UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________________

FORM 10-Q

____________________________________

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File No. 001-13300

____________________________________

CAPITAL ONE FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter) 

____________________________________

Delaware		54-1719854
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
1680 Capital One Drive,
McLean,	Virginia	22102
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (703) 720-1000

(Not applicable)

(Former name, former address and former fiscal year, if changed since last report)

____________________________________

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Trading Symbol(s)	Name of Each Exchange on Which Registered
Common Stock (par value $.01 per share)	COF	New York Stock Exchange
Depositary Shares, Each Representing a 1/40th Interest in a Share of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series B	COF PRP	New York Stock Exchange
Depositary Shares, Each Representing a 1/40th Interest in a Share of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series C	COF PRC	New York Stock Exchange
Depositary Shares, Each Representing a 1/40th Interest in a Share of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series D	COF PRD	New York Stock Exchange
Depositary Shares, Each Representing a 1/40th Interest in a Share of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series F	COF PRF	New York Stock Exchange
Depositary Shares, Each Representing a 1/40th Interest in a Share of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series G	COF PRG	New York Stock Exchange
Depositary Shares, Each Representing a 1/40th Interest in a Share of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series H	COF PRH	New York Stock Exchange
0.800% Senior Notes Due 2024	COF24	New York Stock Exchange
1.650% Senior Notes Due 2029	COF29	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of June 30, 2019, there were 470,333,041 shares of the registrant’s Common Stock outstanding.

TABLE OF CONTENTS

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

1 Capital One Financial Corporation (COF)

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

2 Capital One Financial Corporation (COF)

INDEX OF MD&A AND SUPPLEMENTAL TABLES

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

3 Capital One Financial Corporation (COF)

PART I—FINANCIAL INFORMATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)

This discussion contains forward-looking statements that are based upon management’s current expectations and are subject to significant uncertainties and changes in circumstances. Please review “MD&A—Forward-Looking Statements” for more information on the forward-looking statements in this Quarterly Report on Form 10-Q (“this Report”). All statements that address operating performance, events or developments that we expect or anticipate will occur in the future, including those relating to operating results and the Cybersecurity Incident described in “MD&A—Introduction—Cybersecurity Incident” and “Note 14—Commitments, Contingencies, Guarantees and Others” are forward-looking statements. Our actual results may differ materially from those included in these forward-looking statements due to a variety of factors including, but not limited to, those described in “Part II—Item 1A. Risk Factors” in this Report and in “Part I—Item 1A. Risk Factors” in our 2018 Annual Report on Form 10-K (“2018 Form 10-K”). Unless otherwise specified, references to notes to our consolidated financial statements refer to the notes to our consolidated financial statements as of June 30, 2019 included in this Report.

Management monitors a variety of key indicators to evaluate our business results and financial condition. The following MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and related notes in this Report and the more detailed information contained in our 2018 Form 10-K.

INTRODUCTION

We are a diversified financial services holding company with banking and non-banking subsidiaries. Capital One Financial Corporation and its subsidiaries (the “Company”) offer a broad array of financial products and services to consumers, small businesses and commercial clients through branches, the internet and other distribution channels. As of June 30, 2019, our principal subsidiaries included:

• Capital One Bank (USA), National Association (“COBNA”), which offers credit and debit card products, other lending products and deposit products; and

• Capital One, National Association (“CONA”), which offers a broad spectrum of banking products and financial services to consumers, small businesses and commercial clients.

The Company is hereafter collectively referred to as “we,” “us” or “our.” COBNA and CONA are collectively referred to as the “Banks.” Certain business terms used in this document are defined in the “MD&A—Glossary and Acronyms” and should be read in conjunction with the consolidated financial statements included in this Report.

Our consolidated total net revenues are derived primarily from lending to consumer, small business, and commercial customers net of funding costs associated with interest on deposits, short-term borrowings and long-term debt. We also earn non-interest income which primarily consists of interchange income net of reward expenses, and service charges and other customer-related fees. Our expenses primarily consist of the provision for credit losses, operating expenses, marketing expenses and income taxes.

Our principal operations are organized for management reporting purposes into three major business segments, which are defined primarily based on the products and services provided or the types of customer served: Credit Card, Consumer Banking and Commercial Banking. The operations of acquired businesses have been integrated into our existing business segments. Certain activities that are not part of a segment, such as management of our corporate investment portfolio, asset/liability management by our centralized Corporate Treasury group and residual tax expense or benefit to arrive at the consolidated effective tax rate that is not assessed to our primary business segments, are included in the Other category.

• Credit Card: Consists of our domestic consumer and small business card lending, and international card businesses in Canada and the United Kingdom (“U.K.”).

• Consumer Banking: Consists of our branch-based lending and deposit gathering activities for consumers and small businesses, national deposit gathering and national auto lending.

4 Capital One Financial Corporation (COF)

• Commercial Banking: Consists of our lending, deposit gathering, capital markets and treasury management services to commercial real estate and commercial and industrial customers. Our commercial and industrial customers typically include companies with annual revenues between $20 million and $2 billion.

Business Developments

We regularly explore and evaluate opportunities to acquire financial services and financial assets, including credit card and other loan portfolios, and enter into strategic partnerships as part of our growth strategy. We also explore opportunities to acquire technology companies and related assets to improve our information technology infrastructure and to deliver on our digital strategy. In addition, we regularly consider the potential disposition of certain of our assets, branches, partnership agreements or lines of business. We may issue equity or debt to fund our acquisitions.

In the second quarter of 2019, we made the decision to exit several small partnership portfolios in our Credit Card business. We sold approximately $900 million of receivables and transferred approximately $100 million to loans held for sale as of June 30, 2019, which resulted in a gain on sale of $49 million recognized in other non-interest income and an allowance release of $68 million.

On July 26, 2018, we announced that we entered into a new, long-term credit card program agreement with Walmart Inc. (“Walmart”). Under the terms of the agreement, we will become the exclusive issuer of Walmart’s cobrand and private label credit card program in the U.S. On January 22, 2019, we announced that we entered into a definitive agreement to acquire the existing portfolio of Walmart’s cobrand and private label credit card receivables. We expect to launch the new issuance program and close on the acquired portfolio late in the third quarter or early in the fourth quarter of 2019.

Cybersecurity Incident

On July 29, 2019, we announced that on July 19, 2019, we determined there was unauthorized access by an outside individual who obtained certain types of personal information relating to people who had applied for our credit card products and to our credit card customers (the “Cybersecurity Incident”). The Cybersecurity Incident occurred on March 22 and 23, 2019. We believe that a highly sophisticated individual was able to exploit a specific configuration vulnerability in our infrastructure. The configuration vulnerability was reported to us by an external security researcher on July 17, 2019. We then began our own internal investigation, leading to the July 19, 2019, determination that the Cybersecurity Incident occurred. We immediately fixed the configuration vulnerability that this individual exploited and verified there are no other instances in our environment. Among other things, we also augmented our routine automated scanning to look for this issue on a continuous basis. We promptly began working with federal law enforcement. The person responsible was arrested by the Federal Bureau of Investigation on July 29, 2019 and federal prosecution of the responsible person commenced.

Based on our analysis to date, we believe it is unlikely that the information was used for fraud or disseminated by this individual. However, we will continue to investigate. Based on our analysis to date, this event affected approximately 100 million individuals in the United States and approximately 6 million in Canada. We believe no credit card account numbers or log-in credentials were compromised. The largest category of information accessed was information on consumers and small businesses as of the time they applied for one of our credit card products from 2005 through early 2019. This information included personal information that we routinely collect at the time we receive credit card applications, including names, addresses, zip codes/postal codes, phone numbers, email addresses, dates of birth, and self-reported income. In addition to credit card application data, the individual also obtained portions of credit card customer data, including customer status data (e.g., credit scores, credit limits, balances, payment history, contact information) and fragments of transaction data from a total of 23 days during 2016, 2017 and 2018. Approximately 140,000 Social Security numbers of our credit card customers and approximately 80,000 linked bank account numbers of our secured credit card customers were compromised in this incident. For our Canadian credit card customers, approximately 1 million Social Insurance Numbers were compromised in this incident. Our assessment of the incident is ongoing and analysis is subject to change.

We expect to notify affected individuals through a variety of channels and make free credit monitoring and identity protection available to everyone affected. We have retained a leading independent cybersecurity firm to conduct a comprehensive assessment to confirm the scope of the access and the specific data impacted.

We expect the Cybersecurity Incident to generate incremental costs of approximately $100 to $150 million in 2019. Expected costs are largely driven by customer notifications, credit monitoring, technology costs, and professional support relating to the remediation

5 Capital One Financial Corporation (COF)

of and response to the Cybersecurity Incident. We expect to accrue the costs for customer notification and credit monitoring in 2019. The expected incremental costs related to the incident will be separately reported as an adjusting item as it relates to our financial results. In addition to the adjusting item in 2019, we expect any incremental investments in cybersecurity to be funded within our current budget. We carry insurance to cover certain costs associated with a cyber risk event. This insurance is subject to a $10 million deductible and standard exclusions and carries a total coverage limit of $400 million. The timing of recognition of costs may differ from the timing of recognition of any insurance reimbursement. Insurance recoveries associated with the incident will also be treated as an adjusting item as it relates to our financial results.

