine months of 2020 and 2019.
Table 9: Business Segment Results
 
Three Months Ended September 30,
 
20202019
 
Total Net
Revenue
(1)
Net Income
(Loss)(2)
Total Net
Revenue (Loss)
(1)
Net Income
(Loss)(2)
(Dollars in millions)
Amount% of
Total
Amount% of
Total
Amount% of
Total
Amount% of
Total
Credit Card
$4,305 58 %$1,414 59 %$4,416 63 %$734 55 %
Consumer Banking
2,011 27 796 33 1,847 27 505 38 
Commercial Banking(3)
754 10 309 13 707 10 154 12 
Other(3)
311 5 (113)(5)(11)— (64)(5)
Total
$7,381 100 %$2,406 100 %$6,959 100 %$1,329 100 %

 
Nine Months Ended September 30,
 
20202019
 
Total Net
Revenue
(1)
Net Income
(Loss)(2)
Total Net
Revenue (Loss)
(1)
Net Income
(Loss)(2)
(Dollars in millions)
Amount% of
Total
Amount% of
Total
Amount% of
Total
Amount% of
Total
Credit Card
$13,132 62 %$(110)(74)%$13,525 64 %$2,423 56 %
Consumer Banking
5,556 26 630 423 5,561 26 1,516 35 
Commercial Banking(3)
2,181 10 (220)(148)2,097 10 457 10 
Other(3)
317 2 (151)(101)(17)— (41)(1)
Total
$21,186 100 %$149 100 %$21,166 100 %$4,355 100 %
__________
(1)Total net revenue (loss) consists of net interest income and non-interest income.
(2)Net income (loss) for our business segments and the Other category is based on income (loss) from continuing operations, net of tax.
(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.
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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 $1.4 billion in the third quarter of 2020 and a net loss of $110 million in the first nine months of 2020, compared to net income of $734 million and $2.4 billion in the third quarter and first nine months of 2019, 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 September 30,Nine Months Ended September 30,
(Dollars in millions, except as noted)20202019Change20202019Change
Selected income statement data:
Net interest income$3,292 $3,546 (7)%$10,363 $10,667 (3)%
Non-interest income1,013 870 16 2,769 2,858 (3)
Total net revenue(1)
4,305 4,416 (3)13,132 13,525 (3)
Provision for credit losses450 1,087 (59)7,096 3,571 99 
Non-interest expense2,003 2,360 (15)6,180 6,784 (9)
Income (loss) from continuing operations before income taxes1,852 969 91 (144)3,170 **
Income tax provision (benefit)438 235 86 (34)747 **
Income (loss) from continuing operations, net of tax$1,414 $734 93 $(110)$2,423 **
Selected performance metrics:
Average loans held for investment(2)
$105,367 $112,371 (6)$112,272 $111,545 
Average yield on loans held for investment(3)
13.83 %15.55 %(172)bps14.03 %15.66 %(163)bps
Total net revenue margin(4)
16.34 15.72 62 15.59 16.17 (58)
Net charge-offs$943 $1,151 (18)%$3,590 $3,835 (6)%
Net charge-off rate3.58 %4.09 %(51)bps4.26 %4.58 %(32)bps
Purchase volume$107,102 $108,034 (1)%$297,171 $308,134 (4)%
(Dollars in millions, except as noted)September 30, 2020December 31, 2019Change
Selected period-end data:
Loans held for investment(2)(5)
$103,641 $128,236 (19)%
30+ day performing delinquency rate2.20 %3.89 %(169)bps
30+ day delinquency rate2.21 3.91 (170)
Nonperforming loan rate(6)
0.02 0.02 — 
Allowance for credit losses(2)
$11,612 $5,395 115 %
Allowance coverage ratio11.20 %4.21 %699 bps
__________
(1)We recognize finance charges and fee income on open-ended loans in accordance with the contractual provisions of the credit arrangements and charge-off uncollectible amounts. Total net revenue was reduced by $235 million and $942 million in the third quarter and first nine months of 2020 for finance charges and fees charged-off as uncollectible and by $330 million and $1.0 billion in the third quarter and first nine months of 2019 for the estimated uncollectible amount of billed finance charges and fees and related losses.
(2)Period-end loans held for investment and average loans held for investment include billed finance charges and fees. Concurrent with our adoption of the CECL standard in the first quarter of 2020, we reclassified our finance charge and fee reserve to our allowance for credit losses, with a corresponding increase to credit card loans held for investment.
(3)Average yield on loans held for investment is calculated by dividing 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)We transferred a $2.1 billion partnership loan portfolio to held for sale as of September 30, 2020.
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(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.
**    Not meaningful
Key factors affecting the results of our Credit Card business for the third quarter and first nine months of 2020 compared to the third quarter and first nine months of 2019, and changes in financial condition and credit performance between September 30, 2020 and December 31, 2019 include the following:
Net Interest Income: Net interest income decreased by $254 million to $3.3 billion in the third quarter of 2020 primarily driven by lower margins and lower average loan balances from customer behavior in response to the COVID-19 pandemic. Net interest income decreased by $304 million to $10.4 billion in the first nine months of 2020 primarily driven by lower margins, partially offset by growth in our domestic credit card loan portfolio, including the acquired Walmart portfolio.
Non-Interest Income: Non-interest income increased by $143 million to $1.0 billion in the third quarter of 2020 primarily driven by higher revenues from card partnership arrangements and a release in our U.K. PPI reserve in the current quarter compared to a build in the prior year quarter. Non-interest income decreased by $89 million to $2.8 billion in the first nine months of 2020 primarily driven by lower net interchange fees from a decline in purchase volume, partially offset by higher revenues from card partnership arrangements.
Provision for Credit Losses: Provision for credit losses decreased by $637 million to $450 million in the third quarter of 2020 primarily driven by an allowance release for partnership loans moved to held-for sale and lower loan balances. Provision for credit losses increased by $3.5 billion to $7.1 billion in the first nine months of 2020 driven by allowance builds in the first and second quarters of 2020 due to expectations of economic worsening as a result of the COVID-19 pandemic.
Non-Interest Expense: Non-interest expense decreased by $357 million to $2.0 billion in the third quarter of 2020 and decreased by $604 million to $6.2 billion in the first nine months of 2020 primarily driven by our decision to decrease marketing spend in the current economic environment. The third quarter of 2020 also benefited from a release in our U.K. PPI reserve compared to a build in the prior year quarter.
Loans Held for Investment:
Period-end loans held for investment decreased by $24.6 billion to $103.6 billion as of September 30, 2020 from December 31, 2019 and average loans held for investment decreased by $7.0 billion to $105.4 billion in the third quarter of 2020 compared to the third quarter of 2019 primarily due to a decline in purchase volume and higher payments in response to the COVID-19 pandemic. Period-end loans held for investment also declined due to the transfer of a $2.1 billion partnership loan portfolio to held for sale as of September 30, 2020.
Average loans held for investment increased by $727 million to $112.3 billion in the first nine months of 2020 compared to the first nine months of 2019 primarily due to the acquired Walmart portfolio, largely offset by a decline in purchase volume and higher payments in response to the COVID-19 pandemic.
Net Charge-Off and Delinquency Metrics: The net charge-off rate decreased by 51 basis points to 3.58% in the third quarter of 2020 compared to the third quarter of 2019 and decreased by 32 basis points to 4.26% in the first nine months of 2020 compared to the first nine months of 2019 primarily driven by strong credit performance in Domestic Card due to consumer payment behavior, the impact of the government stimulus, and the impact of the acquired Walmart portfolio.
The 30+ day delinquency rate decreased by 170 basis points to 2.21% as of September 30, 2020 from December 31, 2019 due to lower delinquency inventories in our domestic credit card loan portfolio primarily driven by consumer payment behavior, the impact of government stimulus, and seasonality.

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Domestic Card Business
The Domestic Card business generated net income from continuing operations of $1.3 billion in the third quarter of 2020 and net loss of $192 million in the first nine months of 2020, compared to net income from continuing operations of $837 million and $2.4 billion in the third quarter and first nine months of 2019, respectively. In the third quarter and first nine months of 2020 and 2019, the Domestic Card business accounted for greater than 90% of total net revenue of our Credit Card business.
Table 10.1 summarizes the financial results for Domestic Card business and displays selected key metrics for the periods indicated.
Table 10.1: Domestic Card Business Results
Three Months Ended September 30,Nine Months Ended September 30,
(Dollars in millions, except as noted)20202019Change20202019Change
Selected income statement data:
Net interest income$2,995 $3,299 (9)%$9,470 $9,792 (3)%
Non-interest income952 878 2,589 2,722 (5)
Total net revenue(1)(2)
3,947 4,177 (6)12,059 12,514 (4)
Provision for credit losses378 1,010 (63)6,748 3,325 103 
Non-interest expense1,802 2,076 (13)5,562 6,059 (8)
Income (loss) from continuing operations before income taxes1,767 1,091 62 (251)3,130 **
Income tax provision (benefit)419 254 65 (59)729 **
Income (loss) from continuing operations, net of tax$1,348 $837 61 $(192)$2,401 **
Selected performance metrics:
Average loans held for investment(3)
$97,306 $103,426 (6)$103,980 $102,677 
Average yield on loans held for investment(4)
13.57 %15.74 %(217)bps13.82 %15.67 %(185)bps
Total net revenue margin(5)
16.22 16.15 15.46 16.25 (79)
Net charge-offs$885 $1,065 (17)%$3,359 $3,599 (7)%
Net charge-off rate3.64 %4.12 %(48)bps4.31 %4.67 %(36)bps
Purchase volume$98,107 $99,087 (1)%$273,215 $282,878 (3)%
(Dollars in millions, except as noted)September 30, 2020December 31, 2019Change
Selected period-end data:
Loans held for investment(3)(6)
$95,541 $118,606 (19)%
30+ day performing delinquency rate2.21 %3.93 %(172)bps
Allowance for credit losses$11,062 $4,997 121 %
Allowance coverage ratio11.58 %4.21 %737 bps
__________
(1)We recognize finance charges and fee income on open-ended loans in accordance with the contractual provisions of the credit arrangements and charge-off uncollectible amounts. Finance charges and fees charged-off as uncollectible are reflected as a reduction in total net revenue.
(2)We pay bounties to third parties for new accounts, which are considered loan origination costs and therefore deferred and amortized as an offset to revenue. Total net revenue was reduced by $97 million and $370 million in the third quarter and first nine months of 2020 and by $127 million and $333 million in the third quarter and first nine months of 2019 due to the amortization of these bounties. As of September 30, 2020, approximately $95 million of deferred bounty payments remained to be amortized in future periods.
(3)Period-end loans held for investment and average loans held for investment include billed finance charges and fees. Concurrent with our adoption of the CECL standard in the first quarter of 2020, we reclassified our finance charge and fee reserve to our allowance for credit losses, with a corresponding increase to credit card loans held for investment.
(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)Total net revenue margin is calculated by dividing annualized total net revenue for the period by average loans held for investment during the period.
(6)We transferred a $2.1 billion partnership loan portfolio to held for sale as of September 30, 2020.
**    Not meaningful
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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 third quarter of 2020 compared to the third quarter of 2019 and decreased in the first nine months of 2020 compared to the first nine months of 2019 primarily driven by:
lower provision for credit losses in the third quarter of 2020 due to an allowance release for partnership loans moved to held-for sale and lower loan balances, and higher provision for credit losses in the first nine months of 2020 driven by allowance builds in the first and second quarters of 2020 due to expectations of economic worsening as a result of the COVID-19 pandemic;
lower net interest income in the third quarter of 2020 due to lower margins and lower average loan balances from customer behavior in response to the COVID-19 pandemic, and lower net interest income in the first nine months of 2020 due to lower margins, partially offset by growth in our domestic credit card loan portfolio, including the acquired Walmart portfolio;
higher non-interest income in the third quarter of 2020 primarily driven by higher revenues from card partnership arrangements, and lower non-interest income in the first nine months of 2020 primarily driven by lower net interchange fees from a decline in purchase volume, partially offset by higher revenues from card partnership arrangements; and
lower non-interest expense primarily driven by our decision to decrease marketing spend in the current economic environment.

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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, net interchange income and 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 $796 million and $630 million in the third quarter and first nine months of 2020, respectively, and $505 million and $1.5 billion in the third quarter and first nine months of 2019, 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 September 30,Nine Months Ended September 30,
(Dollars in millions, except as noted)20202019Change20202019Change
Selected income statement data:
Net interest income$1,904 $1,682 13 %$5,226 $5,070 %
Non-interest income107 165 (35)330 491 (33)
Total net revenue2,011 1,847 5,556 5,561 — 
Provision (benefit) for credit losses(43)203 **1,693 603 181 
Non-interest expense1,011 985 3,038 2,981 
Income from continuing operations before income taxes1,043 659 58 825 1,977 (58)
Income tax provision 247 154 60 195 461 (58)
Income from continuing operations, net of tax$796 $505 58 $630 $1,516 (58)
Selected performance metrics:
Average loans held for investment:
Auto$64,476 $58,517 10 $62,434 $57,282 
Retail banking3,346 2,752 22 3,023 2,790 
Total consumer banking$67,822 $61,269 11 $65,457 $60,072 
Average yield on loans held for investment(1)
8.36 %8.47 %(11)bps8.41 %8.33 %bps
Average deposits$248,418 $204,933 21 %$231,988 $203,404 14 %
Average deposits interest rate0.66 %1.31 %(65)bps0.86 %1.25 %(39)bps
Net charge-offs$48 $251 (81)%$486 $644 (25)%
Net charge-off rate0.28 %1.64 %(136)bps0.99 %1.43 %(44)bps
Auto loan originations$8,979 $8,175 10 %$24,910 $21,723 15 %
(Dollars in millions, except as noted)September 30, 2020December 31, 2019Change
Selected period-end data:
Loans held for investment:
Auto$65,394 $60,362 %
Retail banking3,294 2,703 22 
Total consumer banking$68,688 $63,065 
30+ day performing delinquency rate3.62 %6.63 %(301)bps
30+ day delinquency rate3.90 7.34 (344)
Nonperforming loan rate0.38 0.81 (43)
Nonperforming asset rate(2)
0.43 0.91 (48)
Allowance for credit losses$2,747 $1,038 165 %
Allowance coverage ratio4.00 %1.65 %235 bps
Deposits$249,684 $213,099 17 %
__________
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(1)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.
(2)Nonperforming assets primarily consist of nonperforming loans and repossessed assets. The total nonperforming asset rate is calculated based on total nonperforming assets divided by the combined period-end total loans held for investment and repossessed assets.
**    Not meaningful.
Key factors affecting the results of our Consumer Banking business for the third quarter and first nine months of 2020 compared to the third quarter and first nine months of 2019, and changes in financial condition and credit performance between September 30, 2020 and December 31, 2019 include the following:
Net Interest Income: Net interest income increased by $222 million to $1.9 billion in the third quarter of 2020 primarily driven by growth in our auto loan portfolio. Net interest income increased by $156 million to $5.2 billion in the first nine months of 2020 primarily driven by growth in our auto loan portfolio, partially offset by lower margins in our Retail Banking business due to a decline in interest rates.
Non-Interest Income: Non-interest income decreased by $58 million to $107 million in the third quarter of 2020 and decreased by $161 million to $330 million in the first nine months of 2020 primarily driven by lower service charges and fees on deposit accounts as a result of the COVID-19 pandemic.
Provision for Credit Losses: Provision for credit losses decreased by $246 million to a benefit of $43 million in the third quarter of 2020 due to lower losses due to short-term payment extensions offered to affected auto borrowers in response to the COVID-19 pandemic and an allowance release due to favorable auction prices. Provision for credit losses increased by $1.1 billion to $1.7 billion in the first nine months of 2020 driven by allowance builds in the first and second quarters of 2020 due to expectations of economic worsening as a result of the COVID-19 pandemic.
Non-Interest Expense: Non-interest expense increased by $26 million to $1.0 billion in the third quarter of 2020 and increased by $57 million to $3.0 billion in the first nine months of 2020 primarily driven by continued investment in technology and infrastructure.
Loans Held for Investment: Period-end loans held for investment increased by $5.6 billion to $68.7 billion as of September 30, 2020 from December 31, 2019, and average loans held for investment increased by $6.6 billion to $67.8 billion in the third quarter of 2020 compared to the third quarter of 2019 and increased by $5.4 billion to $65.5 billion in the first nine months of 2020 compared to the first nine months of 2019 primarily due to growth in our auto loan portfolio.
Deposits: Period-end deposits increased by $36.6 billion to $249.7 billion as of September 30, 2020 from December 31, 2019 primarily driven by deposit growth from increased consumer savings aided by the impact of government stimulus.
Net Charge-Off and Delinquency Metrics: The net charge-off rate decreased by 136 basis points to 0.28% in the third quarter of 2020 compared to the third quarter of 2019 and decreased by 44 basis points to 0.99% in the first nine months of 2020 compared to the first nine months of 2019 primarily driven by the impact of short-term payment extensions offered to affected auto borrowers in response to the COVID-19 pandemic.
The 30+ day delinquency rate decreased by 344 basis points to 3.90% as of September 30, 2020 from December 31, 2019 driven by lower auto delinquency inventories resulting from the short-term payment extensions offered to affected auto borrowers in response to the COVID-19 pandemic.

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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 transaction 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 and operating costs.
Our Commercial Banking business generated net income from continuing operations of $309 million in the third quarter of 2020 and a net loss of $220 million in the first nine months of 2020, compared to net income of $154 million and $457 million in the third quarter and first nine months of 2019, respectively.
Table 12 summarizes the financial results of our Commercial Banking business and displays selected key metrics for the periods indicated.

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Table 12: Commercial Banking Business Results
 Three Months Ended September 30,Nine Months Ended September 30,
(Dollars in millions, except as noted)20202019Change20202019Change
Selected income statement data:
Net interest income$517 $486 %$1,526 $1,489 %
Non-interest income237 221 655 608 
Total net revenue(1)
754 707 2,181 2,097 
Provision (benefit) for credit losses(2)
(74)93 **1,209 244 **
Non-interest expense424 414 1,261 1,258 — 
Income (loss) from continuing operations before income taxes404 200 102 (289)595 **
Income tax provision (benefit)95 46 107 (69)138 **
Income (loss) from continuing operations, net of tax$309 $154 101 $(220)$457 **
Selected performance metrics:
Average loans held for investment:
Commercial and multifamily real estate$30,918 $29,698 $31,239 $29,418 
Commercial and industrial45,404 42,807 46,264 42,474 
Total commercial lending76,322 72,505 77,503 71,892 
Small-ticket commercial real estate ** 93 **
Total commercial banking$76,322 $72,507 $77,503 $71,985 
Average yield on loans held for investment(1)(3)
2.82 %4.45 %(163)bps3.23 %4.61 %(138)bps
Average deposits$36,278 $30,693 18 %$34,391 $30,957 11 %
Average deposits interest rate0.25 %1.25 %(100)bps0.47 %1.21 %(74)bps
Net charge-offs$82 $60 37 %$293 $90 **
Net charge-off rate0.43 %0.33 %10 bps0.50 %0.17 %33 bps
(Dollars in millions, except as noted)September 30, 2020December 31, 2019Change
Selected period-end data:
Loans held for investment:
Commercial and multifamily real estate$31,197 $30,245 %
Commercial and industrial44,697 44,263 
Total commercial banking$75,894 $74,508 
Nonperforming loan rate1.01 %0.60 %41 bps
Nonperforming asset rate(4)
1.01 0.60 41 
Allowance for credit losses(2)
$1,770 $775 128 %
Allowance coverage ratio2.33 %1.04 %129 bps
Deposits$36,783 $32,134 14 %
Loans serviced for others41,602 38,481 
__________
(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)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 is included in other liabilities on our consolidated balance sheets. Our reserve for unfunded lending commitments totaled $195 million and $130 million as of September 30, 2020 and December 31, 2019, respectively.
(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)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 and other foreclosed assets.
**    Not meaningful.
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Key factors affecting the results of our Commercial Banking business for the third quarter and first nine months of 2020 compared to the third quarter and first nine months of 2019, and changes in financial condition and credit performance between September 30, 2020 and December 31, 2019 include the following:
Net Interest Income: Net interest income increased by $31 million to $517 million in the third quarter of 2020 and increased by $37 million to $1.5 billion in the first nine months of 2020 as higher average loans and deposits were partially offset by slightly lower loan margins.
Non-Interest Income: Non-interest income increased by $16 million to $237 million in the third quarter of 2020 primarily driven by higher revenue from our agency business partially offset by lower activity in our capital markets business and increased by $47 million to $655 million in the first nine months of 2020 primarily driven by higher revenue from our agency and capital markets businesses.
Provision for Credit Losses: Provision for credit losses decreased by $167 million to a benefit of $74 million in the third quarter of 2020 driven by an allowance release primarily due to lower loan balances. Provision for credit losses increased by $965 million to $1.2 billion in the first nine months of 2020 driven by allowance builds in the first and second quarters of 2020 due to expectations of economic worsening as a result of the COVID-19 pandemic as well as credit deterioration in our energy loan portfolio.
Non-Interest Expense: Non-interest expense remained substantially flat at $424 million in the third quarter of 2020 and $1.3 billion in the first nine months of 2020.
Loans Held for Investment: Period-end loans held for investment increased by $1.4 billion to $75.9 billion as of September 30, 2020 from December 31, 2019, and average loans held for investment increased by $3.8 billion to $76.3 billion in the third quarter of 2020 compared to the third quarter of 2019 and increased by $5.5 billion to $77.5 billion in the first nine months of 2020 compared to the first nine months of 2019 driven by growth across our commercial loan portfolio.
Deposits: Period-end deposits increased by $4.6 billion to $36.8 billion as of September 30, 2020 from December 31, 2019 primarily driven by elevated client liquidity.
Net Charge-Off and Nonperforming Metrics: The net charge-off rate increased by 10 basis points to 0.43% in the third quarter of 2020 primarily driven by isolated charge-offs in our real estate portfolio and increased by 33 basis points to 0.50% in the first nine months of 2020 primarily driven by elevated charge-offs in our energy loan portfolio.
The nonperforming loan rate increased by 41 basis points to 1.01% as of September 30, 2020 from December 31, 2019 driven by credit downgrades in industries that are impacted by the COVID-19 pandemic.
Other Category
Other includes unallocated amounts related to our centralized Corporate Treasury group activities, such as management of our corporate investment securities portfolio, asset/liability management and certain capital management activities. Other also includes:
unallocated corporate revenue and expenses that do not directly support the operations of the business segments or for which the business segments are not considered financially accountable in evaluating their performance, such as certain restructuring charges;
offsets related to certain line-item reclassifications;
residual tax expense or benefit to arrive at the consolidated effective tax rate that is not assessed to our primary business segments; and
foreign exchange-rate fluctuations on foreign currency-denominated balances.
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Table 13 summarizes the financial results of our Other category for the periods indicated.
Table 13: Other Category Results
 Three Months Ended September 30,Nine Months Ended September 30,
(Dollars in millions)20202019Change20202019Change
Selected income statement data:
Net interest income (loss)$(158)$23 **$(75)$48 **
Non-interest income (loss)469 (34)**392 (65)**
Total net revenue (loss)(1)
311 (11)**317 (17)**
Provision (benefit) for credit losses(2)— **2 — **
Non-interest expense(2)
110 113 (3)%568 299 90 %
Income (loss) from continuing operations before income taxes203 (124)**(253)(316)(20)
Income tax provision (benefit)316 (60)**(102)(275)(63)
Loss from continuing operations, net of tax$(113)$(64)77 $(151)$(41)**
__________
(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)Includes legal reserve builds of $40 million and $350 million, and net Cybersecurity Incident expenses of $6 million and $21 million in the third quarter and first nine months of 2020, respectively.
**    Not meaningful.
Net loss from continuing operations was $113 million and $64 million in the third quarter of 2020 and 2019, respectively, primarily driven by an increase in income tax provision due to changes in expectations in pre-tax income for 2020, partially offset by a gain of $470 million on our equity investment in Snowflake Inc., which recently completed its initial public offering.
Net loss from continuing operations was $151 million and $41 million in the first nine months of 2020 and 2019, respectively, primarily driven by legal reserve builds and reduced income tax benefit, partially offset by the gain on our equity investment in Snowflake Inc. noted above.
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 this Report and in our December 31, 2019 Form 10-K.
We have identified the following accounting estimates 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. Our critical accounting policies and estimates are as follows:
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.
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Loan Loss Reserves
In the first quarter of 2020, we adopted Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“CECL”) and updated our critical accounting policy and estimate for loan loss reserves. We maintain an allowance for credit losses that represents management’s current estimate of expected credit losses inherent in our credit card, consumer banking and commercial banking loans held for investment as of each balance sheet date. We also separately reserve for unfunded lending commitments that are not unconditionally cancellable. For all such loans and unfunded lending commitments, our estimate of expected credit losses includes a reasonable and supportable forecast period of one year and then reverts over a one-year period to historical losses. We build our allowance for credit losses and reserve for unfunded lending commitments through the provision for credit losses, which is driven by charge-offs, changes in the allowance for credit losses and changes in the reserve for unfunded lending commitments. The allowance for credit losses was $16.1 billion as of September 30, 2020 and $7.2 billion as of December 31, 2019.
We have an established process, using analytical tools and management judgment, to determine our allowance for credit losses. Establishing the allowance each quarter involves evaluating many factors including, but not limited to, historical loss and recovery experience, recent trends in delinquencies and charge-offs, risk ratings, the impact of bankruptcy filings, the value of collateral underlying secured loans, account seasoning, changes in our credit evaluation, underwriting and collection management policies, seasonality, credit bureau scores, current general economic conditions, our reasonable and supportable forecasts of future economic conditions, changes in the legal and regulatory environment and uncertainties in forecasting and modeling techniques used in estimating our allowance for credit losses. Key factors that have a significant impact on our allowance for credit losses include assumptions about employment levels, home prices and the valuation of commercial properties, automobiles and other collateral.
We have a governance framework intended to ensure that our estimate of the allowance for credit losses is appropriate. Our governance framework provides for oversight of methods, models, qualitative adjustments, process controls and results. At least quarterly, representatives from the Finance and Risk Management organizations review and assess our allowance methodologies, key assumptions and the appropriateness of the allowance for credit losses.
Groups independent of our estimation functions participate in the review and validation process. Tasks performed by these groups include periodic review of the rationale for and quantification of inputs requiring judgment as well as adjustments to results.
We have a model policy, established by an independent Model Risk Office, which governs the validation of models and related supporting documentation to ensure the appropriate use of models for estimating credit losses. The Model Risk Office validates all models and requires ongoing monitoring of their performance.
In addition to the allowance for credit losses, on a quarterly basis, we review and assess our estimate of expected losses related to unfunded lending commitments that are not unconditionally cancellable. The factors impacting our assessment generally align with those considered in our evaluation of the allowance for credit losses for the Commercial Banking business. Changes to the reserve for losses on unfunded lending commitments are recorded through the provision for credit losses in the consolidated statements of income and to other liabilities on the consolidated balance sheets.
Although we examine a variety of externally available data, as well as our internal loan performance data, to determine our allowance for credit losses and reserve for unfunded lending commitments, our estimation process is subject to risks and uncertainties, including a reliance on historical loss and trend information that may not be representative of current conditions and indicative of future performance as well as economic forecasts that may not align with actual future economic conditions. Accordingly, our actual credit loss experience may not be in line with our expectations. We provide additional information on the methodologies and key assumptions used in determining our allowance for credit losses for each of our loan portfolio segments in “Note 1—Summary of Significant Accounting Policies” and changes in our allowance in “Note 4—Allowance for Credit Losses and Reserve for Unfunded Lending Commitments.”
Finance Charge and Fee Reserve
Finance charges and fees on credit card loans are recorded in revenue when earned. Billed finance charges and fees on credit card loans are included in loans held for investment while unbilled finance charges and fees are included in interest receivable. We continue to accrue finance charges and fees on credit card loans until the account is charged off. Billed finance charges and fees that are charged-off are reflected as a reduction to revenue.
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Concurrent with our adoption of the CECL standard in the first quarter of 2020, we reclassified our finance charge and fee reserve of $462 million to our allowance for credit losses, with a corresponding increase to credit card loans held for investment. We review and assess the appropriateness of our finance charge and fee reserve on a quarterly basis. Our methodology for estimating the uncollectible portion of finance charges and fees is consistent with the methodology we use to estimate the allowance for credit losses on the principal portion of our credit card loan receivables.
Asset Impairment
In addition to our loan portfolio, we review other assets for impairment on a regular basis in accordance with applicable accounting guidance. This process requires significant management judgment and involves various estimates and assumptions.
Goodwill
We perform our goodwill impairment test annually on October 1 at a reporting unit level. As of our last annual test and as of September 30, 2020, we had four reporting units which included Credit Card, Auto Finance, Other Consumer Banking and Commercial Banking. We are also required to test goodwill for impairment when a triggering event occurs that indicates it is more likely than not that the fair value of a reporting unit is below its carrying amount. The macroeconomic, industry and market factors previously identified in the first quarter of 2020 coinciding with the COVID-19 pandemic have persisted in both the second and third quarters as there continued to be disruption in the economy and interest rates remain low. We determined it was more likely than not that the fair value of our reporting units remained in excess of their carrying values as of September 30, 2020. We will continue to monitor developments regarding the COVID-19 pandemic and measures implemented in response to the COVID-19 pandemic, our market capitalization, overall economic conditions and any other triggering events or circumstances that may cause an impairment of goodwill in the future.
In the first quarter of 2020, we adopted ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment and updated our critical accounting policy for goodwill impairment. Historical guidance for goodwill impairment testing prescribed that the company must compare each reporting unit’s carrying value to its fair value. If the carrying value exceeds fair value, an entity performs the second step, which assigns the reporting unit’s fair value to its assets and liabilities, including unrecognized assets and liabilities, in the same manner as required in purchase accounting to determine the impairment. This ASU eliminates the second step. Under the new guidance, an impairment of a reporting unit’s goodwill is determined based on the amount by which the reporting unit’s carrying value exceeds its fair value, limited to the amount of goodwill allocated to the reporting unit.
There have been no additional changes to our critical accounting policies and estimates described in our December 31, 2019 Form 10-K under “MD&A—Critical Accounting Policies and Estimates.”
ACCOUNTING CHANGES AND DEVELOPMENTS
Accounting Standards Issued but Not Adopted as of September 30, 2020
StandardGuidanceAdoption Timing and Financial Statement Impacts
Reference Rate Reform
ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effect of Reference Rate Reform on Financial Reporting
Issued March 2020
The amendments in this ASU provide optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met.
This ASU is effective from March 12, 2020 through December 31, 2022 with early adoption as of January 1, 2020 permitted.

We are evaluating the expected impact of and our operational readiness for this ASU.
Income Tax Accounting Simplification
ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes
Issued December 2019
Simplifies various aspects of the guidance on accounting for income taxes.
This ASU is effective January 1, 2021 with early adoption permitted, using the retrospective, modified retrospective and prospective methods of adoption.