The ultimate magnitude of any expenses or any other impact to our business or reputation may be significant and some of our expenses may not be covered by insurance. However, we do not believe that this incident will impact our strategy or long-term financial health. For more information, see “Note 14—Commitments, Contingencies, Guarantees and Others.”

SUMMARY OF SELECTED FINANCIAL DATA

The following table presents selected consolidated financial data and performance from our results of operations for the second quarter and first six months of 2019 and 2018 and selected comparative balance sheet data as of June 30, 2019 and December 31, 2018. We also provide selected key metrics we use in evaluating our performance, including certain metrics that are computed using non-GAAP measures. We believe these non-GAAP metrics provide useful insight to investors and users of our financial information as they provide an alternate measurement of our performance and assist in assessing our capital adequacy and level of return generated.

Table 1: Consolidated Financial Highlights

	Three Months Ended June 30,								Six Months Ended June 30,
(Dollars in millions, except per share data and as noted)	2019			2018			Change		2019			2018			Change
Income statement
Net interest income	$	5,746		$	5,551		4	%	$	11,537		$	11,269		2	%
Non-interest income	1,378			1,641			(16	)	2,670			2,832			(6	)
Total net revenue	7,124			7,192			(1	)	14,207			14,101			1
Provision for credit losses	1,342			1,276			5		3,035			2,950			3
Non-interest expense:
Marketing	546			425			28		1,063			839			27
Operating expense	3,233			2,999			8		6,387			6,158			4
Total non-interest expense	3,779			3,424			10		7,450			6,997			6
Income from continuing operations before income taxes	2,003			2,492			(20	)	3,722			4,154			(10	)
Income tax provision	387			575			(33	)	696			894			(22	)
Income from continuing operations, net of tax	1,616			1,917			(16	)	3,026			3,260			(7	)
Income (loss) from discontinued operations, net of tax	9			(11		)	**		11			(8		)	**
Net income	1,625			1,906			(15	)	3,037			3,252			(7	)
Dividends and undistributed earnings allocated to participating securities	(12		)	(12		)	—		(24		)	(23		)	4
Preferred stock dividends	(80		)	(80		)	—		(132		)	(132		)	—
Net income available to common stockholders	$	1,533		$	1,814		(15	)	$	2,881		$	3,097		(7	)
Common share statistics
Basic earnings per common share:
Net income from continuing operations	$	3.24		$	3.76		(14	)%	$	6.11		$	6.39		(4	)%
Income (loss) from discontinued operations	0.02			(0.02		)	**		0.02			(0.02		)	**
Net income per basic common share	$	3.26		$	3.74		(13	)	$	6.13		$	6.37		(4	)
Diluted earnings per common share:
Net income from continuing operations	$	3.22		$	3.73		(14	)%	$	6.08		$	6.35		(4	)%
Income (loss) from discontinued operations	0.02			(0.02		)	**		0.02			(0.02		)	**
Net income per diluted common share	$	3.24		$	3.71		(13	)	$	6.10		$	6.33		(4	)
Weighted-average common shares outstanding (in millions):
Basic	470.8			485.1			(3	)%	470.1			485.9			(3	)%

6 Capital One Financial Corporation (COF)

	Three Months Ended June 30,								Six Months Ended June 30,
(Dollars in millions, except per share data and as noted)	2019			2018			Change		2019			2018			Change
Diluted	473.0			488.3			(3	)%	472.3			489.6			(4	)%
Common shares outstanding (period-end, in millions)	470.3			478.4			(2	)	470.3			478.4			(2	)
Dividends declared and paid per common share	$	0.40		$	0.40		—		$	0.80		$	0.80		—
Tangible book value per common share (period-end)(1)	77.65			63.86			22		77.65			63.86			22
Balance sheet (average balances)
Loans held for investment	$	242,653		$	240,758		1	%	$	242,307		$	245,218		(1	)%
Interest-earning assets	338,026			333,495			1		337,913			331,850			2
Total assets	371,095			363,929			2		370,746			362,988			2
Interest-bearing deposits	230,452			223,079			3		229,020			221,384			3
Total deposits	253,634			248,790			2		252,528			247,040			2
Borrowings	49,982			52,333			(4	)	51,510			53,454			(4	)
Common equity	50,209			45,466			10		49,289			45,070			9
Total stockholders’ equity	54,570			49,827			10		53,650			49,431			9
Selected performance metrics
Purchase volume(2)	$	106,903		$	97,392		10	%	$	200,100		$	183,937		9	%
Total net revenue margin(3)	8.43		%	8.63		%	(20	)bps	8.41		%	8.50		%	(9	)bps
Net interest margin(4)	6.80			6.66			14		6.83			6.79			4
Return on average assets	1.74			2.11			(37	)	1.63			1.80			(17	)
Return on average tangible assets(5)	1.82			2.20			(38	)	1.70			1.87			(17	)
Return on average common equity(6)	12.14			16.06			(392	)	11.65			13.78			(213	)
Return on average tangible common equity (“TCE”)(7)	17.26			23.99			(673	)	16.70			20.70			(400	)
Equity-to-assets ratio(8)	14.71			13.69			102		14.47			13.62			85
Non-interest expense as a percentage of average loans held for investment	6.23			5.69			54		6.15			5.71			44
Efficiency ratio(9)	53.05			47.61			544		52.44			49.62			282
Operating efficiency ratio(10)	45.38			41.70			368		44.96			43.67			129
Effective income tax rate from continuing operations	19.3			23.1			(380	)	18.7			21.5			(280	)
Net charge-offs	$	1,508		$	1,459		3	%	$	3,107		$	3,077		1	%
Net charge-off rate(11)	2.48		%	2.42		%	6	bps	2.56		%	2.51		%	5	bps

(Dollars in millions, except as noted)	June 30, 2019			December 31, 2018			Change
Balance sheet (period-end)
Loans held for investment	$	244,460		$	245,899		(1	)%
Interest-earning assets	339,160			341,293			(1	)
Total assets	373,619			372,538			—
Interest-bearing deposits	231,161			226,281			2
Total deposits	254,535			249,764			2
Borrowings	49,233			58,905			(16	)
Common equity	51,406			47,307			9
Total stockholders’ equity	55,767			51,668			8
Credit quality metrics
Allowance for loan and lease losses	$	7,133		$	7,220		(1	)%
Allowance as a percentage of loans held for investment (“allowance coverage ratio”)	2.92		%	2.94		%	(2	)bps
30+ day performing delinquency rate	3.15			3.62			(47	)
30+ day delinquency rate	3.35			3.84			(49	)
Capital ratios
Common equity Tier 1 capital(12)	12.3		%	11.2		%	110	bps
Tier 1 capital(12)	13.8			12.7			110
Total capital(12)	16.2			15.1			110
Tier 1 leverage(12)	11.4			10.7			70
Tangible common equity(13)	10.2			9.1			110
Supplementary leverage(12)	9.7			9.0			70
Other
Employees (period end, in thousands)	50.7			47.6			7	%

7 Capital One Financial Corporation (COF)

__________

⁽¹⁾  Tangible book value per common share is a non-GAAP measure calculated based on tangible common equity divided by common shares outstanding. See “MD&A—Table A —Reconciliation of Non-GAAP Measures” for additional information on non-GAAP measures.

⁽²⁾  Purchase volume consists of purchase transactions, net of returns, for the period for loans both classified as held for investment and held for sale in our Credit Card business, and excludes cash advance and balance transfer transactions.

⁽³⁾  Total net revenue margin is calculated based on annualized total net revenue for the period divided by average interest-earning assets for the period.

⁽⁴⁾  Net interest margin is calculated based on annualized net interest income for the period divided by average interest-earning assets for the period.

⁽⁵⁾  Return on average tangible assets is a non-GAAP measure calculated based on annualized income from continuing operations, net of tax, for the period divided by average tangible assets for the period. See “MD&A—Table A—Reconciliation of Non-GAAP Measures” for additional information on non-GAAP measures.

⁽⁶⁾  Return on average common equity is calculated based on annualized (i) income from continuing operations, net of tax; (ii) less dividends and undistributed earnings allocated to participating securities; (iii) less preferred stock dividends, for the period, divided by average common equity. Our calculation of return on average common equity may not be comparable to similarly-titled measures reported by other companies.

⁽⁷⁾  Return on average tangible common equity is a non-GAAP measure calculated based on annualized (i) income from continuing operations, net of tax; (ii) less dividends and undistributed earnings allocated to participating securities; (iii) less preferred stock dividends, for the period, divided by average TCE. Our calculation of return on average TCE may not be comparable to similarly-titled measures reported by other companies. See “MD&A—Table A—Reconciliation of Non-GAAP Measures” for additional information on non-GAAP measures.

⁽⁸⁾  Equity-to-assets ratio is calculated based on average stockholders’ equity for the period divided by average total assets for the period.

⁽⁹⁾  Efficiency ratio is calculated based on non-interest expense for the period divided by total net revenue for the period.

⁽¹⁰⁾  Operating efficiency ratio is calculated based on operating expense for the period divided by total net revenue for the period.

⁽¹¹⁾  Net charge-off rate is calculated by dividing annualized net charge-offs by average loans held for investment for the period for each loan category.

⁽¹²⁾  Capital ratios are calculated based on the Basel III Standardized Approach framework, subject to applicable transition provision. See “MD&A—Capital Management” for additional information.

⁽¹³⁾  Tangible common equity ratio is a non-GAAP measure calculated based on TCE divided by tangible assets. See “MD&A—Table A—Reconciliation of Non-GAAP Measures” for the calculation of this measure and reconciliation to the comparative U.S. GAAP measure.

** Not meaningful.

8 Capital One Financial Corporation (COF)

EXECUTIVE SUMMARY AND BUSINESS OUTLOOK

Financial Highlights

We reported net income of $1.6 billion ($3.24 per diluted common share) on total net revenue of $7.1 billion and net income of $3.0 billion ($6.10 per diluted common share) on total net revenue of $14.2 billion for the second quarter and first six months of 2019, respectively. In comparison, we reported net income of $1.9 billion ($3.71 per diluted common share) on total net revenue of $7.2 billion and net income of $3.3 billion ($6.33 per diluted common share) on total net revenue of $14.1 billion for the second quarter and first six months of 2018, respectively.

Our common equity Tier 1 capital ratio as calculated under the Basel III Standardized Approach was 12.3% and 11.2% as of June 30, 2019 and December 31, 2018, respectively. See “MD&A—Capital Management” below for additional information.

On June 28, 2018, we announced that our Board of Directors authorized the repurchase of up to $1.2 billion of shares of our common stock (“2018 Stock Repurchase Program”) beginning in the third quarter of 2018 through the end of the second quarter of 2019. We completed the 2018 Stock Repurchase Program in the fourth quarter of 2018. Additionally, on June 27, 2019, we announced that our Board of Directors authorized the repurchase of up to $2.2 billion of shares of our common stock (“2019 Stock Repurchase Program”) beginning in the third quarter of 2019 through the end of the second quarter of 2020. See “MD&A—Capital Management—Dividend Policy and Stock Purchases” for additional information.

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

Below are additional highlights of our performance in the second quarter and first six months of 2019. These highlights are generally based on a comparison between the results of the second quarter and first six months of 2019 and 2018, except as otherwise noted. The changes in our financial condition and credit performance are generally based on our financial condition and credit performance as of June 30, 2019 compared to our financial condition and credit performance as of December 31, 2018. We provide a more detailed discussion of our financial performance in the sections following this “Executive Summary and Business Outlook.”

Total Company Performance

• Earnings: Our net income decreased by $281 million to $1.6 billion in the second quarter of 2019 and decreased by $215 million to $3.0 billion in the first six months of 2019 primarily driven by:

◦ lower non-interest income largely due to the absence of the net gain from the sale of our consumer home loan portfolio; and

◦ higher non-interest expense due to increased marketing expenses and higher operating expenses associated with continued investments in technology and infrastructure including Walmart partnership related expenses.

These drivers were partially offset by:

◦ higher net interest income primarily driven by higher yields on interest earning assets and growth in our loan and investment portfolios, partially offset by higher deposit rates paid and deposit growth; and

◦ higher net interchange fees, driven by higher purchase volume and the impact of updated rewards cost estimates.

• Loans Held for Investment:

◦ Period-end loans held for investment decreased by $1.4 billion to $244.5 billion as of June 30, 2019 from December 31, 2018 primarily driven by expected seasonal paydowns in our domestic credit card loan portfolio and sale of certain partnership receivables, partially offset by growth in our commercial, domestic credit card and auto loan portfolios.

◦ Average loans held for investment increased by $1.9 billion to $242.7 billion in the second quarter of 2019 compared to the second quarter of 2018 primarily driven by growth in our commercial, domestic credit card and auto loan portfolios, partially offset by the sale of our consumer home loan portfolio. These same factors drove average loans held for investment to decrease $2.9 billion to $242.3 billion in the first six months of 2019 compared to the first six

9 Capital One Financial Corporation (COF)

months of 2018 as the growth in our commercial, domestic credit card and auto loan portfolios being more than offset by the impact of the sale of our consumer home loan portfolio.

• Net Charge-Off and Delinquency Metrics: Our net charge-off rate increased by 6 basis points to 2.48% in the second quarter of 2019 compared to the second quarter of 2018 primarily driven by higher net charge-offs in our domestic credit card loan portfolio and the impact of lower loan balances from the sale of our consumer home loan portfolio, partially offset by lower net charge-offs in our auto loan portfolio.

Our net charge-off rate increased by 5 basis points to 2.56% in the first six months of 2019 compared to the first six months of 2018 primarily driven by the impact of lower loan balances from the sale of our consumer home loan portfolio, partially offset by growth in our commercial and auto loan portfolios.

Our 30+ day delinquency rate decreased by 49 basis points to 3.35% as of June 30, 2019 from December 31, 2018 primarily driven by seasonally lower delinquency inventories in our auto and domestic credit card loan portfolios.

• Allowance for Loan and Lease Losses: Our allowance for loan and lease losses decreased by $87 million to $7.1 billion and the allowance coverage ratio decreased by 2 basis points to 2.92% as of June 30, 2019 from December 31, 2018 primarily driven by an allowance release in our domestic credit card loan portfolio largely due to the strong economy, stable underlying credit performance and the impact of the sale of certain partnership receivables, partially offset by an allowance build in our commercial loan portfolio.

Business Outlook

We discuss below our current expectations regarding our total company performance and the performance of our business segments based on market conditions, the regulatory environment and our business strategies. The statements contained in this section are based on our current expectations regarding our outlook for our financial results and business strategies. Our expectations take into account, and should be read in conjunction with, our expectations regarding economic trends and analysis of our business as discussed in “Part I—Item 1. Business” and “Part II—Item 7. MD&A” in our 2018 Form 10-K. Certain statements are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those in our forward-looking statements. Except as otherwise disclosed, forward-looking statements do not reflect:

• any change in current dividend or repurchase strategies;

• the effect of any acquisitions, divestitures or similar transactions that have not been previously disclosed;

• any changes in laws, regulations or regulatory interpretations, in each case after the date as of which such statements are made; or

• the potential impact on our business, operations and reputation from, and expenses and uncertainties associated with, the Cybersecurity Incident, other than the incremental costs related to the incident we expect to incur in 2019 which will be separately reported as an adjusting item as it relates to the Company’s financial results.

See “MD&A—Forward-Looking Statements” in this Report for more information on the forward-looking statements and “Part I—Item 1A. Risk Factors” in our 2018 Form 10-K for factors that could materially influence our results.

Total Company Expectations

Net Interest Margin:

• We continue to expect deposit mix changes will have a negative impact on net interest margin during 2019.

Marketing and Efficiency:

• We expect marketing for full-year 2019 to be modestly higher than full-year 2018, with a more normal seasonal pattern than the exaggerated pattern in 2018.

• We expect to achieve modest improvements in full-year operating efficiency ratio, net of adjustments, in both 2019 and 2020, while we expect full-year operating efficiency ratio, net of adjustments, to improve to 42% in 2021.

10 Capital One Financial Corporation (COF)

• We expect this operating efficiency ratio improvement to drive significant improvement in our total efficiency ratio by 2021.

Business Segment Expectations

Consumer Banking:

• We expect that faster growth in higher-rate deposit products will continue to change our product mix.

• We continue to expect that the annual auto charge-off rate will increase gradually as the cycle plays out.

CONSOLIDATED RESULTS OF OPERATIONS

The section below provides a comparative discussion of our consolidated financial performance for the second quarter and first six months of 2019 and 2018. We provide a discussion of our business segment results in the following section, “MD&A—Business Segment Financial Performance.” You should read this section together with our “MD&A—Executive Summary and Business Outlook,” where we discuss trends and other factors that we expect will affect our future results of operations.

Net Interest Income

Net interest income represents the difference between the interest income, including certain fees, earned on our interest-earning assets and the interest expense paid on our interest-bearing liabilities. Interest-earning assets include loans, investment securities and other interest-earning assets, while our interest-bearing liabilities include interest-bearing deposits, securitized debt obligations, senior and subordinated notes, other borrowings and other interest-bearing liabilities. Generally, we include in interest income any past due fees on loans that we deem collectible. Our net interest margin, based on our consolidated results, represents the difference between the yield on our interest-earning assets and the cost of our interest-bearing liabilities, including the notional impact of non-interest-bearing funding. We expect net interest income and our net interest margin to fluctuate based on changes in interest rates and changes in the amount and composition of our interest-earning assets and interest-bearing liabilities.