We are currently evaluating the impact of adopting this standard.
See “Note 1—Summary of Significant Accounting Policies” for information on the accounting standards we adopted in 2020.
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CAPITAL MANAGEMENT
The level and composition of our capital are determined by multiple factors, including our consolidated regulatory capital requirements and internal risk-based capital assessments such as internal stress testing and economic capital. The level and composition of our capital may also be influenced by rating agency guidelines, subsidiary capital requirements, business environment, conditions in the financial markets and assessments of potential future losses due to adverse changes in our business and market environments.
Capital Standards and Prompt Corrective Action
We are subject to capital adequacy standards adopted by the Board of Governors of the Federal Reserve System (“Federal Reserve”), Office of the Comptroller of the Currency (“OCC”) and Federal Deposit Insurance Corporation (“FDIC”) (collectively, the “Federal Banking Agencies”), including the capital rules that implemented the Basel III capital framework (“Basel III Capital Rule”) developed by the Basel Committee on Banking Supervision (“Basel Committee”). Moreover, the Banks, as insured depository institutions, are subject to Prompt Corrective Action (“PCA”) capital regulations.
The Basel III Capital Rule includes the “Basel III Standardized Approach” and the “Basel III Advanced Approaches.” We entered parallel run under Basel III Advanced Approaches on January 1, 2015, during which we were required to calculate capital ratios under both the Basel III Standardized Approach and the Basel III Advanced Approaches, though we used the Standardized Approach for purposes of meeting regulatory capital requirements.
In October 2019, the Federal Banking Agencies amended the Basel III Capital Rule to provide for tailored application of certain capital requirements across different categories of banking institutions (“Tailoring Rules”). As a bank holding company (“BHC”) with total consolidated assets of at least $250 billion that does not exceed any of the applicable risk-based thresholds, we are a Category III institution under the Tailoring Rules. As such, we are no longer subject to the Basel III Advanced Approaches and certain associated capital requirements and have the option of excluding certain elements of accumulated other comprehensive income (“AOCI”) from our regulatory capital. Effective in the first quarter of 2020, we excluded certain elements of AOCI from our regulatory capital as permitted by the Tailoring Rules.
In July 2019, the Federal Banking Agencies finalized certain changes in the Basel III Capital Rule for institutions not subject to the Basel III Advanced Approaches, including Capital One (“Capital Simplification Rule”). These changes, effective January 1, 2020, generally raise the threshold above which institutions subject to the Capital Simplification Rule must deduct certain assets from their common equity Tier 1 capital, including certain deferred tax assets, mortgage servicing assets, and investments in unconsolidated financial institutions. While the higher thresholds will not impact our current capital levels, in stress scenarios they may provide a benefit by enabling us to include more deferred tax assets in our common equity Tier 1 capital. The Tailoring Rules and Capital Simplification Rule have, taken together, decreased our capital requirements.
The Basel III Capital Rule requires banking institutions to maintain a capital conservation buffer, composed of common equity Tier 1 capital, above the regulatory minimum ratios. In March 2020, the Federal Reserve issued a final rule to implement the stress capital buffer requirement (“Stress Capital Buffer Final Rule”). Pursuant to the Stress Capital Buffer Final Rule, which became effective in May 2020, the Federal Reserve will use the results of its supervisory stress test to determine the size of a banking institution’s stress capital buffer requirement. In particular, a banking institution’s stress capital buffer requirement will equal, subject to a floor of 2.5%, the sum of (i) the difference between the banking institution’s starting common equity Tier 1 capital ratio and its lowest projected common equity Tier 1 capital ratio under the severely adverse scenario of the Federal Reserve’s supervisory stress test plus (ii) the ratio of the banking institution’s projected four quarters of common stock dividends (for the fourth to seventh quarters of the planning horizon) to the projected risk-weighted assets for the quarter in which the banking institution’s projected common equity Tier 1 capital ratio reaches its minimum under the supervisory stress test.
In addition, Category III institutions, including the Company and the Banks, are subject to certain capital requirements formerly applicable only to Basel III Advanced Approaches banking organizations. Category III institutions are subject to a supplementary leverage ratio of 3.0% and their 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 September 30, 2020, 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.
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The Market Risk Rule requires institutions subject to the rule to adjust their risk-based capital ratios to reflect the market risk in their trading portfolios. As of September 30, 2020, the Company and CONA are subject to the Market Risk Rule. See “MD&A—Market Risk Profile” below for additional information.
As part of the response to the COVID-19 pandemic, the Federal Banking Agencies adopted a final rule (“2020 CECL Transition Rule”) that provides banking organizations an optional five-year transition period to phase in the impact of CECL on regulatory capital (the “2020 CECL Transition Election”).
Pursuant to the 2020 CECL Transition Rule, banking organizations may elect to delay for two years the estimated impact of CECL on regulatory capital and then phase in the estimated cumulative impact of the initial two-year delay over the next three years. The estimated cumulative impact of CECL, which will be phased in during the three-year transition period, includes the after-tax impact of adopting the CECL standard and the estimated impact of CECL in the initial two years thereafter. The 2020 CECL Transition Rule introduced a uniform “scaling factor” of 25% for estimating the impact of CECL during the initial two years. The 25% “scaling factor” is an approximation of the impact of differences in credit loss allowances reflected under the CECL standard versus the incurred loss methodology. We made the 2020 CECL Transition Election in the first quarter of 2020, and therefore the applicable amounts presented in this Report reflect such election.
As of September 30, 2020, the minimum capital requirements plus the capital conservation buffer of 2.5% and the countercyclical capital buffer (currently set as 0%) for common equity Tier 1 capital, Tier 1 capital and total capital ratios were 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 0%) might restrict a banking organization’s ability to distribute capital and make discretionary bonus payments.
Under the stress capital buffer framework, our new “standardized approach capital conservation buffer” includes the stress capital buffer requirement, the countercyclical capital buffer and any G-SIB surcharge. Our stress capital buffer requirement is 5.6% for the period from October 1, 2020 through September 30, 2021, at which point a revised stress capital buffer requirement will be applicable to us based on our 2021 stress testing results, the countercyclical capital buffer is currently set at 0%, and the G-SIB surcharge is not applicable to us. Therefore, the Company’s minimum capital requirements plus the standardized approach capital conservation buffer for common equity Tier 1 capital, Tier 1 capital and total capital ratios under the stress capital buffer framework are 10.1%, 11.6% and 13.6%, respectively, for the period from October 1, 2020 through September 30, 2021. If we fail to maintain our capital ratios above the minimum capital requirements plus the standardized approach capital conservation buffer, we will face increasingly strict limitations on capital distributions and discretionary bonus payments to certain executive officers.
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 September 30, 2020 and December 31, 2019, respectively.
For the description of the regulatory capital rules we are subject to, see “MD&A—Supervision and Regulation” in this Report and our Quarterly Report on Form 10-Q for the period ended March 31, 2020 as well as “Part I—Item 1. Business—Supervision and Regulation” in our 2019 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 September 30, 2020 and December 31, 2019.
Table 14: Capital Ratios Under Basel III(1)(2)
 September 30, 2020December 31, 2019
RatioMinimum
Capital
Adequacy
Well-
Capitalized
RatioMinimum
Capital
Adequacy
Well-
Capitalized
Capital One Financial Corp:
Common equity Tier 1 capital(3)
13.0 %4.5 %N/A12.2 %4.5 %N/A
Tier 1 capital(4)
14.8 6.0 6.0 %13.7 6.0 6.0 %
Total capital(5)
17.3 8.0 10.0 16.1 8.0 10.0 
Tier 1 leverage(6)
10.6 4.0 N/A11.7 4.0 N/A
Supplementary leverage(7)(8)
10.2 3.0 N/A9.9 3.0 N/A
COBNA:
Common equity Tier 1 capital(3)
20.3 4.5 6.5 16.1 4.5 6.5 
Tier 1 capital(4)
20.3 6.0 8.0 16.1 6.0 8.0 
Total capital(5)
22.3 8.0 10.0 18.1 8.0 10.0 
Tier 1 leverage(6)
16.2 4.0 5.0 14.8 4.0 5.0 
Supplementary leverage(7)
13.0 3.0 N/A12.1 3.0 N/A
CONA:
Common equity Tier 1 capital(3)
12.1 4.5 6.5 13.4 4.5 6.5 
Tier 1 capital(4)
12.1 6.0 8.0 13.4 6.0 8.0 
Total capital(5)
13.4 8.0 10.0 14.5 8.0 10.0 
Tier 1 leverage(6)
7.4 4.0 5.0 9.2 4.0 5.0 
Supplementary leverage(7)
6.7 3.0 N/A8.2 3.0 N/A
__________
(1)Capital requirements that are not applicable are denoted by “N/A.”
(2)Ratios as of September 30, 2020 are preliminary. As we continue to validate our data, the calculations are subject to change until we file our September 30, 2020 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.
(8)Supplementary leverage ratio for the Company as of September 30, 2020 excludes U.S. Treasury securities and deposits with the Federal Reserve Banks pursuant to an interim final rule issued by the Federal Reserve, see “MD&A—Supervision and Regulation” for more information.
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Table 15 presents regulatory capital under the Basel III Standardized Approach and regulatory capital metrics as of September 30, 2020 and December 31, 2019.
Table 15: Regulatory Risk-Based Capital Components and Regulatory Capital Metrics
(Dollars in millions)September 30, 2020December 31, 2019
Regulatory Capital Under Basel III Standardized Approach
Common equity excluding AOCI$52,839 $52,001 
Adjustments:
AOCI, net of tax(1)
(122)1,156 
Goodwill, net of related deferred tax liabilities(14,448)(14,465)
Intangible assets, net of related deferred tax liabilities(95)(170)
Other(1)
 (360)
Common equity Tier 1 capital38,174 38,162 
Tier 1 capital instruments5,331 4,853 
Tier 1 capital43,505 43,015 
Tier 2 capital instruments3,675 3,377 
Qualifying allowance for credit losses3,775 3,956 
Tier 2 capital7,450 7,333 
Total capital$50,955 $50,348 
Regulatory Capital Metrics
Risk-weighted assets$293,852 $313,155 
Adjusted average assets409,602 368,511 
Total leverage exposure425,729 435,976 
__________
(1)In the first quarter of 2020, we elected to exclude from our regulatory capital ratios certain components of AOCI as permitted under the Tailoring Rules. As such, we revised our presentation herein to only include those components of AOCI that impact our regulatory capital ratios.
Capital Planning and Regulatory Stress Testing
On June 25, 2020, the Federal Reserve released the stress testing results for the 2020 Comprehensive Capital Analysis and Review (“CCAR”) cycle, including additional sensitivity analyses conducted due to the COVID-19 pandemic, and required all participating banking organizations, including us, to update and resubmit their capital plans. We resubmitted our updated capital plan on November 2, 2020.
Pursuant to the Federal Reserve’s capital plan rule, a participating banking organization, such as us, is prohibited from making capital distributions without the prior approval of the Federal Reserve following an event requiring the resubmission of its capital plan. Specifically for the third quarter of 2020, the Federal Reserve required all participating banking organizations, including us, to preserve capital by suspending share repurchases and capping common stock dividend payments to the lower of (i) the amount paid in the second quarter of 2020 and (ii) an amount equal to the average net income across the four preceding calendar quarters. Scheduled payments on additional Tier 1 and Tier 2 capital instruments, such as preferred stock and subordinated debt, were not similarly restricted.
On September 30, 2020, the Federal Reserve announced the extension of capital distribution restrictions through the fourth quarter of 2020 to ensure that large banking organizations maintain a high level of capital resilience. Specifically, for the fourth quarter of 2020, banking organizations with more than $100 billion in total assets, including us, continue to be required by the Federal Reserve to suspend share repurchases and to cap common stock dividends.
We suspended our 2019 Stock Repurchase Program on March 13, 2020 in response to the COVID-19 pandemic through the program’s expiration at the end of the second quarter of 2020.
Consistent with the Federal Reserve’s limitations on common stock dividend payments as described above, we reduced our quarterly dividend on our common stock from $0.40 per share to $0.10 per share for the third quarter of 2020.
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While our third quarter results would have permitted us to increase our common stock dividend pursuant to the Federal Reserve’s limitations described above, we decided to maintain our quarterly dividend at $0.10 per share in the fourth quarter of 2020 as the process surrounding our resubmitted capital plan has not yet completed.
For the description of the regulatory capital planning rules we are subject to, see “MD&A—Supervision and Regulation” in this Report and our Quarterly Report on Form 10-Q for the period ended March 31, 2020 as well as “Part I—Item 1. Business—Supervision and Regulation” in our 2019 Form 10-K.
Equity Offerings and Transactions
On January 31, 2020, we issued 50,000,000 depositary shares, each representing a 1/40th interest in a share of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series J, $0.01 par value, with a liquidation preference of $25 per depositary share (“Series J Preferred Stock”). The net proceeds of the offering of Series J Preferred Stock were approximately $1.2 billion, after deducting underwriting commissions and offering expenses. Dividends on the Series J Preferred Stock are payable quarterly in arrears at a rate of 4.80% per annum.
On March 2, 2020, we redeemed all outstanding shares of our Fixed Rate 6.00% Non-Cumulative Perpetual Preferred Stock Series B. The redemption increased our net loss available to common shareholders by $22 million in the first quarter of 2020.
On September 17, 2020, we issued 5,000,000 depositary shares, each representing a 1/40th interest in a share of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series K, $0.01 par value, with a liquidation preference of $25 per depositary share (“Series K Preferred Stock”). The net proceeds of the offering of Series K Preferred Stock were approximately $121 million, after deducting underwriting commissions and offering expenses. Dividends on the Series K Preferred Stock are payable quarterly in arrears at a rate of 4.625% per annum.
On October 22, 2020, we announced that we will redeem all outstanding shares of our Fixed Rate 6.20% Non-Cumulative Perpetual Preferred Stock Series F on December 1, 2020. We expect this redemption will reduce net income available to common shareholders by approximately $17 million in the fourth quarter of 2020 and will reduce our Tier 1 capital ratio by an estimated 17 basis points.
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Dividend Policy and Stock Purchases
In the first nine months of 2020, we declared and paid common stock dividends of $417 million, or $0.90 per share, and preferred stock dividends of $212 million. The following table summarizes the dividends paid per share on our various preferred stock series in the first nine months of 2020.
Table 16: Preferred Stock Dividends Paid Per Share
SeriesDescriptionIssuance DatePer Annum
Dividend Rate
Dividend Frequency2020
Q3Q2Q1
Series B(1)
6.000%
Non-Cumulative
August 20, 20126.000%Quarterly$15.00
Series EFixed-to-Floating Rate
Non-Cumulative
May 14, 20155.550% through 5/31/2020;
3-mo. LIBOR + 380 bps thereafter
Semi-Annually through 5/31/2020; Quarterly thereafter$10.61$27.75
Series F6.200%
Non-Cumulative
August 24, 20156.200Quarterly15.5015.5015.50
Series G5.200%
Non-Cumulative
July 29, 20165.200Quarterly13.0013.0013.00
Series H6.000%
Non-Cumulative
November 29, 20166.000Quarterly15.0015.0015.00
Series I5.000%
Non-Cumulative
September 11, 20195.000Quarterly12.5012.5012.50
Series J4.800%
Non-Cumulative
January 31, 20204.800Quarterly12.0016.13
Series K4.625%
Non-Cumulative
September 17, 20204.625Quarterly
__________
(1)On March 2, 2020, we redeemed all outstanding shares of our preferred stock Series B.
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, regulatory requirements and other factors deemed relevant by the Board of Directors. As a BHC, our ability to pay dividends is largely dependent upon the receipt of dividends or other payments from our subsidiaries. The Banks are subject to regulatory restrictions that limit their ability to transfer funds to our BHC. As of September 30, 2020, funds available for dividend payments from COBNA and CONA were $2.3 billion and $917 million, respectively. There can be no assurance that we will declare and pay any dividends to stockholders.
Consistent with our 2019 Stock Repurchase Program which was announced on June 27, 2019, our Board of Directors authorized the repurchase of up to $2.2 billion of shares of common stock beginning in the third quarter of 2019 through the end of the second quarter of 2020. During the first quarter of 2020, we repurchased approximately $312 million of shares of our common stock under the 2019 Stock Repurchase Program before suspending further repurchases on March 13, 2020 in response to the COVID-19 pandemic through the program's expiration at the end of the second quarter of 2020. As noted above, for the third quarter of 2020, the Federal Reserve required all participating banking organizations, including us, to suspend share repurchases as a measure of capital preservation.
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 “MD&A—Capital Management—Capital Planning and Regulatory Stress Testing” and “Part I—Item 1. Business—Supervision and Regulation—Dividends, Stock Repurchases and Transfers of Funds” in our 2019 Form 10-K.
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RISK MANAGEMENT
Risk Management Framework
Our Risk Management Framework (the “Framework”) sets consistent expectations for risk management across the Company. It also sets expectations for our “Three Lines of Defense” model, which defines the roles, responsibilities and accountabilities for taking and managing risk across the Company. Accountability for overseeing an effective Framework resides with our Board of Directors either directly or through its committees.
The “First Line of Defense” consists of any line of business or function that is accountable for risk taking and is responsible for: (i) engaging in activities designed to generate revenue or reduce expenses; (ii) providing operational support or servicing to any business function for the delivery of products or services to customers; or (iii) providing technology services in direct support of first line business areas. Each line of business or first line function is responsible for managing the risks associated with their activities, including identifying, assessing, measuring, monitoring, controlling, and reporting the risks within its business activities, consistent with the risk framework. The “Second Line of Defense” consists of two types of functions: Independent Risk Management (“IRM”) and Support Functions. IRM oversees risk-taking activities and assesses risks and issues independent from the first line of defense. Support Functions are centers of specialized expertise (e.g., Human Resources, Accounting, Legal) that provide support services to the Company. The “Third Line of Defense” is comprised of the Internal Audit and Credit Review functions. The third line provides independent and objective assurance to senior management and to the Board of Directors that the first and second lines of defense have systems and governance processes which are well-designed and working as intended, and that the Framework is appropriate for our size, complexity and risk profile.
Our Framework consists of the following nine elements:

 Governance and Accountability


Strategy and Risk Alignment


Risk Identification

Assessment, Measurement
and Response


Monitoring and Testing


Aggregation, Reporting and Escalation


Capital and Liquidity Management (including Stress Testing)


Risk Data and Enabling Technology


Culture and Talent Management

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We provide additional discussion of our risk management principles, roles and responsibilities, framework and risk appetite under “MD&A—Risk Management” in our 2019 Form 10-K.
Risk Categories
We apply our Framework to protect the Company from the major categories of risk that we are exposed to through our business activities. We have seven major categories of risk as noted below. We provide a description of these categories and how we manage them under “MD&A—Risk Management” in our 2019 Form 10-K.
Compliance risk
Credit risk
Liquidity risk
Market risk
Operational risk
Reputation risk
Strategic risk
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 ongoing 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 related to our investment securities portfolio under “MD&A—Consolidated Balance Sheets Analysis—Investment Securities” and credit risk related to derivative transactions in “Note 8—Derivative Instruments and Hedging Activities.”
Portfolio Composition of Loans Held for Investment
We provide a variety of lending products. Our primary products include credit cards, auto loans and commercial lending products. 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 2019 Form 10-K.
Our loan portfolio consists of loans held for investment, including loans held in our consolidated trusts, and loans held for sale. The information presented in this section excludes loans held for sale, which totaled $3.4 billion and $400 million as of September 30, 2020 and December 31, 2019, respectively. Concurrent with our adoption of the CECL standard in the first quarter of 2020, we reclassified our finance charge and fee reserve to our allowance for credit losses, with a corresponding increase to credit card loans held for investment.
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Table 17 presents the composition of our portfolio of loans held for investment by portfolio segment as of September 30, 2020 and December 31, 2019.
Table 17: Portfolio Composition of Loans Held for Investment
September 30, 2020December 31, 2019
(Dollars in millions)Loans% of TotalLoans% of Total
Credit Card:
Domestic credit card$95,541 38.5 %$118,606 44.6 %
International card businesses8,100 3.3 9,630 3.6 
Total credit card103,641 41.8 128,236 48.2 
Consumer Banking:
Auto65,394 26.3 60,362 22.7 
Retail banking(1)
3,294 1.3 2,703 1.0 
Total consumer banking68,688 27.6 63,065 23.7 
Commercial Banking:(1)
Commercial and multifamily real estate31,197 12.6 30,245 11.4 
Commercial and industrial44,697 18.0 44,263 16.7 
Total commercial banking75,894 30.6 74,508 28.1 
Total loans held for investment$248,223 100.0 %$265,809 100.0 %
__________
(1)Includes PPP loans of $966 million and $242 million in our retail and commercial loan portfolios, respectively, as of September 30, 2020. See “MD&A—Credit Risk Profile—COVID-19 Customer Assistance Programs and Loan Modifications” for more information.
Geographic Composition
We market our credit card products throughout the United States, Canada and the United Kingdom. Our credit card loan portfolio is geographically diversified due to our product and marketing approach. The table below presents the geographic profile of our credit card loan portfolio as of September 30, 2020 and December 31, 2019.
Table 18: Credit Card Portfolio by Geographic Region
 September 30, 2020December 31, 2019
(Dollars in millions)Amount% of TotalAmount% of Total
Domestic credit card:
California$9,751 9.4 %$12,538 9.8 %
Texas7,807 7.5 9,353 7.3 
Florida6,616 6.4 8,093 6.3 
New York6,172 6.0 7,941 6.2 
Illinois4,075 3.9 5,195 4.1 
Pennsylvania3,997 3.9 4,979 3.9 
Ohio3,491 3.4 4,388 3.4 
New Jersey3,096 3.0 3,915 3.1 
Michigan2,934 2.8 3,811 3.0 
Other47,602 45.9 58,393 45.4 
Total domestic credit card95,541 92.2 118,606 92.5 
International card businesses:
Canada5,498 5.3 6,493 5.1 
United Kingdom2,602 2.5 3,137 2.4 
Total international card businesses8,100 7.8 9,630 7.5 
Total credit card$103,641 100.0 %$128,236 100.0 %
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Our auto loan portfolio is geographically diversified in the United States due to our product and marketing approach. Retail banking includes small business loans and other consumer lending products originated through our branch network. The table below presents the geographic profile of our auto loan and retail banking portfolios as of September 30, 2020 and December 31, 2019.
Table 19: Consumer Banking Portfolio by Geographic Region
 September 30, 2020December 31, 2019
(Dollars in millions)Amount% of TotalAmount% of Total
Auto:
Texas$8,196 11.9 %$7,675 12.2 %
California7,507 10.9 6,918 11.0 
Florida5,474 8.0 5,013 7.9 
Georgia2,976 4.3 2,757 4.4 
Ohio2,791 4.1 2,652 4.2 
Pennsylvania2,549 3.7 2,334 3.7 
Illinois2,415 3.5 2,239 3.6 
North Carolina2,265 3.3 2,060 3.3 
Other31,221 45.5 28,714 45.4 
Total auto65,394 95.2 60,362 95.7 
Retail banking:
New York1,125 1.7 793 1.3 
Louisiana679 1.0 708 1.1 
Texas619 0.9 595 1.0 
Maryland234 0.3 155 0.2 
New Jersey229 0.3 194 0.3 
Virginia189 0.3 125 0.2 
Other219 0.3 133 0.2 
Total retail banking3,294 4.8 2,703 4.3 
Total consumer banking$68,688 100.0 %$63,065 100.0 %
We originate commercial loans in most regions of the United States. The table below presents the geographic profile of our commercial loan portfolio by segment as of September 30, 2020 and December 31, 2019.
Table 20: Commercial Banking Portfolio by Geographic Region
 September 30, 2020
(Dollars in millions)Commercial
and
Multifamily
Real Estate
% of
Total
Commercial
and
Industrial
% of
Total
Total
Commercial
Banking
% of
Total
 
Geographic concentration:(1)
Northeast$17,761 56.9 %$8,540 19.1 %$26,301 34.7 %
Mid-Atlantic3,424 11.0 6,311 14.1 9,735 12.8 
South3,524 11.3 15,535 34.8 19,059 25.1 
Other6,488 20.8 14,311 32.0 20,799 27.4 
Total$31,197 100.0 %$44,697 100.0 %$75,894 100.0 %
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 December 31, 2019
(Dollars in millions)Commercial
and
Multifamily
Real Estate
% of
Total
Commercial
and
Industrial
% of
Total
Total
Commercial
Banking
% of
Total
 
Geographic concentration:(1)
Northeast$17,139 56.7 %$7,899 17.8 %$25,038 33.6 %
Mid-Atlantic3,024 10.0 5,927 13.4 8,951 12.0 
South4,087 13.5 16,403 37.1 20,490 27.5 
Other5,995 19.8 14,034 31.7 20,029 26.9 
Total$30,245 100.0 %$44,263 100.0 %$74,508 100.0 %
__________
(1)Geographic concentration is generally determined by the location of the borrower’s business or the location of the collateral associated with the loan. Northeast consists of CT, MA, ME, NH, NJ, NY, PA and VT. Mid-Atlantic consists of DC, DE, MD, VA and WV. South consists of AL, AR, FL, GA, KY, LA, MO, MS, NC, SC, TN and TX.
Commercial Loans by Industry
Table 21 summarizes our commercial loans held for investment portfolio by industry classification as of September 30, 2020 and December 31, 2019. Industry classifications below are based on our interpretation of the North American Industry Classification System codes as they pertain to each individual loan.
Table 21: Commercial Loans by Industry
(Percentage of portfolio)September 30, 2020December 31, 2019
Real estate39 %39 %
Finance16 16 
Healthcare11 12 
Business services6 
Educational services5 
Oil and gas4 
Public administration4 
Retail trade3 
Construction and land3 
Other9 
Total100 %100 %
Credit Risk Measurement
We closely monitor economic conditions and loan performance trends to assess and manage our exposure to credit risk. Trends in delinquency rates are the key credit quality indicator for our credit card and retail banking loan portfolios as changes in delinquency rates can provide an early warning of changes in potential future credit losses. The key indicator we monitor when assessing the credit quality and risk of our auto loan portfolio is borrower credit scores as they provide insight into borrower risk profiles, which give indications of potential future credit losses. The key credit quality indicator for our commercial loan portfolios is our internal risk ratings as we generally classify loans that have been delinquent for an extended period of time and other loans with significant risk of loss as nonperforming. In addition to these credit quality indicators, we also manage and monitor other credit quality metrics such as level of nonperforming loans and net charge-off rates.
We underwrite most consumer loans using proprietary models, which typically include credit bureau data, such as borrower credit scores, application information and, where applicable, collateral and deal structure data. We continuously adjust our management of credit lines and collection strategies based on customer behavior and risk profile changes. We also use borrower credit scores for subprime classification, for competitive benchmarking and, in some cases, to drive product segmentation decisions. 
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Table 22 provides details on the credit scores of our domestic credit card and auto loan portfolios as of September 30, 2020 and December 31, 2019.
Table 22: Credit Score Distribution
(Percentage of portfolio)September 30, 2020December 31, 2019
Domestic credit card—Refreshed FICO scores:(1)
Greater than 66069 %67 %
660 or below31 33 
Total100 %100 %
AutoAt origination FICO scores:(2)
Greater than 66046 %48 %
621 - 66020 20 
620 or below34 32 
Total100 %100 %
__________
(1)Percentages represent period-end loans held for investment in each credit score category. Domestic card credit scores generally represent FICO scores. These scores are obtained from one of the major credit bureaus at origination and are refreshed monthly thereafter. We approximate non-FICO credit scores to comparable FICO scores for consistency purposes. Balances for which no credit score is available or the credit score is invalid are included in the 660 or below category.
(2)Percentages represent period-end loans held for investment in each credit score category. Auto credit scores generally represent average FICO scores obtained from three credit bureaus at the time of application and are not refreshed thereafter. Balances for which no credit score is available or the credit score is invalid are included in the 620 or below category.
We present information in the section below on the credit performance of our loan portfolio, including the key metrics we use in tracking changes in the credit quality of our loan portfolio. See “Note 3—Loans” for additional credit quality information and see “Note 1—Summary of Significant Accounting Policies” for information on our accounting policies for delinquent and nonperforming loans, charge-offs and troubled debt restructurings (“TDRs”) for each of our loan categories.
Delinquency Rates
We consider the entire balance of an account to be delinquent if the minimum required payment is not received by the customer’s due date, measured at each balance sheet date. Our 30+ day delinquency metrics include all loans held for investment that are 30 or more days past due, whereas our 30+ day performing delinquency metrics include loans that are 30 or more days past due but are currently classified as performing and accruing interest. The 30+ day delinquency and 30+ day performing delinquency metrics are the same for domestic credit card loans, as we continue to classify these loans as performing until the account is charged off, typically when the account is 180 days past due. See “Note 1—Summary of Significant Accounting Policies” for information on our policies for classifying loans as nonperforming for each of our loan categories. We provide additional information on our credit quality metrics in “MD&A—Business Segment Financial Performance.” Amounts as of September 30, 2020, include the impacts of COVID-19 customer assistance programs where applicable. See “MD&A—Credit Risk Profile—COVID-19 Customer Assistance Programs and Loan Modifications” for more information.
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Table 23 presents our 30+ day performing delinquency rates and 30+ day delinquency rates of our portfolio of loans held for investment, by portfolio segment, as of September 30, 2020 and December 31, 2019.
Table 23: 30+ Day Delinquencies
 September 30, 2020December 31, 2019
 30+ Day Performing Delinquencies30+ Day Delinquencies30+ Day Performing Delinquencies30+ Day Delinquencies
(Dollars in millions)Amount
Rate(1)
Amount
Rate(1)
Amount
Rate(1)
Amount
Rate(1)
Credit Card:
Domestic credit card$2,108 2.21 %$2,108 2.21 %$4,656 3.93 %$4,656 3.93 %
International card businesses173 2.15 185 2.29 335 3.47 353 3.66 
Total credit card2,281 2.20 2,293 2.21 4,991 3.89 5,009 3.91 
Consumer Banking:
Auto2,461 3.76 2,638 4.03 4,154 6.88 4,584 7.59 
Retail banking27 0.83 44 1.33 28 1.02 43 1.59 
Total consumer banking2,488 3.62 2,682 3.90 4,182 6.63 4,627 7.34 
Commercial Banking:
Commercial and multifamily real estate32 0.10 179 0.57 63 0.21 67 0.22 
Commercial and industrial80 0.18 359 0.80 101 0.23 244 0.55 
Total commercial banking112 0.15 538 0.71 164 0.22 311 0.42 
Total$4,881 1.97 $5,513 2.22 $9,337 3.51 $9,947 3.74 
__________
(1)Delinquency rates are calculated by dividing delinquency amounts by period-end loans held for investment for each specified loan category.
Table 24 presents our 30+ day delinquent loans, by aging and geography, as of September 30, 2020 and December 31, 2019.
Table 24: Aging and Geography of 30+ Day Delinquent Loans
 September 30, 2020December 31, 2019
(Dollars in millions)Amount
Rate(1)
Amount
Rate(1)
Delinquency status:
30 – 59 days$2,675 1.07 %$4,444 1.67 %
60 – 89 days1,231 0.50 2,537 0.95 
> 90 days
1,607 0.65 2,966 1.12 
Total$5,513 2.22 %$9,947 3.74 %
Geographic region:
Domestic$5,328 2.15 %$9,594 3.61 %
International185 0.07 353 0.13 
Total$5,513 2.22 %$9,947 3.74 %
__________
(1)Delinquency rates are calculated by dividing delinquency amounts by total period-end loans held for investment.
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Table 25 summarizes loans that were 90+ days delinquent as to interest or principal, and still accruing interest as of September 30, 2020 and December 31, 2019. These loans consist primarily of credit card accounts between 90 days and 179 days past due. As permitted by regulatory guidance issued by the Federal Financial Institutions Examination Council, we continue to accrue interest and fees on domestic credit card loans through the date of charge off, which is typically in the period the account becomes 180 days past due.
Table 25: 90+ Day Delinquent Loans Accruing Interest
 September 30, 2020December 31, 2019
(Dollars in millions)Amount
Rate(1)
Amount
Rate(1)
Loan category:
Credit card$1,083 1.04 %$2,407 1.88 %
Consumer banking1 — — 
Total$1,084 0.44 $2,407 0.91 
Geographic region:
Domestic$1,021 0.42 %$2,277 0.89 %
International63 0.78 130 1.34 
Total$1,084 0.44 $2,407 0.91 
__________
(1)Delinquency rates are calculated by dividing delinquency amounts by period-end loans held for investment for each specified loan category.
Nonperforming Loans and Nonperforming Assets
Nonperforming assets consist of nonperforming loans, repossessed assets and other foreclosed assets. Nonperforming loans include loans that have been placed on nonaccrual status. See “Note 1—Summary of Significant Accounting Policies” for information on our policies for classifying loans as nonperforming for each of our loan categories.
Table 26 presents our nonperforming loans, by portfolio segment, and other nonperforming assets as of September 30, 2020 and December 31, 2019. We do not classify loans held for sale as nonperforming. We provide additional information on our credit quality metrics in “MD&A—Business Segment Financial Performance.”
Table 26: Nonperforming Loans and Other Nonperforming Assets(1)
 September 30, 2020December 31, 2019
(Dollars in millions)AmountRateAmountRate
Nonperforming loans held for investment:(2)
Credit Card:
International card businesses$21 0.25 %$25 0.26 %
Total credit card21 0.02 25 0.02 
Consumer Banking:
Auto235 0.36 487 0.81 
Retail banking25 0.77 23 0.87 
Total consumer banking260 0.38 510 0.81 
Commercial Banking:
Commercial and multifamily real estate182 0.58 38 0.12 
Commercial and industrial586 1.31 410 0.93 
Total commercial banking768 1.01 448 0.60 
Total nonperforming loans held for investment(3)
$1,049 0.42 $983 0.37 
Other nonperforming assets(4)
38 0.02 63 0.02 
Total nonperforming assets$1,087 0.44 $1,046 0.39 
__________
(1)We recognized interest income for loans classified as nonperforming of $22 million and $37 million in the first nine months of 2020 and 2019, respectively. Interest income foregone related to nonperforming loans was $40 million and $50 million in the first nine months of 2020 and 2019,
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respectively. Foregone interest income represents the amount of interest income in excess of recognized interest income that would have been recorded during the period for nonperforming loans as of the end of the period had the loans performed according to their contractual terms.
(2)Nonperforming loan rates are calculated based on nonperforming loans for each category divided by period-end total loans held for investment for each respective category.
(3)Excluding the impact of domestic credit card loans, nonperforming loans as a percentage of total loans held for investment was 0.69% and 0.67% as of September 30, 2020 and December 31, 2019, respectively.
(4)The denominators used in calculating nonperforming asset rates consist of total loans held for investment and other nonperforming assets.
Net Charge-Offs
Net charge-offs consist of the amortized cost basis, excluding accrued interest, of loans held for investment that we determine to be uncollectible, net of recovered amounts. We charge off loans as a reduction to the allowance for credit losses when we determine the loan is uncollectible and record subsequent recoveries of previously charged off amounts as increases to the allowance for credit losses. Uncollectible finance charges and fees are reversed through revenue and certain fraud losses are recorded in other non-interest expense. Generally, costs to recover charged-off loans are recorded as collection expenses as incurred and included in our consolidated statements of income as a component of other non-interest expense. Our charge-off policy for loans varies based on the loan type. See “Note 1—Summary of Significant Accounting Policies” for information on our charge-off policy for each of our loan categories.
Table 27 presents our net charge-off amounts and rates, by portfolio segment, in the third quarter and first nine months of 2020 and 2019.
Table 27: Net Charge-Offs
 Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
(Dollars in millions)Amount
Rate(1)
Amount
Rate(1)
Amount
Rate(1)
Amount
Rate(1)
Credit Card:
Domestic credit card$885 3.64 %$1,065 4.12 %$3,359 4.31 %$3,599 4.67 %
International card businesses58 2.89 86 3.78 231 3.71 236 3.54 
Total credit card943 3.58 1,151 4.09 3,590 4.26 3,835 4.58 
Consumer Banking:
Auto36 0.23 234 1.60 445 0.95 592 1.38 
Retail banking12 1.38 17 2.55 41 1.80 52 2.51 
Total consumer banking48 0.28 251 1.64 486 0.99 644 1.43 
Commercial Banking:
Commercial and multifamily real estate32 0.41 0.02 39 0.17 0.01 
Commercial and industrial50 0.45 59 0.55 254 0.73 89 0.28 
Total commercial banking82 0.43 60 0.33 293 0.50 90 0.17 
Total net charge-offs$1,073 1.72 $1,462 2.38 $4,369 2.28 $4,569 2.50 
Average loans held for investment$249,511 $246,147 $255,232 $243,602 
__________
(1)Net charge-off rates are calculated by dividing annualized net charge-offs by average loans held for investment for the period for each loan category.
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COVID-19 Customer Assistance Programs and Loan Modifications
In response to the COVID-19 pandemic, the Federal Banking Agencies supported banking organizations that are taking actions to assist customers in a prudent, safe and sound manner, including through loan modifications. As part of our response to the COVID-19 pandemic, we are offering programs to accommodate customer hardship across our lines of business.
Credit Card
For our domestic card customers excluding certain retail partnership portfolios, we are currently offering a one-month payment deferral program with an option to renew and fee waivers. Card loans enrolled in the deferral program continue to accrue interest. Their delinquency status is generally frozen at the time of enrollment and upon exiting the program, resumes to the status at the time of enrollment. Through September 30, 2020, excluding certain retail partnership portfolios, a total of 2.4% of active accounts representing $3.4 billion of loans outstanding have received a payment deferral at any time through this program (including those who are no longer enrolled). Approximately 91% of these customers were current at the time of their first enrollment. As of September 30, 2020, approximately 0.1% of active accounts, representing $247 million of loans outstanding, have been approved to skip their upcoming payment and have not made that payment.
For our international card customers, we also offer short-term payment deferrals and fee waivers. Loans enrolled in the deferral program continue to accrue interest. As of September 30, 2020, $62 million of loans were enrolled in this program.
Consumer Banking
For our auto customers, we are currently offering short-term payment extensions with an option to renew and fee waivers. Auto loans enrolled in short-term payment extensions continue to accrue interest. The contractual term of the loan is extended by the length of the short-term payment extension and the delinquency status is updated to reflect the revised terms of the loan. For customers that were delinquent at the time of enrollment, their delinquency status is reduced commensurate with the length of the short-term payment extension. Through September 30, 2020, a total of 16.1% of accounts representing $11.7 billion of loans outstanding have received a short-term payment extension at any time through this program (including those who are no longer enrolled). Approximately 74% of these customers were current at the time of their first enrollment. As of September 30, 2020, approximately 1% of accounts, representing $686 million of loans outstanding, have been approved to skip their upcoming payment and have not made that payment.
For our retail banking customers, we are currently offering fee waivers and short-term payment deferrals. We also offer PPP loans to our small business banking customers. As of September 30, 2020, $44 million of loans were enrolled in the short-term payment deferral program and $966 million of PPP loans were outstanding.
Commercial Banking
For our commercial banking customers, our offerings are more customized, but generally include short-term payment deferrals. Performing loans enrolled in short-term payment deferrals continue to accrue interest, and principal and interest are due at maturity. Loans remain in their delinquency status as of their modification date through the deferment period. Internal risk ratings are assigned based on relevant information about the ability of the borrower to repay their debt. We also offered PPP loans to our commercial clients. As of September 30, 2020, approximately $108 million of loans were enrolled in the short-term payment deferral program and $242 million of PPP loans were outstanding.
Additional guidance issued by the Federal Banking Agencies and contained in the CARES Act provides banking organizations with TDR relief for modifications of current borrowers impacted by the COVID-19 pandemic. We assessed all loan modifications introduced to current borrowers in response to the COVID-19 pandemic as of September 30, 2020, and followed guidance that such eligible loan modifications made on a temporary and good faith basis are not considered TDRs.
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Troubled Debt Restructurings
As part of our loss mitigation efforts, we may provide short-term (three to twelve months) or long-term (greater than twelve months) modifications to a borrower experiencing financial difficulty to improve long-term collectability of the loan and to avoid the need for repossession or foreclosure of collateral.
Table 28 presents our recorded investment of loans modified in TDRs as of September 30, 2020 and December 31, 2019, which excludes loan modifications that do not meet the definition of a TDR.
Table 28: Troubled Debt Restructurings
 September 30, 2020December 31, 2019
(Dollars in millions)Amount% of Total ModificationsAmount% of Total Modifications
Credit Card:
Domestic credit card$537 26.2 %$630 38.1 %
International card businesses192 9.3201 12.2 
Total credit card729 35.5831 50.3 
Consumer banking:
Auto546 26.6 346 20.9 
Retail banking19 0.9 24 1.5 
Total consumer banking565 27.5 370 22.4 
Commercial banking761 37.0 451 27.3 
Total$2,055 100.0 %$1,652 100.0 %
Status of TDRs:
Performing$1,662 80.9 %$1,347 81.5 %
Nonperforming393 19.1 305 18.5 
Total$2,055 100.0 %$1,652 100.0 %
In our Credit Card business, the majority of our credit card loans modified in TDRs involve reducing the interest rate on the account and placing the customer on a fixed payment plan not exceeding 60 months. The effective interest rate in effect immediately prior to the loan modification is used as the effective interest rate for purposes of measuring impairment using the present value of expected cash flows. If the customer does not comply with the modified payment terms, then the credit card loan agreement may revert to its original payment terms, generally resulting in any loan outstanding reflected in the appropriate delinquency category and charged off in accordance with our standard charge-off policy.
In our Consumer Banking business, the majority of our loans modified in TDRs receive an extension, an interest rate reduction or principal reduction, or a combination of these concessions. In addition, TDRs also occur in connection with bankruptcy of the borrower. In certain bankruptcy discharges, the loan is written down to the collateral value and the charged off amount is reported as principal reduction. Impairment is determined using the present value of expected cash flows or a collateral evaluation for certain auto loans where the collateral value is lower than the recorded investment.
In our Commercial Banking business, the majority of loans modified in TDRs receive an extension, with a portion of these loans receiving an interest rate reduction or a gross balance reduction. The impairment on modified commercial loans is generally determined based on the underlying collateral value.
We provide additional information on modified loans accounted for as TDRs, including the performance of those loans subsequent to modification, in “Note 3—Loans.”
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Allowance for Credit Losses and Reserve for Unfunded Lending Commitments
Our allowance for credit losses represents management’s current estimate of expected credit losses over the contractual terms of our loans held for investment as of each balance sheet date. Expected recoveries of amounts previously charged off or expected to be charged off are recognized within the allowance. We also estimate expected credit losses related to unfunded lending commitments that are not unconditionally cancellable. 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. We provide additional information on the methodologies and key assumptions used in determining our allowance for credit losses in “Note 1—Summary of Significant Accounting Policies.”
Table 29 presents changes in our allowance for credit losses and reserve for unfunded lending commitments for the third quarter and first nine months of 2020 and 2019, and details by portfolio segment for the provision for credit losses, charge-offs and recoveries. The cumulative effects from adoption of the CECL standard and the change to include our finance charge and fee reserve in the allowance for credit losses are included in Table 29 and Table 30 below.
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Table 29: Allowance for Credit Losses and Reserve for Unfunded Lending Commitments Activity
Three Months Ended September 30, 2020
Credit CardConsumer Banking
(Dollars in millions)Domestic CardInternational Card BusinessesTotal Credit CardAutoRetail BankingTotal Consumer BankingCommercial BankingTotal
Allowance for credit losses:
Balance as of June 30, 2020$11,569 $522 $12,091 $2,726 $112 $2,838 $1,903 $16,832 
Charge-offs
(1,198)(98)(1,296)(280)(15)(295)(88)(1,679)
Recoveries(1)
313 40 353 244 3 247 6 606 
Net charge-offs(885)(58)(943)(36)(12)(48)(82)(1,073)
Provision (benefit) for credit losses378 72 450 (43) (43)(51)356 
Allowance build (release) for credit losses(507)14 (493)(79)(12)(91)(133)(717)
Other changes(2)
 14 14     14 
Balance as of September 30, 202011,062 550 11,612 2,647 100 2,747 1,770 16,129 
Reserve for unfunded lending commitments:
Balance as of June 30, 2020      218 218 
Benefit for losses on unfunded lending commitments      (23)(23)
Balance as of September 30, 2020      195 195 
Combined allowance and reserve as of September 30, 2020$11,062 $550 $11,612 $2,647 $100 $2,747 $1,965 $16,324 