11 Capital One Financial Corporation (COF)

Table 2 below presents, for each major category of our interest-earning assets and interest-bearing liabilities, the average outstanding balance, interest income earned, interest expense incurred and average yield for the second quarter and first six months of 2019 and 2018. Nonperforming loans are included in the average loan balances below.

Table 2: Average Balances, Net Interest Income and Net Interest Margin

	Three Months Ended June 30,
	2019								2018
(Dollars in millions)	Average Balance			Interest Income/ Expense			Average Yield/ Rate		Average Balance			Interest Income/ Expense			Average Yield/ Rate
Assets:
Interest-earning assets:
Loans:(1)
Credit card	$	110,800		$	4,339		15.66	%	$	107,893		$	4,062		15.06	%
Consumer banking	59,858			1,251			8.36		66,692			1,218			7.31
Commercial banking(2)	73,157			864			4.72		67,198			744			4.43
Other	16			(71		)	**		260			(35		)	(53.85	)
Total loans, including loans held for sale	243,831			6,383			10.47		242,043			5,989			9.90
Investment securities	82,383			629			3.05		79,829			539			2.70
Cash equivalents and other interest-earning assets	11,812			64			2.16		11,623			68			2.34
Total interest-earning assets	338,026			7,076			8.37		333,495			6,596			7.91
Cash and due from banks	4,180								3,596
Allowance for loan and lease losses	(7,308		)						(7,536		)
Premises and equipment, net	4,266								4,145
Other assets	31,931								30,229
Total assets	$	371,095							$	363,929
Liabilities and stockholders’ equity:
Interest-bearing liabilities:
Interest-bearing deposits	$	230,452		$	870		1.51	%	$	223,079		$	622		1.12	%
Securitized debt obligations	18,262			139			3.04		19,147			124			2.59
Senior and subordinated notes	30,630			310			4.05		32,250			289			3.58
Other borrowings and liabilities	2,322			11			1.91		4,132			10			0.97
Total interest-bearing liabilities	281,666			1,330			1.89		278,608			1,045			1.50
Non-interest-bearing deposits	23,182								25,711
Other liabilities	11,677								9,783
Total liabilities	316,525								314,102
Stockholders’ equity	54,570								49,827
Total liabilities and stockholders’ equity	$	371,095							$	363,929
Net interest income/spread				$	5,746		6.48					$	5,551		6.41
Impact of non-interest-bearing funding							0.32								0.25
Net interest margin							6.80	%							6.66	%

12 Capital One Financial Corporation (COF)

	Six Months Ended June 30,
	2019								2018
(Dollars in millions)	Average Balance			Interest Income/ Expense			Average Yield/ Rate		Average Balance			Interest Income/ Expense			Average Yield/ Rate
Assets:
Interest-earning assets:
Loans:(1)
Credit card	$	111,126		$	8,734		15.72	%	$	108,693		$	8,235		15.15	%
Consumer banking	59,464			2,454			8.25		70,875			2,504			7.07
Commercial banking(2)	72,762			1,697			4.67		66,590			1,427			4.29
Other	31			(134		)	**		293			(43		)	(29.35	)
Total loans, including loans held for sale	243,383			12,751			10.48		246,451			12,123			9.84
Investment securities	83,027			1,284			3.09		74,731			991			2.65
Cash equivalents and other interest-earning assets	11,503			133			2.31		10,668			119			2.23
Total interest-earning assets	337,913			14,168			8.39		331,850			13,233			7.98
Cash and due from banks	4,233								3,704
Allowance for loan and lease losses	(7,269		)						(7,520		)
Premises and equipment, net	4,273								4,142
Other assets	31,596								30,812
Total assets	$	370,746							$	362,988
Liabilities and stockholders’ equity:
Interest-bearing liabilities:
Interest-bearing deposits	$	229,020		$	1,687		1.47	%	$	221,384		$	1,161		1.05	%
Securitized debt obligations	18,503			282			3.05		19,421			231			2.38
Senior and subordinated notes	30,732			624			4.06		31,345			540			3.45
Other borrowings and liabilities	3,497			38			2.20		5,483			32			1.17
Total interest-bearing liabilities	281,752			2,631			1.87		277,633			1,964			1.41
Non-interest-bearing deposits	23,508								25,656
Other liabilities	11,836								10,268
Total liabilities	317,096								313,557
Stockholders’ equity	53,650								49,431
Total liabilities and stockholders’ equity	$	370,746							$	362,988
Net interest income/spread				$	11,537		6.52					$	11,269		6.57
Impact of non-interest-bearing funding							0.31								0.22
Net interest margin							6.83	%							6.79	%

__________

⁽¹⁾  Past due fees included in interest income totaled approximately $406 million and $801 million in the second quarter and first six months of 2019, respectively, and $387 million and $790 million in the second quarter and first six months of 2018, respectively.

⁽²⁾  Some of our commercial loans generate tax-exempt income. Accordingly, we present our Commercial Banking interest income and yields on a taxable- equivalent basis, calculated using the federal statutory rate of 21% and state taxes where applicable, with offsetting reductions to the Other category. Taxable-equivalent adjustments included in the interest income and yield computations for our commercial loans totaled approximately $20 million and $41 million in the second quarter and first six months of 2019, respectively, and $21 million and $41 million in the second quarter and first six months of 2018, respectively, with corresponding reductions to the Other category.

**    Not meaningful.

Net interest income increased by $195 million to $5.7 billion in the second quarter of 2019 compared to the second quarter of 2018, and increased by $268 million to $11.5 billion in the first six months of 2019 compared to the first six months of 2018, primarily driven by higher yields on interest earning assets and growth in our loan and investment portfolios, partially offset by higher deposit rates paid and deposit growth.

Net interest margin increased by 14 basis points to 6.80% in the second quarter of 2019 compared to the second quarter of 2018, and increased by 4 basis points to 6.83% in the first six months of 2019 compared to the first six months of 2018, primarily driven by changes in product mix and higher rates on interest-earnings assets, partially offset by higher rates on interest-bearing liabilities.

13 Capital One Financial Corporation (COF)

Table 3 displays the change in our net interest income between periods and the extent to which the variance is attributable to:

• changes in the volume of our interest-earning assets and interest-bearing liabilities; or

• changes in the interest rates related to these assets and liabilities.

Table 3: Rate/Volume Analysis of Net Interest Income⁽¹⁾

	Three Months Ended June 30,									Six Months Ended June 30,
	2019 vs. 2018									2019 vs. 2018
(Dollars in millions)	Total Variance			Volume			Rate			Total Variance			Volume			Rate
Interest income:
Loans:
Credit card	$	277		$	111		$	166		$	499		$	187		$	312
Consumer banking	33			(125		)	158			(50		)	(403		)	353
Commercial banking(2)	120			68			52			270			138			132
Other(2)	(36		)	(4		)	(32		)	(91		)	51			(142		)
Total loans, including loans held for sale	394			50			344			628			(27		)	655
Investment securities	90			18			72			293			117			176
Cash equivalents and other interest-earning assets	(4		)	1			(5		)	14			10			4
Total interest income	480			69			411			935			100			835
Interest expense:
Interest-bearing deposits	248			21			227			526			41			485
Securitized debt obligations	15			(6		)	21			51			(11		)	62
Senior and subordinated notes	21			(15		)	36			84			(10		)	94
Other borrowings and liabilities	1			(4		)	5			6			(12		)	18
Total interest expense	285			(4		)	289			667			8			659
Net interest income	$	195		$	73		$	122		$	268		$	92		$	176

__________

⁽¹⁾  We calculate the change in interest income and interest expense separately for each item. The portion of interest income or interest expense attributable to both volume and rate is allocated proportionately when the calculation results in a positive value. When the portion of interest income or interest expense attributable to both volume and rate results in a negative value, the total amount is allocated to volume or rate, depending on which amount is positive.

⁽²⁾  Some of our commercial loans generate tax-exempt income. Accordingly, we present our Commercial Banking interest income and yields on a taxable- equivalent basis, calculated using the federal statutory rate of 21% and state taxes where applicable, with offsetting reductions to the Other category.

14 Capital One Financial Corporation (COF)

Non-Interest Income

Table 4 displays the components of non-interest income for the second quarter and first six months of 2019 and 2018.

Table 4: Non-Interest Income

	Three Months Ended June 30,					Six Months Ended June 30,
(Dollars in millions)	2019		2018			2019		2018
Interchange fees, net	$	820	$	723		$	1,578	$	1,366
Service charges and other customer-related fees	352		391			705		823
Net securities gains (losses)	15		(1		)	39		7
Other non-interest income:(1)
Mortgage banking revenue	33		440			79		478
Treasury and other investment income	47		38			103		46
Other	111		50			166		112
Total other non-interest income	191		528			348		636
Total non-interest income	$	1,378	$	1,641		$	2,670	$	2,832

__________

⁽¹⁾  Includes gains on deferred compensation plan investments of $10 million and $38 million for the second quarter and first six months of 2019, respectively, and $6 million and $5 million for the second quarter and first six months of 2018, respectively. These amounts have corresponding offsets in salaries and associate benefits expense.

Non-interest income decreased by $263 million to $1.4 billion in the second quarter of 2019 compared to the second quarter of 2018 and decreased by $162 million to $2.7 billion in the first six months of 2019 compared to first six months of 2018 primarily due to the absence of the net gain from the sale of our consumer home loan portfolio and lower service charges and other customer-related fees, partially offset by an increase in net interchange fees, driven by higher purchase volume and the impact of updated rewards cost estimates, as well as a gain on the sale of certain partnership receivables.

Provision for Credit Losses

Our provision for credit losses in each period is driven by net charge-offs, changes to the allowance for loan and lease losses, and changes to the reserve for unfunded lending commitments. Our provision for credit losses increased by $66 million to $1.3 billion in the second quarter of 2019 compared to the second quarter of 2018 primarily driven by the absence of the impact from the sale of our consumer home loan portfolio. Provision for credit losses increased by $85 million to $3.0 billion in the first six months of 2019 compared to the first six months of 2018 primarily driven by allowance builds in our commercial loan portfolio.

The provision for credit losses as a percentage of net interest income was 23.4% and 26.3% in the second quarter and first six months of 2019, respectively, compared to 23.0% and 26.2% in the second quarter and first six months of 2018, respectively. We provide additional information on the provision for credit losses and changes in the allowance for loan and lease losses within “MD&A—Credit Risk Profile,” “Note 4—Loans” and “Note 5—Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments.” For information on the allowance methodology for each of our loan categories, see “Note 1—Summary of Significant Accounting Policies” in our 2018 Form 10-K.

15 Capital One Financial Corporation (COF)

Non-Interest Expense

Table 5 displays the components of non-interest expense for the second quarter and first six months of 2019 and 2018.

Table 5: Non-Interest Expense

	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in millions)	2019		2018		2019		2018
Salaries and associate benefits(1)	$	1,558	$	1,430	$	3,131	$	2,950
Occupancy and equipment	521		503		1,014		993
Marketing	546		425		1,063		839
Professional services	314		234		605		444
Communications and data processing	329		317		632		623
Amortization of intangibles	29		43		59		87
Other non-interest expense:
Bankcard, regulatory and other fee assessments	86		65		173		234
Collections	96		104		191		212
Fraud losses	97		89		200		186
Other	203		214		382		429
Total other non-interest expense	482		472		946		1,061
Total non-interest expense	$	3,779	$	3,424	$	7,450	$	6,997

__________

⁽¹⁾  Includes expenses related to our deferred compensation plan of $10 million and $38 million for the second quarter and first six months of 2019, respectively, and $6 million and $5 million for the second quarter and first six months of 2018, respectively. These amounts have corresponding offsets in non-interest income.

Non-interest expense increased by $355 million to $3.8 billion in the second quarter of 2019 compared to the second quarter of 2018 and increased by $453 million to $7.5 billion in the first six months of 2019 compared to the first six months of 2018, primarily due to increased marketing expenses and higher operating expenses associated with continued investments in technology and infrastructure including Walmart partnership related expenses.

Income Taxes

We recorded income tax provisions of $387 million (19.3% effective income tax rate) and $696 million (18.7% effective income tax rate) in the second quarter and first six months of 2019, respectively, compared to $575 million (23.1% effective income tax rate) and $894 million (21.5% effective income tax rate) in the second quarter and first six months of 2018, respectively. Our effective tax rate on income from continuing operations varies between periods due, in part, to fluctuations in our pre-tax earnings, which affects the relative tax benefit of tax-exempt income, tax credits and other permanent tax items.

The decrease in our income tax provision and effective income tax rate in the second quarter and first six months of 2019 compared to the second quarter and first six months of 2018 was primarily due to higher tax credits and lower non-deductible expenses relative to our income, and lower discrete tax expense.

We provide additional information on items affecting our income taxes and effective tax rate in “Note 16—Income Taxes” in our 2018 Form 10-K.

16 Capital One Financial Corporation (COF)

CONSOLIDATED BALANCE SHEETS ANALYSIS

Total assets increased by $1.1 billion to $373.6 billion as of June 30, 2019 from December 31, 2018 driven by an increase in cash and cash equivalents and growth in commercial, domestic credit card and auto loan portfolios, largely offset by a decrease in our domestic credit card loan portfolio due to the expected seasonal paydowns as well as sale of certain partnership receivables.

Total liabilities decreased by $3.0 billion to $317.9 billion as of June 30, 2019 from December 31, 2018 primarily driven by maturities of our short-term Federal Home Loan Banks (“FHLB”) advances, partially offset by deposit growth.

Stockholders’ equity increased by $4.1 billion to $55.8 billion as of June 30, 2019 from December 31, 2018 primarily due to our net income of $3.0 billion and $1.4 billion of other comprehensive income in the first six months of 2019, partially offset by dividend payments to our stockholders.

The following is a discussion of material changes in the major components of our assets and liabilities during the first six months of 2019. Period-end balance sheet amounts may vary from average balance sheet amounts due to liquidity and balance sheet management activities that are intended to support the adequacy of capital while managing our liquidity requirements, our customers and our market risk exposure in accordance with our risk appetite.

Investment Securities

Our investment securities portfolio consists primarily of the following: U.S. Treasury securities; U.S. government-sponsored enterprise or agency (“Agency”) and non-agency residential mortgage-backed securities (“RMBS”); Agency commercial mortgage-backed securities (“CMBS”); and other securities. Agency securities include Government National Mortgage Association (“Ginnie Mae”) guaranteed securities, and Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”) issued securities. The U.S. Treasury and Agency securities generally have high credit ratings and low credit risks, and our investments in U.S. Treasury and Agency securities represented 96% of our total investment securities portfolio, as of both June 30, 2019 and December 31, 2018.

The fair value of our available for sale securities portfolio decreased by $492 million to $45.7 billion as of June 30, 2019 from December 31, 2018 primarily driven by sales and maturities outpacing purchases, partially offset by the fair value gains as a result of changes in interest rates. The fair value of our held to maturity securities portfolio remained substantially flat at $36.5 billion as of June 30, 2019 from December 31, 2018 as fair value gains were largely offset by the decline from maturities.

17 Capital One Financial Corporation (COF)

Table 6 presents the amortized cost, carrying value and fair value for the major categories of our investment securities portfolio as of June 30, 2019 and December 31, 2018.

Table 6: Investment Securities

	June 30, 2019				December 31, 2018
(Dollars in millions)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Investment securities available for sale:
U.S. Treasury securities	$	4,226	$	4,219	$	6,146	$	6,144
RMBS:
Agency	33,183		33,032		32,710		31,903
Non-agency	1,362		1,675		1,440		1,742
Total RMBS	34,545		34,707		34,150		33,645
Agency CMBS	5,380		5,389		4,806		4,739
Other securities(1)	1,343		1,343		1,626		1,622
Total investment securities available for sale	$	45,494	$	45,658	$	46,728	$	46,150
(Dollars in millions)	Carrying Value		Fair Value		Carrying Value		Fair Value
Investment securities held to maturity:
Agency RMBS	$	31,635	$	32,582	$	33,061	$	32,977
Agency CMBS	3,840		3,959		3,710		3,642
Total investment securities held to maturity	$	35,475	$	36,541	$	36,771	$	36,619

__________

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

Loans Held for Investment

Total loans held for investment consist of both unsecuritized loans and loans held in our consolidated trusts. Table 7 summarizes the carrying value of our loans held for investment by portfolio segment, the allowance for loan and lease losses, and net loan balance as of June 30, 2019 and December 31, 2018.

Table 7: Loans Held for Investment

	June 30, 2019						December 31, 2018
(Dollars in millions)	Loans		Allowance		Net Loans		Loans		Allowance		Net Loans
Credit Card	$	112,141	$	5,342	$	106,799	$	116,361	$	5,535	$	110,826
Consumer Banking	60,327		1,055		59,272		59,205		1,048		58,157
Commercial Banking	71,992		736		71,256		70,333		637		69,696
Total	$	244,460	$	7,133	$	237,327	$	245,899	$	7,220	$	238,679

Loans held for investment decreased by $1.4 billion to $244.5 billion as of June 30, 2019 from December 31, 2018 primarily driven by expected seasonal paydowns in our domestic credit card loan portfolio and sale of certain partnership receivables, partially offset by growth in our commercial, domestic credit card and auto loan portfolios.