Nine Months Ended September 30, 2020
Credit CardConsumer Banking
(Dollars in millions)Domestic CardInternational Card BusinessesTotal Credit CardAutoRetail BankingTotal Consumer BankingCommercial BankingTotal
Allowance for credit losses:
Balance as of December 31, 2019$4,997 $398 $5,395 $984 $54 $1,038 $775 $7,208 
Cumulative effects from adoption of the CECL standard2,237 4 2,241 477 25 502 102 2,845 
Finance charge and fee reserve reclassification(3)
439 23 462     462 
Balance as of January 1, 20207,673 425 8,098 1,461 79 1,540 877 10,515 
Charge-offs
(4,406)(351)(4,757)(1,155)(52)(1,207)(303)(6,267)
Recoveries(1)
1,047 120 1,167 710 11 721 10 1,898 
Net charge-offs(3,359)(231)(3,590)(445)(41)(486)(293)(4,369)
Provision for credit losses6,748 348 7,096 1,631 62 1,693 1,186 9,975 
Allowance build for credit losses3,389 117 3,506 1,186 21 1,207 893 5,606 
Other changes(2)
 8 8     8 
Balance as of September 30, 202011,062 550 11,612 2,647 100 2,747 1,770 16,129 
Reserve for unfunded lending commitments:
Balance as of December 31, 2019    5 5 130 135 
Cumulative effects from adoption of the CECL standard    (5)(5)42 37 
Balance as of January 1, 2020      172 172 
Provision for losses on unfunded lending commitments      23 23 
Balance as of September 30, 2020      195 195 
Combined allowance and reserve as of September 30, 2020$11,062 $550 $11,612 $2,647 $100 $2,747 $1,965 $16,324 
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Three Months Ended September 30, 2019
Credit CardConsumer Banking
(Dollars in millions)Domestic CardInternational Card BusinessesTotal Credit CardAutoRetail BankingTotal Consumer BankingCommercial BankingTotal
Allowance for loan and lease losses:
Balance as of June 30, 2019$4,925 $417 $5,342 $997 $58 $1,055 $736 $7,133 
Charge-offs
(1,403)(128)(1,531)(468)(21)(489)(66)(2,086)
Recoveries(1)
338 42 380 234 238 624 
Net charge-offs(1,065)(86)(1,151)(234)(17)(251)(60)(1,462)
Provision for loan and lease losses1,010 77 1,087 189 14 203 84 1,374 
Allowance build (release) for loan and lease losses(55)(9)(64)(45)(3)(48)24 (88)
Other changes(2)
— (8)(8)— — — — (8)
Balance as of September 30, 20194,870 400 5,270 952 55 1,007 760 7,037 
Reserve for unfunded lending commitments:
Balance as of June 30, 2019— — — — 140 144 
Provision for losses on unfunded lending commitments— — — — — — 
Balance as of September 30, 2019— — — — 149 153 
Combined allowance and reserve as of September 30, 2019$4,870 $400 $5,270 $952 $59 $1,011 $909 $7,190 

Nine Months Ended September 30, 2019
Credit CardConsumer Banking
(Dollars in millions)Domestic CardInternational Card BusinessesTotal Credit CardAutoRetail BankingTotal Consumer BankingCommercial BankingTotal
Allowance for loan and lease losses:
Balance as of December 31, 2018$5,144 $391 $5,535 $990 $58 $1,048 $637 $7,220 
Charge-offs
(4,635)(389)(5,024)(1,318)(65)(1,383)(109)(6,516)
Recoveries(1)
1,036 153 1,189 726 13 739 19 1,947 
Net charge-offs(3,599)(236)(3,835)(592)(52)(644)(90)(4,569)
Provision for loan and lease losses3,325 246 3,571 554 49 603 213 4,387 
Allowance build (release) for loan and lease losses(274)10 (264)(38)(3)(41)123 (182)
Other changes(2)
— (1)(1)— — — — (1)
Balance as of September 30, 20194,870 400 5,270 952 55 1,007 760 7,037 
Reserve for unfunded lending commitments:
Balance as of December 31, 2018— — — — 118 122 
Provision for losses on unfunded lending commitments— — — — — — 31 31 
Balance as of September 30, 2019— — — — 149 153 
Combined allowance and reserve as of September 30, 2019$4,870 $400 $5,270 $952 $59 $1,011 $909 $7,190 
__________
(1)The amount and timing of recoveries is impacted by our collection strategies, which are based on customer behavior and risk profile and include direct customer communications, repossession of collateral, the periodic sale of charged off loans as well as additional strategies, such as litigation.
(2)Represents foreign currency translation adjustments.
(3)Concurrent with our adoption of the CECL standard in the first quarter of 2020, we reclassified our finance charge and fee reserve to our allowance for credit losses, with a corresponding increase to credit card loans held for investment.
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Allowance coverage ratios are calculated based on the allowance for credit losses for each specified portfolio segment divided by period-end loans held for investment within the specified loan category. Table 30 presents the allowance coverage ratios as of September 30, 2020 and December 31, 2019.
Table 30: Allowance Coverage Ratios
September 30, 2020December 31, 2019
(Dollars in millions)Allowance for Credit Losses
Amount(1)
Allowance Coverage RatioAllowance for Loan and Lease Losses
Amount(1)
Allowance Coverage Ratio
Credit Card$11,612 $2,293 506.38 %$5,395 $5,009 107.70 %
Consumer Banking2,747 2,682 102.41 1,038 4,627 22.42 
Commercial Banking1,770 768 230.55 775 448 173.20 
Total$16,129 248,223 6.50 $7,208 265,809 2.71 
__________
(1)Represents period-end 30+ day delinquent loans for our credit card and consumer banking loan portfolios, nonperforming loans for our commercial banking loan portfolio and total loans held for investment for the total ratio.
Our allowance for credit losses increased by $8.9 billion to $16.1 billion, and our allowance coverage ratio increased by 379 basis points to 6.50% as of September 30, 2020 from December 31, 2019, driven by the allowance builds in the first and second quarters of 2020 from expectations of economic worsening and uncertainty as a result of the COVID-19 pandemic as well as the adoption of the CECL standard in the first quarter of 2020.
LIQUIDITY RISK PROFILE
We have established liquidity practices that are intended to ensure that we have sufficient asset-based liquidity to cover our funding requirements and maintain adequate reserves to withstand the potential impact of deposit attrition or diminished liquidity in the funding markets. In addition to our cash position, we maintain reserves in the form of investment securities and certain loans that are either readily-marketable or pledgeable.
Table 31 below presents the composition of our liquidity reserves as of September 30, 2020 and December 31, 2019.
Table 31: Liquidity Reserves
(Dollars in millions)September 30, 2020December 31, 2019
Cash and cash equivalents$44,106 $13,407 
Investment securities available for sale, at fair value99,853 79,213 
FHLB borrowing capacity secured by loans10,726 10,835 
Outstanding FHLB advances and letters of credit secured by loans(131)(7,210)
Investment securities encumbered for Public Funds and others(6,123)(5,688)
Total liquidity reserves$148,431 $90,557 
Our liquidity reserves increased by $57.9 billion to $148.4 billion as of September 30, 2020 from December 31, 2019 primarily driven by increases in our investment securities and cash balances from deposit growth. See “MD&A—Risk Management” in our 2019 Form 10-K for additional information on our management of liquidity risk.
Liquidity Coverage Ratio
We are subject to the Liquidity Coverage Ratio Rule (“LCR Rule”) as implemented by the Federal Reserve and OCC. The LCR Rule requires us to calculate our LCR daily. It also requires the Company to publicly disclose, on a quarterly basis, its LCR, certain related quantitative liquidity metrics, and a qualitative discussion of its LCR. Our average LCR during the third quarter of 2020 was 147%, which exceeded the LCR Rule requirement of 100%. The calculation and the underlying components are based on our interpretations, expectations and assumptions of relevant regulations, as well as interpretations provided by our regulators, and are subject to change based on changes to future regulations and interpretations. See “Part I—Item 1. Business—Supervision and Regulation” in our 2019 Form 10-K and “MD&A—Supervision and Regulation” in our Quarterly Report on Form 10-Q for the period ended March 31, 2020 for additional information.
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Borrowing Capacity
We maintain a shelf registration with the U.S. Securities and Exchange Commission (“SEC”) so that we may periodically offer and sell an indeterminate aggregate amount of senior or subordinated debt securities, preferred stock, depositary shares, common stock, purchase contracts, warrants and units. There is no limit under this shelf registration to the amount or number of such securities that we may offer and sell, subject to market conditions. In addition, we also maintain a shelf registration that allows us to periodically offer and sell up to $25 billion of securitized debt obligations from our credit card loan securitization trust and a shelf registration that allows us to periodically offer and sell up to $20 billion from our auto loan securitization trusts.
In addition to our issuance capacity under the shelf registration statements, we also have access to FHLB advances and the Federal Reserve Discount Window. The ability to borrow utilizing these sources is based on membership status and the amount is dependent upon the Banks’ ability to post collateral. As of September 30, 2020, we pledged both loans and securities to FHLB to secure a maximum borrowing capacity of $16.2 billion, of which $16.1 billion was still available to us to borrow. Our FHLB membership is supported by our investment in FHLB stock of $30 million and $328 million as of September 30, 2020 and December 31, 2019, respectively, which was determined in part based on our outstanding advances. As of September 30, 2020, we pledged loans to secure a borrowing capacity of $21.0 billion under the Federal Reserve Discount Window. Our membership with the Federal Reserve is supported by our investment in Federal Reserve stock, which totaled $1.3 billion as of both September 30, 2020 and December 31, 2019.
Funding
Our primary source of funding comes from deposits, as they are a stable and relatively low cost source of funding. In addition to deposits, we raise funding through the issuance of senior and subordinated notes and securitized debt obligations, federal funds purchased, securities loaned or sold under agreements to repurchase, and FHLB advances secured by certain portions of our loan and securities portfolios. A key objective in our use of these markets is to maintain access to a diversified mix of wholesale funding sources. See “MD&A—Consolidated Balance Sheets Analysis—Funding Sources Composition” for additional information on our primary sources of funding.
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Deposits
Table 32 provides a comparison of average balances, interest expense and average deposit interest rates for the third quarter and first nine months of 2020 and 2019.
Table 32: Deposits Composition and Average Deposits Interest Rates
Three Months Ended September 30,
20202019
(Dollars in millions)Average
Balance
Interest
Expense
Average
Deposits
Interest Rate
Average
Balance
Interest
Expense
Average
Deposits
Interest Rate
Interest-bearing checking accounts(1)
$38,115 $25 0.26 %$33,804 $75 0.87 %
Saving deposits(2)
196,575 287 0.58 154,442 540 1.39 
Time deposits less than $100,00026,626 112 1.67 28,174 197 2.78 
Total interest-bearing core deposits261,316 424 0.65 216,420 812 1.49 
Time deposits of $100,000 or more15,023 52 1.40 15,643 89 2.25 
Total interest-bearing deposits$276,339 $476 0.69 $232,063 $901 1.55 

Nine Months Ended September 30,
20202019
(Dollars in millions)Average
Balance
Interest
Expense
Average
Deposits
Interest Rate
Average
Balance
Interest
Expense
Average
Deposits
Interest Rate
Interest-bearing checking accounts(1)
$36,201 $106 0.39 %$34,437 $223 0.86 %
Saving deposits(2)
179,643 1,085 0.81 154,168 1,565 1.36 
Time deposits less than $100,00027,477 407 1.98 26,898 555 2.76 
Total interest-bearing core deposits243,321 1,598 0.88 215,503 2,343 1.45 
Time deposits of $100,000 or more16,310 220 1.81 14,542 245 2.25 
Total interest-bearing deposits$259,631 $1,818 0.93 $230,045 $2,588 1.50 
__________
(1)Includes negotiable order of withdrawal accounts.
(2)Includes money market deposit accounts.
The FDIC limits the acceptance of brokered deposits to well-capitalized insured depository institutions and, with a waiver from the FDIC, to adequately-capitalized institutions. COBNA and CONA were well-capitalized, as defined under the federal banking regulatory guidelines, as of September 30, 2020 and December 31, 2019, respectively. See “Part I—Item 1. Business—Supervision and Regulation” in our 2019 Form 10-K for additional information. We provide additional information on the composition of deposits in “MD&A—Consolidated Balance Sheets Analysis—Funding Sources Composition” and in “Note 7—Deposits and Borrowings.”
Short-Term Borrowings and Long-Term Debt
We access the capital markets to meet our funding needs through the issuance of senior and subordinated notes, securitized debt obligations, and federal funds purchased and securities loaned or sold under agreements to repurchase. In addition, we may utilize short-term and long-term FHLB advances secured by certain of our investment securities, multifamily real estate loans, and commercial real estate loans.
Our short-term borrowings include those borrowings with an original contractual maturity of one year or less and do not include the current portion of long-term debt. The short-term borrowings, which consist of short-term FHLB advances and federal funds purchased, securities loaned or sold under agreements to repurchase, decreased by $6.6 billion to $702 million as of September 30, 2020 from December 31, 2019 driven by maturities of our short-term FHLB advances.
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Our long-term debt, which primarily consists of securitized debt obligations and senior and subordinated notes, decreased by $6.3 billion to $42.1 billion as of September 30, 2020 from December 31, 2019 primarily due to the repurchase of a portion of our senior unsecured debt and net maturities in our credit card securitization program. We provide more information on our securitization activity in “Note 5—Variable Interest Entities and Securitizations.”
On October 1, 2020, pursuant to a tender offer, we repurchased approximately $308 million of securitized debt obligations issued through our credit card securitization program.
The following table summarizes issuances of securitized debt obligations, senior and subordinated notes, and FHLB advances and their respective maturities or redemptions for the third quarter and first nine months of 2020 and 2019.
Table 33: Long-Term Funding
IssuancesMaturities/Redemptions
Three Months Ended September 30,Three Months Ended September 30,
(Dollars in millions)2020201920202019
Securitized debt obligations$ $4,050 $2,159 $2,096 
Senior and subordinated notes 1,500  2,844 
FHLB advances —  — 
Total$ $5,550 $2,159 $4,940 
IssuancesMaturities/Redemptions
Nine Months Ended September 30,Nine Months Ended September 30,
(Dollars in millions)2020201920202019
Securitized debt obligations$1,250 $6,673 $5,752 $6,222 
Senior and subordinated notes4,000 4,161 7,092 5,344 
FHLB advances —  251 
Total$5,250 $10,834 $12,844 $11,817 
Credit Ratings
Our credit ratings impact our ability to access capital markets and our borrowing costs. Rating agencies base their ratings on numerous factors, including liquidity, capital adequacy, asset quality, quality of earnings and the probability of systemic support. Significant changes in these factors could result in different ratings.
Table 34 provides a summary of the credit ratings for the senior unsecured long-term debt of Capital One Financial Corporation, COBNA and CONA as of September 30, 2020 and December 31, 2019.
Table 34: Senior Unsecured Long-Term Debt Credit Ratings
September 30, 2020December 31, 2019
Capital One
Financial
Corporation
COBNACONACapital One
Financial
Corporation
COBNACONA
Moody’sBaa1Baa1Baa1Baa1Baa1Baa1
S&PBBBBBB+BBB+BBBBBB+BBB+
FitchA-A-A-A-A-A-
As of October 28, 2020, Moody’s Investors Service (“Moody’s”), Standard & Poor’s (“S&P”), and Fitch Ratings (“Fitch”) have our credit ratings on a negative outlook.
MARKET RISK PROFILE
Market risk is the risk of economic loss in the value of our financial instruments due to changes in market factors. Our primary market risk exposures include interest rate risk, foreign exchange risk and commodity pricing risk. We are exposed to market risk primarily from the following operations and activities:
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Traditional banking activities of deposit gathering and lending;
Asset/liability management activities including the management of investment securities, short-term and long-term borrowings and derivatives;
Foreign operations in the U.K. and Canada within our Credit Card business; and
Customer accommodation activities within our Commercial Banking business.
We have enterprise-wide risk management policies and limits, approved by our Board of Directors, which govern our market risk management activities. Our objective is to manage our exposure to market risk in accordance with these policies and limits based on prevailing market conditions and long-term expectations. We provide additional information below about our primary sources of market risk, our market risk management strategies and the measures that we use to evaluate these exposures.
Interest Rate Risk
Interest rate risk represents exposure to financial instruments whose values vary with the level or volatility of interest rates. We are exposed to interest rate risk primarily from the differences in the timing between the maturities or re-pricing of assets and liabilities. We manage our interest rate risk primarily by entering into interest rate swaps and other derivative instruments, including caps, floors, options, futures and forward contracts.
We use various industry standard market risk measurement techniques and analyses to measure, assess and manage the impact of changes in interest rates on our net interest income and our economic value of equity and changes in foreign exchange rates on our non-dollar-denominated funding and non-dollar equity investments in foreign operations.
Net Interest Income Sensitivity
Our net interest income sensitivity measure estimates the impact on our projected 12-month baseline interest rate-sensitive revenue resulting from movements in interest rates. Interest rate-sensitive revenue consists of net interest income and certain components of other non-interest income significantly impacted by movements in interest rates, including changes in the fair value of freestanding interest rate derivatives. In addition to our existing assets and liabilities, we incorporate expected future business growth assumptions, such as loan and deposit growth and pricing, and plans for projected changes in our funding mix in our baseline forecast. In measuring the sensitivity of interest rate movements on our projected interest rate-sensitive revenue, we assume a hypothetical instantaneous parallel shift in the level of interest rates detailed in Table 35 below. At the current level of interest rates, our interest rate sensitive revenue is expected to increase in higher rate scenarios and decrease modestly in lower rate scenarios. Our current sensitivity to upward shocks has increased relative to December 2019 mainly due to the decline in interest rates and the growth in deposits and cash.
Economic Value of Equity
Our economic value of equity sensitivity measure estimates the impact on the net present value of our assets and liabilities, including derivative exposures, resulting from movements in interest rates. Our economic value of equity sensitivity measure is calculated based on our existing assets and liabilities, including derivatives, and does not incorporate business growth assumptions or projected balance sheet changes. Key assumptions used in the calculation include projecting rate sensitive prepayments for mortgage securities, loans and other assets, term structure modeling of interest rates, discount spreads, and deposit volume and pricing assumptions. In measuring the sensitivity of interest rate movements on our economic value of equity, we assume a hypothetical instantaneous parallel shift in the level of interest rates detailed in Table 35 below. Our current economic value of equity sensitivity profile demonstrates that our economic value of equity increases in higher rate scenarios and decreases in lower interest rate scenarios. Similar to the changes in net interest income sensitivity, our current economic value of equity sensitivity to upward shocks has also increased since December 2019 mainly due to the decline in interest rates and the growth in deposits and cash.
Table 35 shows the estimated percentage impact on our projected baseline net interest income and economic value of equity calculated under the methodology described above as of September 30, 2020 and December 31, 2019. In instances where a declining interest rate scenario would result in a rate less than 0%, we assume a rate of 0% for that scenario.

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Table 35: Interest Rate Sensitivity Analysis
September 30, 2020December 31, 2019
Estimated impact on projected baseline net interest income:
+200 basis points7.3 %1.8 %
+100 basis points5.3 1.3 
+50 basis points2.7 1.1 
–50 basis points(0.7)(0.5)
Estimated impact on economic value of equity:
+200 basis points10.8 (3.6)
+100 basis points10.1 0.5 
+50 basis points6.3 0.8 
–50 basis points(11.6)(2.4)
In addition to these industry standard measures, we also consider the potential impact of alternative interest rate scenarios, such as stressed rate shocks as well as steepening and flattening yield curve scenarios in our internal interest rate risk management decisions.
Limitations of Market Risk Measures
The interest rate risk models that we use in deriving these measures incorporate contractual information, internally-developed assumptions and proprietary modeling methodologies, which project borrower and depositor behavior patterns in certain interest rate environments. Other market inputs, such as interest rates, market prices and interest rate volatility, are also critical components of our interest rate risk measures. We regularly evaluate, update and enhance these assumptions, models and analytical tools as we believe appropriate to reflect our best assessment of the market environment and the expected behavior patterns of our existing assets and liabilities.
There are inherent limitations in any methodology used to estimate the exposure to changes in market interest rates. The sensitivity analysis described above contemplates only certain movements in interest rates and is performed at a particular point in time based on the existing balance sheet and, in some cases, expected future business growth and funding mix assumptions. The strategic actions that management may take to manage our balance sheet may differ significantly from our projections, which could cause our actual earnings and economic value of equity sensitivities to differ substantially from the above sensitivity analysis.
For further information on our interest rate exposures, see “Note 8—Derivative Instruments and Hedging Activities.”
Foreign Exchange Risk
Foreign exchange risk represents exposure to changes in the values of current holdings and future cash flows denominated in other currencies. We are exposed to foreign exchange risk primarily from the intercompany funding denominated in the pound sterling (“GBP”) and the Canadian dollar (“CAD”) that we provide to our businesses in the U.K. and Canada and net equity investments in those businesses. We are also exposed to foreign exchange risk due to changes in the dollar-denominated value of future earnings and cash flows from our foreign operations and from our Euro (“EUR”)-denominated borrowings.
Our non-dollar denominated intercompany funding and EUR-denominated borrowings expose our earnings to foreign exchange transaction risk. We manage these transaction risks by using forward foreign currency derivatives and cross-currency swaps to hedge our exposures. We measure our foreign exchange transaction risk exposures by applying a 1% U.S. dollar appreciation shock against the value of the non-dollar denominated intercompany funding and EUR-denominated borrowings and their related hedges, which shows the impact to our earnings from foreign exchange risk. Our intercompany funding outstanding was 430 million GBP and 761 million GBP as of September 30, 2020 and December 31, 2019, respectively, and 5.2 billion CAD and 6.6 billion CAD as of September 30, 2020 and December 31, 2019, respectively. Our EUR-denominated borrowings outstanding were 1.3 billion EUR and 1.2 billion EUR as of September 30, 2020 and December 31, 2019, respectively.
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Our non-dollar equity investments in foreign operations expose our balance sheet to translation risk in AOCI and our capital ratios. We manage our AOCI exposure by entering into foreign currency derivatives designated as net investment hedges. We measure these exposures by applying a 30% U.S. dollar appreciation shock, which we believe approximates a significant adverse shock over a one-year time horizon, against the value of the equity invested in our foreign operations net of related net investment hedges where applicable. Our gross equity exposures in our U.K. and Canadian operations were 1.6 billion GBP as of both September 30, 2020 and December 31, 2019, and 1.4 billion CAD as of both September 30, 2020 and December 31, 2019.
As a result of our derivative management activities, we believe our net exposure to foreign exchange risk is minimal.
Risk related to Customer Accommodation Derivatives
We offer interest rate, commodity and foreign currency derivatives as an accommodation to our customers within our Commercial Banking business. We offset the majority of the market risk of these customer accommodation derivatives by entering into offsetting derivatives transactions with other counterparties. We use value-at-risk (“VaR”) as the primary method to measure the market risk in our customer accommodation derivative activities on a daily basis. VaR is a statistical risk measure used to estimate the potential loss from movements observed in the recent market environment. We employ an historical simulation approach using the most recent 500 business days and use a 99 percent confidence level and a holding period of one business day. As a result of offsetting our customer exposures with other counterparties, we believe that our net exposure to market risk in our customer accommodation derivatives is minimal. For further information on our risk related to customer accommodation derivatives, see “Note 8—Derivative Instruments and Hedging Activities.”
London Interbank Offered Rate (“LIBOR”) Transition
On July 27, 2017, the U.K. Financial Conduct Authority, the regulator for the administration of LIBOR, announced that LIBOR would be transitioned as an interest rate benchmark and that it will no longer compel banks to contribute LIBOR data beyond December 31, 2021. In the U.S., the Federal Reserve Board and the Federal Reserve Bank of New York established the Alternative Reference Rates Committee (“ARRC”), a group of private market participants and ex-officio members representing banking and financial sector regulators. The ARRC has recommended the Secured Overnight Financing Rate (“SOFR”) as the preferred alternative rate for certain U.S. dollar derivative and cash instruments. While the ARRC has recommended SOFR as the replacement rate for LIBOR, there is acknowledgment that the development of a credit-sensitive element could be a complement to SOFR. It is unclear as to the likelihood and timing, but such a development would have impacts to our transition efforts.
We have exposures to LIBOR, including loans, derivative contracts, unsecured debt, securitizations, vendor agreements and other instruments with attributes that are either directly or indirectly dependent on LIBOR. To facilitate an orderly transition from LIBOR, we have established a company-wide, cross-functional initiative to oversee and manage our transition away from LIBOR and other Interbank Offered Rates (“IBORs”) to alternative reference rates. We have made progress on our transition efforts as we:
implemented a robust governance framework and transition planning;
completed an assessment of exposures and are developing exposure reporting for products, legal contracts, systems, models and processes;
included LIBOR transition language (“fallback language”) for certain new legal contracts and agreements; and
started issuing securities and originating agency multifamily loans with SOFR-based features in 2020.
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We also continue to focus our transition efforts on:
monitoring market developments for hardwired language from the ARRC and the International Swaps and Derivatives Association (“ISDA”);
reviewing existing legal contracts and agreements and assessing fallback language impacts;
monitoring and reducing our LIBOR exposure;
building internal operational readiness and risk management processes;
implementing necessary updates to our infrastructure including systems, models, valuation tools and processes;
engaging with our clients, industry working groups, and regulators; and
monitoring developments associated with LIBOR alternatives and industry practices related to LIBOR-indexed instruments.
For a further discussion of the various risks we face in connection with the expected replacement of LIBOR on our operations, see “Part I—Item 1A. Risk Factors—Uncertainty regarding, and transition away from, LIBOR may adversely affect our business” in our 2019 Form 10-K.
SUPERVISION AND REGULATION
Dividends and Stock Repurchases Update
On September 30, 2020, in light of the continued economic uncertainty from the COVID-19 pandemic, the Federal Reserve announced the extension of several capital distribution restrictions through the fourth quarter of 2020 to ensure that large banking organizations maintain a high level of capital resilience. Specifically, for the fourth quarter of 2020, banking organizations with more than $100 billion in total assets, including us, continue to be required by the Federal Reserve to suspend share repurchases and to cap common stock dividends.
In August 2020, the Federal Banking Agencies adopted as final the interim final rule issued in March 2020 that revised the definition of “eligible retained income” in the capital rule to make any required reduction in capital distributions less sudden and severe and more gradual than would have occurred under the original definition of the term. For more information about this interim final rule, see “MD&A—Supervision and Regulation” in our Quarterly Report on Form 10-Q for the period ended March 31, 2020.
Net Stable Funding Ratio
The Federal Banking Agencies have finalized a rule to implement the net stable funding ratio (“NSFR”) in the United States (the “NSFR Rule”). The NSFR Rule requires the Company and each of the Banks to maintain an amount of available stable funding, which is a weighted measure of a company’s funding sources over a one-year time horizon, calculated by applying standardized weightings to equity and liabilities based on their expected stability, that is no less than the amount of required stable funding, which is calculated by applying standardized weightings to assets, derivatives exposures and certain other items based on their liquidity characteristics. As a Category III institution, we and the Banks are subject to an NSFR requirement equal to 85% of the full requirement. These requirements will become effective as of July 1, 2021 and will apply to us and each of the Banks.
CECL Update
In August 2020, the Federal Banking Agencies adopted as final the 2020 CECL Transition Rule that provides banking organizations, including us, an option to mitigate the estimated capital effects of CECL for two years, followed by a three-year transition period (the “2020 CECL Transition Election”). We made the 2020 CECL Transition Election beginning in the first quarter of 2020. For a description of the 2020 CECL Transition Rule, see “MD&A—Supervision and Regulation” in our Quarterly Report on Form 10-Q for the period ended March 31, 2020.
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Derivatives Activities Update
Title VII of the Dodd-Frank Act establishes a regulatory framework for the governance of the over-the-counter derivatives market, including swaps and security-based swaps and the registration of certain market participants as a swap dealer (an “SD”). CONA provisionally registered with the Commodity Futures Trading Commission (the “CFTC”) as an SD in the third quarter of this year. Registration as an SD subjects CONA to an enhanced and heightened regulatory regime with respect to its swaps and other derivatives activities. As a result of CONA’s swap dealer registration, it is subject to the OCC’s rules concerning capital and margin requirements for SDs, including the mandatory exchange of variation margin and initial margin with certain counterparties. Additionally, as a provisionally registered SD, CONA is subject to the CFTC’s rules regarding business conduct standards, recordkeeping obligations, regulatory reporting and procedures relating to swaps trading. CONA’s swaps and other derivatives activities do not require it to register with the SEC as a security-based swap dealer.
FDIC Insurance Assessment
As of June 30, 2020, the Deposit Insurance Fund (“DIF”) reserve ratio fell to 1.30 percent. The FDIC, as required under the Federal Deposit Insurance Act, established a plan on September 15, 2020, to restore the DIF reserve ratio to meet or exceed 1.35 percent within eight years. The FDIC’s restoration plan projects the reserve ratio to exceed 1.35 percent without increasing the deposit insurance assessment rate, subject to ongoing monitoring over the next eight years.
We provided additional information on our Supervision and Regulation in our 2019 Form 10-K under “Part I—Item 1. Business—Supervision and Regulation” and in our Quarterly Reports on Form 10-Q for the period ended March 31, 2020 and for the period ended June 30, 2020 under “MD&A—Supervision and Regulation.”
FORWARD-LOOKING STATEMENTS
From time to time, we have made and will make forward-looking statements, including those that discuss, among other things, strategies, goals, outlook or other non-historical matters; projections, revenues, income, returns, expenses, capital measures, capital allocation plans, accruals for claims in litigation and for other claims against us; earnings per share, efficiency ratio, operating efficiency ratio, or other financial measures for us; future financial and operating results; our plans, objectives, expectations and intentions; and the assumptions that underlie these matters.
To the extent that any such information is forward-looking, it is intended to fit within the safe harbor for forward-looking information provided by the Private Securities Litigation Reform Act of 1995.
Numerous factors could cause our actual results to differ materially from those described in such forward-looking statements, including, among other things:
the impact of the COVID-19 pandemic and related public health measures on our business, financial condition and results of operations;
general economic and business conditions in the U.S., the U.K., Canada or our local markets, including conditions affecting employment levels, interest rates, tariffs, collateral values, consumer income, credit worthiness and confidence, spending and savings that may affect consumer bankruptcies, defaults, charge-offs and deposit activity;
an increase or decrease in credit losses, including increases due to a worsening of general economic conditions in the credit environment, and the impact of inaccurate estimates or inadequate reserves;
compliance with financial, legal, regulatory, tax or accounting changes or actions, including the impacts of the Tax Act, the Dodd-Frank Act, and other regulations governing bank capital and liquidity standards;
our ability to manage effectively our capital and liquidity;
developments, changes or actions relating to any litigation, governmental investigation or regulatory enforcement action or matter involving us;
the inability to sustain revenue and earnings growth;
increases or decreases in interest rates and uncertainty with respect to the interest rate environment;
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uncertainty regarding, and transition away from, the London Interbank Offered Rate;
our ability to access the capital markets at attractive rates and terms to capitalize and fund our operations and future growth;
increases or decreases in our aggregate loan balances or the number of customers and the growth rate and composition thereof, including increases or decreases resulting from factors such as shifting product mix, amount of actual marketing expenses we incur and attrition of loan balances;
the amount and rate of deposit growth;
changes in deposit costs;
our ability to execute on our strategic and operational plans;
restructuring activities or other charges;
our response to competitive pressures;
changes in retail distribution strategies and channels, including the emergence of new technologies and product delivery systems;
our success in integrating acquired businesses and loan portfolios, and our ability to realize anticipated benefits from announced transactions and strategic partnerships;
the success of our marketing efforts in attracting and retaining customers;
changes in the reputation of, or expectations regarding, the financial services industry or us with respect to practices, products or financial condition;
any significant disruption in our operations or in the technology platforms on which we rely, including cybersecurity, business continuity and related operational risks, as well as other security failures or breaches of our systems or those of our customers, partners, service providers or other third parties;
the potential impact to our business, operations and reputation from, and expenses and uncertainties associated with, the Cybersecurity Incident we announced on July 29, 2019 and associated legal proceedings and other inquiries or investigations, as discussed in “MD&A—Introduction—Cybersecurity Incident” and “Note 13—Commitments, Contingencies, Guarantees and Others”
our ability to maintain a compliance and technology infrastructure suitable for the nature of our business;
our ability to develop and adapt to rapid changes in digital technology to address the needs of our customers and comply with applicable regulatory standards, including compliance with data protection and privacy standards;
the effectiveness of our risk management strategies;
our ability to control costs, including the amount of, and rate of growth in, our expenses as our business develops or changes or as it expands into new market areas;
the extensive use, reliability and accuracy of the models and data we rely on;
our ability to recruit and retain talented and experienced personnel;
the impact from, and our ability to respond to, natural disasters and other catastrophic events;
changes in the labor and employment markets;
fraud or misconduct by our customers, employees, business partners or third parties;
merchants’ increasing focus on the fees charged by credit card networks; and
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other risk factors identified from time to time in our public disclosures, including in the reports that we file with the SEC.
We expect that the effects of the COVID-19 pandemic will heighten the risks associated with many of these factors.
Forward-looking statements often use words such as “will,” “anticipate,” “target,” “expect,” “estimate,” “intend,” “plan,” “goal,” “believe,” “forecast,” “outlook” or other words of similar meaning. Any forward-looking statements made by us or on our behalf speak only as of the date they are made or as of the date indicated, and we do not undertake any obligation to update forward-looking statements as a result of new information, future events or otherwise. For additional information on factors that could materially influence forward-looking statements included in this Report, see the risk factors set forth under “Part I—Item 1A. Risk Factors” in our 2019 Form 10-K and “Part II—Item 1A. Risk Factors” in our Quarterly Report on Form 10-Q for the period ended March 31, 2020. You should carefully consider the factors discussed above, and in our Risk Factors or other disclosure, in evaluating these forward-looking statements.
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SUPPLEMENTAL TABLE
Reconciliation of Non-GAAP Measures
The following non-GAAP measures consist of TCE, tangible assets and metrics computed using these amounts, which include tangible book value per common share, return on average tangible assets, return on average TCE and TCE ratio. We consider these metrics to be key financial performance measures that management uses in assessing capital adequacy and the level of returns generated. While these non-GAAP measures are widely used by investors, analysts and bank regulatory agencies to assess the capital position of financial services companies, they may not be comparable to similarly-titled measures reported by other companies. The following table presents reconciliations of these non-GAAP measures to the applicable amounts measured in accordance with GAAP.
Table A—Reconciliation of Non-GAAP Measures
(Dollars in millions, except as noted)September 30, 2020December 31, 2019
Tangible Common Equity (Period-End):
Stockholders’ equity$58,424 $58,011 
Goodwill and intangible assets(1)
(14,825)(14,932)
Noncumulative perpetual preferred stock(5,330)(4,853)
Tangible common equity$38,269 $38,226 
Tangible Common Equity (Quarterly Average):
Stockholders’ equity$57,223 $58,148 
Goodwill and intangible assets(1)
(14,867)(14,967)
Noncumulative perpetual preferred stock(5,228)(5,506)
Tangible common equity$37,128 $37,675 
Tangible Assets (Period-End):
Total assets$421,883 $390,365 
Goodwill and intangible assets(1)
(14,825)(14,932)
Tangible assets$407,058 $375,433 
Tangible Assets (Quarterly Average):
Total assets$422,854 $383,162 
Goodwill and intangible assets(1)
(14,867)(14,967)
Tangible assets$407,987 $368,195 
Non-GAAP Ratio:
Tangible common equity(2)
9.4 %10.2 %
__________
(1)Includes impact of related deferred taxes.
(2)Tangible common equity (“TCE”) ratio is a non-GAAP measure calculated based on TCE divided by tangible assets.
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Glossary and Acronyms
2019 Stock Repurchase Program: On June 27, 2019, we announced that our Board of Directors authorized the repurchase of up to $2.2 billion of shares of our common stock from the third quarter of 2019 through the end of the second quarter of 2020.
Annual Report: References to our “2019 Form 10-K” or “2019 Annual Report” are to our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
Banks: Refers to COBNA and CONA.
Basel Committee: The Basel Committee on Banking Supervision.
Basel III Advanced Approaches: The Basel III Advanced Approaches is mandatory for those institutions with consolidated total assets of $250 billion or more or consolidated total on-balance sheet foreign exposure of $10 billion or more. The Basel III Capital Rule modified the Advanced Approaches version of Basel II to create the Basel III Advanced Approaches.
Basel III Capital Rule: The Federal Banking Agencies issued a rule in July 2013 implementing the Basel III capital framework developed by the Basel Committee as well as certain Dodd-Frank Act and other capital provisions.
Basel III Standardized Approach: The Basel III Capital Rule modified Basel I to create the Basel III Standardized Approach, which requires for Basel III Advanced Approaches banking organizations that have yet to exit parallel run to use the Basel III Standardized Approach to calculate regulatory capital, including capital ratios, subject to transition provisions.
Capital One or the Company: Capital One Financial Corporation and its subsidiaries.
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”): This was signed into law on March 27, 2020, and among other provisions, authorizes a number of lending programs to support the flow of credit to consumers and businesses.
Carrying value (with respect to loans): The amount at which a loan is recorded on the consolidated balance sheets. For loans recorded at amortized cost, carrying value is the unpaid principal balance net of unamortized deferred loan origination fees and costs, and unamortized purchase premium or discount. For loans that are or have been on nonaccrual status, the carrying value is also reduced by any net charge-offs that have been recorded and the amount of interest payments applied as a reduction of principal under the cost recovery method. For credit card loans, the carrying value also includes interest that has been billed to the customer, net of any related reserves. Loans held for sale are recorded at either fair value (if we elect the fair value option) or at the lower of cost or fair value.
CECL: In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU requires an impairment model (known as the current expected credit loss (“CECL”) model) that is based on expected rather than incurred losses, with an anticipated result of more timely loss recognition. This guidance was effective for us on January 1, 2020.
COBNA: Capital One Bank (USA), National Association, one of our fully owned subsidiaries, which offers credit and debit card products, other lending products and deposit products.
Common equity Tier 1 capital: Calculated as the sum of common equity, related surplus and retained earnings, and accumulated other comprehensive income net of applicable phase-ins, less goodwill and intangibles net of associated deferred tax liabilities and applicable phase-ins, less other deductions, as defined by regulators.
CONA: Capital One, National Association, one of our fully owned subsidiaries, which offers a broad spectrum of banking products and financial services to consumers, small businesses and commercial clients.
Credit risk: The risk of loss from an obligor’s failure to meet the terms of any contract or otherwise fail to perform as agreed.
Cybersecurity Incident: The unauthorized access by an outside individual who obtained certain types of personal information relating to people who had applied for our credit card products and to our credit card customers that we announced on July 29, 2019.
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Derivative: A contract or agreement whose value is derived from changes in interest rates, foreign exchange rates, prices of securities or commodities, credit worthiness for credit default swaps or financial or commodity indices.
Discontinued operations: The operating results of a component of an entity, as defined by Accounting Standards Codification (“ASC”) 205, that are removed from continuing operations when that component has been disposed of or it is management’s intention to sell the component.
Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”): Regulatory reform legislation signed into law on July 21, 2010. This law broadly affects the financial services industry and contains numerous provisions aimed at strengthening the sound operation of the financial services sector.
Exchange Act: The Securities Exchange Act of 1934, as amended.
eXtensible Business Reporting Language (“XBRL”): A language for the electronic communication of business and financial data.
Federal Banking Agencies: The Federal Reserve, Office of the Comptroller of the Currency and Federal Deposit Insurance Corporation.
Federal Reserve: The Board of Governors of the Federal Reserve System.
FICO score: A measure of consumer credit risk provided by credit bureaus, typically produced from statistical modeling software created by FICO (formerly known as “Fair Isaac Corporation”) utilizing data collected by the credit bureaus.
Foreign currency derivative contracts: An agreement to exchange contractual amounts of one currency for another currency at one or more future dates.
Foreign exchange contracts: Contracts that provide for the future receipt or delivery of foreign currency at previously agreed-upon terms.
GSE or Agency: A government-sponsored enterprise or agency is a financial services corporation created by the United States Congress. Examples of U.S. government agencies include Federal National Mortgage Association (“Fannie Mae”), Federal Home Loan Mortgage Corporation (“Freddie Mac”), Government National Mortgage Association (“Ginnie Mae”) and the Federal Home Loan Banks (“FHLB”).
Interest rate sensitivity: The exposure to interest rate movements.
Interest rate swaps: Contracts in which a series of interest rate flows in a single currency are exchanged over a prescribed period. Interest rate swaps are the most common type of derivative contract that we use in our asset/liability management activities.
Investment grade: Represents Moody’s long-term rating of Baa3 or better; and/or a Standard & Poor’s or DBRS long-term rating of BBB- or better; or if unrated, an equivalent rating using our internal risk ratings. Instruments that fall below these levels are considered to be non-investment grade.
Investor entities: Entities that invest in community development entities (“CDE”) that provide debt financing to businesses and non-profit entities in low-income and rural communities.
LCR Rule: In September 2014, the Federal Banking Agencies issued final rules implementing the Basel III Liquidity Coverage Ratio in the United States. The LCR is calculated by dividing the amount of an institution’s high quality, unencumbered liquid assets by its estimated net cash outflow, as defined and calculated in accordance with the LCR Rule.
Leverage ratio: Tier 1 capital divided by average assets after certain adjustments, as defined by the regulators.
Liquidity risk: The risk that the Company will not be able to meet its future financial obligations as they come due, or invest in future asset growth because of an inability to obtain funds at a reasonable price within a reasonable time period.
Loan-to-value (“LTV”) ratio: The relationship, expressed as a percentage, between the principal amount of a loan and the appraised value of the collateral securing the loan.
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Managed presentation: A non-GAAP presentation of financial results that includes reclassifications to present revenue on a fully taxable-equivalent basis. Management uses this non-GAAP financial measure at the segment level, because it believes this provides information to enable investors to understand the underlying operational performance and trends of the particular business segment and facilitates a comparison of the business segment with the performance of competitors.
Market risk: The risk that an institution’s earnings or the economic value of equity could be adversely impacted by changes in interest rates, foreign exchange rates or other market factors.
Master netting arrangements: An agreement between two counterparties that have multiple contracts with each other that provides for the net settlement of all contracts through a single payment in the event of default or termination of any one contract.
Mortgage-backed security (“MBS”): An asset-backed security whose cash flows are backed by the principal and interest payments of a set of mortgage loans.
Mortgage servicing rights (“MSRs”): The right to service a mortgage loan when the underlying loan is sold or securitized. Servicing includes collections for principal, interest and escrow payments from borrowers and accounting for and remitting principal and interest payments to investors.
Net charge-off rate: Represents (annualized) net charge-offs divided by average loans held for investment for the period.
Net interest margin: Represents (annualized) net interest income divided by average interest-earning assets for the period.
Net stable funding ratio (“NSFR”): The Federal Banking Agencies issued a rule in October 2020 implementing the NSFR. The NSFR measures the stability of our funding profile and requires us to maintain minimum amounts of stable funding to support our assets, commitments and derivatives exposures over a one-year period.
Nonperforming loans: Generally include loans that have been placed on nonaccrual status. We also do not report loans classified as held for sale as nonperforming.
Option-ARM loans: The option-ARM real estate loan product is an adjustable-rate mortgage (“ARM”) loan that initially provides the borrower with the monthly option to make a fully-amortizing, interest-only or minimum fixed payment. After the initial payment option period, usually five years, the recalculated minimum payment represents a fully-amortizing principal and interest payment that would effectively repay the loan by the end of its contractual term.
Public Funds deposits: Deposits that are derived from a variety of political subdivisions such as school districts and municipalities.
Purchase volume: Consists of purchase transactions, net of returns, for the period, and excludes cash advance and balance transfer transactions.
Rating agency: An independent agency that assesses the credit quality and likelihood of default of an issue or issuer and assigns a rating to that issue or issuer.
Recorded investment: The amount of the investment in a loan which includes any direct write-down of the investment.
Repurchase agreement: An instrument used to raise short-term funds whereby securities are sold with an agreement for the seller to buy back the securities at a later date.
Restructuring charges: Charges associated with the realignment of resources supporting various businesses, primarily consisting of severance and related benefits pursuant to our ongoing benefit programs and impairment of certain assets related to business locations and activities being exited.
Risk-weighted assets: On- and off-balance sheet assets that are assigned to one of several broad risk categories and weighted by factors representing their risk and potential for default.
Securitized debt obligations: A type of asset-backed security and structured credit product constructed from a portfolio of fixed-income assets.
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Subprime: For purposes of lending in our Credit Card business, we generally consider FICO scores of 660 or below, or other equivalent risk scores, to be subprime. For purposes of auto lending in our Consumer Banking business, we generally consider FICO scores of 620 or below to be subprime.
Tailoring Rules: In October 2019, the Federal Banking Agencies released final rules that provide for tailored application of certain capital, liquidity and stress-testing requirements across different categories of banking institutions. As a bank holding company with total consolidated assets of at least $250 billion that does not exceed any of the applicable risk-based thresholds, we are a Category III institution under the Tailoring Rules.
Tangible common equity: A non-GAAP financial measure. Common equity less goodwill and intangible assets adjusted for deferred tax liabilities associated with non-tax deductible intangible assets and tax deductible goodwill.
Tax Act: The Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018 enacted on December 22, 2017.
Troubled debt restructuring (“TDR”): A TDR is deemed to occur when the contractual terms of a loan agreement are modified by granting a concession to a borrower that is experiencing financial difficulty.
Unfunded commitments: Legally binding agreements to provide a defined level of financing until a specified future date.
U.K. PPI Reserve: U.K. payment protection insurance customer refund reserve.
U.S. GAAP: Accounting principles generally accepted in the United States of America. Accounting rules and conventions defining acceptable practices in preparing financial statements in the U.S.
Variable interest entity (“VIE”): An entity that (i) lacks enough equity investment at risk to permit the entity to finance its activities without additional financial support from other parties; (ii) has equity owners that lack the right to make significant decisions affecting the entity’s operations; and/or (iii) has equity owners that do not have an obligation to absorb or the right to receive the entity’s losses or return.
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Acronyms
AML: Anti-money laundering
AOCI: Accumulated other comprehensive income
ARM: Adjustable rate mortgage
ARRC: Alternative Reference Rates Committee
ASU: Accounting Standards Update
ASC: Accounting Standards Codification
BHC: Bank holding company
bps: Basis points
CAD: Canadian dollar
CCAR: Comprehensive Capital Analysis and Review
CCP: Central Counterparty Clearinghouse, or Central Clearinghouse
CDE: Community development entities
CECL: Current expected credit loss
CFTC: Commodity Futures Trading Commission
CMBS: Commercial mortgage-backed securities
CME: Chicago Mercantile Exchange
COEP: Capital One (Europe) plc
COF: Capital One Financial Corporation
CVA: Credit valuation adjustment
DIF: Deposit Insurance Fund
DVA: Debit valuation adjustment
EUR: Euro
Fannie Mae: Federal National Mortgage Association
FASB: Financial Accounting Standards Board
FCA: U.K. Financial Conduct Authority
FCM: Futures commission merchant
FDIC: Federal Deposit Insurance Corporation
FFIEC: Federal Financial Institutions Examination Council
FHLB: Federal Home Loan Banks
FinCEN: Financial Crimes Enforcement Network
Fitch: Fitch Ratings
FOS: Financial Ombudsman Service
Freddie Mac: Federal Home Loan Mortgage Corporation
GAAP: Generally accepted accounting principles in the U.S.
GBP: Great British pound
Ginnie Mae: Government National Mortgage Association
GSE or Agency: Government-sponsored enterprise
IBOR: Interbank Offered Rate
IRM: Independent Risk Management
LCH: LCH Group
LCR: Liquidity coverage ratio
LIBOR: London Interbank Offered Rate
MDL: Multi-district litigation
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Moody’s: Moody’s Investors Service
MSRs: Mortgage servicing rights
NSFR: Net stable funding ratio
OCC: Office of the Comptroller of the Currency
OTC: Over-the-counter
PCA: Prompt corrective action
PCD: Purchased credit-deteriorated
PCI: Purchased credit-impaired
PCCR: Purchased credit card relationship
PPI: Payment protection insurance
PPP: Paycheck Protection Program
RMBS: Residential mortgage-backed securities
RSU: Restricted stock unit
S&P: Standard & Poor’s
SD: Swap dealer
SEC: U.S. Securities and Exchange Commission
SLR: Supplementary leverage ratio
SOFR: Secured Overnight Financing Rate
TCE: Tangible common equity
TDR: Troubled debt restructuring
U.K.: United Kingdom
U.S.: United States of America

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CAPITAL ONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Three Months Ended September 30,Nine Months Ended September 30,
(Dollars in millions, except per share-related data)2020201920202019
Interest income:
Loans, including loans held for sale$5,758 $6,429 $18,120 $19,180 
Investment securities443 583 1,455 1,867 
Other14 63 67 196 
Total interest income6,215 7,075 19,642 21,243 
Interest expense:
Deposits476 901 1,818 2,588 
Securitized debt obligations43 123 198 405 
Senior and subordinated notes132 299 551 923 
Other borrowings9 15 35 53 
Total interest expense660 1,338 2,602 3,969 
Net interest income5,555 5,737 17,040 17,274 
Provision for credit losses331 1,383 10,000 4,418 
Net interest income after provision for credit losses5,224 4,354 7,040 12,856 
Non-interest income:
Interchange fees, net775 790 2,199 2,368 
Service charges and other customer-related fees320 283 905 988 
Net securities gains 25 25 44 
Other706 144 1,017 492 
Total non-interest income1,826 1,222 4,146 3,892 
Non-interest expense:
Salaries and associate benefits1,719 1,605 5,050 4,736 
Occupancy and equipment506 519 1,546 1,533 
Marketing283 501 1,047 1,564 
Professional services327 314 918 919 
Communications and data processing310 312 920 944 
Amortization of intangibles14 25 52 84 
Other389 596 1,514 1,542 
Total non-interest expense3,548 3,872 11,047 11,322 
Income from continuing operations before income taxes3,502 1,704 139 5,426 
Income tax provision (benefit)1,096 375 (10)1,071 
Income from continuing operations, net of tax2,406 1,329 149 4,355 
Income (loss) from discontinued operations, net of tax0 (1)15 
Net income2,406 1,333 148 4,370 
Dividends and undistributed earnings allocated to participating securities(20)(10)(5)(34)
Preferred stock dividends(67)(53)(212)(185)
Issuance cost for redeemed preferred stock0 (22)
Net income (loss) available to common stockholders$2,319 $1,270 $(91)$4,151 
Basic earnings per common share:
Net income (loss) from continuing operations$5.07 $2.70 $(0.20)$8.80 
Income from discontinued operations0.00 0.01 0.00 0.03 
Net income (loss) per basic common share$5.07 $2.71 $(0.20)$8.83 
Diluted earnings per common share:
Net income (loss) from continuing operations$5.06 $2.68 $(0.20)$8.76 
Income from discontinued operations0.00 0.01 0.00 0.03 
Net income (loss) per diluted common share$5.06 $2.69 $(0.20)$8.79 
See Notes to Consolidated Financial Statements.
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CAPITAL ONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended September 30,Nine Months Ended September 30,
(Dollars in millions)2020201920202019
Net income$2,406 $1,333 $148 $4,370 
Other comprehensive income (loss), net of tax:
Net unrealized gains on securities available for sale1 100 1,447 664 
Net unrealized gains (losses) on hedging relationships(175)189 1,256 1,003 
Foreign currency translation adjustments28 (12)(16)33 
Net changes in securities held to maturity0 0 20 
Other(2)(2)(2)(4)
Other comprehensive income (loss), net of tax(148)283 2,685 1,716 
Comprehensive income$2,258 $1,616 $2,833 $6,086 

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

(Dollars in millions, except per share-related data)September 30, 2020December 31, 2019
Assets:
Cash and cash equivalents:
Cash and due from banks$4,267 $4,129 
Interest-bearing deposits and other short-term investments39,839 9,278 
Total cash and cash equivalents44,106 13,407 
Restricted cash for securitization investors895 342 
Securities available for sale (amortized cost of $96.7 billion and allowance for credit losses of $3 million as of September 30, 2020)
99,853 79,213 
Loans held for investment:
Unsecuritized loans held for investment217,878 231,992 
Loans held in consolidated trusts30,345 33,817 
Total loans held for investment248,223 265,809 
Allowance for credit losses(16,129)(7,208)
Net loans held for investment232,094 258,601 
Loans held for sale ($1.3 billion and $251 million carried at fair value at September 30, 2020 and December 31, 2019, respectively)
3,433 400 
Premises and equipment, net4,333 4,378 
Interest receivable1,551 1,758 
Goodwill14,648 14,653 
Other assets20,970 17,613 
Total assets$421,883 $390,365 
Liabilities:
Interest payable$332 $439 
Deposits:
Non-interest-bearing deposits29,633 23,488 
Interest-bearing deposits276,092 239,209 
Total deposits305,725 262,697 
Securitized debt obligations13,566 17,808 
Other debt:
Federal funds purchased and securities loaned or sold under agreements to repurchase702 314 
Senior and subordinated notes28,448 30,472 
Other borrowings79 7,103 
Total other debt29,229 37,889 
Other liabilities14,607 13,521 
Total liabilities363,459 332,354 
Commitments, contingencies and guarantees (see Note 13)
Stockholders’ equity:
Preferred stock (par value $0.01 per share; 50,000,000 shares authorized; 5,475,000 and 4,975,000 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively)
0 
Common stock (par value $0.01 per share; 1,000,000,000 shares authorized; 678,318,329 and 672,969,391 shares issued as of September 30, 2020 and December 31, 2019, respectively; 457,397,091 and 456,562,399 shares outstanding as of September 30, 2020 and December 31, 2019, respectively)
7 
Additional paid-in capital, net33,793 32,980 
Retained earnings37,653 40,340 
Accumulated other comprehensive income3,833 1,156 
Treasury stock, at cost (par value $0.01 per share; 220,921,238 and 216,406,992 shares as of September 30, 2020 and December 31, 2019, respectively)
(16,862)(16,472)
Total stockholders’ equity58,424 58,011 
Total liabilities and stockholders’ equity$421,883 $390,365 
See Notes to Consolidated Financial Statements.
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CAPITAL ONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
(Dollars in millions)Preferred StockCommon StockAdditional
Paid-In
Capital
Retained EarningsAccumulated
Other
Comprehensive
Income (Loss)
Treasury
Stock
Total
Stockholders’
Equity
SharesAmountSharesAmount
Balance as of December 31, 20194,975,000 $672,969,391 $$32,980 $40,340 $1,156 $(16,472)$58,011 
Cumulative effects from adoption of the CECL standard(2,184)(8)(2,192)
Comprehensive income (loss)(1,340)2,531 1,191 
Dividends—common stock(1)
23,213 (187)(185)
Dividends—preferred stock(55)(55)
Purchases of treasury stock(386)(386)
Issuances of common stock and restricted stock, net of forfeitures2,618,628 63 63 
Exercises of stock options559,333 20 20 
Issuances of preferred stock1,250,000 1,209 1,209 
Redemptions of preferred stock (875,000)(853)(22)(875)
Compensation expense for restricted stock units and stock options29 29 
Balance as of March 31, 20205,350,000 $676,170,565 $$33,450 $36,552 $3,679 $(16,858)$56,830 
Comprehensive income (loss)(918)302 (616)
Dividends—common stock(1)
6,521 (183)(183)
Dividends—preferred stock(90)(90)
Purchases of treasury stock(2)(2)
Issuances of common stock and restricted stock, net of forfeitures1,041,311 58 58 
Exercises of stock options8,410 
Compensation expense for restricted stock units and stock options48 48 
Balance as of June 30, 20205,350,000 $677,226,807 $$33,556 $35,361 $3,981 $(16,860)$56,045 
Comprehensive income (loss)2,406 (148)2,258 
Dividends—common stock(1)
1,608 0 0 (47)(47)
Dividends—preferred stock(67)(67)
Purchases of treasury stock(2)(2)
Issuances of common stock and restricted stock, net of forfeitures1,073,323 0 63 63 
Exercises of stock options16,591 0 1 1 
Issuances of preferred stock125,000 0 121 121 
Compensation expense for restricted stock units and stock options52 52 
Balance as of September 30, 20205,475,000 $0 678,318,329 $7 $33,793 $37,653 $3,833 $(16,862)$58,424 
See Notes to Consolidated Financial Statements.
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CAPITAL ONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
(Dollars in millions)Preferred StockCommon StockAdditional
Paid-In
Capital
Retained EarningsAccumulated
Other
Comprehensive
Income (Loss)
Treasury
Stock
Total
Stockholders’
Equity
SharesAmountSharesAmount
Balance as of December 31, 20184,475,000 $667,969,069 $$32,040 $35,875 $(1,263)$(14,991)$51,668 
Cumulative effects from adoption of new lease standard(11)(11)
Comprehensive income1,412 603 2,015 
Dividends—common stock(1)
32,700 (194)(191)
Dividends—preferred stock(52)(52)
Purchases of treasury stock(65)(65)
Issuances of common stock and restricted stock, net of forfeitures2,641,635 52 52 
Exercises of stock options5,000 
Compensation expense for restricted stock units and stock options65 65 
Balance as of March 31, 20194,475,000 $670,648,404 $$32,160 $37,030 $(660)$(15,056)$53,481 
Comprehensive income1,625 830 2,455 
Dividends—common stock(1)
8,680 (189)(188)
Dividends—preferred stock(80)(80)
Purchases of treasury stock(2)(2)
Issuances of common stock and restricted stock, net of forfeitures745,017 46 46 
Exercises of stock options4,000 
Compensation expense for restricted stock units and stock options55 55 
Balance as of June 30, 20194,475,000 $671,406,101 $$32,262 $38,386 $170 $(15,058)$55,767 
Comprehensive income1,333 283 1,616 
Dividends—common stock(1)
4,646 (190)(190)
Dividends—preferred stock(53)(53)
Purchases of treasury stock(469)(469)
Issuances of common stock and restricted stock, net of forfeitures673,255 55 55 
Exercises of stock options
Issuances of preferred stock1,500,000 1,463 1,463 
Compensation expense for restricted stock units and stock options46 46 
Balance as of September 30, 20195,975,000 $672,084,002 $$33,826 $39,476 $453 $(15,527)$58,235 
__________
(1)We declared dividend per share on our common stock of $0.10 and $0.40 in the third quarter of 2020 and 2019, respectively, and $0.90 and $1.20 in the first nine months of 2020 and 2019, respectively.