We provide additional information on the composition of our loan portfolio and credit quality below in “MD&A—Credit Risk Profile,” “MD&A—Consolidated Results of Operations” and “Note 4—Loans.”

18 Capital One Financial Corporation (COF)

Funding Sources

Our primary source of funding comes from deposits, as they are a stable and relatively low cost source of funding. In addition to deposits, we also raise funding through the issuance of securitized debt obligations and other debt. Other debt primarily consists of senior and subordinated notes, FHLB advances secured by certain portions of our loan and securities portfolios, and federal funds purchased and securities loaned or sold under agreements to repurchase.

Table 8 provides the composition of our primary sources of funding as of June 30, 2019 and December 31, 2018.

Table 8: Funding Sources Composition

	June 30, 2019				December 31, 2018
(Dollars in millions)	Amount		% of Total		Amount		% of Total
Deposits:
Consumer Banking	$	205,220	68	%	$	198,607	64	%
Commercial Banking	30,761		10		29,480		10
Other(1)	18,554		6		21,677		7
Total deposits	254,535		84		249,764		81
Securitized debt obligations	16,959		6		18,307		6
Other debt	32,274		10		40,598		13
Total funding sources	$	303,768	100	%	$	308,669	100	%

__________

⁽¹⁾  Includes brokered deposits of $17.8 billion and $21.2 billion as of June 30, 2019 and December 31, 2018, respectively.

Total deposits increased by $4.8 billion to $254.5 billion as of June 30, 2019 from December 31, 2018 primarily driven by strong growth in our deposit products as a result of our national banking strategy in our Consumer Banking business.

Securitized debt obligations decreased by $1.3 billion to $17.0 billion as of June 30, 2019 from December 31, 2018 as debt maturities outpaced issuances in the first six months of 2019.

Other debt decreased by $8.3 billion to $32.3 billion as of June 30, 2019 from December 31, 2018 primarily driven by maturities of our short-term FHLB advances.

We provide additional information on our funding sources in “MD&A—Liquidity Risk Profile” and in “Note 8—Deposits and Borrowings.”

OFF-BALANCE SHEET ARRANGEMENTS

In the ordinary course of business, we engage in certain activities that are not reflected on our consolidated balance sheets, generally referred to as off-balance sheet arrangements. These activities typically involve transactions with unconsolidated variable interest entities (“VIEs”) as well as other arrangements, such as letters of credit, loan commitments and guarantees, to meet the financing needs of our customers and support their ongoing operations. We provide additional information regarding these types of activities in “Note 6—Variable Interest Entities and Securitizations” and “Note 14—Commitments, Contingencies, Guarantees and Others.”

BUSINESS SEGMENT FINANCIAL PERFORMANCE

Our principal operations are organized for management reporting purposes into three major business segments, which are defined primarily based on the products and services provided or the types of customer served: Credit Card, Consumer Banking and Commercial Banking. The operations of acquired businesses have been integrated into our existing business segments. Certain activities that are not part of a segment, such as management of our corporate investment portfolio and asset/liability management by our centralized Corporate Treasury group and residual tax expense or benefit to arrive at the consolidated effective tax rate that is not assessed to our primary business segments, are included in the Other category.

19 Capital One Financial Corporation (COF)

The results of our individual businesses, which we report on a continuing operations basis, reflect the manner in which management evaluates performance and makes decisions about funding our operations and allocating resources. We provide additional information on the allocation methodologies used to derive our business segment results in “Note 18—Business Segments and Revenue from Contracts with Customers” in our 2018 Form 10-K.

We refer to the business segment results derived from our internal management accounting and reporting process as our “managed” presentation, which differs in some cases from our reported results prepared based on U.S. GAAP. There is no comprehensive authoritative body of guidance for management accounting equivalent to U.S. GAAP; therefore, the managed presentation of our business segment results may not be comparable to similar information provided by other financial services companies. In addition, our individual business segment results should not be used as a substitute for comparable results determined in accordance with U.S. GAAP.

We summarize our business segment results for the second quarter and first six months of 2019 and 2018 and provide a comparative discussion of these results, as well as changes in our financial condition and credit performance metrics as of June 30, 2019 compared to December 31, 2018. We provide a reconciliation of our total business segment results to our reported consolidated results in “Note 13—Business Segments and Revenue from Contracts with Customers.”

Business Segment Financial Performance

Table 9 summarizes our business segment results, which we report based on revenue and income from continuing operations, for the second quarter and first six months of 2019 and 2018.

Table 9: Business Segment Results

	Three Months Ended June 30,
	2019										2018
	Total Net Revenue(1)					Net Income (Loss)(2)					Total Net Revenue(1)				Net Income (Loss)(2)
(Dollars in millions)	Amount			% of Total		Amount			% of Total		Amount		% of Total		Amount		% of Total
Credit Card	$	4,569		64	%	$	938		58	%	$	4,280	59	%	$	923	48	%
Consumer Banking	1,875			26		543			33		1,784		25		539		28
Commercial Banking(3)(4)	714			10		157			10		726		10		217		11
Other(3)(4)	(34		)	—		(22		)	(1	)	402		6		238		13
Total	$	7,124		100	%	$	1,616		100	%	$	7,192	100	%	$	1,917	100	%

	Six Months Ended June 30,
	2019									2018
	Total Net Revenue(1)					Net Income (Loss)(2)				Total Net Revenue(1)				Net Income (Loss)(2)
(Dollars in millions)	Amount			% of Total		Amount		% of Total		Amount		% of Total		Amount		% of Total
Credit Card	$	9,109		64	%	$	1,689	56	%	$	8,695	62	%	$	1,630	50	%
Consumer Banking	3,714			26		1,011		33		3,573		25		965		30
Commercial Banking(3)(4)	1,390			10		303		10		1,419		10		450		14
Other(3)(4)	(6		)	—		23		1		414		3		215		6
Total	$	14,207		100	%	$	3,026	100	%	$	14,101	100	%	$	3,260	100	%

20 Capital One Financial Corporation (COF)

__________

⁽¹⁾  Total net revenue consists of net interest income and non-interest income.

⁽²⁾  Net income (loss) for our business segments and the Other category is based on income from continuing operations, net of tax.

⁽³⁾  Some of our commercial investments generate tax-exempt income, tax credits or other tax benefits. Accordingly, we present our Commercial Banking revenue and yields on a taxable-equivalent basis, calculated using the federal statutory tax rate of 21% and state taxes where applicable, with offsetting reductions to the Other category.  

⁽⁴⁾  In the first quarter of 2019, we made a change in how revenue is measured in our Commercial Banking business by revising the allocation of tax benefits on certain tax-advantaged investments. As such, prior period results have been recast to conform with the current period presentation. The result of this measurement change reduced the previously reported total net revenue in our Commercial Banking business by $32 million and $62 million for the second quarter and first six months of 2018, with an offsetting increase in the Other category.

Credit Card Business

The primary sources of revenue for our Credit Card business are net interest income, net interchange income and fees collected from customers. Expenses primarily consist of the provision for credit losses, operating costs and marketing expenses.

Our Credit Card business generated net income from continuing operations of $938 million and $1.7 billion in the second quarter and first six months of 2019, respectively, and $923 million and $1.6 billion in the second quarter and first six months of 2018, respectively.

Table 10 summarizes the financial results of our Credit Card business and displays selected key metrics for the periods indicated.

Table 10: Credit Card Business Results

	Three Months Ended June 30,								Six Months Ended June 30,
(Dollars in millions, except as noted)	2019			2018			Change		2019			2018			Change
Selected income statement data:
Net interest income	$	3,531		$	3,396		4	%	$	7,121		$	6,954		2	%
Non-interest income	1,038			884			17		1,988			1,741			14
Total net revenue(1)	4,569			4,280			7		9,109			8,695			5
Provision for credit losses	1,095			1,171			(6	)	2,484			2,627			(5	)
Non-interest expense	2,253			1,904			18		4,424			3,943			12
Income from continuing operations before income taxes	1,221			1,205			1		2,201			2,125			4
Income tax provision	283			282			—		512			495			3
Income from continuing operations, net of tax	$	938		$	923		2		$	1,689		$	1,630		4
Selected performance metrics:
Average loans held for investment(2)	$	110,798		$	107,893		3		$	111,125		$	108,693		2
Average yield on loans held for investment(3)	15.66		%	15.06		%	60	bps	15.72		%	15.15		%	57	bps
Total net revenue margin(4)	16.50			15.87			63		16.39			16.00			39
Net charge-offs	$	1,320		$	1,260		5	%	$	2,684		$	2,637		2	%
Net charge-off rate	4.76		%	4.67		%	9	bps	4.83		%	4.85		%	(2	)bps
Purchase volume(5)	$	106,903		$	97,392		10	%	$	200,100		$	183,937		9	%
(Dollars in millions, except as noted)	June 30, 2019			December 31, 2018			Change
Selected period-end data:
Loans held for investment(2)	$	112,141		$	116,361		(4	)%
30+ day performing delinquency rate	3.40		%	4.00		%	(60	)bps
30+ day delinquency rate	3.42			4.01			(59	)
Nonperforming loan rate(6)	0.02			0.02			—
Allowance for loan and lease losses	$	5,342		$	5,535		(3	)%
Allowance coverage ratio	4.76		%	4.76		%	—

__________

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

21 Capital One Financial Corporation (COF)

revenue and is not included in our net charge-offs. Total net revenue was reduced by $318 million and $694 million in the second quarter and first six months of 2019, respectively, and by $309 million and $644 million in the second quarter and first six months of 2018, respectively, for the estimated uncollectible amount of billed finance charges and fees and related losses. The finance charge and fee reserve totaled $426 million and $468 million as of June 30, 2019 and December 31, 2018, respectively.