See Notes to Consolidated Financial Statements.
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CAPITAL ONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30,
(Dollars in millions) 20202019
Operating activities:
Income from continuing operations, net of tax$149 $4,355 
Income (loss) from discontinued operations, net of tax(1)15 
Net income148 4,370 
Adjustments to reconcile net income (loss) to net cash from operating activities:
Provision for credit losses10,000 4,418 
Depreciation and amortization, net2,701 2,434 
Deferred tax benefit(1,420)(72)
Net securities gains(25)(44)
Gain on sales of loans(15)(53)
Stock-based compensation expense128 175 
Other (including unrealized gains from equity investments)(477)
Loans held for sale:
Originations and purchases(6,739)(8,064)
Proceeds from sales and paydowns5,833 8,126 
Changes in operating assets and liabilities:
Changes in interest receivable207 (13)
Changes in other assets1,052 1,852 
Changes in interest payable(107)(88)
Changes in other liabilities785 (522)
Net change from discontinued operations1 
Net cash from operating activities12,072 12,519 
Investing activities:
Securities available for sale:
Purchases(35,189)(8,919)
Proceeds from paydowns and maturities15,593 6,099 
Proceeds from sales812 4,226 
Securities held to maturity:
Purchases0 (396)
Proceeds from paydowns and maturities0 3,209 
Loans:
Net changes in loans held for investment9,083 (10,555)
Principal recoveries of loans previously charged off1,898 1,947 
Net purchases of premises and equipment(543)(631)
Net cash from acquisition activities(7)(85)
Net cash from other investing activities(564)(781)
Net cash from investing activities(8,917)(5,886)
See Notes to Consolidated Financial Statements.
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CAPITAL ONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30,
(Dollars in millions) 20202019
Financing activities:
Deposits and borrowings:
Changes in deposits$42,763 $7,072 
Issuance of securitized debt obligations1,248 6,656 
Maturities and paydowns of securitized debt obligations(5,752)(6,222)
Issuance of senior and subordinated notes and long-term FHLB advances3,987 4,142 
Maturities and paydowns of senior and subordinated notes and long-term FHLB advances(7,156)(5,595)
Changes in other borrowings(6,636)(8,964)
Common stock:
Net proceeds from issuances184 153 
Dividends paid(415)(569)
Preferred stock:
Net proceeds from issuances1,330 1,463 
Dividends paid(212)(185)
Redemptions(875)
Purchases of treasury stock(390)(536)
Proceeds from share-based payment activities21 
Net cash from financing activities28,097 (2,585)
Changes in cash, cash equivalents and restricted cash for securitization investors31,252 4,048 
Cash, cash equivalents and restricted cash for securitization investors, beginning of the period13,749 13,489 
Cash, cash equivalents and restricted cash for securitization investors, end of the period$45,001 $17,537 
Supplemental cash flow information:
Non-cash items:
Net transfers from (to) loans held for investment to (from) loans held for sale$2,173 $1,494 
Interest paid2,944 3,689 
Income tax paid625 364 
See Notes to Consolidated Financial Statements.
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NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Capital One Financial Corporation, a Delaware Corporation established in 1994 and headquartered in McLean, Virginia, is a diversified financial services holding company with banking and non-banking subsidiaries. Capital One Financial Corporation and its subsidiaries (the “Company”) offer a broad array of financial products and services to consumers, small businesses and commercial clients through digital channels, branches, Cafés and other distribution channels. As of September 30, 2020, our principal subsidiaries included:
Capital One Bank (USA), National Association (“COBNA”), which offers credit and debit card products, other lending products and deposit products; and
Capital One, National Association (“CONA”), which offers a broad spectrum of banking products and financial services to consumers, small businesses and commercial clients.
The Company is hereafter collectively referred to as “we,” “us” or “our.” COBNA and CONA are collectively referred to as the “Banks.”
We also offer products outside of the United States of America (“U.S.”) principally through Capital One (Europe) plc (“COEP”), an indirect subsidiary of COBNA organized and located in the United Kingdom (“U.K.”), and through a branch of COBNA in Canada. COEP has authority, among other things, to provide credit card loans. Our branch of COBNA in Canada also has the authority to provide credit card loans.
Our principal operations are organized for management reporting purposes into three major business segments, which are defined primarily based on the products and services provided or the types of customer served: Credit Card, Consumer Banking and Commercial Banking. We provide details on our business segments, the integration of recent acquisitions, if any, into our business segments and the allocation methodologies and accounting policies used to derive our business segment results in “Note 12—Business Segments and Revenue from Contracts with Customers.”
Basis of Presentation and Use of Estimates
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the U.S. (“U.S. GAAP”). The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and in the related disclosures. These estimates are based on information available as of the date of the consolidated financial statements. While management makes its best judgments, actual amounts or results could differ from these estimates. In the opinion of management, all normal, recurring adjustments have been included for a fair statement of this interim financial information. Certain prior period amounts have been reclassified to conform to the current period presentation.
These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements, and related notes thereto, included in Capital One Financial Corporation’s 2019 Annual Report on Form 10-K (“2019 Form 10-K”).
Income Taxes
Our effective tax rates in the third quarter and first nine months of 2020 were computed utilizing the estimated annual effective tax rate method and were driven by the relationship of our tax credits in proportion to our pre-tax earnings.
Significant Accounting Policies Impacted by our Adoption of the CECL Standard
In the first quarter of 2020, we adopted ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“CECL standard”) and updated the below significant accounting policies.
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Investment Securities
We classify securities as available for sale or held to maturity based on our investment strategy and management’s assessment of our intent and ability to hold the securities until maturity. We did not have any securities that were classified as held to maturity as of September 30, 2020.
We report securities available for sale on our consolidated balance sheets at fair value. The amortized cost of investment securities reflects the amount for which the security was acquired, adjusted for accrued interest, amortization of premiums, discounts, and net deferred fees and costs, collection of cash, and charge-offs. We elect to present accrued interest for securities available for sale within interest receivable on our consolidated balance sheets. Unrealized gains or losses are recorded, net of tax, as a component of accumulated other comprehensive income (“AOCI”). Unamortized premiums, discounts and other basis adjustments for available for sale securities are generally recognized in interest income over the contractual lives of the securities using the effective interest method. However, premiums on certain callable investment securities are amortized to the earliest call date. We record purchases and sales of investment securities available for sale on a trade date basis. Realized gains or losses from the sale of debt securities are computed using the first-in first-out method of identification, and are included in non-interest income in our consolidated statements of income.
An individual debt security is impaired when the fair value of the security is less than its amortized cost. If we intend to sell an available for sale security in an unrealized loss position or it is more likely than not that we will be required to sell the security prior to recovery of its amortized cost basis, any allowance for credit losses is reversed through our provision for credit losses and the difference between the amortized cost basis of the security and its fair value is recognized in our consolidated statements of income.
For impaired debt securities that we have both the intent and ability to hold, the securities are evaluated to determine if a credit loss exists. The allowance for credit losses on our investment securities is recognized through our provision for credit losses and limited by the unrealized losses of a security measured as the difference between the security’s amortized cost and fair value. See further discussion below under the “Allowance for Credit Losses - Available for Sale Investment Securities” section of this Note.
Our investment portfolio also includes certain debt securities that, at the time of purchase, had experienced a more-than-insignificant deterioration in credit quality since origination. Such debt securities are accounted for in accordance with accounting guidance for purchased financial assets with credit deterioration and are herein referred to as purchased credit-deteriorated (“PCD”) securities.
PCD securities require the recognition of an allowance for credit losses at the time of acquisition. The allowance for credit losses is not recognized in earnings. Instead, the purchase price and the initial allowance collectively represent the amortized cost basis of a PCD security. Any noncredit discount or premium at the date of acquisition is amortized into interest income over the remaining life of the security. Subsequent to the date of purchase, we re-measure the allowance for credit losses on the amortized cost basis using the same policies as for other debt securities available for sale and changes are recognized through our provision for credit losses. See further discussion below under the “Allowance for Credit Losses - Available for Sale Investment Securities” section of this Note.
We charge off any portion of an investment security that we determine is uncollectible. The amortized cost basis, excluding accrued interest, is charged off through the allowance for credit losses. Accrued interest is charged off as a reduction to interest income. Recoveries of previously charged off principal amounts are recognized in our provision for credit losses when received.
Loans
Our loan portfolio consists of loans held for investment, including loans underlying our consolidated securitization trusts, and loans held for sale and is divided into three portfolio segments: credit card, consumer banking and commercial banking loans. Credit card loans consist of domestic and international credit card loans. Consumer banking loans consist of auto and retail banking loans. Commercial banking loans consist of commercial and multifamily real estate as well as commercial and industrial loans.
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Loan Classification
Upon origination or purchase, we classify loans as held for investment or held for sale based on our investment strategy and management’s intent and ability with regard to the loans, which may change over time. The accounting and measurement framework for loans differs depending on the loan classification, whether we elect the fair value option, whether the loans are originated or purchased and whether purchased loans are considered to have experienced a more-than-insignificant deterioration in credit quality since origination. The presentation within the consolidated statements of cash flows is based on management’s intent at acquisition or origination. Cash flows related to loans that are acquired or originated with the intent to hold for investment are included in cash flows from investing activities on our consolidated statements of cash flows. Cash flows related to loans that are acquired or originated with the intent to sell are included in cash flows from operating activities on our consolidated statements of cash flows.
Loans Held for Investment
Loans that we have the ability and intent to hold for the foreseeable future and loans associated with consolidated securitization transactions are classified as held for investment. Loans classified as held for investment, except for credit card loans, are reported at their amortized cost basis, excluding accrued interest. For these loans, we elect to present accrued interest within interest receivable on our consolidated balance sheets. For credit card loans, billed finance charges and fees are included in loans held for investment. Unbilled finance charges and fees on credit card loans are included in interest receivable.
Interest income is recognized on performing loans held for investment on an accrual basis. We defer loan origination fees and direct loan origination costs on originated loans, premiums and discounts on purchased loans and loan commitment fees. We recognize these amounts in interest income as yield adjustments over the life of the loan and/or commitment period using the effective interest method. For credit card loans, loan origination fees and direct loan origination costs are amortized on a straight-line basis over a 12-month period. The amortized cost of loans held for investment is subject to our allowance for credit losses methodology described below under the “Allowance for Credit Losses - Loans Held for Investment” section of this Note.
Loans Held for Sale
Loans purchased or originated with the intent to sell or for which we do not have the ability and intent to hold for the foreseeable future are classified as held for sale. Multifamily commercial real estate loans originated with the intent to sell to government-sponsored enterprises are accounted for under the fair value option. We elect the fair value option on these loans as part of our management of interest rate risk with corresponding forward sale commitments. Loan origination fees and direct loan origination costs are recognized as incurred and are reported in other non-interest income in the consolidated statements of income. Interest income is calculated based on the loan's stated rate of interest and is reported in interest income in the consolidated statements of income. Fair value adjustments are recorded in other non-interest income in the consolidated statements of income.
All other loans classified as held for sale are recorded at the lower of cost or fair value. Loan origination fees, direct loan origination costs and any discounts and premiums are deferred until the loan is sold and are then recognized as part of the total gain or loss on sale. The fair value of loans held for sale is determined on an aggregate portfolio basis for each loan type. Fair value adjustments are recorded in other non-interest income in the consolidated statements of income.
If a loan is transferred from held for investment to held for sale, then on the transfer date, any decline in fair value related to credit is recorded as a charge-off and any allowance for credit losses is reversed through our provision for credit losses. The loan is then reclassified to held for sale at its amortized cost at the date of the transfer. A valuation allowance is established, if needed, such that the loan held for sale is recorded at the lower of cost or fair value. Subsequent to transfer, we report write-downs or recoveries in fair value up to the carrying value at the date of transfer and realized gains or losses on loans held for sale in our consolidated statements of income as a component of other non-interest income. We calculate the gain or loss on loan sales as the difference between the proceeds received and the carrying value of the loans sold, net of the fair value of any residual interests retained.
Loans Acquired
All purchased loans, including loans transferred in a business combination, are initially recorded at fair value, which includes consideration of expected future losses, as of the date of the acquisition. To determine the fair value of loans at acquisition, we
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estimate discounted contractual cash flows due using an observable market rate of interest, when available, adjusted for factors that a market participant would consider in determining fair value. In determining fair value, contractual cash flows are adjusted to include prepayment estimates based upon historical payment trends, forecasted default rates and loss severities and other relevant factors. The difference between the fair value and the contractual cash flows is recorded as a loan premium or discount, which may relate to either credit or non-credit factors, at acquisition.
We account for purchased loans under the accounting guidance for purchased financial assets with credit deterioration when, at the time of purchase, the loans have experienced a more-than-insignificant deterioration in credit quality since origination. We also account for loans under this guidance when the loans were previously accounted for under the accounting guidance for purchased credit impaired loans and debt securities (“PCI”) prior to our adoption of Accounting Standards Codification (“ASC”) 326, Financial Instruments-Credit Losses, on January 1, 2020. We refer to these loans which are accounted for under accounting guidance for purchased financial assets with more-than-insignificant deterioration in credit quality since origination as “PCD loans”.
We recognize an allowance for credit losses on purchased loans that have not experienced a more-than-insignificant deterioration in credit quality since origination at the time of purchase through earnings in a manner that is consistent with originated loans. The policies relating to the allowance for credit losses on loans is described below in the “Allowance for Credit Losses - Loans Held for Investment” section of this Note.
Loan Modifications and Restructurings
As part of our loss mitigation efforts, we may provide modifications to a borrower experiencing financial difficulty to improve long-term collectability of the loan and to avoid the need for foreclosure or repossession of collateral, if any. Our loan modifications typically include short-term payment deferrals, an extension of the loan term, a reduction in the interest rate, a reduction in the loan balance, or a combination of these concessions. A loan modification in which a concession is granted to a borrower experiencing financial difficulty is accounted for and reported as a troubled debt restructuring (“TDR”). See “Note 3—Loans” for additional information on our loan modifications and restructurings, including those in response to the COVID-19 pandemic.
Delinquent and Nonperforming Loans
The entire balance of a loan is considered contractually delinquent if the minimum required payment is not received by the first statement cycle date equal to or following the due date specified on the customer’s billing statement. Delinquency is reported on loans that are 30 or more days past due. Interest and fees continue to accrue on past due loans until the date the loan is placed on nonaccrual status, if applicable. For loan modifications, delinquency and nonaccrual status are reported in accordance with the revised terms of the loans. We generally place loans on nonaccrual status when we believe the collectability of interest and principal is not reasonably assured.
Nonperforming loans generally include loans that have been placed on nonaccrual status. We do not report loans classified as held for sale as nonperforming.
Our policies for classifying loans as nonperforming, by loan category, are as follows:
Credit card loans: As permitted by regulatory guidance issued by the Federal Financial Institutions Examination Council (“FFIEC”), our policy is generally to exempt credit card loans from being classified as nonperforming, as these loans are generally charged off in the period the account becomes 180 days past due. Consistent with industry conventions, we generally continue to accrue interest and fees on delinquent credit card loans until the loans are charged off.
Consumer banking loans: We classify consumer banking loans as nonperforming when we determine that the collectability of all interest and principal on the loan is not reasonably assured, generally when the loan becomes 90 days past due.
Commercial banking loans: We classify commercial banking loans as nonperforming as of the date we determine that the collectability of all interest and principal on the loan is not reasonably assured.
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Modified loans and troubled debt restructurings: Modified loans, including TDRs, that are current at the time of the restructuring remain on accrual status if there is demonstrated performance prior to the restructuring and continued performance under the modified terms is expected. Otherwise, the modified loan is classified as nonperforming.
Interest and fees accrued but not collected at the date a loan is placed on nonaccrual status are reversed against earnings. In addition, the amortization of deferred loan fees, costs, premiums and discounts is suspended. Interest and fee income are subsequently recognized only upon the receipt of cash payments. However, if there is doubt regarding the ultimate collectability of loan principal, cash received is generally applied against the principal balance of the loan. Nonaccrual loans are generally returned to accrual status when all principal and interest is current and repayment of the remaining contractual principal and interest is reasonably assured, or when the loan is both well-secured and in the process of collection and collectability is no longer doubtful.
Charge-Offs - Loans
We charge off loans when we determine that the loan is uncollectible. The amortized cost basis, excluding accrued interest, is charged off as a reduction to the allowance for credit losses based on the time frames presented below. Accrued interest on loans other than credit card loans determined to be uncollectible is reversed as a reduction of interest income when the loan is classified as nonperforming. For credit card loans, accrued interest is charged off simultaneously with the charge off of other components of amortized cost and as a reduction of interest income. When received, recoveries of previously charged off amounts are recorded as an increase to the allowance for credit losses (see the “Allowance for Credit Losses - Loans Held for Investment” section of this Note for information on how we account for expected recoveries). Costs to recover charged off loans are recorded as collection expense and included in our consolidated statements of income as a component of other non-interest expense as incurred. Our charge-off time frames by loan type are presented below.
Credit card loans: We generally charge off credit card loans in the period the account becomes 180 days past due. We charge off delinquent credit card loans for which revolving privileges have been revoked as part of loan workout when the account becomes 120 days past due. Credit card loans in bankruptcy are generally charged off by the end of the month following 30 days after the receipt of a complete bankruptcy notification from the bankruptcy court. Credit card loans of deceased account holders are generally charged off 5 days after receipt of notification.
Consumer banking loans: We generally charge off consumer banking loans at the earlier of the date when the account is a specified number of days past due or upon repossession of the underlying collateral. Our charge-off period for auto loans is 120 days past due. Small business banking loans generally charge off at 120 days past due based on the date the amortized cost basis is deemed uncollectible. Auto loans that have not been previously charged off where the borrower has filed for bankruptcy and the loan has not been reaffirmed charge off in the period that the loan is 60 days from the bankruptcy notification date, regardless of delinquency status. Auto loans that have not been previously charged off and have been discharged under Chapter 7 bankruptcy are charged off at the end of the month in which the bankruptcy discharge occurs. Remaining consumer loans generally are charged off within 40 days of receipt of notification from the bankruptcy court. Consumer loans of deceased account holders are charged off by the end of the month following 60 days of receipt of notification.
Commercial banking loans: We charge off commercial loans in the period we determine that the amortized cost basis is uncollectible.
Allowance for Credit Losses
We maintain an allowance for credit losses (“allowance”) that represents management’s current estimate of expected credit losses over the contractual terms of our loans held for investment and investment securities classified as available for sale. We measure the allowance on a quarterly basis through consideration of past events, including historical experience, current conditions and reasonable and supportable forecasts.
Allowance for Credit Losses - Loans Held for Investment
We measure current expected credit losses over the contractual terms of our loans. The contractual terms are adjusted for expected prepayments but are not extended for renewals or extensions, except when an extension or renewal arises from a borrower option that is not unconditionally cancellable or through a TDR that is reasonably expected to occur.
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We aggregate loans sharing similar risk characteristics into pools for purposes of measuring expected credit losses. Pools are reassessed periodically to confirm that all loans within each pool continue to share similar risk characteristics. Expected credit losses for loans that do not share similar risk characteristics with other financial assets are measured individually.
Expected recoveries of amounts previously charged off or expected to be charged off are recognized within the allowance, with a corresponding reduction to our provision for credit losses. At times expected recoveries may result in a negative allowance. We limit the allowance to amounts previously charged off and expected to be charged off. Charge-offs of uncollectible amounts result in a reduction to the allowance and recoveries of previously charged off amounts result in an increase to the allowance.
When developing an estimate of expected credit losses, we use both quantitative and qualitative methods in considering all available information relevant to assessing collectability. This may include internal information, external information, or a combination of both relating to past events, current conditions, and reasonable and supportable forecasts. Significant judgment is applied to the development and duration of reasonable and supportable forecasts used in our estimation of lifetime losses. We estimate expected credit losses over the duration of those forecasts and then revert, on a rational and systematic basis, to historical losses at each relevant loss component of the estimate. Expected losses for contractual terms extending beyond the reasonable and supportable forecast and reversion periods are based on those historical losses.
Management will consider and may qualitatively adjust for conditions, changes and trends in loan portfolios that may not be captured in modeled results. These adjustments are referred to as qualitative factors and represent management’s judgment of the imprecision and risks inherent in the processes and assumptions used in establishing the allowance for credit losses. Management’s judgment may involve an assessment of current and forward-looking conditions including but not limited to changes in lending policies and procedures, nature and volume of the portfolio, external factors, and uncertainty as it relates to economic, model or forecast risks, where not already captured in the modeled results.
Expected credit losses for collateral-dependent loans are based on the fair value of the underlying collateral. When we intend to liquidate the collateral, the fair value of the collateral is adjusted for expected costs to sell. A loan is deemed to be a collateral-dependent loan when (i) we determine foreclosure or repossession of the underlying collateral is probable, or (ii) foreclosure or repossession is not probable, but the borrower is experiencing financial difficulty and we expect repayment to be provided substantially through the operation or sale of the collateral. The allowance for a collateral-dependent loan reflects the difference between the loan’s amortized cost basis and the fair value (less selling costs, where applicable) of the loan's underlying collateral.
Our credit card and consumer banking loan portfolios consist of smaller-balance, homogeneous loans. The consumer banking loan portfolio is divided into two primary portfolio segments: auto loans and retail banking loans. The credit card and consumer banking loan portfolios are further divided by our business units into groups based on common risk characteristics, such as origination year, contract type, interest rate, credit bureau score and geography. The commercial banking loan portfolio is primarily composed of larger-balance, non-homogeneous loans. These loans are subject to reviews that result in internal risk ratings. In assessing the risk rating of a particular commercial banking loan, among the factors we consider are the financial condition of the borrower, geography, collateral performance, historical loss experience and industry-specific information that management believes is relevant in determining and measuring expected credit losses. Subjective assessment and interpretation are involved. Emphasizing one factor over another or considering additional factors could impact the risk rating assigned to that commercial banking loan.
For consumer banking and commercial banking loans, the contractual period typically does not include renewals or extensions because the renewals and extensions are generally not at the borrower’s exclusive option to exercise. Management has determined that the undrawn credit exposure that is associated with our credit card loans is unconditionally cancellable. For this reason, expected credit losses are measured based on the drawn balance at each quarterly measurement date, but not on the undrawn exposure. Because credit card loans do not have a defined contractual life, management estimates both the volume and application of payments to determine a contractual life of the drawn balance at the measurement date over which expected credit losses are developed for credit card loans.
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With the exception of credit card loans, we have made a policy election to not measure an allowance on accrued interest for loans held for investment because we reverse uncollectible accrued interest in a timely manner. See the “Delinquent and Nonperforming Loans” and “Charge-Offs - Loans” sections of this Note for information on what we consider timely. For credit card loans, we do not make this election, as we reserve for uncollectible accrued interest relating to credit card loans in the allowance.
The allowance related to credit card and consumer banking loans assessed on a pooled basis is based on a modeled calculation, which is supplemented by management judgment as described above. Because of the homogeneous nature of our consumer loan portfolios, the allowance is based on the aggregated portfolio segment evaluations. The allowance is established through a process that begins with estimates of historical losses in each pool based upon various statistical analyses, with adjustments for current conditions and reasonable and supportable forecasts of conditions, which includes expected economic conditions. Loss forecast models are utilized to estimate expected credit losses and consider several portfolio indicators including, but not limited to, expected economic conditions, historical loss experience, account seasoning, the value of collateral underlying secured loans, estimated foreclosures or defaults based on observable trends, delinquencies, bankruptcy filings, unemployment, credit bureau scores and general business trends. Management believes these factors are relevant in estimating expected credit losses and also considers an evaluation of overall portfolio credit quality based on indicators such as changes in our credit evaluation, underwriting and collection management policies, the effect of other external factors such as competition and legal and regulatory requirements, general economic conditions and business trends, and uncertainties in forecasting and modeling techniques used in estimating our allowance.
The allowance related to commercial banking loans assessed on a pooled basis is based on our historical loss experience for loans with similar risk characteristics and consideration of the current credit quality of the portfolio, which is supplemented by management judgment as described above. These are adjusted for current conditions, and reasonable and supportable forecasts of conditions likely to cause future losses which vary from historical levels. We apply internal risk ratings to commercial banking loans, which we use to assess credit quality and derive a total loss estimate based on an estimated probability of default (“default rate”) and loss given default (“loss severity”). Management may also apply judgment to adjust the loss factors derived, taking into consideration both quantitative and qualitative factors, including general economic conditions, industry-specific and geographic trends, portfolio concentrations, trends in internal credit quality indicators, and current and past underwriting standards that have occurred but are not yet reflected in the historical data underlying our loss estimates.
The allowance related to smaller-balance homogeneous credit card and consumer banking loans whose terms have been modified in a TDR is calculated on a pool basis using historical loss experience, adjusted for current conditions and reasonable and supportable forecasts of conditions likely to cause future losses which vary from historical levels for the respective class of assets. The allowance related to consumer banking loans that are assessed at a loan-level is determined based on key considerations that include the borrower’s overall financial condition, resources and payment history, prospects for support from financially responsible guarantors, and when applicable, the estimated realizable value of any collateral. The allowance related to commercial banking loans that are assessed at a loan-level is generally determined in accordance with our policy for estimating expected credit losses for collateral-dependent loans as described above.
Off-balance sheet credit exposures
In addition to the allowance, we also measure expected credit losses related to unfunded lending commitments that are not unconditionally cancellable in our Commercial Banking business. This reserve is measured using the same measurement objectives as the allowance for loans held for investment and is recorded within other liabilities on our consolidated balance sheets. These commitments are segregated by risk according to our internal risk rating scale, which we use to assess credit quality and derive an expected credit loss estimate. We assess these risk classifications, taking into consideration both quantitative and qualitative factors, including historical loss experience, adjusted for current conditions and reasonable and supportable forecasts of conditions likely to cause future losses which vary from historical levels, and utilization assumptions to estimate the reserve for unfunded lending commitments. Expected credit losses are not measured on unfunded lending commitments that are unconditionally cancellable, including all of our unfunded credit card and consumer banking lending commitments and certain of our unfunded commercial banking lending commitments.
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Determining the appropriateness of the allowance and the reserve for unfunded lending commitments is complex and requires judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the loan portfolio, in light of the factors then prevailing, may result in significant changes in the reserve for unfunded lending commitments in future periods. See “Note 4—Allowance for Credit Losses and Reserve for Unfunded Lending Commitments” for additional information.
Allowance for Credit Losses - Available for Sale Investment Securities
When an investment security available for sale is impaired due to credit factors, we recognize a provision for credit losses in our consolidated statements of income and an allowance for credit losses on our consolidated balance sheets. Credit losses recognized in the allowance for credit losses are limited to the amount by which the investment security’s amortized cost basis exceeds its fair value. Investment securities in unrealized gain positions do not have an allowance for credit losses as the investment security could be sold at its fair value to prevent realization of credit losses. We exclude accrued interest from the fair value and amortized cost basis of an investment security for purposes of measuring impairment. Charge-offs of uncollectible amounts of investment securities are deducted from the allowance for credit losses.
For certain of our securities available for sale, we have determined that there is no risk of impairment due to credit factors. These investment securities include high quality debt instruments that are issued and guaranteed by the United States government and its agencies or are issued through certain government-sponsored enterprises. Management performs periodic assessments to reevaluate this conclusion by considering any changes in historical losses, current conditions, and reasonable and supportable forecasts.
We evaluate impairment on a quarterly basis at the individual security level and determine whether any portion of the decline in fair value is due to a credit loss. We make this determination through the use of quantitative and qualitative analyses. Our qualitative analysis includes factors such as the extent to which fair value is less than amortized cost, any changes in the security’s credit rating, past defaults or delayed payments, and adverse conditions impacting the security or issuer. A credit loss exists to the extent that management does not expect to recover the amortized cost basis.
For investment securities which require further assessment, we perform a quantitative analysis using a discounted cash flow methodology and compare the present value of expected future cash flows from the security available for sale to the security’s amortized cost basis. Projected future cash flows reflect management’s best estimate and are based on our understanding of past events, current conditions, reasonable and supportable forecasts, and are discounted by the security’s effective interest rate adjusted for prepayments. The allowance for credit losses for investment securities reflects the difference by which the amortized cost basis exceeds the present value of future cash flows and is limited to the amount by which the security’s amortized cost exceeds its fair value. See “Note 2—Investment Securities” for additional information.
Revenue Recognition
Interest Income and Fees
Interest income and fees on loans and investment securities are recognized based on the contractual provisions of the underlying arrangements.
Loan origination fees and costs and premiums and discounts on loans held for investment are deferred and generally amortized into interest income as yield adjustments over the contractual life and/or commitment period using the effective interest method. Costs deferred include direct origination costs such as bounties paid to third parties for new accounts and incentives paid to our network of auto dealers for loan referrals. In certain circumstances, we elect to factor prepayment estimates into the calculation of the constant effective yield necessary to apply the interest method. Prepayment estimates are based on historical prepayment data, existing and forecasted interest rates, and economic data. For credit card loans, loan origination fees and direct loan origination costs are amortized on a straight-line basis over a 12-month period.
Unamortized premiums, discounts and other basis adjustments on investment securities are generally recognized in interest income over the contractual lives of the securities using the effective interest method. However, premiums for certain callable investment securities are amortized to the earliest call date.
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Finance charges and fees on credit card loans are recorded in revenue when earned. Billed finance charges and fees on credit card loans are included in loan receivables. Unbilled finance charges and fees on credit card loans are included in interest receivable on our consolidated balance sheets. Annual membership fees are classified as service charges and other customer-related fees in our consolidated statements of income and are deferred and amortized into income over 12 months on a straight-line basis. We continue to accrue finance charges and fees on credit card loans until the account is charged off.
Newly Adopted Accounting Standards During the Nine Months Ended September 30, 2020
StandardGuidanceAdoption Timing and Financial Statement Impacts
Cloud Computing
ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
Issued August 2018
Aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license).
We adopted this guidance in the first quarter of 2020 using the prospective method of adoption.
Our adoption of this standard did not have a material impact on our consolidated financial statements.
Goodwill Impairment Test Simplification
ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
Issued January 2017
Historical guidance for goodwill impairment testing prescribed that the company must compare each reporting unit’s carrying value to its fair value. If the carrying value exceeds fair value, an entity performs the second step, which assigns the reporting unit’s fair value to its assets and liabilities, including unrecognized assets and liabilities, in the same manner as required in purchase accounting and then records an impairment. This ASU eliminates the second step.
Under the new guidance, an impairment of a reporting unit’s goodwill is determined based on the amount by which the reporting unit’s carrying value exceeds its fair value, limited to the amount of goodwill allocated to the reporting unit.
We adopted this guidance in the first quarter of 2020 using the prospective method of adoption.
Our adoption of this standard did not have a material impact on our consolidated financial statements.
Current Expected Credit Loss (“CECL”)
ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
Issued June 2016
Requires use of the current expected credit loss model that is based on expected losses (net of expected recoveries), rather than incurred losses, to determine our allowance for credit losses on financial assets measured at amortized cost, certain net investments in leases and certain off-balance sheet arrangements.

Replaces current accounting for purchased credit-impaired (“PCI”) and impaired loans.

Amends the other-than-temporary impairment model for available for sale debt securities. The new guidance requires that credit losses be recorded through an allowance approach, rather than through permanent write-downs for credit losses and subsequent accretion of positive changes through interest income over time.
We adopted this guidance in the first quarter of 2020, using the modified retrospective method of adoption.

Upon adoption, we recorded an increase to our reserves for credit losses of $2.9 billion, an increase to our deferred tax assets of $694 million, and a decrease to our retained earnings of $2.2 billion.

Additionally, we made a prospective change to present our finance charge and fee reserve as a component of our allowance for credit losses instead of as an offset to our loans held for investment. This balance sheet reclassification increased our allowance for credit losses, with a corresponding increase to our loans held for investment by $462 million as of January 1, 2020.
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NOTE 2—INVESTMENT SECURITIES
Our investment securities portfolio consists of the following: U.S. Treasury securities, U.S. government-sponsored enterprise or agency (“Agency”) and non-agency residential mortgage-backed securities (“RMBS”), Agency commercial mortgage-backed securities (“CMBS”) and other securities. Agency securities include Government National Mortgage Association (“Ginnie Mae”) guaranteed securities, Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”) issued securities. The carrying value of our investments in U.S. Treasury and Agency securities represented 96% of our total investment securities portfolio as of both September 30, 2020 and December 31, 2019.
In the first quarter of 2020, we adopted the CECL standard. For our purchased credit-deteriorated (“PCD”) securities, which are classified as available for sale, this adoption resulted in an increase of their amortized cost basis and related allowance for credit losses. The allowance for credit losses for these PCD securities is limited to the amount by which the amortized cost basis of the security exceeds its fair value. This limitation resulted in an increase of $11 million to our retained earnings with a corresponding decrease in AOCI at adoption.
We exclude accrued interest receivable from the amortized cost disclosed in this note. Our disclosures below reflect these adoption changes. Prior period presentation was not reclassified to conform to the current period presentation. See “Note 1—Summary of Significant Accounting Policies” for additional information.
The table below presents the amortized cost, gross unrealized gains and losses, and fair value of securities available for sale as of September 30, 2020 and December 31, 2019. Accrued interest receivable of $251 million as of September 30, 2020 is not included in the below table.
Table 2.1: Investment Securities Available for Sale
September 30, 2020
(Dollars in millions)Amortized
Cost
Allowance for Credit LossesGross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Investment securities available for sale:
U.S. Treasury securities$9,331 $0 $14 $0 $9,345 
RMBS:
Agency72,948 0 2,506 (88)75,366 
Non-agency1,093 (3)204 (1)1,293 
Total RMBS74,041 (3)2,710 (89)76,659 
Agency CMBS10,953 0 490 (8)11,435 
Other securities(1)
2,410 0 4 0 2,414 
Total investment securities available for sale$96,735 $(3)$3,218 $(97)$99,853 
 December 31, 2019
(Dollars in millions)Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Investment securities available for sale:
U.S. Treasury securities$4,122 $$(4)$4,124 
RMBS:
Agency62,003 1,120 (284)62,839 
Non-agency1,235 266 (2)1,499 
Total RMBS63,238 1,386 (286)64,338 
Agency CMBS9,303 165 (42)9,426 
Other securities(1)
1,321 1,325 
Total investment securities available for sale$77,984 $1,561 $(332)$79,213 
__________
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(1)Includes $1.5 billion and $117 million of asset-backed securities as of September 30, 2020, and December 31, 2019, respectively. The remaining amount is primarily comprised of supranational bonds and foreign government bonds.
Investment Securities in a Gross Unrealized Loss Position
The table below provides the gross unrealized losses and fair value of our securities available for sale aggregated by major security type and the length of time that individual securities have been in a continuous unrealized loss position as of September 30, 2020 and December 31, 2019. The amounts as of September 30, 2020 only include securities available for sale without an allowance for credit losses.
Table 2.2: Securities in a Gross Unrealized Loss Position
September 30, 2020
Less than 12 Months12 Months or LongerTotal
(Dollars in millions)Fair ValueGross
Unrealized
Losses
Fair ValueGross
Unrealized
Losses
Fair ValueGross
Unrealized
Losses
Investment securities available for sale without an allowance for credit losses:
U.S. Treasury securities$0 $0 $0 $0 $0 $0 
RMBS:
Agency6,681 (51)1,866 (37)8,547 (88)
Non-agency14 0 0 0 14 0 
Total RMBS6,695 (51)1,866 (37)8,561 (88)
Agency CMBS916 (4)257 (4)1,173 (8)
Other securities(1)
442 0 3 0 445 0 
Total investment securities available for sale in a gross unrealized loss position without an allowance for credit losses(2)
$8,053 $(55)$2,126 $(41)$10,179 $(96)

December 31, 2019
Less than 12 Months12 Months or LongerTotal
(Dollars in millions)Fair ValueGross
Unrealized
Losses
Fair ValueGross
Unrealized
Losses
Fair ValueGross
Unrealized
Losses
Investment securities available for sale:
U.S. Treasury securities$2,647 $(4)$$$2,647 $(4)
RMBS:
Agency10,494 (92)10,567 (192)21,061 (284)
Non-agency35 (1)16 (1)51 (2)
Total RMBS10,529 (93)10,583 (193)21,112 (286)
Agency CMBS2,580 (23)1,563 (19)4,143 (42)
Other securities(1)
126 106 232 
Total investment securities available for sale in a gross unrealized loss position$15,882 $(120)$12,252 $(212)$28,134 $(332)
__________
(1)    Includes primarily supranational bonds, foreign government bonds and other asset-backed securities
(2)    Consists of approximately 300 securities in gross unrealized loss positions as of September 30, 2020.
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Maturities and Yields of Investment Securities
The table below summarizes, by major security type, the contractual maturities and weighted-average yields of our investment securities as of September 30, 2020. Because borrowers may have the right to call or prepay certain obligations, the expected maturities of our securities are likely to differ from the scheduled contractual maturities presented below. The weighted-average yield below represents the effective yield for the investment securities and is calculated based on the amortized cost of each security.
Table 2.3: Contractual Maturities and Weighted-Average Yields of Securities
September 30, 2020
(Dollars in millions)Due in
1 Year or Less
Due > 1 Year
through
5 Years
Due > 5 Years
through
10 Years
Due > 10 YearsTotal
Fair value of securities available for sale:
U.S. Treasury securities$101 $9,244 $0 $0 $9,345 
RMBS(1):
Agency0 73 1,073 74,220 75,366 
Non-agency0 0 0 1,293 1,293 
Total RMBS0 73 1,073 75,513 76,659 
Agency CMBS(1)
52 2,766 5,242 3,375 11,435 
Other securities251 1,882 281 0 2,414 
Total securities available for sale$404 $13,965 $6,596 $78,888 $99,853 
Amortized cost of securities available for sale$402 $13,901 $6,334 $76,098 $96,735 
Weighted-average yield for securities available for sale1.44 %0.82 %1.93 %2.37 %2.11 %
__________
(1)As of September 30, 2020, the weighted-average expected maturities of RMBS and Agency CMBS are 3.7 years and 5.3 years, respectively.
Net Securities Gains or Losses and Process from Sales
For the three and nine months ended September 30, 2020, total proceeds from the sale of our securities were $668 million and $812 million, respectively, with gains of $25 million in both periods. For the three and nine months ended September 30, 2019, total proceeds from sale of our securities were $243 million and $4.2 billion, with gains of $5 million and $44 million, respectively.
Securities Pledged and Received
We pledged investment securities totaling $11.5 billion and $14.0 billion as of September 30, 2020 and December 31, 2019, respectively. These securities are primarily pledged to secure Federal Home Loan Banks (“FHLB”) advances and Public Funds deposits, as well as for other purposes as required or permitted by law. We accepted pledges of securities with a fair value of approximately $1 million as of both September 30, 2020 and December 31, 2019, related to our derivative transactions.
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NOTE 3—LOANS
Our loan portfolio consists of loans held for investment, including loans held in our consolidated trusts, and loans held for sale. We further divide our loans held for investment into three portfolio segments: credit card, consumer banking and commercial banking. Credit card loans consist of domestic and international credit card loans. Consumer banking loans consist of auto and retail banking loans. Commercial banking loans consist of commercial and multifamily real estate as well as commercial and industrial loans. The information presented in this section excludes loans held for sale, which are carried at either fair value (if we elect the fair value option) or at the lower of cost or fair value.
In the first quarter of 2020, we adopted the CECL standard. Accordingly, our disclosures below reflect these adoption changes. Prior period presentation was not modified to conform to the current period presentation. See “Note 1—Summary of Significant Accounting Policies” for additional information. Amounts as of September 30, 2020 include the impacts of COVID-19 customer assistance programs where applicable.
Accrued interest receivable of $1.3 billion as of September 30, 2020 is not included in the tables in this note. The table below presents the composition and aging analysis of our loans held for investment portfolio as of September 30, 2020 and December 31, 2019. The delinquency aging includes all past due loans, both performing and nonperforming.
Table 3.1: Loan Portfolio Composition and Aging Analysis
 September 30, 2020
Delinquent Loans
(Dollars in millions)Current30-59
Days
60-89
Days
> 90
Days
Total
Delinquent
Loans
Total
Loans
Credit Card:
Domestic credit card$93,433 $661 $427 $1,020 $2,108 $95,541 
International card businesses7,915 77 41 67 185 8,100 
Total credit card101,348 738 468 1,087 2,293 103,641 
Consumer Banking:
Auto62,756 1,810 669 159 2,638 65,394 
Retail banking3,250 23 6 15 44 3,294 
Total consumer banking66,006 1,833 675 174 2,682 68,688 
Commercial Banking:
Commercial and multifamily real estate31,018 29 4 146 179 31,197 
Commercial and industrial44,338 75 84 200 359 44,697 
Total commercial banking75,356 104 88 346 538 75,894 
Total loans(1)
$242,710 $2,675 $1,231 $1,607 $5,513 $248,223 
% of Total loans97.8 %1.1 %0.5 %0.6 %2.2 %100.0 %
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December 31, 2019
Delinquent Loans
(Dollars in millions)Current30-59
Days
60-89
Days
> 90
Days
Total
Delinquent
Loans
PCI
Loans
Total
Loans
Credit Card:
Domestic credit card$113,857 $1,341 $1,038 $2,277 $4,656 $93 $118,606 
International card businesses9,277 133 84 136 353 9,630 
Total credit card123,134 1,474 1,122 2,413 5,009 93 128,236 
Consumer Banking:
Auto55,778 2,828 1,361 395 4,584 60,362 
Retail banking2,658 24 11 43 2,703 
Total consumer banking58,436 2,852 1,369 406 4,627 63,065 
Commercial Banking:
Commercial and multifamily real estate30,157 43 20 67 21 30,245 
Commercial and industrial44,009 75 26 143 244 10 44,263 
Total commercial banking74,166 118 46 147 311 31 74,508 
Total loans(1)
$255,736 $4,444 $2,537 $2,966 $9,947 $126 $265,809 
% of Total loans96.2 %1.6 %1.0 %1.1 %3.7 %0.1 %100.0 %
__________
(1)Loans include unamortized premiums and discounts, and unamortized deferred fees and costs totaling $1.1 billion as of both September 30, 2020 and December 31, 2019.
The following table presents our loans held for investment that are 90 days or more past due that continue to accrue interest and loans that are classified as nonperforming as of September 30, 2020 and December 31, 2019. We also present nonperforming loans without an allowance as of September 30, 2020. Nonperforming loans generally include loans that have been placed on nonaccrual status.
Table 3.2: 90+ Day Delinquent Loans Accruing Interest and Nonperforming Loans
September 30, 2020December 31, 2019
(Dollars in millions)
> 90 Days and Accruing
Nonperforming
Loans(1)
Nonperforming Loans Without an Allowance
> 90 Days and Accruing
Nonperforming
Loans
Credit Card:
Domestic credit card$1,020 N/A$0 $2,277 N/A
International card businesses63 $21 0 130 $25 
Total credit card1,083 21 0 2,407 25 
Consumer Banking:
Auto0 235 0 487 
Retail banking1 25 0 23 
Total consumer banking1 260 0 510 
Commercial Banking:
Commercial and multifamily real estate0 182 180 38 
Commercial and industrial0 586 243 410 
Total commercial banking0 768 423 448 
Total$1,084 $1,049 $423 $2,407 $983 
% of Total loans held for investment0.4 %0.4 %0.2 %0.9 %0.4 %
__________
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(1)We recognized interest income for loans classified as nonperforming of $4 million and $22 million for the three and nine months ended September 30, 2020, respectively.
Credit Quality Indicators
We closely monitor economic conditions and loan performance trends to assess and manage our exposure to credit risk. We discuss these risks and our credit quality indicator for each portfolio segment below.
Credit Card
Our credit card loan portfolio is highly diversified across millions of accounts and numerous geographies without significant individual exposure. We therefore generally manage credit risk based on portfolios with common risk characteristics. The risk in our credit card loan portfolio correlates to broad economic trends, such as unemployment rates and home values, as well as consumers’ financial condition, all of which can have a material effect on credit performance. The key indicator we assess in monitoring the credit quality and risk of our credit card loan portfolio is delinquency trends, including an analysis of loan migration between delinquency categories over time.
The table below presents our credit card portfolio by delinquency status as of September 30, 2020.
Table 3.3: Credit Card Delinquency Status
September 30, 2020
(Dollars in millions)Revolving LoansRevolving Loans Converted to TermTotal
Credit Card:
Domestic credit card:
Current
$92,904 $529 $93,433 
30-59 days
641 20 661 
60-89 days
414 13 427 
Greater than 90 days
1,004 16 1,020 
Total domestic credit card94,963 578 95,541 
International card businesses:
Current
7,845 70 7,915 
30-59 days
67 10 77 
60-89 days
33 8 41 
Greater than 90 days
59 8 67 
Total international card businesses8,004 96 8,100 
Total credit card$102,967 $674 $103,641 

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Consumer Banking
Our consumer banking loan portfolio consists of auto and retail banking loans. Similar to our credit card loan portfolio, the risk in our consumer banking loan portfolio correlates to broad economic trends, such as unemployment rates, gross domestic product and home values, as well as consumers’ financial condition, all of which can have a material effect on credit performance. The key indicator we monitor when assessing the credit quality and risk of our auto loan portfolio is borrower credit scores as they measure the creditworthiness of borrowers. Delinquency trends are the key indicator we assess in monitoring the credit quality and risk of our retail banking loan portfolio.
The table below presents our consumer banking portfolio of loans held for investment by credit quality indicator as of September 30, 2020 and December 31, 2019. We present our auto loan portfolio by FICO scores at origination and our retail banking loan portfolio by delinquency status, which includes all past due loans, both performing and nonperforming.
Table 3.4: Consumer Banking Portfolio by Credit Quality Indicator
September 30, 2020
Term Loans by Vintage Year
(Dollars in millions)20202019201820172016PriorTotal Term LoansRevolving LoansRevolving Loans Converted to TermTotalDecember 31, 2019
AutoAt origination FICO scores:(1)
Greater than 660$10,562 $9,021 $5,353 $3,338 $1,496 $333 $30,103 $0 $0 $30,103 $28,773 
621-6604,666 4,027 2,264 1,361 597 161 13,076 0 0 13,076 11,924 
620 or below7,875 6,924 3,722 2,283 1,068 343 22,215 0 0 22,215 19,665 
Total auto23,103 19,972 11,339 6,982 3,161 837 65,394 0 0 65,394 60,362 
Retail banking—Delinquency status:
Current1,081 237 231 231 186 576 2,542 699 9 3,250 2,658 
30-59 days0 0 0 2 1 3 6 17 0 23 24 
60-89 days0 0 0 0 1 2 3 3 0 6 
Greater than 90 days0 0 0 1 1 4 6 8 1 15 11 
Total retail banking(2)
1,081 237 231 234 189 585 2,557 727 10 3,294 2,701 
Total consumer banking$24,184 $20,209 $11,570 $7,216 $3,350 $1,422 $67,951 $727 $10 $68,688 $63,063 
__________
(1)Amounts represent period-end loans held for investment in each credit score category. Auto credit scores generally represent average FICO scores obtained from three credit bureaus at the time of application and are not refreshed thereafter. Balances for which no credit score is available or the credit score is invalid are included in the 620 or below category.
(2)Includes Paycheck Protection Program (“PPP”) loans of $966 million as of September 30, 2020.
Commercial Banking
The key credit quality indicator for our commercial loan portfolios is our internal risk ratings. We assign internal risk ratings to loans based on relevant information about the ability of the borrowers to repay their debt. In determining the risk rating of a particular loan, some of the factors considered are the borrower’s current financial condition, historical and projected future credit performance, prospects for support from financially responsible guarantors, the estimated realizable value of any collateral and current economic trends. The scale based on our internal risk rating system is as follows:
Noncriticized: Loans that have not been designated as criticized, frequently referred to as “pass” loans.
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Criticized performing: Loans in which the financial condition of the obligor is stressed, affecting earnings, cash flows or collateral values. The borrower currently has adequate capacity to meet near-term obligations; however, the stress, left unabated, may result in deterioration of the repayment prospects at some future date.
Criticized nonperforming: Loans that are not adequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, if any. Loans classified as criticized nonperforming have a well-defined weakness, or weaknesses, which jeopardize the full repayment of the debt. These loans are characterized by the distinct possibility that we will sustain a credit loss if the deficiencies are not corrected and are generally placed on nonaccrual status.
We use our internal risk rating system for regulatory reporting, determining the frequency of credit exposure reviews, and evaluating and determining the allowance for credit losses for commercial loans. Generally, loans that are designated as criticized performing and criticized nonperforming are reviewed quarterly by management to determine if they are appropriately classified/rated and whether any impairment exists. Noncriticized loans are also generally reviewed, at least annually, to determine the appropriate risk rating. In addition, we evaluate the risk rating during the renewal process of any loan or if a loan becomes past due.
The following table presents our commercial banking portfolio of loans held for investment by internal risk ratings as of September 30, 2020 and December 31, 2019. The internal risk rating status includes all past due loans, both performing and nonperforming.
Table 3.5: Commercial Banking Portfolio by Internal Risk Ratings
September 30, 2020
Term Loans by Vintage Year
(Dollars in millions)20202019201820172016PriorTotal Term LoansRevolving LoansRevolving Loans Converted to TermTotal
Internal risk rating:(1)
Commercial and multifamily real estate
Noncriticized$3,017 $5,267 $3,426 $1,796 $1,972 $5,756 $21,234 $7,152 $0 $28,386 
Criticized performing217 369 438 326 288 935 2,573 56 0 2,629 
Criticized nonperforming0 12 30 0 3 137 182 0 0 182 
Total commercial and multifamily real estate3,234 5,648 3,894 2,122 2,263 6,828 23,989 7,208 0 31,197 
Commercial and industrial
Noncriticized7,467 8,363 4,565 2,932 1,981 3,443 28,751 11,213 183 40,147 
Criticized performing258 732 461 345 91 210 2,097 1,825 42 3,964 
Criticized nonperforming45 78 52 75 9 3 262 324 0 586 
Total commercial and industrial7,770 9,173 5,078 3,352 2,081 3,656 31,110 13,362 225 44,697 
Total commercial banking(2)
$11,004 $14,821 $8,972 $5,474 $4,344 $10,484 $55,099 $20,570 $225 $75,894 

 December 31, 2019
(Dollars in millions)Commercial and Multifamily Real Estate% of TotalCommercial and Industrial% of TotalTotal Commercial Banking
% of Total 
Internal risk rating:(1)
Noncriticized$29,625 97.9 %$42,223 95.4 %$71,848 96.5 %
Criticized performing561 1.9 1,620 3.7 2,181 2.9 
Criticized nonperforming38 0.1 410 0.9 448 0.6 
PCI loans21 0.1 10 0.0 31 0.0 
Total$30,245 100.0 %$44,263 100.0 %$74,508 100.0 %
__________
(1)Criticized exposures correspond to the “Special Mention,” “Substandard” and “Doubtful” asset categories defined by bank regulatory authorities.
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(2)Includes PPP loans of $242 million as of September 30, 2020.
Revolving Loans Converted to Term Loans
For the three and nine months ended September 30, 2020, we converted $250 million and $499 million of revolving loans to term loans, respectively, primarily in our domestic credit card and commercial banking loan portfolios.
Troubled Debt Restructurings
In response to the COVID-19 pandemic, the Federal Banking Agencies issued an interagency statement that provides banking organizations with additional guidance and relief on accounting for certain customer concessions related to the COVID-19 pandemic. Specifically, TDR accounting relief is available for short-term modifications of loans that were not more than 30 days past due where concessions do not extend beyond six months. We assessed all loan modifications introduced to borrowers as of September 30, 2020 in response to the COVID-19 pandemic and followed guidance that such eligible loan modifications made on a temporary and good faith basis in response to the COVID-19 pandemic are not considered TDRs.
Total recorded TDRs were $2.1 billion and $1.7 billion as of September 30, 2020 and December 31, 2019, respectively. TDRs classified as performing in our credit card and consumer banking loan portfolios totaled $1.2 billion and $1.1 billion as of September 30, 2020 and December 31, 2019, respectively. TDRs classified as performing in our commercial banking loan portfolio totaled $438 million and $224 million as of September 30, 2020 and December 31, 2019, respectively. Commitments to lend additional funds on loans modified in TDRs totaled $168 million and $178 million as of September 30, 2020 and December 31, 2019, respectively.
Loans Modified in TDRs
As part of our loan modification programs to borrowers experiencing financial difficulty, we may provide multiple concessions to minimize our economic loss and improve long-term loan performance and collectability. The following tables present the major modification types, recorded investment amounts and financial effects of loans modified in TDRs during the three and nine months ended September 30, 2020 and 2019.
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Table 3.6: Troubled Debt Restructurings
Total Loans Modified(1)
Three Months Ended September 30, 2020
Reduced Interest RateTerm ExtensionBalance Reduction
(Dollars in millions)
% of TDR Activity(2)
Average Rate Reduction
% of TDR Activity(2)
Average Term Extension (Months)
% of TDR Activity(2)
Gross Balance Reduction
Credit Card:
Domestic credit card$50 100 %15.53 %0 %00 %$0 
International card businesses39 100 27.89 0 00 0 
Total credit card89 100 20.94 0 00 0 
Consumer Banking:
Auto133 3 4.83 94 20 1 
Retail banking1 85 3.24 15 610 0 
Total consumer banking134 4 4.75 94 20 1 
Commercial Banking:
Commercial and multifamily real estate57 0 0.00 100 40 0 
Commercial and industrial201 0 0.00 54 320 0 
Total commercial banking258 0 0.00 64 230 0 
Total$481 19 20.08 61 140 $1 

 
Total Loans Modified(1)
Nine Months Ended September 30, 2020
 Reduced Interest RateTerm ExtensionBalance Reduction
(Dollars in millions)
% of TDR Activity(2)
Average Rate Reduction
% of TDR Activity(2)
Average Term Extension (Months)
% of TDR Activity(2)
Gross Balance Reduction
Credit Card:
Domestic credit card$195 100 %15.92 %0 %00 %$0 
International card businesses118 100 27.33 0 00 0 
Total credit card313 100 20.22 0 00 0 
Consumer Banking:
Auto393 9 3.68 95 30 1 
Retail banking5 9 10.85 15 80 0 
Total consumer banking398 9 3.76 94 30 1 
Commercial Banking:
Commercial and multifamily real estate85 0 0.00 100 60 0 
Commercial and industrial389 0 0.00 52 214 7 
Total commercial banking474 0 0.00 61 163 7 
Total$1,185 29 18.49 56 91 $8 

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Total Loans Modified(1)
Three Months Ended September 30, 2019
Reduced Interest RateTerm ExtensionBalance Reduction
(Dollars in millions)
% of TDR Activity(2)
Average Rate Reduction
% of TDR Activity(2)
Average Term Extension (Months)
% of
TDR
Activity
(2)
Gross
Balance
Reduction
Credit Card:
Domestic credit card$85 100 %16.76 %%0%$
International card businesses43 100 27.08 0
Total credit card128 100 20.19 0
Consumer Banking:
Auto66 42 3.51 89 8
Retail banking9.30 0
Total consumer banking67 42 3.53 88 8
Commercial Banking:
Commercial and industrial51 1.00 15 14
Total commercial banking51 1.00 15 14
Total$246 65 16.70 27 9$
Total Loans Modified(1)
Nine Months Ended September 30, 2019
Reduced Interest RateTerm ExtensionBalance Reduction
(Dollars in millions)
% of TDR Activity(2)
Average Rate Reduction
% of TDR Activity(2)
Average Term Extension (Months)
% of
TDR
Activity
(2)
Gross
Balance
Reduction
Credit Card:
Domestic credit card$257 100 %16.58 %%0%$
International card businesses130 100 27.25 0
Total credit card387 100 20.18 0
Consumer Banking:
Auto190 41 3.70 90 8
Retail banking10 10.73 54 334 
Total consumer banking197 40 3.76 89 7
Commercial Banking:
Commercial and multifamily real estate34 100 0.00 0
Commercial and industrial86 0.60 25 9
Total commercial lending120 32 0.07 18 9
Small-ticket commercial real estate0.00 0
Total commercial banking121 32 0.07 18 9
Total$705 72 16.08 28 8$
__________
(1)Represents the recorded investment of total loans modified in TDRs at the end of the quarter in which they were modified. As not every modification type is included in the table above, the total percentage of TDR activity may not add up to 100%. Some loans may receive more than one type of concession as part of the modification.
(2)Due to multiple concessions granted to some troubled borrowers, percentages may total more than 100% for certain loan types.
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Subsequent Defaults of Completed TDR Modifications
The following table presents the type, number and recorded investment of loans modified in TDRs that experienced a default during the period and had completed a modification event in the twelve months prior to the default. A default occurs if the loan is either 90 days or more delinquent, has been charged off as of the end of the period presented or has been reclassified from accrual to nonaccrual status.
Table 3.7: TDRs—Subsequent Defaults
Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
(Dollars in millions)Number of ContractsAmountNumber of ContractsAmountNumber of ContractsAmountNumber of ContractsAmount
Credit Card:
Domestic credit card6,554 $14 10,619 $22 27,022 $57 36,227 $77 
International card businesses10,673 17 17,104 26 46,038 68 51,995 82 
Total credit card17,227 31 27,723 48 73,060 125 88,222 159 
Consumer Banking:
Auto1,307 15 1,446 18 3,442 42 3,863 47 
Retail banking3 1 7 1 18 
Total consumer banking1,310 16 1,452 18 3,449 43 3,881 48 
Commercial Banking:
Commercial and industrial4 16 11 65 
Total commercial banking4 16 11 65 
Total18,541 $63 29,175 $66 76,520 $233 92,103 $207 
Loans Pledged
We pledged loan collateral of $15.0 billion and $14.6 billion to secure the majority of our FHLB borrowing capacity of $16.2 billion and $18.7 billion as of September 30, 2020 and December 31, 2019, respectively. We also pledged loan collateral of $26.6 billion and $6.7 billion to secure our Federal Reserve Discount Window borrowing capacity of $21.0 billion and $5.3 billion as of September 30, 2020 and December 31, 2019, respectively. In addition to loans pledged, we securitized a portion of our credit card and auto loans. See “Note 5—Variable Interest Entities and Securitizations” for additional information.
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NOTE 4—ALLOWANCE FOR CREDIT LOSSES AND RESERVE FOR UNFUNDED LENDING COMMITMENTS
In the first quarter of 2020, we adopted the CECL standard. Accordingly, our disclosures below reflect these adoption changes. Prior period presentation was not modified to conform to the current period presentation. See “Note 1—Summary of Significant Accounting Policies” for additional information. Concurrent with this adoption, we reclassified our finance charge and fee reserve to our allowance for credit losses, with a corresponding increase to credit card loans held for investment.
Our allowance for credit losses represents management’s current estimate of expected credit losses over the contractual terms of our loans held for investment as of each balance sheet date. Expected recoveries of amounts previously charged off or expected to be charged off are recognized within the allowance. When developing an estimate of expected credit losses, we use both quantitative and qualitative methods in considering all available information relevant to assessing collectability. This may include internal information, external information, or a combination of both relating to past events, current conditions, and reasonable and supportable forecasts. Management will consider and may qualitatively adjust for conditions, changes, and trends in loan portfolios that may not be captured in modeled results. These adjustments are referred to as qualitative factors and represent management’s judgment of the imprecision and risks inherent in the processes and assumptions used in establishing the allowance for credit losses. Significant judgment is applied in our estimation of lifetime credit losses.
We have unfunded lending commitments in our Commercial Banking business that are not unconditionally cancellable by us and for which we estimate expected credit losses in establishing a reserve. This reserve is measured using the same measurement objectives as the allowance for loans held for investment. We build or release the reserve for unfunded lending commitments through 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.
Allowance for Credit Losses and Reserve for Unfunded Lending Commitments Activity
The table below summarizes changes in the allowance for credit losses and reserve for unfunded lending commitments by portfolio segment for the three and nine months ended September 30, 2020 and 2019. The allowance balance as of September 30, 2020 reflects the cumulative effects from adoption of the CECL standard and the change to include finance charge and fee reserve in the allowance for credit losses. The reserve for unfunded lending commitments balance as of September 30, 2020 also reflects the cumulative effects from adoption of the CECL standard, including the component of loss sharing agreements with the government-sponsored enterprises (“GSEs”) on multifamily commercial real estate loans that are within the scope of the CECL standard.
When developing an estimate of expected credit losses, we use both quantitative and qualitative methods in considering all available information relevant to assessing collectability. Management will consider and may make adjustments for qualitative factors, which represent management’s judgment of the imprecision and risks inherent in the processes and assumptions used in establishing the allowance for credit losses. Our allowance for credit losses increased by $8.9 billion to $16.1 billion as of September 30, 2020 from December 31, 2019, primarily driven by the allowance builds in the first and second quarters of 2020 from expectations of economic worsening and uncertainty as a result of the COVID-19 pandemic as well as the adoption of the CECL standard.
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Table 4.1: Allowance for Credit Losses and Reserve for Unfunded Lending Commitments Activity
Three Months Ended September 30, 2020
(Dollars in millions)Credit CardConsumer BankingCommercial BankingTotal
Allowance for credit losses:
Balance as of June 30, 2020$12,091 $2,838 $1,903 $16,832 
Charge-offs
(1,296)(295)(88)(1,679)
Recoveries(1)
353 247 6 606 
Net charge-offs(943)(48)(82)(1,073)
Provision (benefit) for credit losses450 (43)(51)356 
Allowance release for credit losses(2)
(493)(91)(133)(717)
Other changes(3)
14 0 0 14 
Balance as of September 30, 202011,612 2,747 1,770 16,129 
Reserve for unfunded lending commitments:
Balance as of June 30, 2020218 218 
Benefit for losses on unfunded lending commitments0 0 (23)(23)
Balance as of September 30, 20200 0 195 195 
Combined allowance and reserve as of September 30, 2020$11,612 $2,747 $1,965 $16,324 

Nine Months Ended September 30, 2020
(Dollars in millions)Credit CardConsumer BankingCommercial BankingTotal
Allowance for credit losses:
Balance as of December 31, 2019$5,395 $1,038 $775 $7,208 
Cumulative effects from adoption of the CECL standard2,241 502 102 2,845 
Finance charge and fee reserve reclassification(4)
462 462 
Balance as of January 1, 20208,098 1,540 877 10,515 
Charge-offs
(4,757)(1,207)(303)(6,267)
Recoveries(1)
1,167 721 10 1,898 
Net charge-offs(3,590)(486)(293)(4,369)
Provision for credit losses7,096 1,693 1,186 9,975 
Allowance build for credit losses(2)
3,506 1,207 893 5,606 
Other changes(3)
8 0 0 8 
Balance as of September 30, 202011,612 2,747 1,770 16,129 
Reserve for unfunded lending commitments:
Balance as of December 31, 2019130 135 
Cumulative effects from adoption of the CECL standard(5)42 37 
Balance as of January 1, 2020172 172 
Provision for losses on unfunded lending commitments0 0 23 23 
Balance as of September 30, 20200 0 195 195 
Combined allowance and reserve as of September 30, 2020$11,612 $2,747 $1,965 $16,324 
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Three Months Ended September 30, 2019
(Dollars in millions)Credit CardConsumer BankingCommercial BankingTotal
Allowance for loan and lease losses:
Balance as of June 30, 2019$5,342 $1,055 $736 $7,133 
Charge-offs
(1,531)(489)(66)(2,086)
Recoveries(1)
380 238 624 
Net charge-offs(1,151)(251)(60)(1,462)
Provision for loan and lease losses1,087 203 84 1,374 
Allowance build (release) for loan and lease losses(64)(48)24 (88)
Other changes(3)
(8)(8)
Balance as of September 30, 20195,270 1,007 760 7,037 
Reserve for unfunded lending commitments:
Balance as of June 30, 2019140 144 
Provision for losses on unfunded lending commitments
Balance as of September 30, 2019149 153 
Combined allowance and reserve as of September 30, 2019$5,270 $1,011 $909 $7,190 

Nine Months Ended September 30, 2019
(Dollars in millions)Credit CardConsumer BankingCommercial BankingTotal
Allowance for loan and lease losses:
Balance as of December 31, 2018$5,535 $1,048 $637 $7,220 
Charge-offs
(5,024)(1,383)(109)(6,516)
Recoveries(1)
1,189 739 19 1,947 
Net charge-offs(3,835)(644)(90)(4,569)
Provision for loan and lease losses3,571 603 213 4,387 
Allowance build (release) for loan and lease losses(264)(41)123 (182)
Other changes(3)
(1)(1)
Balance as of September 30, 20195,270 1,007 760 7,037 
Reserve for unfunded lending commitments:
Balance as of December 31, 2018118 122 
Provision for losses on unfunded lending commitments31 31 
Balance as of September 30, 2019149 153 
Combined allowance and reserve as of September 30, 2019$5,270 $1,011 $909 $7,190 
__________
(1)The amount and timing of recoveries is impacted by our collection strategies, which are based on customer behavior and risk profile and include direct customer communications, repossession of collateral, the periodic sale of charged off loans as well as additional strategies, such as litigation.
(2)Includes an allowance release of $327 million for a partnership credit card loan portfolio transferred to held for sale in the third quarter of 2020.
(3)Represents foreign currency translation adjustments.
(4)Concurrent with our adoption of the CECL standard in the first quarter of 2020, we reclassified our finance charge and fee reserve to our allowance for credit losses, with a corresponding increase to credit card loans held for investment.

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Credit Card Partnership Loss Sharing Arrangements
We have certain credit card partnership agreements that are presented within our consolidated financial statements on a net basis, in which our partner agrees to share a portion of the credit losses on the underlying loan portfolio. The expected reimbursements from these partners are netted against our allowance for credit losses. Our methodology for estimating reimbursements is consistent with the methodology we use to estimate the allowance for credit losses on our credit card loan receivables. These expected reimbursements result in reductions to net charge-offs and provision for credit losses. See “Note 1—Summary of Significant Accounting Policies” in our 2019 Form 10-K for further discussion of our credit card partnership agreements.
The table below summarizes the changes in the estimated reimbursements from these partners for the three and nine months ended September 30, 2020 and 2019.
Table 4.2: Summary of Credit Card Partnership Loss Sharing Arrangements Impacts
Three Months Ended September 30,
(Dollars in millions)20202019
Estimated reimbursements from partners, beginning of period$2,433 $414 
Amounts due from partners which reduced net charge-offs(212)(100)
Amounts estimated to be charged to partners which reduced provision for credit losses121 86 
Estimated reimbursements from partners, end of period$2,342 $400 

Nine Months Ended September 30,
(Dollars in millions)20202019
Estimated reimbursements from partners, beginning of period(1)
$2,166 $379 
Amounts due from partners which reduced net charge-offs(807)(313)
Amounts estimated to be charged to partners which reduced provision for credit losses983 334 
Estimated reimbursements from partners, end of period$2,342 $400 
__________
(1)Includes effects from adoption of the CECL standard in the first quarter of 2020.
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NOTE 5—VARIABLE INTEREST ENTITIES AND SECURITIZATIONS
In the normal course of business, we enter into various types of transactions with entities that are considered to be VIEs. Our primary involvement with VIEs has been related to our securitization transactions in which we transferred assets to securitization trusts. We have primarily securitized credit card and auto loans, which have provided a source of funding for us and enabled us to transfer a certain portion of the economic risk of the loans or related debt securities to third parties.
The entity that has a controlling financial interest in a VIE is referred to as the primary beneficiary and is required to consolidate the VIE. The majority of the VIEs in which we are involved have been consolidated in our financial statements.
Summary of Consolidated and Unconsolidated VIEs
The assets of our consolidated VIEs primarily consist of cash, loan receivables and the related allowance for credit losses, which we report on our consolidated balance sheets under restricted cash for securitization investors, loans held in consolidated trusts and allowance for credit losses, respectively. The assets of a particular VIE are the primary source of funds to settle its obligations. Creditors of these VIEs typically do not have recourse to our general credit. Liabilities primarily consist of debt securities issued by the VIEs, which we report under securitized debt obligations on our consolidated balance sheets. For unconsolidated VIEs, we present the carrying amount of assets and liabilities reflected on our consolidated balance sheets and our maximum exposure to loss. Our maximum exposure to loss is estimated based on the unlikely event that all of the assets in the VIEs become worthless and we are required to meet our maximum remaining funding obligations.
The tables below present a summary of VIEs in which we had continuing involvement or held a variable interest, aggregated based on VIEs with similar characteristics as of September 30, 2020 and December 31, 2019. We separately present information for consolidated and unconsolidated VIEs.
Table 5.1: Carrying Amount of Consolidated and Unconsolidated VIEs
 September 30, 2020
 ConsolidatedUnconsolidated
(Dollars in millions)Carrying Amount of AssetsCarrying Amount of LiabilitiesCarrying Amount of AssetsCarrying Amount of LiabilitiesMaximum Exposure to Loss
Securitization-Related VIEs:
Credit card loan securitizations(1)
$26,586 $11,218 $0 $0 $0 
Auto loan securitizations2,671 2,344 0 0 0 
Home loan securitizations0 0 56 0 313 
Total securitization-related VIEs29,257 13,562 56 0 313 
Other VIEs:(2)
Affordable housing entities243 18 4,582 1,281 4,582 
Entities that provide capital to low-income and rural communities2,014 69 0 0 0 
Other0 0 466 0 466 
Total other VIEs2,257 87 5,048 1,281 5,048 
Total VIEs$31,514 $13,649 $5,104 $1,281 $5,361 
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 December 31, 2019
 ConsolidatedUnconsolidated
(Dollars in millions)Carrying Amount of AssetsCarrying Amount of LiabilitiesCarrying Amount of AssetsCarrying Amount of LiabilitiesMaximum Exposure to Loss
Securitization-Related VIEs:
Credit card loan securitizations(1)
$31,112 $16,113 $$$
Auto loan securitizations2,282 2,012 
Home loan securitizations66 352 
Total securitization-related VIEs33,394 18,125 66 352 
Other VIEs:(2)
Affordable housing entities236 4,559 1,289 4,559 
Entities that provide capital to low-income and rural communities1,889 69 
Other502 502 
Total other VIEs2,125 76 5,061 1,289 5,061 
Total VIEs$35,519 $18,201 $5,127 $1,289 $5,413 
__________
(1)Represents the carrying amount of assets and liabilities owned by the VIE, which includes the seller’s interest and repurchased notes held by other related parties.
(2)In certain investment structures, we consolidate a VIE which in turn holds as its primary asset an investment in an unconsolidated VIE. In these instances, we disclose the carrying amount of assets and liabilities on our consolidated balance sheets as unconsolidated VIEs to avoid duplicating our exposure, as the unconsolidated VIEs are generally the operating entities generating the exposure. The carrying amount of assets and liabilities included in the unconsolidated VIE columns above related to these investment structures were $2.3 billion of assets and $631 million of liabilities as of September 30, 2020, and $2.3 billion of assets and $741 million of liabilities as of December 31, 2019.
Securitization-Related VIEs
In a securitization transaction, assets are transferred to a trust, which generally meets the definition of a VIE. We engage in securitization activities as an issuer and an investor. Our primary securitization issuance activity includes credit card and auto securitizations, conducted through securitization trusts which we consolidate. Our continuing involvement in these securitization transactions mainly consists of acting as the primary servicer and holding certain retained interests.
In our multifamily agency business, we originate multifamily commercial real estate loans and transfer them to securitization trusts of GSEs. We retain the related Mortgage servicing rights (“MSRs”) and service the transferred loans pursuant to the guidelines set forth by the GSEs. As an investor, we hold primarily RMBS, CMBS, and ABS in our investment securities portfolio, which represent variable interests in the respective securitization trusts from which those securities were issued. We exclude these VIEs from the tables within this note because we do not consider our continuing involvement with these VIEs to be significant as we either invest in securities issued by the VIE and were not involved in the design of the VIE or no transfers have occurred between the VIE and us. Our maximum exposure to loss as a result of our involvement with these VIEs is the carrying value of MSRs and contractual obligations under loss sharing arrangements as well as investment securities on our consolidated balance sheets. See “Note 6—Goodwill and Intangible Assets” for information related to our MSRs associated with these securitizations and “Note 2—Investment Securities” for more information on the securities held in our investment securities portfolio. In addition, where we have certain lending arrangements in the normal course of business with entities that could be VIEs, we have also excluded these VIEs from the tables presented in this note. See “Note 3—Loans” for additional information regarding our lending arrangements in the normal course of business.
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The table below presents our continuing involvement in certain securitization-related VIEs as of September 30, 2020 and December 31, 2019.
Table 5.2: Continuing Involvement in Securitization-Related VIEs
(Dollars in millions)Credit CardAutoMortgages
September 30, 2020:
Securities held by third-party investors$11,224 $2,342 $832 
Receivables in the trust27,797 2,548 838 
Cash balance of spread or reserve accounts0 10 15 
Retained interestsYesYesYes
Servicing retainedYesYesNo
December 31, 2019:
Securities held by third-party investors$15,798 $2,010 $962 
Receivables in the trust31,625 2,192 978 
Cash balance of spread or reserve accounts17 
Retained interestsYesYesYes
Servicing retainedYesYesNo
Credit Card Securitizations
We securitize a portion of our credit card loans which provides a source of funding for us. Credit card securitizations involve the transfer of credit card receivables to securitization trusts. These trusts then issue debt securities collateralized by the transferred receivables to third-party investors. We hold certain retained interests in our credit card securitizations and continue to service the receivables in these trusts. We consolidate these trusts because we are deemed to be the primary beneficiary as we have the power to direct the activities that most significantly impact the economic performance of the trusts, and the right to receive benefits or the obligation to absorb losses that could potentially be significant to the trusts.
Auto Securitizations
Similar to our credit card securitizations, we securitize a portion of our auto loans which provides a source of funding for us. Auto securitization involves the transfer of auto loans to securitization trusts. These trusts then issue debt securities collateralized by the transferred loans to third-party investors. We hold certain retained interests and continue to service the loans in these trusts. We consolidate these trusts because we are deemed to be the primary beneficiary as we have the power to direct the activities that most significantly impact the economic performance of the trusts, and the right to receive benefits or the obligation to absorb losses that could potentially be significant to the trusts.
Mortgage Securitizations
We had previously securitized mortgage loans by transferring these loans to securitization trusts that had issued mortgage-backed securities to investors. These mortgage trusts consist of option-adjustable rate mortgage (“option-ARM”) securitizations and securitizations from our discontinued operations which include the mortgage origination operations of our wholesale mortgage banking unit, GreenPoint Mortgage Funding, Inc. (“GreenPoint”) and the manufactured housing operations of GreenPoint Credit, LLC, a subsidiary of GreenPoint (collectively “GreenPoint securitizations”). We retain rights to certain future cash flows arising from these securitizations. We do not consolidate the mortgage securitizations because we do not have the power to direct the activities that most significantly impact the economic performance of the trusts, and the right to receive the benefits or the obligation to absorb losses that could potentially be significant to the trusts.
Other VIEs
Affordable Housing Entities
As part of our community reinvestment initiatives, we invest in private investment funds that make equity investments in multifamily affordable housing properties. We receive affordable housing tax credits for these investments. The activities of these entities are financed with a combination of invested equity capital and debt. We account for certain of our investments in
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qualified affordable housing projects using the proportional amortization method if certain criteria are met. The proportional amortization method amortizes the cost of the investment over the period in which the investor expects to receive tax credits and other tax benefits, and the resulting amortization is recognized as a component of income tax expense attributable to continuing operations. For the nine months ended September 30, 2020 and 2019, we recognized amortization of $428 million and $417 million, respectively, and tax credits of $47 million and $516 million, respectively, associated with these investments within income tax provision or benefit. The carrying value of our equity investments in these qualified affordable housing projects was $4.5 billion and $4.4 billion as of September 30, 2020 and December 31, 2019, respectively. We are periodically required to provide additional financial or other support during the period of the investments. Our liability for these unfunded commitments was $1.5 billion as of both September 30, 2020 and December 31, 2019, and is largely expected to be paid from 2020 to 2022.
For those investment funds considered to be VIEs, we are not required to consolidate them if we do not have the power to direct the activities that most significantly impact the economic performance of those entities. We record our interests in these unconsolidated VIEs in loans held for investment, other assets and other liabilities on our consolidated balance sheets. Our maximum exposure to these entities is limited to our variable interests in the entities which consisted of assets of approximately $4.6 billion as of both September 30, 2020 and December 31, 2019. The creditors of the VIEs have no recourse to our general credit and we do not provide additional financial or other support other than during the period that we are contractually required to provide it. The total assets of the unconsolidated VIE investment funds were approximately $10.8 billion and $10.9 billion as of September 30, 2020 and December 31, 2019, respectively.
Entities that Provide Capital to Low-Income and Rural Communities
We hold variable interests in entities (“Investor Entities”) that invest in community development entities (“CDEs”) that provide debt financing to businesses and non-profit entities in low-income and rural communities. Variable interests in the CDEs held by the consolidated Investor Entities are also our variable interests. The activities of the Investor Entities are financed with a combination of invested equity capital and debt. The activities of the CDEs are financed solely with invested equity capital. We receive federal and state tax credits for these investments. We consolidate the VIEs in which we have the power to direct the activities that most significantly impact the VIE’s economic performance and where we have the obligation to absorb losses or right to receive benefits that could be potentially significant to the VIE. We consolidate other investments and CDEs that are not considered to be VIEs, but where we hold a controlling financial interest. The assets of the VIEs that we consolidated, which totaled approximately $2.0 billion and $1.9 billion as of September 30, 2020 and December 31, 2019, respectively, are reflected on our consolidated balance sheets in cash, loans held for investment, and other assets. The liabilities are reflected in other liabilities. The creditors of the VIEs have no recourse to our general credit. We have not provided additional financial or other support other than during the period that we are contractually required to provide it.
Other
We hold variable interests in other VIEs, including companies that promote renewable energy sources and other equity method investments. We were not required to consolidate these VIEs because we do not have the power to direct the activities that most significantly impact their economic performance. Our maximum exposure to these VIEs is limited to the investments on our consolidated balance sheets of $466 million and $502 million as of September 30, 2020 and December 31, 2019, respectively. The creditors of the other VIEs have no recourse to our general credit. We have not provided additional financial or other support other than during the period that we are contractually required to provide it.
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NOTE 6—GOODWILL AND INTANGIBLE ASSETS
The table below presents our goodwill, intangible assets and MSRs as of September 30, 2020 and December 31, 2019. Goodwill is presented separately, while intangible assets and MSRs are included in other assets on our consolidated balance sheets.
Table 6.1: Components of Goodwill, Intangible Assets and MSRs
September 30, 2020
(Dollars in millions)Carrying Amount of AssetsAccumulated AmortizationNet Carrying Amount
Goodwill$14,648 N/A$14,648 
Intangible assets:
Purchased credit card relationship (“PCCR”) intangibles157 $(145)12 
Other(1)
249 (162)87 
Total intangible assets406 (307)99 
Total goodwill and intangible assets$15,054 $(307)$14,747 
Commercial MSRs(2)
$503 $(177)$326 
December 31, 2019
(Dollars in millions)Carrying Amount of AssetsAccumulated AmortizationNet Carrying Amount
Goodwill$14,653 N/A$14,653 
Intangible assets:
PCCR intangibles1,932 $(1,864)68 
Other(1)
246 (140)106 
Total intangible assets2,178 (2,004)174 
Total goodwill and intangible assets$16,831 $(2,004)$14,827 
Commercial MSRs(2)
$555 $(255)$300 
__________
(1)Primarily consists of intangibles for sponsorship, customer and merchant relationships, partnership, trade name and other contract intangibles.
(2)Commercial MSRs are accounted for under the amortization method on our consolidated balance sheets.
Amortization expense for amortizable intangible assets, which is presented separately in our consolidated statements of income, totaled $14 million and $52 million for the three and nine months ended September 30, 2020, respectively, and $25 million and $84 million for the three and nine months ended September 30, 2019, respectively.
Goodwill
The following table presents changes in the carrying amount of goodwill by each of our business segments as of September 30, 2020 and December 31, 2019.
Table 6.2: Goodwill by Business Segments
(Dollars in millions)Credit
Card
Consumer
Banking
Commercial BankingTotal
Balance as of December 31, 2019$5,088 $4,645 $4,920 $14,653 
Other adjustments(1)
(5)0 0 (5)
Balance as of September 30, 2020$5,083 $4,645 $4,920 $14,648 
__________
(1)Represents foreign currency translation adjustments and measurement period adjustments on prior period acquisitions.
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NOTE 7—DEPOSITS AND BORROWINGS
Our deposits represent our largest source of funding for our assets and operations, which include checking accounts, money market deposits, negotiable order of withdrawals, savings deposits and time deposits. We also use a variety of other funding sources including short-term borrowings, senior and subordinated notes, securitized debt obligations and other borrowings. In addition, we utilize FHLB advances, which are secured by certain portions of our loan and investment securities portfolios. Securitized debt obligations are presented separately on our consolidated balance sheets, as they represent obligations of consolidated securitization trusts, while federal funds purchased and securities loaned or sold under agreements to repurchase, senior and subordinated notes and other borrowings, including FHLB advances, are included in other debt on our consolidated balance sheets.
Our total short-term borrowings generally consist of federal funds purchased and securities loaned or sold under agreements to repurchase and short-term FHLB advances. Our long-term debt consists of borrowings with an original contractual maturity of greater than one year. The following tables summarize the components of our deposits, short-term borrowings and long-term debt as of September 30, 2020 and December 31, 2019. The carrying value presented below for these borrowings includes unamortized debt premiums and discounts, net of debt issuance costs and fair value hedge accounting adjustments.
Table 7.1: Components of Deposits, Short-Term Borrowings and Long-Term Debt
(Dollars in millions)September 30, 2020December 31, 2019
Deposits:
Non-interest-bearing deposits$29,633 $23,488 
Interest-bearing deposits(1)
276,092 239,209 
Total deposits$305,725 $262,697 
Short-term borrowings:
Federal funds purchased and securities loaned or sold under agreements to repurchase$702 $314 
FHLB advances0 7,000 
Total short-term borrowings$702 $7,314 
 September 30, 2020December 31, 2019
(Dollars in millions)Maturity DatesStated Interest RatesWeighted-Average Interest RateCarrying ValueCarrying Value
Long-term debt:
Securitized debt obligations2020-2026
0.50% - 3.01%
1.90 %$13,566 $17,808 
Senior and subordinated notes:
Fixed unsecured senior debt(2)
2020-2029
0.80 - 4.75
3.19 21,685 23,302 
Floating unsecured senior debt2020-2023
0.70 - 1.42
1.03 2,008 2,695 
Total unsecured senior debt3.01 23,693 25,997 
Fixed unsecured subordinated debt2023-2026
3.38 - 4.20
3.78 4,755 4,475 
Total senior and subordinated notes28,448 30,472 
Other long-term borrowings:
Finance lease liabilities2020-2031
1.63 - 9.91
3.77 79 103 
Total other long-term borrowings79 103 
Total long-term debt$42,093 $48,383 
Total short-term borrowings and long-term debt$42,795 $55,697 
__________
(1)Includes $5.2 billion and $6.5 billion of time deposits in denominations in excess of the $250,000 federal insurance limit as of September 30, 2020 and December 31, 2019, respectively.
(2)Includes $1.5 billion and $1.4 billion of EUR-denominated unsecured notes as of September 30, 2020 and December 31, 2019, respectively.
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NOTE 8—DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Use of Derivatives and Accounting for Derivatives
We regularly enter into derivative transactions to support our overall risk management activities. Our primary market risks stem from the impact on our earnings and economic value of equity due to changes in interest rates and, to a lesser extent, changes in foreign exchange rates. We manage our interest rate sensitivity by employing several techniques, which include changing the duration and re-pricing characteristics of various assets and liabilities by using interest rate derivatives. We also use foreign currency derivatives to limit our earnings and capital exposures to foreign exchange risk by hedging exposures denominated in foreign currencies. We primarily use interest rate and foreign currency derivatives to hedge, but we may also use a variety of other derivative instruments, including caps, floors, options, futures and forward contracts, to manage our interest rate and foreign exchange risks. We designate these risk management derivatives as either qualifying accounting hedges or free-standing derivatives. Qualifying accounting hedges are further designated as fair value hedges, cash flow hedges or net investment hedges. Free-standing derivatives are economic hedges that do not qualify for hedge accounting.
We also offer interest rate, commodity, foreign currency derivatives and other contracts as an accommodation to our customers within our Commercial Banking business. We enter into these derivatives with our customers primarily to help them manage their interest rate risks, hedge their energy and other commodities exposures, and manage foreign currency fluctuations. We then enter into derivative contracts with counterparties to economically hedge substantially all of our subsequent exposures.
See below for additional information on our use of derivatives and how we account for them:
Fair Value Hedges: We designate derivatives as fair value hedges when they are used to manage our exposure to changes in the fair value of certain financial assets and liabilities, which fluctuate in value as a result of movements in interest rates. Changes in the fair value of derivatives designated as fair value hedges are presented in the same line item in our consolidated statements of income as the earnings effect of the hedged items. Our fair value hedges primarily consist of interest rate swaps that are intended to modify our exposure to interest rate risk on various fixed-rate financial assets and liabilities.
Cash Flow Hedges: We designate derivatives as cash flow hedges when they are used to manage our exposure to variability in cash flows related to forecasted transactions. Changes in the fair value of derivatives designated as cash flow hedges are recorded as a component of AOCI. Those amounts are reclassified into earnings in the same period during which the forecasted transactions impact earnings and presented in the same line item in our consolidated statements of income as the earnings effect of the hedged items. Our cash flow hedges use interest rate swaps and floors that are intended to hedge the variability in interest receipts or interest payments on some of our variable-rate financial assets or liabilities. We also enter into foreign currency forward contracts to hedge our exposure to variability in cash flows related to intercompany borrowings denominated in foreign currencies.
Net Investment Hedges: We use net investment hedges to manage the foreign currency exposure related to our net investments in foreign operations that have functional currencies other than the U.S. dollar. Changes in the fair value of net investment hedges are recorded in the translation adjustment component of AOCI, offsetting the translation gain or loss from those foreign operations. We execute net investment hedges using foreign currency forward contracts to hedge the translation exposure of the net investment in our foreign operations under the forward method.
Free-Standing Derivatives: Our free-standing derivatives primarily consist of our customer accommodation derivatives and other economic hedges. The customer accommodation derivatives and the related offsetting contracts are mainly interest rate, commodity and foreign currency contracts. The other free-standing derivatives are primarily used to economically hedge the risk of changes in the fair value of our commercial mortgage loan origination and purchase commitments as well as other interests held. Changes in the fair value of free-standing derivatives are recorded in earnings as a component of other non-interest income.
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Derivatives Counterparty Credit Risk
Counterparty Types
Derivative instruments contain an element of credit risk that arises from the potential failure of a counterparty to perform according to the terms of the contract, including making payments due upon maturity of certain derivative instruments. We execute our derivative contracts primarily in over-the-counter (“OTC”) markets. We also execute interest rate and commodity futures in the exchange-traded derivative markets. Our OTC derivatives consist of both trades cleared through central counterparty clearinghouses (“CCPs”) and uncleared bilateral contracts. The Chicago Mercantile Exchange (“CME”) and the LCH Group (“LCH”) are our CCPs in our centrally cleared contracts. In our uncleared bilateral contracts, we enter into agreements directly with our derivative counterparties.
Counterparty Credit Risk Management
We manage the counterparty credit risk associated with derivative instruments by entering into legally enforceable master netting arrangements, where possible, and exchanging collateral with our counterparties, typically in the form of cash or high-quality liquid securities. The amount of collateral exchanged is dependent upon the fair value of the derivative instruments as well as the fair value of the pledged collateral and will vary over time as market variables change. When valuing collateral, an estimate of the variation in price and liquidity over time is subtracted in the form of a “haircut” to discount the value of the collateral pledged. Our exposure to derivative counterparty credit risk, at any point in time, is equal to the amount reported as a derivative asset on our balance sheet. The fair value of our derivatives is adjusted on an aggregate basis to take into consideration the effects of legally enforceable master netting agreements and any associated cash collateral received or pledged. See Table 8.3 for our net exposure associated with derivatives.
The terms under which we collateralize our exposures differ between cleared exposures and uncleared bilateral exposures.
CCPs: We clear eligible OTC derivatives with CCPs as part of our regulatory requirements. Futures commission merchants (“FCMs”) serve as the intermediary between CCPs and us. CCPs require that we post initial and variation margin through our FCMs to mitigate the risk of non-payment or default. Initial margin is required upfront by CCPs as collateral against potential losses on our cleared derivative contracts and variation margin is exchanged on a daily basis to account for mark-to-market changes in those derivative contracts. For CME and LCH-cleared OTC derivatives, we characterize variation margin cash payments as settlements. Our FCM agreements governing these derivative transactions include provisions that may require us to post additional collateral under certain circumstances.
Bilateral Counterparties: We enter into legally enforceable master netting agreements and collateral agreements, where possible, with bilateral derivative counterparties to mitigate the risk of default. We review our collateral positions on a daily basis and exchange collateral with our counterparties in accordance with these agreements. These bilateral agreements typically provide the right to offset exposure with the same counterparty and require the party in a net liability position to post collateral. Agreements with certain bilateral counterparties require both parties to maintain collateral in the event the fair values of derivative instruments exceed established exposure thresholds. Certain of these bilateral agreements include provisions requiring that our debt maintain a credit rating of investment grade or above by each of the major credit rating agencies. In the event of a downgrade of our debt credit rating below investment grade, some of our counterparties would have the right to terminate their derivative contract and close out existing positions.
Credit Risk Valuation Adjustments
We record counterparty credit valuation adjustments (“CVAs”) on our derivative assets to reflect the credit quality of our counterparties. We consider collateral and legally enforceable master netting agreements that mitigate our credit exposure to each counterparty in determining CVAs, which may be adjusted due to changes in the fair values of the derivative contracts, collateral, and creditworthiness of the counterparty. We also record debit valuation adjustments (“DVAs”) to adjust the fair values of our derivative liabilities to reflect the impact of our own credit quality.
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Balance Sheet Presentation
The following table summarizes the notional amounts and fair values of our derivative instruments as of September 30, 2020 and December 31, 2019, which are segregated by derivatives that are designated as accounting hedges and those that are not, and are further segregated by type of contract within those two categories. The total derivative assets and liabilities are adjusted on an aggregate basis to take into consideration the effects of legally enforceable master netting agreements and any associated cash collateral received or pledged. Derivative assets and liabilities are included in other assets and other liabilities, respectively, on our consolidated balance sheets, and their related gains or losses are included in operating activities as changes in other assets and other liabilities in the consolidated statements of cash flows.
Table 8.1: Derivative Assets and Liabilities at Fair Value
September 30, 2020December 31, 2019
Notional or Contractual Amount
Derivative(1)
Notional or Contractual Amount
Derivative(1)
(Dollars in millions)AssetsLiabilitiesAssetsLiabilities
Derivatives designated as accounting hedges:
Interest rate contracts:
Fair value hedges$49,703 $4 $17 $57,587 $11 $55 
Cash flow hedges82,650 847 9 96,900 321 29 
Total interest rate contracts132,353 851 26 154,487 332 84 
Foreign exchange contracts:
Fair value hedges1,465 90 0 1,402 
Cash flow hedges4,495 13 99 6,103 113 
Net investment hedges2,817 3 76 2,829 102 
Total foreign exchange contracts8,777 106 175 10,334 221 
Total derivatives designated as accounting hedges141,130 957 201 164,821 332 305 
Derivatives not designated as accounting hedges:
Customer accommodation:
Interest rate contracts68,343 1,623 198 62,268 552 117 
Commodity contracts17,388 1,379 1,219 15,492 758 694 
Foreign exchange and other contracts3,677 47 50 4,674 39 42 
Total customer accommodation89,408 3,049 1,467 82,434 1,349 853 
Other interest rate exposures(2)
7,300 90 66 6,729 48 30 
Other contracts2,667 5 5 1,562 
Total derivatives not designated as accounting hedges99,375 3,144 1,538 90,725 1,397 892 
Total derivatives$240,505 $4,101 $1,739 $255,546 $1,729 $1,197 
Less: netting adjustment(3)
(1,622)(708)(633)(523)
Total derivative assets/liabilities$2,479 $1,031 $1,096 $674 
__________
(1)Does not reflect $40 million and $12 million recognized as a net valuation allowance on derivative assets and liabilities for non-performance risk as of September 30, 2020 and December 31, 2019, respectively. Non-performance risk is included in derivative assets and liabilities, which are part of other assets and other liabilities on the consolidated balance sheets, and is offset through non-interest income in the consolidated statements of income.
(2)Other interest rate exposures include commercial mortgage-related derivatives and interest rate swaps.
(3)Represents balance sheet netting of derivative assets and liabilities, and related payables and receivables for cash collateral held or placed with the same counterparty.
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The following table summarizes the carrying value of our hedged assets and liabilities in fair value hedges and the associated cumulative basis adjustments included in those carrying values, excluding basis adjustments related to foreign currency risk, as of September 30, 2020 and December 31, 2019.
Table 8.2: Hedged Items in Fair Value Hedging Relationships
September 30, 2020December 31, 2019
Carrying Amount Assets/(Liabilities)Cumulative Amount of Basis Adjustments Included in the Carrying AmountCarrying Amount Assets/(Liabilities)Cumulative Amount of Basis Adjustments Included in the Carrying Amount
(Dollars in millions)Total
Assets/(Liabilities)
Discontinued-Hedging RelationshipsTotal
Assets/(Liabilities)
Discontinued-Hedging Relationships
Line item on our consolidated balance sheets in which the hedged item is included:
Investment securities available for sale(1)(2)
$9,831 $629 $206 $10,825 $300 $52 
Interest-bearing deposits(12,865)(257)0 (14,310)(12)
Securitized debt obligations(8,473)(208)34 (9,403)44 64 
Senior and subordinated notes(21,989)(1,425)(700)(27,777)(458)324 
__________
(1)These amounts include the amortized cost basis of our investment securities designated in hedging relationships for which the hedged item is the last layer expected to be remaining at the end of the hedging relationship. In the second quarter of 2020, we terminated all last of layer hedging relationships with cumulative basis adjustments related to these discontinued hedging relationships totaling $206 million as of September 30, 2020. As of December 31, 2019, the amortized cost basis of this portfolio was $5.9 billion, the amount of the designated hedged items was $3.1 billion, and the cumulative basis adjustment associated with these hedges was $75 million.
(2)Carrying value represents amortized cost.
Balance Sheet Offsetting of Financial Assets and Liabilities
Derivative contracts and repurchase agreements that we execute bilaterally in the OTC market are generally governed by enforceable master netting arrangements where we generally have the right to offset exposure with the same counterparty. Either counterparty can generally request to net settle all contracts through a single payment upon default on, or termination of, any one contract. We elect to offset the derivative assets and liabilities under master netting arrangements for balance sheet presentation where a right of setoff exists. For derivative contracts entered into under master netting arrangements for which we have not been able to confirm the enforceability of the setoff rights, or those not subject to master netting arrangements, we do not offset our derivative positions for balance sheet presentation.
The following table presents the gross and net fair values of our derivative assets, derivative liabilities, resale and repurchase agreements and the related offsetting amounts permitted under U.S. GAAP as of September 30, 2020 and December 31, 2019. The table also includes cash and non-cash collateral received or pledged in accordance with such arrangements. The amount of collateral presented, however, is limited to the amount of the related net derivative fair values or outstanding balances; therefore, instances of over-collateralization are excluded.
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Table 8.3: Offsetting of Financial Assets and Financial Liabilities
Gross AmountsGross Amounts Offset in the Balance SheetNet Amounts as RecognizedSecurities Collateral Held Under Master Netting Agreements
(Dollars in millions)Financial InstrumentsCash Collateral ReceivedNet Exposure
As of September 30, 2020
Derivative assets(1)
$4,101 $(535)$(1,087)$2,479 $0 $2,479 
As of December 31, 2019
Derivative assets(1)
1,729 (347)(286)1,096 1,096 
Gross AmountsGross Amounts Offset in the Balance SheetNet Amounts as RecognizedSecurities Collateral Pledged Under Master Netting Agreements
(Dollars in millions)Financial InstrumentsCash Collateral PledgedNet Exposure
As of September 30, 2020
Derivative liabilities(1)
$1,739 $(535)$(173)$1,031 $0 $1,031 
Repurchase agreements(2)
702 0 0 702 (702)0 
As of December 31, 2019
Derivative liabilities(1)
1,197 (347)(176)674 674 
Repurchase agreements(2)
314 314 (314)
__________
(1)We received cash collateral from derivative counterparties totaling $1.2 billion and $347 million as of September 30, 2020 and December 31, 2019, respectively. We also received securities from derivative counterparties with a fair value of approximately $1 million as of both September 30, 2020 and December 31, 2019, which we have the ability to re-pledge. We posted $1.4 billion and $954 million of cash collateral as of September 30, 2020 and December 31, 2019, respectively.
(2)Under our customer repurchase agreements, which mature the next business day, we pledged collateral with a fair value of $716 million and $320 million as of September 30, 2020 and December 31, 2019, respectively, primarily consisting of agency RMBS securities.