⁽²⁾  Period-end loans held for investment and average loans held for investment include billed finance charges and fees, net of the estimated uncollectible amount.

⁽³⁾  Average yield on loans held for investment is calculated by dividing annualized interest income for the period by average loans held for investment during the period. Interest income excludes various allocations including funds transfer pricing that assigns certain balance sheet assets, deposits and other liabilities and their related revenue and expenses attributable to each business segment.

⁽⁴⁾  Total net revenue margin is calculated by dividing annualized total net revenue for the period by average loans held for investment during the period. Interest income also includes interest income on loans held for sale.

⁽⁵⁾  Purchase volume consists of purchase transactions, net of returns, for the period, and excludes cash advance and balance transfer transactions.

⁽⁶⁾  Within our credit card loan portfolio, only certain loans in our international card businesses are classified as nonperforming. See “MD&A—Nonperforming Loans and Other Nonperforming Assets” for additional information.

Key factors affecting the results of our Credit Card business for the second quarter and first six months of 2019 compared to the second quarter and first six months of 2018, and changes in financial condition and credit performance between June 30, 2019 and December 31, 2018 include the following:

• Net Interest Income: Net interest income increased by $135 million to $3.5 billion in the second quarter of 2019 and increased by $167 million to $7.1 billion in the first six months of 2019 primarily driven by growth in our domestic credit card loan portfolio.

• Non-Interest Income: Non-interest income increased by $154 million to $1.0 billion in the second quarter of 2019 and increased by $247 million to $2.0 billion in the first six months of 2019 primarily due to an increase in net interchange fees, driven by higher purchase volume and the impact of updated rewards cost estimates, as well as a gain on the sale of certain partnership receivables.

• Provision for Credit Losses: The provision for credit losses decreased by $76 million to $1.1 billion in the second quarter of 2019 and decreased by $143 million to $2.5 billion in the first six months of 2019 primarily driven by an allowance release in our domestic card loan portfolio due to the strong economy, stable underlying credit performance and the impact of the sale of certain partnership receivables.

• Non-Interest Expense: Non-interest expense increased by $349 million to $2.3 billion in the second quarter of 2019 and increased by $481 million to $4.4 billion in the first six months of 2019 primarily driven by increased marketing expenses and higher operating expenses including Walmart partnership and related expenses.

• Loans Held for Investment:

◦ Period-end loans held for investment decreased by $4.2 billion to $112.1 billion as of June 30, 2019 from December 31, 2018 primarily due to expected seasonal paydowns and the sale of certain partnership receivables, partially offset by growth in our domestic credit card loan portfolio.

◦ Average loans held for investment increased by $2.9 billion to $110.8 billion in the second quarter of 2019 compared to the second quarter of 2018 and increased by $2.4 billion to $111.1 billion in the first six months of 2019 compared to the first six months of 2018 primarily due to growth in our domestic credit card loan portfolio.

• Net Charge-Off and Delinquency Metrics: The net charge-off rate increased by 9 basis points to 4.76% in the second quarter of 2019 compared to the second quarter of 2018 primarily driven by higher net charge-offs in our domestic credit card loan portfolio. The net charge-off rate decreased by 2 basis points to 4.83% in the first six months of 2019 compared to the first six months of 2018 primarily driven by favorability realized from portfolio seasoning.

The 30+ day delinquency rate decreased by 59 basis points to 3.42% as of June 30, 2019 from December 31, 2018 primarily due to seasonally lower delinquency inventories in our domestic credit card loan portfolio.

Domestic Card Business

The Domestic Card business generated net income from continuing operations of $869 million and $1.6 billion in the second quarter and first six months of 2019, respectively, compared to net income from continuing operations of $881 million and $1.5 billion in the second quarter and first six months of 2018, respectively. In the second quarter and first six months of 2019 and 2018, Domestic Card business accounted for greater than 90% of total net revenue of our Credit Card business.

22 Capital One Financial Corporation (COF)

Table 10.1 summarizes the financial results for Domestic Card business and displays selected key metrics for the periods indicated.

Table 10.1: Domestic Card Business Results

	Three Months Ended June 30,								Six Months Ended June 30,
(Dollars in millions, except as noted)	2019			2018			Change		2019			2018			Change
Selected income statement data:
Net interest income	$	3,220		$	3,108		4	%	$	6,493		$	6,337		2	%
Non-interest income	971			818			19		1,844			1,592			16
Total net revenue(1)	4,191			3,926			7		8,337			7,929			5
Provision for credit losses	1,024			1,094			(6	)	2,315			2,474			(6	)
Non-interest expense	2,034			1,683			21		3,983			3,515			13
Income from continuing operations before income taxes	1,133			1,149			(1	)	2,039			1,940			5
Income tax provision	264			268			(1	)	475			452			5
Income from continuing operations, net of tax	$	869		$	881		(1	)	$	1,564		$	1,488		5
Selected performance metrics:
Average loans held for investment(2)	$	101,930		$	98,895		3		$	102,296		$	99,668		3
Average yield on loans held for investment(3)	15.60		%	15.05		%	55	bps	15.65		%	15.07		%	58	bps
Total net revenue margin(4)	16.45			15.88			57		16.30			15.91			39
Net charge-offs	$	1,240		$	1,166		6	%	$	2,534		$	2,487		2	%
Net charge-off rate	4.86		%	4.72		%	14	bps	4.95		%	4.99		%	(4	)bps
Purchase volume(5)	$	98,052		$	88,941		10	%	$	183,790		$	168,135		9	%
(Dollars in millions, except as noted)	June 30, 2019			December 31, 2018			Change
Selected period-end data:
Loans held for investment(2)	$	102,959		$	107,350		(4	)%
30+ day delinquency rate	3.40		%	4.04		%	(64	)bps
Allowance for loan and lease losses	$	4,925		$	5,144		(4	)
Allowance coverage ratio	4.78		%	4.79		%	(1	)bps

__________

⁽¹⁾  We recognize billed finance charges and fee income on open-ended loans in accordance with the contractual provisions of the credit arrangements and estimate the uncollectible amount on a quarterly basis. The estimated uncollectible amount of billed finance charges and fees is reflected as a reduction in revenue and is not included in our net charge-offs.

⁽²⁾  Period-end loans held for investment and average loans held for investment include billed finance charges and fees, net of the estimated uncollectible amount.

⁽³⁾  Average yield on loans held for investment is calculated by dividing annualized interest income for the period by average loans held for investment during the period. Interest income excludes various allocations including funds transfer pricing that assigns certain balance sheet assets, deposits and other liabilities and their related revenue and expenses attributable to each business segment.

⁽⁴⁾  Total net revenue margin is calculated by dividing annualized total net revenue for the period by average loans held for investment during the period.

⁽⁵⁾  Purchase volume consists of purchase transactions, net of returns, for the period, and excludes cash advance and balance transfer transactions.

Because our Domestic Card business accounts for the substantial majority of our Credit Card business, the key factors driving the results are similar to the key factors affecting our total Credit Card business. Net income for our Domestic Card business remained substantially flat in the second quarter of 2019 compared to the second quarter of 2018 and increased in the first six months of 2019 compared to the first six months of 2018 primarily driven by:

• higher non-interest income due to an increase in net interchange fees, driven by higher purchase volume and the impact of updated rewards cost estimates, as well as a gain on the sale of certain partnership receivables;

• lower provision for credit losses due to the strong economy, stable underlying credit performance and the impact of the sale of certain partnership receivables; and

• higher net interest income due to portfolio growth.

23 Capital One Financial Corporation (COF)

These drivers were largely offset by increased marketing expenses and higher operating expenses including Walmart partnership and related expenses.

Consumer Banking Business

The primary sources of revenue for our Consumer Banking business are net interest income from loans and deposits, net interchange income and non-interest income from service charges and customer-related fees. Expenses primarily consist of the provision for credit losses, operating costs and marketing expenses.

Our Consumer Banking business generated net income from continuing operations of $543 million and $1.0 billion in the second quarter and first six months of 2019, respectively, and $539 million and $965 million in the second quarter and first six months of 2018, respectively.