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Income Statement and AOCI Presentation
Fair Value and Cash Flow Hedges
The net gains (losses) recognized in our consolidated statements of income related to derivatives in fair value and cash flow hedging relationships are presented below for the three and nine months ended September 30, 2020 and 2019.
Table 8.4: Effects of Fair Value and Cash Flow Hedge Accounting
Three Months Ended September 30, 2020
Net Interest IncomeNon-Interest Income
(Dollars in millions)Investment SecuritiesLoans, Including Loans Held for SaleOtherInterest-bearing DepositsSecuritized Debt ObligationsSenior and Subordinated NotesOther
Total amounts presented in our consolidated statements of income$443 $5,758 $14 $(476)$(43)$(132)$706 
Fair value hedging relationships:
Interest rate and foreign exchange contracts:
Interest recognized on derivatives$(23)$0 $0 $44 $40 $56 $0 
Gains (losses) recognized on derivatives24 0 0 (47)(48)(72)61 
Gains (losses) recognized on hedged items(1)
(31)0 0 48 41 111 (61)
Excluded component of fair value hedges(2)
0 0 0 0 0 (1)0 
Net expense recognized on fair value hedges$(30)$0 $0 $45 $33 $94 $0 
Cash flow hedging relationships:(3)
Interest rate contracts:
Realized losses reclassified from AOCI into net income$8 $171 $0 $0 $0 $0 $0 
Foreign exchange contracts:
Realized gains reclassified from AOCI into net income(4)
0 0 1 0 0 0 0 
Net income (expense) recognized on cash flow hedges$8 $171 $1 $0 $0 $0 $0 
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Nine Months Ended September 30, 2020
Net Interest IncomeNon-Interest Income
(Dollars in millions)Investment SecuritiesLoans, Including Loans Held for SaleOtherInterest-bearing DepositsSecuritized Debt ObligationsSenior and Subordinated NotesOther
Total amounts presented in our consolidated statements of income
$1,455 $18,120 $67 $(1,818)$(198)$(551)$1,017 
Fair value hedging relationships:
Interest rate and foreign exchange contracts:
Interest recognized on derivatives$(51)$0 $0 $69 $92 $166 $0 
Gains (losses) recognized on derivatives(340)0 0 249 221 1,057 64 
Gains (losses) recognized on hedged items(1)
329 0 0 (248)(251)(1,048)(64)
Excluded component of fair value hedges(2)
0 0 0 0 0 (2)0 
Net income (expense) recognized on fair value hedges$(62)$0 $0 $70 $62 $173 $0 
Cash flow hedging relationships:(3)
Interest rate contracts:
Realized gains reclassified from AOCI into net income$17 $330 $0 $0 $0 $0 $0 
Foreign exchange contracts:
Realized gains reclassified from AOCI into net income(4)
0 0 10 0 0 0 (2)
Net income recognized on cash flow hedges$17 $330 $10 $0 $0 $0 $(2)
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Three Months Ended September 30, 2019
Net Interest IncomeNon-Interest Income
(Dollars in millions)Investment SecuritiesLoans, Including Loans Held for SaleOtherInterest-bearing DepositsSecuritized Debt ObligationsSenior and Subordinated NotesOther
Total amounts presented in our consolidated statements of income
$583 $6,429 $63 $(901)$(123)$(299)$144 
Fair value hedging relationships:
Interest rate and foreign exchange contracts:
Interest recognized on derivatives$(3)$$$(26)$(5)$(3)$
Gains (losses) recognized on derivatives(80)46 (10)216 (60)
Gains (losses) recognized on hedged items(1)
81 (46)(6)(261)58 
Excluded component of fair value hedges(2)
(1)
Net expense recognized on fair value hedges$(2)$$$(26)$(21)$(49)$(2)
Cash flow hedging relationships:(3)
Interest rate contracts:
Realized losses reclassified from AOCI into net income$(1)$(43)$$$$$
Foreign exchange contracts:
Realized gains reclassified from AOCI into net income(4)
12 
Net income (expense) recognized on cash flow hedges$(1)$(43)$12 $$$$
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Nine Months Ended September 30, 2019
Net Interest IncomeNon-Interest Income
(Dollars in millions)Investment SecuritiesLoans, Including Loans Held for SaleOtherInterest-bearing DepositsSecuritized Debt ObligationsSenior and Subordinated NotesOther
Total amounts presented in our consolidated statements of income
$1,867 $19,180 $196 $(2,588)$(405)$(923)$492 
Fair value hedging relationships:
Interest rate and foreign exchange contracts:
Interest recognized on derivatives$(2)$$$(95)$(17)$(24)$
Gains (losses) recognized on derivatives(366)295 102 968 (49)
Gains (losses) recognized on hedged items(1)
365 (289)(165)(1,092)48 
Excluded component of fair value hedges(2)
(1)
Net expense recognized on fair value hedges$(3)$$$(89)$(80)$(149)$(1)
Cash flow hedging relationships:(3)
Interest rate contracts:
Realized losses reclassified from AOCI into net income$(8)$(158)$$$$$
Foreign exchange contracts:
Realized gains reclassified from AOCI into net income(4)
37 
Net income (expense) recognized on cash flow hedges$(8)$(158)$37 $$$$
__________
(1)Includes amortization income of $19 million and expense of $34 million for the three and nine months ended September 30, 2020, respectively, and amortization expense of $60 million and $177 million for the three and nine months ended September 30, 2019, respectively, related to basis adjustments on discontinued hedges.
(2)Changes in fair values of cross-currency swaps attributable to changes in cross-currency basis spreads are excluded from the assessment of hedge effectiveness and recorded in other comprehensive income. The initial value of the excluded component is recognized in earnings over the life of the swap under the amortization approach.
(3)See “Note 9—Stockholders’ Equity” for the effects of cash flow and net investment hedges on AOCI and amounts reclassified to net income, net of tax.
(4)We recognized a loss of $73 million and a gain of $20 million for the three and nine months ended September 30, 2020, respectively, and a gain of $71 million and a loss of $224 million for the three and nine months ended September 30, 2019, respectively, on foreign exchange contracts reclassified from AOCI. These amounts were largely offset by the foreign currency transaction gains (losses) on our foreign currency denominated intercompany funding included other non-interest income.
In the next 12 months, we expect to reclassify to earnings net after-tax gains of $644 million recorded in AOCI as of September 30, 2020. These amounts will offset the cash flows associated with the hedged forecasted transactions. The maximum length of time over which forecasted transactions were hedged was approximately 7 years as of September 30, 2020. The amount we expect to reclassify into earnings may change as a result of changes in market conditions and ongoing actions taken as part of our overall risk management strategy.
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Free-Standing Derivatives
The net impacts to our consolidated statements of income related to free-standing derivatives are presented below for the three and nine months ended September 30, 2020 and 2019. These gains or losses are recognized in other non-interest income in our consolidated statements of income.
Table 8.5: Gains (Losses) on Free-Standing Derivatives
Three Months Ended September 30,Nine Months Ended September 30,
(Dollars in millions)2020201920202019
Gains (losses) recognized in other non-interest income:
Customer accommodation:
Interest rate contracts$(5)$18 $7 $28 
Commodity contracts7 23 17 
Foreign exchange and other contracts1 5 10 
Total customer accommodation3 29 35 55 
Other interest rate exposures17 (1)1 (15)
Other contracts0 (7)0 (9)
Total$20 $21 $36 $31 

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NOTE 9—STOCKHOLDERS’ EQUITY
Preferred Stock
The following table summarizes our preferred stock outstanding as of September 30, 2020 and December 31, 2019.
Table 9.1: Preferred Stock Outstanding(1)
Redeemable by Issuer BeginningPer Annum Dividend RateDividend FrequencyLiquidation Preference per ShareTotal Shares Outstanding
as of
September 30, 2020
Carrying Value
(in millions)
SeriesDescriptionIssuance DateSeptember 30, 2020December 31, 2019
Series B(2)
6.000%
Non-Cumulative
August 20, 2012September 1, 20176.000%Quarterly$1,000 0$0 $853 
Series EFixed-to-Floating Rate
Non-Cumulative
May 14, 2015June 1, 2020
5.550% through 5/31/2020;
3-mo. LIBOR + 380 bps thereafter
Semi-Annually through 5/31/2020; Quarterly thereafter1,000 1,000,000 988 988 
Series F6.200%
Non-Cumulative
August 24, 2015December 1, 20206.200Quarterly1,000 500,000 484 484 
Series G5.200%
Non-Cumulative
July 29, 2016December 1, 20215.200Quarterly1,000 600,000 583 583 
Series H6.000%
Non-Cumulative
November 29, 2016December 1, 20216.000Quarterly1,000 500,000 483 483 
Series I5.000%
Non-Cumulative
September 11, 2019December 1, 20245.000Quarterly1,000 1,500,000 1,462 1,462 
Series J4.800%
Non-Cumulative
January 31, 2020June 1, 20254.800Quarterly1,000 1,250,000 1,209 
Series K4.625%
Non-Cumulative
September 17, 2020December 1, 20254.625Quarterly1,000 125,000 121 
Total$5,330 $4,853 
__________
(1)Except for Series E, ownership is held in the form of depositary shares, each representing a 1/40th interest in a share of fixed-rate non-cumulative perpetual preferred stock.
(2)On March 2, 2020, we redeemed all outstanding shares of our preferred stock Series B.
Accumulated Other Comprehensive Income
Accumulated other comprehensive income primarily consists of accumulated net unrealized gains associated with securities available for sale, changes in fair value of derivatives in hedging relationships, and foreign currency translation adjustments.
The following table includes the AOCI impacts from the adoption of the CECL standard and the changes in AOCI by component for the three and nine months ended September 30, 2020 and 2019.
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Table 9.2: Accumulated Other Comprehensive Income (Loss)
Three Months Ended September 30, 2020
(Dollars in millions)Securities Available for Sale
Hedging Relationships(1)
Foreign Currency Translation Adjustments(2)
OtherTotal
AOCI as of June 30, 2020$2,373 $1,785 $(151)$(26)$3,981 
Other comprehensive income (loss) before reclassifications20 (95)28 0 (47)
Amounts reclassified from AOCI into earnings(19)(80)0 (2)(101)
Other comprehensive income (loss), net of tax1 (175)28 (2)(148)
AOCI as of September 30, 2020$2,374 $1,610 $(123)$(28)$3,833 

Nine Months Ended September 30, 2020
(Dollars in millions)Securities Available for Sale
Hedging Relationships(1)
Foreign Currency Translation Adjustments(2)
OtherTotal
AOCI as of December 31, 2019$935 $354 $(107)$(26)$1,156 
Cumulative effects from the adoption of the CECL standard(8)0 0 0 (8)
Other comprehensive income (loss) before reclassifications1,466 1,540 (16)0 2,990 
Amounts reclassified from AOCI into earnings(19)(284)0 (2)(305)
Other comprehensive income (loss), net of tax1,447 1,256 (16)(2)2,685 
AOCI as of September 30, 2020$2,374 $1,610 $(123)$(28)$3,833 

Three Months Ended September 30, 2019
(Dollars in millions)Securities Available for Sale
Hedging Relationships(1)
Foreign Currency Translation Adjustments(2)
Securities Held to MaturityOtherTotal
AOCI as of June 30, 2019$125 $396 $(132)$(178)$(41)$170 
Other comprehensive income (loss) before reclassifications103 218 (12)309 
Amounts reclassified from AOCI into earnings(3)(29)(2)(26)
Other comprehensive income (loss), net of tax100 189 (12)(2)283 
AOCI as of September 30, 2019$225 $585 $(144)$(170)$(43)$453 

Nine Months Ended September 30, 2019
(Dollars in millions)Securities Available for Sale
Hedging Relationships(1)
Foreign Currency Translation Adjustments(2)
Securities Held to MaturityOtherTotal
AOCI as of December 31, 2018$(439)$(418)$(177)$(190)$(39)$(1,263)
Other comprehensive income (loss) before reclassifications697 735 33 (1)1,464 
Amounts reclassified from AOCI into earnings(33)268 20 (3)252 
Other comprehensive income (loss), net of tax664 1,003 33 20 (4)1,716 
AOCI as of September 30, 2019$225 $585 $(144)$(170)$(43)$453 
__________
(1)Includes amounts related to cash flow hedges as well as the excluded component of cross-currency swaps designated as fair value hedges.
(2)Includes other comprehensive loss of $75 million and gain of $59 million for the three and nine months ended September 30, 2020, respectively, and other comprehensive gains of $67 million and $86 million for the three and nine months ended September 30, 2019, respectively, from hedging instruments designated as net investment hedges.
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The following table presents amounts reclassified from each component of AOCI to our consolidated statements of income for the three and nine months ended September 30, 2020 and 2019.
Table 9.3: Reclassifications from AOCI
(Dollars in millions)Three Months Ended September 30,Nine Months Ended September 30,
AOCI ComponentsAffected Income Statement Line Item2020201920202019
Securities available for sale:
Non-interest income$25 $$25 $44 
Income tax provision (benefit)6 6 11 
Net income 19 19 33 
Hedging relationships:
Interest rate contracts:Interest income179 (44)347 (166)
Foreign exchange contracts:Interest income1 12 10 37 
Interest expense(1)(1)(3)(1)
Non-interest income(73)71 20 (224)
Income from continuing operations before income taxes106 38 374 (354)
Income tax provision (benefit)26 90 (86)
Net income80 29 284 (268)
Securities held to maturity:(1)
Interest income0 (10)0 (26)
Income tax provision (benefit)0 (2)0 (6)
Net income0 (8)0 (20)
Other:
Non-interest income and non-interest expense2 2 
Income tax provision (benefit)0 0 
Net income 2 2 
Total reclassifications$101 $26 $305 $(252)
__________
(1)On December 31, 2019, we transferred our entire portfolio of held to maturity securities to available for sale.
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The table below summarizes other comprehensive income (loss) activity and the related tax impact for the three and nine months ended September 30, 2020 and 2019.
Table 9.4: Other Comprehensive Income (Loss)
 Three Months Ended September 30,
 20202019
(Dollars in millions)Before
Tax
Provision
(Benefit)
After
Tax
Before
Tax
Provision
(Benefit)
After
Tax
Other comprehensive income (loss):
Net unrealized gains on securities available for sale$1 $0 $1 $132 $32 $100 
Net unrealized gains (losses) on hedging relationships(231)(56)(175)24960189
Foreign currency translation adjustments(1)
4 (24)28 921(12)
Net changes in securities held to maturity0 0 0 1028
Other(2)0 (2)(2)(2)
Other comprehensive income (loss)$(228)$(80)$(148)$398 $115 $283 

 Nine Months Ended September 30,
 20202019
(Dollars in millions)Before
Tax
Provision
(Benefit)
After
Tax
Before
Tax
Provision
(Benefit)
After
Tax
Other comprehensive income:
Net unrealized gains on securities available for sale$1,903 $456 $1,447 $874 $210 $664 
Net unrealized gains on hedging relationships1,653 397 1,256 1,3223191,003
Foreign currency translation adjustments(1)
3 19 (16)612833
Net changes in securities held to maturity0 0 0 26620
Other(2)0 (2)(5)(1)(4)
Other comprehensive income$3,557 $872 $2,685 $2,278 $562 $1,716 
__________
(1)Includes the impact of hedging instruments designated as net investment hedges.
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NOTE 10—EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per common share.
Table 10.1: Computation of Basic and Diluted Earnings per Common Share
Three Months Ended September 30,Nine Months Ended September 30,
(Dollars and shares in millions, except per share data)2020201920202019
Income from continuing operations, net of tax$2,406 $1,329 $149 $4,355 
Income (loss) from discontinued operations, net of tax0 (1)15 
Net income2,406 1,333 148 4,370 
Dividends and undistributed earnings allocated to participating securities(20)(10)(5)(34)
Preferred stock dividends(67)(53)(212)(185)
Issuance cost for redeemed preferred stock0 (22)
Net income (loss) available to common stockholders$2,319 $1,270 $(91)$4,151 
Total weighted-average basic common shares outstanding457.8 469.5 457.4 469.9 
Effect of dilutive securities:(1)
Stock options0.4 1.3 0.0 1.2 
Other contingently issuable shares0.3 1.0 0.0 1.0 
Total effect of dilutive securities0.7 2.3 0.0 2.2 
Total weighted-average diluted common shares outstanding458.5 471.8 457.4 472.1 
Basic earnings per common share:
Net income (loss) from continuing operations$5.07 $2.70 $(0.20)$8.80 
Income from discontinued operations0.00 0.01 0.00 0.03 
Net income (loss) per basic common share$5.07 $2.71 $(0.20)$8.83 
Diluted earnings per common share:(1)
Net income (loss) from continuing operations$5.06 $2.68 $(0.20)$8.76 
Income from discontinued operations0.00 0.01 0.00 0.03 
Net income (loss) per diluted common share$5.06 $2.69 $(0.20)$8.79 
__________
(1)Excluded from the computation of diluted earnings per share were 774 thousand shares related to options with an exercise price ranging from $70.96 to $86.34 for the three months ended September 30, 2020, because their inclusion would be anti-dilutive. In periods of net loss available to common stockholders, dilutive securities are excluded as their inclusion would have an anti-dilutive effect. Accordingly, awards of 762 thousand shares and options of 2.7 million shares with an exercise price ranging from $36.55 to $86.34 were excluded for the nine months ended September 30, 2020. For the nine months ended September 30, 2019, 92 thousand shares related to options with an exercise price of $86.34 were excluded from the computation of diluted earnings per share, because their inclusion would be anti-dilutive.
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NOTE 11—FAIR VALUE MEASUREMENT
Fair value, also referred to as an exit price, is defined as the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The fair value accounting guidance provides a three-level fair value hierarchy for classifying financial instruments. This hierarchy is based on the markets in which the assets or liabilities trade and whether the inputs to the valuation techniques used to measure fair value are observable or unobservable. The fair value measurement of a financial asset or liability is assigned a level based on the lowest level of any input that is significant to the fair value measurement in its entirety. The three levels of the fair value hierarchy are described below:
Level 1:Valuation is based on quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2:Valuation is based on observable market-based inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3:Valuation is generated from techniques that use significant assumptions not observable in the market. Valuation techniques include pricing models, discounted cash flow methodologies or similar techniques.
The accounting guidance for fair value measurements requires that we maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value. The accounting guidance provides for the irrevocable option to elect, on a contract-by-contract basis, to measure certain financial assets and liabilities at fair value at inception of the contract and record any subsequent changes in fair value in earnings.
The determination and classification of financial instruments in the fair value hierarchy is performed at the end of each reporting period. We consider all available information, including observable market data, indications of market liquidity and orderliness, and our understanding of the valuation techniques and significant inputs. For additional information on the valuation techniques used in estimating the fair value of our financial assets and liabilities on a recurring basis, see “Note 16—Fair Value Measurement” in our 2019 Form 10-K.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table displays our assets and liabilities measured on our consolidated balance sheets at fair value on a recurring basis as of September 30, 2020 and December 31, 2019.
Table 11.1: Assets and Liabilities Measured at Fair Value on a Recurring Basis
September 30, 2020
Fair Value Measurements Using
Netting Adjustments(1)
(Dollars in millions)Level 1Level 2Level 3Total
Assets:
Securities available for sale:
U.S. Treasury securities$9,345 $0 $0 — $9,345 
RMBS0 76,185 474 — 76,659 
CMBS0 11,063 372 — 11,435 
Other securities180 2,234 0 — 2,414 
Total securities available for sale9,525 89,482 846 — 99,853 
Loans held for sale0 1,255 0 — 1,255 
Other assets:
Derivative assets(2)
255 3,693 153 $(1,622)2,479 
Other(3)
371 493 56 — 920 
Total assets$10,151 $94,923 $1,055 $(1,622)$104,507 
Liabilities:
Other liabilities:
Derivative liabilities(2)
$236 $1,394 $109 $(708)$1,031 
Total liabilities$236 $1,394 $109 $(708)$1,031 
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December 31, 2019
Fair Value Measurements Using
Netting Adjustments(1)
(Dollars in millions)Level 1Level 2Level 3Total
Assets:
Securities available for sale:
U.S. Treasury securities$4,124 $$— $4,124 
RMBS63,909 429 — 64,338 
CMBS9,413 13 — 9,426 
Other securities231 1,094 — 1,325 
Total securities available for sale4,355 74,416 442 — 79,213 
Loans held for sale251 — 251 
Other assets:
Derivative assets(2)
84 1,568 77 $(633)1,096 
Other(3)
344 66 — 410 
Total assets$4,783 $76,235 $585 $(633)$80,970 
Liabilities:
Other liabilities:
Derivative liabilities(2)
$17 $1,129 $51 $(523)$674 
Total liabilities$17 $1,129 $51 $(523)$674 
__________
(1)Represents balance sheet netting of derivative assets and liabilities, and related payables and receivables for cash collateral held or placed with the same counterparty. See “Note 8—Derivative Instruments and Hedging Activities” for additional information.
(2)Does not reflect $40 million and $12 million recognized as a net valuation allowance on derivative assets and liabilities for non-performance risk as of September 30, 2020 and December 31, 2019, respectively. Non-performance risk is included in derivative assets and liabilities, which are part of other assets and other liabilities on the consolidated balance sheets, and is offset through non-interest income in the consolidated statements of income.
(3)As of September 30, 2020 and December 31, 2019, other includes retained interests in securitizations of $56 million and $66 million, deferred compensation plan assets of $370 million and $343 million, and equity securities of $494 million (including unrealized gains of $470 million) and $1 million, respectively.
Level 3 Recurring Fair Value Rollforward
The table below presents a reconciliation for all assets and liabilities measured and recognized at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2020 and 2019. Generally, transfers into Level 3 were primarily driven by the usage of unobservable assumptions in the pricing of these financial instruments as evidenced by wider pricing variations among pricing vendors and transfers out of Level 3 were primarily driven by the usage of assumptions corroborated by market observable information as evidenced by tighter pricing among multiple pricing sources.
Table 11.2: Level 3 Recurring Fair Value Rollforward
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Three Months Ended September 30, 2020
Total Gains (Losses) (Realized/Unrealized)
Net Unrealized Gains (Losses) Included in Net Income Related to Assets and Liabilities Still Held as of
September 30, 2020(1)
(Dollars in millions)Balance, July 1, 2020
Included
in Net
Income(1)
Included in OCIPurchasesSalesIssuancesSettlementsTransfers
Into
Level 3
Transfers
Out of
Level 3
Balance, September 30, 2020
Securities available for sale:(2)
RMBS$474 $10 $3 $0 $0 $0 $(22)$56 $(47)$474 $10 
CMBS282 (1)1 0 0 0 (8)98 0 372 (1)
Total securities available for sale756 9 4 0 0 0 (30)154 (47)846 9 
Other assets:
Retained interests in securitizations56 0 0 0 0 0 0 0 0 56 0 
Net derivative assets (liabilities)(3)
34 8 0 0 0 13 (2)0 (9)44 0 
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Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Nine Months Ended September 30, 2020
Total Gains (Losses) (Realized/Unrealized)
Net Unrealized Gains (Losses) Included in Net Income Related to Assets and Liabilities Still Held as of
September 30, 2020(1)
(Dollars in millions)Balance, January 1, 2020
Included
in Net
Income(1)
Included in OCIPurchasesSalesIssuancesSettlementsTransfers
Into
Level 3
Transfers
Out of
Level 3
Balance, September 30, 2020
Securities available for sale:(2)(4)
RMBS$433 $19 $(21)$0 $0 $0 $(55)$196 $(98)$474 $20 
CMBS13 (1)0 0 0 0 (11)371 0 372 (4)
Total securities available for sale446 18 (21)0 0 0 (66)567 (98)846 16 
Other assets:
Retained interests in securitizations66 (10)0 0 0 0 0 0 0 56 (10)
Net derivative assets (liabilities)(3)
26 20 0 0 0 39 (30)0 (11)44 18 

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 Three Months Ended September 30, 2019
Total Gains (Losses)
(Realized/Unrealized)
Net Unrealized Gains (Losses) Included in Net Income Related to Assets and Liabilities Still Held as of
September 30, 2019(1)
(Dollars in millions)Balance, July 1, 2019
Included
in Net
Income(1)
Included in OCIPurchasesSalesIssuancesSettlementsTransfers
Into
Level 3
Transfers
Out of
Level 3
Balance, September 30, 2019
Securities available for sale:(2)
RMBS$515 $10 $$$$$(18)$59 $(114)$452 $
CMBS(1)
Total securities available for sale524 10 (19)59 (114)460 
Other assets:
Retained interests in securitizations177 (1)(69)107 (1)
Net derivative assets (liabilities)(3)
(1)(8)12 (3)

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 Nine Months Ended September 30, 2019
Total Gains (Losses)
(Realized/Unrealized)
Net Unrealized Gains (Losses) Included in Net Income Related to Assets and Liabilities Still Held as of
September 30, 2019
(1)
(Dollars in millions)Balance, January 1, 2019
Included
in Net
Income(1)
Included in OCIPurchasesSalesIssuancesSettlementsTransfers
Into
Level 3
Transfers
Out of
Level 3
Balance, September 30, 2019
Securities available for sale:(2)
RMBS$433 $27 $13 $$$$(43)$173 $(151)$452 $26 
CMBS10 (2)
Total securities available for sale443 27 13 (45)173 (151)460 26 
Other assets:
Retained interests in securitizations158 18 (69)107 
Net derivative assets (liabilities)(3)
(10)(21)39 (6)
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__________
(1)Realized gains (losses) on securities available for sale are included in net securities gains (losses), and retained interests in securitizations are reported as a component of non-interest income in our consolidated statements of income. Gains (losses) on derivatives are included as a component of net interest income or non-interest income in our consolidated statements of income.
(2)For the three and nine months ended September 30, 2020, included in OCI related to Level 3 securities available for sale still held as of September 30, 2020 were net unrealized gains of $5 million and net unrealized losses of $16 million, respectively. For the three and nine months ended September 30, 2019, net unrealized gains included in OCI related to Level 3 securities available for sale still held as of September 30, 2019 were $1 million and $11 million, respectively.
(3)Includes derivative assets and liabilities of $153 million and $109 million, respectively, as of September 30, 2020, $82 million and $76 million, respectively, as of September 30, 2019.
(4)The fair value of RMBS as of January 1, 2020 includes a cumulative adjustment of $4 million from the adoption of the CECL standard.
Significant Level 3 Fair Value Asset and Liability Inputs
Generally, uncertainties in fair value measurements of financial instruments, such as changes in unobservable inputs, may have a significant impact on fair value. Certain of these unobservable inputs will, in isolation, have a directionally consistent impact on the fair value of the instrument for a given change in that input. Alternatively, the fair value of the instrument may move in an opposite direction for a given change in another input. In general, an increase in the discount rate, default rates, loss severity and credit spreads, in isolation, would result in a decrease in the fair value measurement. In addition, an increase in default rates would generally be accompanied by a decrease in recovery rates, slower prepayment rates and an increase in liquidity spreads.
Techniques and Inputs for Level 3 Fair Value Measurements
The following table presents the significant unobservable inputs used to determine the fair values of our Level 3 financial instruments on a recurring basis. We utilize multiple vendor pricing services to obtain fair value for our securities. Several of our vendor pricing services are only able to provide unobservable input information for a limited number of securities due to software licensing restrictions. Other vendor pricing services are able to provide unobservable input information for all securities for which they provide a valuation. As a result, the unobservable input information for the securities available for sale presented below represents a composite summary of all information we are able to obtain. The unobservable input information for all other Level 3 financial instruments is based on the assumptions used in our internal valuation models.
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Table 11.3: Quantitative Information about Level 3 Fair Value Measurements
Quantitative Information about Level 3 Fair Value Measurements
(Dollars in millions)Fair Value at
September 30,
2020
Significant
Valuation
Techniques
Significant
Unobservable
Inputs
Range
Weighted
Average(1)
Securities available for sale:
RMBS$474 Discounted cash flows (vendor pricing)Yield
Voluntary prepayment rate
Default rate
Loss severity
1-12%
5-15%
1-11%
30-100%
3%
9%
2%
68%
CMBS372 Discounted cash flows (vendor pricing)Yield
1-3%
1%
Other assets:
Retained interests in securitizations(2)
56 Discounted cash flowsLife of receivables (months)
Voluntary prepayment rate
Discount rate
Default rate
Loss severity
36-52
3-13%
2-12%
3%
64-70%
N/A
Net derivative assets (liabilities)44 Discounted cash flowsSwap rates1%1%
Quantitative Information about Level 3 Fair Value Measurements
(Dollars in millions)Fair Value at
December 31,
2019
Significant
Valuation
Techniques
Significant
Unobservable
Inputs
Range
Weighted
Average(1)
Securities available for sale:
RMBS$429 Discounted cash flows (vendor pricing)Yield
Voluntary prepayment rate
Default rate
Loss severity
2-18%
0-18%
1-6%
30-95%
5%
10%
2%
67%
CMBS13 Discounted cash flows (vendor pricing)Yield
2-3%
2%
Other assets:
Retained interests in securitizations(2)
66 Discounted cash flowsLife of receivables (months)
Voluntary prepayment rate
Discount rate
Default rate
Loss severity
35-51
4-14%
3-10%
2-3%
74-88%
N/A
Net derivative assets (liabilities)26 Discounted cash flowsSwap rates2%2%
__________
(1)Weighted averages are calculated by using the product of the input multiplied by the relative fair value of the instruments.
(2)Due to the nature of the various mortgage securitization structures in which we have retained interests, it is not meaningful to present a consolidated weighted average for the significant unobservable inputs.
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Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
We are required to measure and recognize certain assets at fair value on a nonrecurring basis on the consolidated balance sheets. These assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, from the application of lower of cost or fair value accounting or when we evaluate for impairment).
The following table presents the carrying value of the assets measured at fair value on a nonrecurring basis and still held as of September 30, 2020 and December 31, 2019, and for which a nonrecurring fair value measurement was recorded during the nine and twelve months then ended.
Table 11.4: Nonrecurring Fair Value Measurements
September 30, 2020
Estimated Fair Value HierarchyTotal
(Dollars in millions)Level 2Level 3
Loans held for investment$0 $294 $294 
Other assets(1)
0 55 55 
Total$0 $349 $349 
December 31, 2019
Estimated Fair Value HierarchyTotal
(Dollars in millions)Level 2Level 3
Loans held for investment$$294 $294 
Other assets(1)
103 103 
Total$$397 $397 
__________
(1)As of September 30, 2020, other assets included equity investments accounted for under the measurement alternative of $14 million, repossessed assets of $35 million and long-lived assets held for sale of $6 million. As of December 31, 2019, other assets included equity investments accounted for under the measurement alternative of $5 million, repossessed assets of $61 million and long-lived assets held for sale of $37 million.
In the above table, loans held for investment are generally valued based in part on the estimated fair value of the underlying collateral and the non-recoverable rate, which is considered to be a significant unobservable input. The non-recoverable rate ranged from 0% to 39%, with a weighted average of 3%, and from 0% to 50%, with a weighted average of 6%, as of September 30, 2020 and December 31, 2019, respectively. The weighted average non-recoverable rate is calculated based on the estimated market value of the underlying collateral. The significant unobservable inputs and related quantitative information related to fair value of the other assets are not meaningful to disclose as they vary significantly across properties and collateral.
The following table presents total nonrecurring fair value measurements for the period, included in earnings, attributable to the change in fair value relating to assets that are still held at September 30, 2020 and 2019.
Table 11.5: Nonrecurring Fair Value Measurements Included in Earnings
Total Gains (Losses)
Nine Months Ended September 30,
(Dollars in millions)20202019
Loans held for investment$187 $(189)
Loans held for sale0 (1)
Other assets(1)
(42)(60)
Total$145 $(250)
__________
(1)Other assets include fair value adjustments related to repossessed assets, long-lived assets held for sale and equity investments accounted for under the measurement alternative.
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Fair Value of Financial Instruments
The following table presents the carrying value and estimated fair value, including the level within the fair value hierarchy, of our financial instruments that are not measured at fair value on a recurring basis on our consolidated balance sheets as of September 30, 2020 and December 31, 2019.
Table 11.6: Fair Value of Financial Instruments
September 30, 2020
Carrying
Value
Estimated
Fair Value
Estimated Fair Value Hierarchy
(Dollars in millions)Level 1Level 2Level 3
Financial assets:
Cash and cash equivalents$44,106 $44,106 $4,267 $39,839 $0 
Restricted cash for securitization investors895 895 895 0 0 
Net loans held for investment232,094 239,525 0 0 239,525 
Loans held for sale2,178 2,277 0 2,277 0 
Interest receivable1,551 1,551 0 1,551 0 
Other investments(1)
1,341 1,341 0 1,341 0 
Financial liabilities:
Deposits with defined maturities38,973 39,414 0 39,414 0 
Securitized debt obligations13,566 13,770 0 13,770 0 
Senior and subordinated notes28,448 28,928 0 28,928 0 
Federal funds purchased and securities loaned or sold under agreements to repurchase702 702 0 702 0 
Interest payable332 332 0 332 0 
 December 31, 2019
Carrying
Value
Estimated
Fair Value
Estimated Fair Value Hierarchy
(Dollars in millions)Level 1Level 2Level 3
Financial assets:
Cash and cash equivalents$13,407 $13,407 $4,129 $9,278 $
Restricted cash for securitization investors342 342 342 
Net loans held for investment258,601 258,696 258,696 
Loans held for sale149 149 149 
Interest receivable1,758 1,758 1,758 
Other investments(1)
1,638 1,638 1,638 
Financial liabilities:
Deposits with defined maturities44,958 45,225 45,225 
Securitized debt obligations17,808 17,941 17,941 
Senior and subordinated notes30,472 31,233 31,233 
Federal funds purchased and securities loaned or sold under agreements to repurchase314 314 314 
Other borrowings(2)
7,000 7,001 7,001 
Interest payable439 439 439 
__________
(1)Other investments include FHLB and Federal Reserve stock. These investments are included in other assets on our consolidated balance sheets.
(2)Other borrowings excludes finance lease liabilities.
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NOTE 12—BUSINESS SEGMENTS AND REVENUE FROM CONTRACTS WITH CUSTOMERS
Our principal operations are organized into three major business segments, which are defined primarily based on the products and services provided or the types of customers 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.
Basis of Presentation
We report the results of each of our business segments on a continuing operations basis. The results of our individual businesses reflect the manner in which management evaluates performance and makes decisions about funding our operations and allocating resources.
Business Segment Reporting Methodology
The results of our business segments are intended to present each segment as if it were a stand-alone business. Our internal management and reporting process used to derive our segment results employs various allocation methodologies, including funds transfer pricing, to assign certain balance sheet assets, deposits and other liabilities and their related revenue and expenses directly or indirectly attributable to each business segment. Our funds transfer pricing process provides a funds credit for sources of funds, such as deposits generated by our Consumer Banking and Commercial Banking businesses, and a funds charge for the use of funds by each segment. Due to the integrated nature of our business segments, estimates and judgments have been made in allocating certain revenue and expense items. Transactions between segments are based on specific criteria or approximate third-party rates. We regularly assess the assumptions, methodologies and reporting classifications used for segment reporting, which may result in the implementation of refinements or changes in future periods. We provide additional information on the allocation methodologies used to derive our business segment results in “Note 17—Business Segments and Revenue from Contracts with Customers” in our 2019 Form 10-K.
Segment Results and Reconciliation
We may periodically change our business segments or reclassify business segment results based on modifications to our management reporting methodologies or changes in organizational alignment. The following table presents our business segment results for the three and nine months ended September 30, 2020 and 2019, selected balance sheet data as of September 30, 2020 and 2019, and a reconciliation of our total business segment results to our reported consolidated income from continuing operations, loans held for investment and deposits.

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Table 12.1: Segment Results and Reconciliation
Three Months Ended September 30, 2020
(Dollars in millions)Credit CardConsumer Banking
Commercial Banking(1)
Other(1)
Consolidated Total
Net interest income (loss)$3,292 $1,904 $517 $(158)$5,555 
Non-interest income1,013 107 237 469 1,826 
Total net revenue(2)
4,305 2,011 754 311 7,381 
Provision (benefit) for credit losses450 (43)(74)(2)331 
Non-interest expense2,003 1,011 424 110 3,548 
Income from continuing operations before income taxes1,852 1,043 404 203 3,502 
Income tax provision438 247 95 316 1,096 
Income (loss) from continuing operations, net of tax$1,414 $796 $309 $(113)$2,406 
Loans held for investment$103,641 $68,688 $75,894 $0 $248,223 
Deposits0 249,684 36,783 19,258 305,725 

Nine Months Ended September 30, 2020
(Dollars in millions)Credit CardConsumer Banking
Commercial Banking(1)
Other(1)
Consolidated Total
Net interest income (loss)$10,363 $5,226 $1,526 $(75)$17,040 
Non-interest income2,769 330 655 392 4,146 
Total net revenue(2)
13,132 5,556 2,181 317 21,186 
Provision for credit losses7,096 1,693 1,209 2 10,000 
Non-interest expense6,180 3,038 1,261 568 11,047 
Income (loss) from continuing operations before income taxes(144)825 (289)(253)139 
Income tax provision (benefit)(34)195 (69)(102)(10)
Income (loss) from continuing operations, net of tax$(110)$630 $(220)$(151)$149 
Loans held for investment$103,641 $68,688 $75,894 $0 $248,223 
Deposits0 249,684 36,783 19,258 305,725 

Three Months Ended September 30, 2019
(Dollars in millions)Credit CardConsumer Banking
Commercial Banking(1)
Other(1)
Consolidated Total
Net interest income$3,546 $1,682 $486 $23 $5,737 
Non-interest income (loss)870 165 221 (34)1,222 
Total net revenue (loss)4,416 1,847 707 (11)6,959 
Provision for credit losses1,087 203 93 1,383 
Non-interest expense2,360 985 414 113 3,872 
Income (loss) from continuing operations before income taxes969 659 200 (124)1,704 
Income tax provision (benefit)235 154 46 (60)375 
Income (loss) from continuing operations, net of tax$734 $505 $154 $(64)$1,329 
Loans held for investment$113,681 $62,015 $73,659 $$249,355 
Deposits206,423 30,923 19,802 257,148 
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Nine Months Ended September 30, 2019
(Dollars in millions)Credit CardConsumer Banking
Commercial Banking(1)
Other(1)
Consolidated Total
Net interest income$10,667 $5,070 $1,489 $48 $17,274 
Non-interest income (loss)2,858 491 608 (65)3,892 
Total net revenue (loss)13,525 5,561 2,097 (17)21,166 
Provision for credit losses3,571 603 244 4,418 
Non-interest expense6,784 2,981 1,258 299 11,322 
Income (loss) from continuing operations before income taxes3,170 1,977 595 (316)5,426 
Income tax provision (benefit)747 461 138 (275)1,071 
Income (loss) from continuing operations, net of tax$2,423 $1,516 $457 $(41)$4,355 
Loans held for investment$113,681 $62,015 $73,659 $$249,355 
Deposits206,423 30,923 19,802 257,148 
__________
(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)Total net revenue was reduced by $235 million and $942 million in the three and nine months ended September 30, 2020, respectively, for finance charges and fees charged off as uncollectible.    
Revenue from Contracts with Customers
The majority of our revenue from contracts with customers consists of interchange fees, service charges and other customer-related fees, and other contract revenue. Interchange fees are primarily from our Credit Card business and are recognized upon settlement with the interchange networks, net of rewards earned by customers. Service charges and other customer-related fees within our Consumer Banking business are primarily related to fees earned on consumer deposit accounts for account maintenance and various transaction-based services such as overdrafts and ATM usage. Service charges and other customer-related fees within our Commercial Banking business are mostly related to fees earned on treasury management and capital markets services. Other contract revenue in our Credit Card business consists primarily of revenue from our partnership arrangements. Other contract revenue in our Consumer Banking business consists primarily of revenue earned on certain marketing and promotional events from our auto dealers. Revenue from contracts with customers is included in non-interest income in our consolidated statements of income.
The following table presents revenue from contracts with customers and a reconciliation to non-interest income by business segment for the three and nine months ended September 30, 2020 and 2019.
Table 12.2: Revenue from Contracts with Customers and Reconciliation to Segment Results
Three Months Ended September 30, 2020
(Dollars in millions)Credit CardConsumer Banking
Commercial Banking(1)
Other(1)
Consolidated Total
Contract revenue:
Interchange fees, net(2)
$703 $54 $17 $1 $775 
Service charges and other customer-related fees0 42 50 0 92 
Other109 5 1 0 115 
Total contract revenue812 101 68 1 982 
Revenue from other sources201 6 169 468 844 
Total non-interest income$1,013 $107 $237 $469 $1,826 
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Nine Months Ended September 30, 2020
(Dollars in millions)Credit CardConsumer Banking
Commercial Banking(1)
Other(1)
Consolidated Total
Contract revenue:
Interchange fees, net(2)
$2,003 $152 $45 $(1)$2,199 
Service charges and other customer-related fees0 137 124 (1)260 
Other236 27 2 0 265 
Total contract revenue2,239 316 171 (2)2,724 
Revenue from other sources530 14 484 394 1,422 
Total non-interest income$2,769 $330 $655 $392 $4,146 

Three Months Ended September 30, 2019
(Dollars in millions)Credit CardConsumer Banking
Commercial Banking(1)
Other(1)
Consolidated Total
Contract revenue:
Interchange fees, net(2)
$722 $54 $15 $(1)$790 
Service charges and other customer-related fees76 35 (1)110 
Other15 26 42 
Total contract revenue737 156 51 (2)942 
Revenue from other sources133 170 (32)280 
Total non-interest income$870 $165 $221 $(34)$1,222 

Nine Months Ended September 30, 2019
(Dollars in millions)Credit CardConsumer Banking
Commercial Banking(1)
Other(1)
Consolidated Total
Contract revenue:
Interchange fees, net(2)
$2,181 $152 $39 $(4)$2,368 
Service charges and other customer-related fees225 88 (1)312 
Other47 76 125 
Total contract revenue2,228 453 129 (5)2,805 
Revenue from other sources630 38 479 (60)1,087 
Total non-interest income$2,858 $491 $608 $(65)$3,892 
__________
(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)Interchange fees are presented net of customer reward expenses.
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NOTE 13—COMMITMENTS, CONTINGENCIES, GUARANTEES AND OTHERS
Commitments to Lend
Our unfunded lending commitments primarily consist of credit card lines, loan commitments to customers of both our Commercial Banking and Consumer Banking businesses, as well as standby and commercial letters of credit. These commitments, other than credit card lines, are legally binding conditional agreements that have fixed expirations or termination dates and specified interest rates and purposes. The contractual amount of these commitments represents the maximum possible credit risk to us should the counterparty draw upon the commitment. We generally manage the potential risk of unfunded lending commitments by limiting the total amount of arrangements, monitoring the size and maturity structure of these portfolios, and applying the same credit standards for all of our credit activities.
For unused credit card lines, we have not experienced and do not anticipate that all of our customers will access their entire available line at any given point in time. Commitments to extend credit other than credit card lines generally require customers to maintain certain credit standards. Collateral requirements and loan-to-value (“LTV”) ratios are the same as those for funded transactions and are established based on management’s credit assessment of the customer. These commitments may expire without being drawn upon; therefore, the total commitment amount does not necessarily represent future funding requirements.
We also issue letters of credit, such as financial standby, performance standby and commercial letters of credit, to meet the financing needs of our customers. Standby letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party in a borrowing arrangement. Commercial letters of credit are short-term commitments issued primarily to facilitate trade finance activities for customers and are generally collateralized by the goods being shipped to the customer. These collateral requirements are similar to those for funded transactions and are established based on management’s credit assessment of the customer. Management conducts regular reviews of all outstanding letters of credit and the results of these reviews are considered in assessing the adequacy of reserves for unfunded lending commitments.
The following table presents the contractual amount and carrying value of our unfunded lending commitments as of September 30, 2020 and December 31, 2019. The carrying value represents our reserve and deferred revenue on legally binding commitments.
Table 13.1: Unfunded Lending Commitments
Contractual AmountCarrying Value
(Dollars in millions)September 30, 2020December 31, 2019September 30, 2020December 31, 2019
Credit card lines$350,356 $363,446 N/AN/A
Other loan commitments(1)
34,574 36,454 $142 $110 
Standby letters of credit and commercial letters of credit(2)
1,335 1,574 34 27 
Total unfunded lending commitments$386,265 $401,474 $176 $137 
__________
(1)Includes $1.6 billion of advised lines of credit as of both September 30, 2020 and December 31, 2019.
(2)These financial guarantees have expiration dates ranging from 2020 to 2023 as of September 30, 2020.
Loss Sharing Agreements
Within our Commercial Banking business, we originate multifamily commercial real estate loans with the intent to sell them to the GSEs. We enter into loss sharing agreements with the GSEs upon the sale of the loans. Beginning January 1, 2020, we elected the fair value option on new loss sharing agreements. Unrealized gains and losses are recorded in other non-interest income in our consolidated statements of income. For those loss sharing agreements entered into as of December 31, 2019, we amortize the liability recorded at inception into non-interest income as we are released from risk of payment under the loss sharing agreement and record our estimate of expected credit losses each period in provision for credit losses in our consolidated statements of income. The liability recognized on our consolidated balance sheets for these loss sharing agreements was $99 million and $75 million as of September 30, 2020 and December 31, 2019, respectively.
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See “Note 4—Allowance for Credit Losses and Reserve for Unfunded Lending Commitments” for more information related to our credit card partnership loss sharing arrangements.
U.K. Payment Protection Insurance
In the U.K., we previously sold payment protection insurance (“PPI”). In response to an elevated level of customer complaints across the industry, heightened media coverage and pressure from consumer advocacy groups, the U.K. Financial Conduct Authority (“FCA”), formerly the Financial Services Authority, investigated and raised concerns about the way the industry has handled complaints related to the sale of these insurance policies. For the past several years, the U.K.’s Financial Ombudsman Service (“FOS”) has been adjudicating customer complaints relating to PPI, escalated to it by consumers who disagree with the rejection of their complaint by firms, leading to customer remediation payments by us and others within the industry. In August 2017, the FCA issued final rules and guidance on the PPI complaints. This set the deadline for complaints as August 29, 2019. It also provided clarity on how to handle PPI complaints under s.140A of the Consumer Credit Act, including guidance on how redress for such complaints should be calculated.
COEP has now materially completed the handling of PPI complaints that were received prior to the deadline set by the FCA. Escalations to the FOS (by customers or their representatives) may still take place until the first quarter of 2021. Throughout this time, the FCA will continue to supervise firms that handle PPI complaints and the supporting processes, people and systems.
Our U.K. PPI reserve declined to a de minimis amount at September 30, 2020 from $188 million as of December 31, 2019. We do not believe there are significant reasonably possible future losses beyond our reserve as of September 30, 2020.
In determining our best estimate of incurred losses for future remediation payments, management considers numerous factors, including (i) the number of customer complaints or information requests still to be processed; (ii) our expectation of upholding those complaints; (iii) the expected number of complaints customers escalate to the FOS; (iv) our expectation of the FOS upholding such escalated complaints; (v) the number of complaints that fall under s.140A of the Consumer Credit Act; and (vi) the estimated remediation payout to customers. We monitor these factors each quarter and adjust our reserves to reflect the latest data.
Litigation
In accordance with the current accounting standards for loss contingencies, we establish reserves for litigation-related matters that arise from the ordinary course of our business activities when it is probable that a loss associated with a claim or proceeding has been incurred and the amount of the loss can be reasonably estimated. None of the amounts we currently have recorded individually or in the aggregate are considered to be material to our financial condition. Litigation claims and proceedings of all types are subject to many uncertain factors that generally cannot be predicted with assurance. Below we provide a description of potentially material legal proceedings and claims.
For some of the matters disclosed below, we are able to estimate reasonably possible losses above existing reserves, and for other disclosed matters, such an estimate is not possible at this time. For those matters below where an estimate is possible, management currently estimates the reasonably possible future losses beyond our reserves as of September 30, 2020 are approximately $1.0 billion. Our reserve and reasonably possible loss estimates involve considerable judgment and reflect that there is still significant uncertainty regarding numerous factors that may impact the ultimate loss levels. Notwithstanding our attempt to estimate a reasonably possible range of loss beyond our current accrual levels for some litigation matters based on current information, it is possible that actual future losses will exceed both the current accrual level and the range of reasonably possible losses disclosed here. Given the inherent uncertainties involved in these matters, especially those involving governmental agencies, and the very large or indeterminate damages sought in some of these matters, there is significant uncertainty as to the ultimate liability we may incur from these litigation matters and an adverse outcome in one or more of these matters could be material to our results of operations or cash flows for any particular reporting period.
Interchange
In 2005, a putative class of retail merchants filed antitrust lawsuits against MasterCard and Visa and several issuing banks, including Capital One, seeking both injunctive relief and monetary damages for an alleged conspiracy by defendants to fix the level of interchange fees. Other merchants have asserted similar claims in separate lawsuits, and while these separate cases did
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not name any issuing banks, Visa, MasterCard and issuers, including Capital One, have entered settlement and judgment sharing agreements allocating the liabilities of any judgment or settlement arising from all interchange-related cases.
The lawsuits were consolidated before the U.S. District Court for the Eastern District of New York for certain purposes and were settled in 2012. The class settlement, however, was invalidated by the United States Court of Appeals for the Second Circuit in June 2016, and the suit was bifurcated into separate class actions seeking injunctive and monetary relief, respectively. In addition, numerous merchant groups opted out of the 2012 settlement and have pursued their own claims. The claims by the injunctive relief class have not been resolved, but the settlement of $5.5 billion for the monetary damages class received final approval from the trial court, and has been appealed to the U.S. Court of Appeals for the Second Circuit. Visa and MasterCard have also settled a number of the opt-out cases, which required non-material payments from issuing banks, including Capital One. Visa created a litigation escrow account following its initial public offering of stock in 2008 that funds settlements for its member banks, and any settlements related to MasterCard-allocated losses have either already been paid or are reflected in our reserves.
Mortgage Representation and Warranty
We face residual exposure related to subsidiaries that originated residential mortgage loans and sold these loans to various purchasers, including purchasers who created securitization trusts. In connection with their sales of mortgage loans, these subsidiaries entered into agreements containing varying representations and warranties about, among other things, the ownership of the loan, the validity of the lien securing the loan, the loan’s compliance with any applicable criteria established by the purchaser, including underwriting guidelines and the existence of mortgage insurance, and the loan’s compliance with applicable federal, state and local laws. Each of these subsidiaries may be required to repurchase mortgage loans or indemnify certain purchasers and others against losses they incur in the event of certain breaches of these representations and warranties.
The substantial majority of our representation and warranty exposure has been resolved through litigation, and our remaining representation and warranty exposure is almost entirely litigation-related. Accordingly, we establish litigation reserves for representation and warranty losses that we consider to be both probable and reasonably estimable. The reserve process relies heavily on estimates, which are inherently uncertain, and requires the application of judgment. Our reserves and estimates of reasonably possible losses could be impacted by claims which may be brought by securitization trustees and sponsors, bond-insurers, investors, and GSEs, as well as claims brought by governmental agencies.
Anti-Money Laundering
In October 2018, we paid a civil monetary penalty of $100 million to resolve the monetary component of a July 2015 Office of the Comptroller of the Currency (“OCC”) consent order relating to our anti-money laundering (“AML”) program. The OCC lifted the AML consent order in November 2019.
The Department of Justice and the New York District Attorney’s Office have closed their investigations into certain former check casher clients of the Commercial Banking business and our AML program. We are in discussions with the Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Department of Treasury to explore a potential regulatory resolution of its investigation into our AML program, which could include a monetary penalty.
Cybersecurity Incident
As a result of the Cybersecurity Incident announced on July 29, 2019, we are subject to numerous legal proceedings and other inquiries and could be the subject of additional proceedings and inquiries in the future.
Consumer class actions. To date, we have been named as a defendant in approximately 73 putative consumer class action cases (61 in U.S. federal courts and 12 in Canadian courts) alleging harm from the Cybersecurity Incident and seeking various remedies, including monetary and injunctive relief. The lawsuits allege breach of contract, negligence, violations of various privacy laws and a variety of other legal causes of action. The U.S. consumer class actions have been consolidated for pretrial proceedings before a multi-district litigation (“MDL”) panel in the U.S. District Court for the Eastern District of Virginia, Alexandria Division. In the third quarter of 2020, the MDL panel denied in part and granted in part Capital One’s motion to dismiss and permitted pretrial discovery to continue.
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Securities class action. The Company and certain officers have also been named as defendants in a putative class action pending in the MDL alleging violations of certain federal securities laws in connection with statements and alleged omissions in securities filings relating to our information security standards and practices. The complaint seeks certification of a class of all persons who purchased or otherwise acquired Capital One securities from July 23, 2015 to July 29, 2019, as well as unspecified monetary damages, costs and other relief.
Governmental inquiries. We have received inquiries and requests for information relating to the Cybersecurity Incident from Congress, federal banking regulators, relevant Canadian regulators, the Department of Justice, and the offices of approximately fourteen state Attorneys General. We are cooperating with these offices and responding to their inquiries.
In August 2020, we entered into consent orders with the Federal Reserve Board of Governors and the OCC resulting from regulatory reviews of the Cybersecurity Incident and relating to ongoing enhancements of our cybersecurity and operational risk management processes. We paid an $80 million penalty to the U.S. Treasury as part of the OCC agreement. The Federal Reserve Board agreement did not contain a monetary penalty.
Taxi Medallion Finance Investigations
Beginning in 2019, we have received subpoenas from the New York Attorney General’s office and from the U.S. Attorney’s Office for the Southern District of New York, Civil and Criminal Divisions, relating to investigations of the taxi medallion finance industry we exited beginning in 2015. The subpoenas seek, among other things, information regarding our lending counterparties and practices. We are cooperating with these investigations.
U.K. PPI Litigation
Some of the claimants in the U.K. PPI regulatory claims process described above have initiated legal proceedings. The significant increase in PPI regulatory claim volumes shortly before the August 29, 2019 claims submission deadline increases the potential exposure for PPI-related litigation, which is not subject to the August 29, 2019 deadline.
Other Pending and Threatened Litigation
In addition, we are commonly subject to various pending and threatened legal actions relating to the conduct of our normal business activities. In the opinion of management, the ultimate aggregate liability, if any, arising out of all such other pending or threatened legal actions, is not expected to be material to our consolidated financial position or our results of operations.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
For a discussion of the quantitative and qualitative disclosures about market risk, see “MD&A—Market Risk Profile.”
Item 4. Controls and Procedures
Overview
We are required under applicable laws and regulations to maintain controls and procedures, which include disclosure controls and procedures as well as internal control over financial reporting, as further described below. 
(a) Disclosure Controls and Procedures
Disclosure controls and procedures refer to controls and other procedures designed to provide reasonable assurance that information required to be disclosed in our financial reports is recorded, processed, summarized and reported within the time periods specified by the U.S. Securities and Exchange Commission (“SEC”) rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding our required disclosure. In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and we must apply judgment in evaluating and implementing possible controls and procedures. 
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15 of the Securities Exchange Act of 1934 (“Exchange Act”), our management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of September 30, 2020, the end of the period covered by this Report on Form 10-Q. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2020, at a reasonable level of assurance, in recording, processing, summarizing and reporting information required to be disclosed within the time periods specified by the SEC rules and forms.
(b) Changes in Internal Control Over Financial Reporting
We regularly review our disclosure controls and procedures and make changes intended to ensure the quality of our financial reporting. There were no changes in internal control over financial reporting that occurred in the third quarter of 2020 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings
The information required by Item 103 of Regulation S-K is included in “Note 13—Commitments, Contingencies, Guarantees and Others.”
Item 1A. Risk Factors
We are not aware of any material changes from the risk factors set forth under “Part I—Item 1A. Risk Factors” in our 2019 Form 10-K and “Part II—Item 1A. Risk Factors” in our Quarterly Report on Form 10-Q for the period ended June 30, 2020.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table presents information related to the withholdings of our common stock for each calendar month in the third quarter of 2020. Commission costs are excluded from the amounts presented below.
Total Number
of Shares
Withheld(1)
Average
Price 
per Share
July4,765 $60.70 
August25,152 63.80 
September  
Total29,917 63.31 
__________
(1)Consists of shares withheld to cover taxes on restricted stock units whose restrictions have lapsed. We suspended our 2019 Stock Repurchase Program in March 2020 and the program subsequently expired at the end of the second quarter of 2020, see “MD&A—Capital Management—Dividend Policy and Stock Purchases” for more information.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
An index to exhibits has been filed as part of this Report and is incorporated herein by reference.
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EXHIBIT INDEX
The following exhibits are incorporated by reference or filed herewith. Reference to the “2003 Form 10-K” is to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, filed on March 5, 2004.
Exhibit No.Description
3.1
3.2
3.3
4.1.1
4.1.2
4.1.3
4.2Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, copies of instruments defining the rights of holders of long-term debt are not filed. The Company agrees to furnish a copy thereof to the SEC upon request.
31.1*
31.2*
32.1**
32.2**
101.INSXBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH*Inline XBRL Taxonomy Extension Schema Document.
101.CAL*Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104The cover page of Capital One Financial Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, formatted in Inline XBRL (included within the Exhibit 101 attachments).
__________
*Indicates a document being filed with this Form 10-Q.
**Indicates a document being furnished with this Form 10-Q. Information in this Form 10-Q furnished herewith shall not be deemed to be “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section. Such exhibit shall not be deemed incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 CAPITAL ONE FINANCIAL CORPORATION
Date: November 2, 2020 By:/s/ R. SCOTT BLACKLEY
 R. Scott Blackley
 Chief Financial Officer
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