24 Capital One Financial Corporation (COF)

Table 11 summarizes the financial results of our Consumer Banking business and displays selected key metrics for the periods indicated.

Table 11: Consumer Banking Business Results

	Three Months Ended June 30,								Six Months Ended June 30,
(Dollars in millions, except as noted)	2019			2018			Change		2019			2018			Change
Selected income statement data:
Net interest income	$	1,709		$	1,609		6	%	$	3,388		$	3,224		5	%
Non-interest income	166			175			(5	)	326			349			(7	)
Total net revenue	1,875			1,784			5		3,714			3,573			4
Provision for credit losses	165			118			40		400			351			14
Non-interest expense	1,002			963			4		1,996			1,963			2
Income from continuing operations before income taxes	708			703			1		1,318			1,259			5
Income tax provision	165			164			1		307			294			4
Income from continuing operations, net of tax	$	543		$	539		1		$	1,011		$	965		5
Selected performance metrics:
Average loans held for investment:
Auto	$	57,070		$	55,298		3		$	56,654		$	54,824		3
Home loan(1)	—			8,098			**		—			12,635			**
Retail banking	2,788			3,084			(10	)	2,809			3,256			(14	)
Total consumer banking	$	59,858		$	66,480		(10	)	$	59,463		$	70,715		(16	)
Average yield on loans held for investment(2)	8.36		%	7.32		%	104	bps	8.25		%	7.08		%	117	bps
Average deposits	$	204,164		$	193,278		6	%	$	202,627		$	190,547		6	%
Average deposits interest rate	1.26		%	0.88		%	38	bps	1.22		%	0.84		%	38	bps
Net charge-offs	$	172		$	198		(13	)%	$	393		$	421		(7	)%
Net charge-off rate	1.15		%	1.19		%	(4	)bps	1.32		%	1.19		%	13	bps
Auto loan originations	$	7,327		$	6,994		5	%	$	13,549		$	13,701		(1	)%
(Dollars in millions, except as noted)	June 30, 2019			December 31, 2018			Change
Selected period-end data:
Loans held for investment:
Auto	$	57,556		$	56,341		2	%
Retail banking	2,771			2,864			(3	)
Total consumer banking	$	60,327		$	59,205		2
30+ day performing delinquency rate	5.87		%	6.67		%	(80	)bps
30+ day delinquency rate	6.41			7.36			(95	)
Nonperforming loan rate	0.66			0.81			(15	)
Nonperforming asset rate(3)	0.75			0.90			(15	)
Allowance for loan and lease losses	$	1,055		$	1,048		1	%
Allowance coverage ratio	1.75		%	1.77		%	(2	)bps
Deposits	$	205,220		$	198,607		3	%

__________

⁽¹⁾  In 2018, we sold all of our consumer home loan portfolio and the related servicing. The impact of this sale is reflected in the Other category.

⁽²⁾  Average yield on loans held for investment is calculated by dividing annualized interest income for the period by average loans held for investment during the period. Interest income excludes various allocations including funds transfer pricing that assigns certain balance sheet assets, deposits and other liabilities and their related revenue and expenses attributable to each business segment.

⁽³⁾  Nonperforming assets primarily consist of nonperforming loans and repossessed assets. The total nonperforming asset rate is calculated based on total nonperforming assets divided by the combined period-end total loans held for investment and repossessed assets.

** Not meaningful.

25 Capital One Financial Corporation (COF)

Key factors affecting the results of our Consumer Banking business for the second quarter and first six months of 2019 compared to the second quarter and first six months of 2018, and changes in financial condition and credit performance between June 30, 2019 and December 31, 2018 include the following:

• Net Interest Income: Net interest income increased by $100 million to $1.7 billion in the second quarter of 2019 and increased by $164 million to $3.4 billion in the first six months of 2019 primarily driven by higher deposit volumes and margins in our Retail Banking business as well as growth in our auto loan portfolio, partially offset by the reduction in net interest income from the sale of our consumer home loan portfolio.

Consumer Banking loan yield increased by 104 basis points to 8.36% and increased by 117 basis points to 8.25% in the second quarter and first six months of 2019, respectively, compared to the second quarter and first six months of 2018. The increase was primarily driven by changes in product mix due to the sale of our consumer home loan portfolio and higher yields as a result of higher interest rates.

• Non-Interest Income: Non-interest income was substantially flat at $166 million in the second quarter of 2019 and decreased by $23 million to $326 million in the first six months of 2019 primarily driven by the impact of the sale of our online retail brokerage business in the fourth quarter of 2018.

• Provision for Credit Losses: The provision for credit losses increased by $47 million to $165 million in the second quarter of 2019 and increased by $49 million to $400 million in the first six months of 2019 primarily driven by the allowance release in 2018 largely due to improvements in credit trends in our auto loan portfolio.

• Non-Interest Expense: Non-interest expense increased by $39 million to $1.0 billion in the second quarter of 2019 and increased by $33 million to $2.0 billion in the first six months of 2019 primarily driven by higher operating expenses due to growth in our auto loan portfolio and increased marketing expense associated with our national banking strategy, partially offset by lower operating expense due to the sale of our consumer home loan portfolio.

• Loans Held for Investment: Period-end loans held for investment increased by $1.1 billion to $60.3 billion as of June 30, 2019 compared to December 31, 2018 due to growth in our auto loan portfolio. Average loans held for investment decreased by $6.6 billion to $59.9 billion in the second quarter of 2019 compared to the second quarter of 2018 and decreased by $11.3 billion to $59.5 billion in the first six months of 2019 compared to the first six months of 2018 primarily driven by the sale of our consumer home loan portfolio, partially offset by growth in our auto loan portfolio.

• Deposits: Period-end deposits increased by $6.6 billion to $205.2 billion as of June 30, 2019 from December 31, 2018 driven by strong growth in our deposit products as a result of our national banking strategy.

• Net Charge-Off and Delinquency Metrics: The net charge-off rate decreased by 4 basis points to 1.15% in the second quarter of 2019 compared to the second quarter of 2018 primarily driven by lower net charge-offs in our auto loan portfolio, partially offset by the lower loan balances due to the sale of our consumer home loan portfolio.

The net charge-off rate increased by 13 basis points to 1.32% in the first six months of 2019 compared to the first six months of 2018 primarily driven by lower loan balances due to the sale of our consumer home loan portfolio, partially offset by lower net charge-offs in our auto loan portfolio.

The 30+ day delinquency rate decreased by 95 basis points to 6.41% as of June 30, 2019 from December 31, 2018 primarily attributable to seasonally lower auto delinquency inventories.

Commercial Banking Business

The primary sources of revenue for our Commercial Banking business are net interest income from loans and deposits and non-interest income from customer fees and other products and services. Because our Commercial Banking business has loans and investments that generate tax-exempt income, tax credits or other tax benefits, we present the revenues on a taxable-equivalent basis. Expenses primarily consist of the provision for credit losses, operating costs and marketing expenses.

Our Commercial Banking business generated net income from continuing operations of $157 million and $303 million in the second quarter and first six months of 2019, respectively, and $217 million and $450 million in the the second quarter and first six months of 2018, respectively.

26 Capital One Financial Corporation (COF)

Table 12 summarizes the financial results of our Commercial Banking business and displays selected key metrics for the periods indicated.

Table 12: Commercial Banking Business Results

	Three Months Ended June 30,								Six Months Ended June 30,
(Dollars in millions, except as noted)	2019			2018			Change		2019			2018			Change
Selected income statement data:
Net interest income	$	514		$	517		(1	)%	$	1,003		$	1,023		(2	)%
Non-interest income	200			209			(4	)	387			396			(2	)
Total net revenue (1)(2)	714			726			(2	)	1,390			1,419			(2	)
Provision for credit losses(3)	82			34			141		151			20			**
Non-interest expense	427			409			4		844			812			4
Income from continuing operations before income taxes	205			283			(28	)	395			587			(33	)
Income tax provision	48			66			(27	)	92			137			(33	)
Income from continuing operations, net of tax	$	157		$	217		(28	)	$	303		$	450		(33	)
Selected performance metrics:
Average loans held for investment:
Commercial and multifamily real estate	$	29,514		$	27,302		8		$	29,276		$	26,924		9
Commercial and industrial	42,476			38,686			10		42,304			38,467			10
Total commercial lending	71,990			65,988			9		71,580			65,391			9
Small-ticket commercial real estate	7			376			(98	)	139			385			(64	)
Total commercial banking	$	71,997		$	66,364		8		$	71,719		$	65,776		9
Average yield on loans held for investment(1)(4)	4.75		%	4.43		%	32	bps	4.68		%	4.30		%	38	bps
Average deposits	$	31,364		$	32,951		(5	)%	$	31,092		$	33,501		(7	)%
Average deposits interest rate	1.28		%	0.65		%	63	bps	1.19		%	0.59		%	60	bps
Net charge-offs (recovery)	$	16		$	(7	)	**		$	30		$	12		150	%
Net charge-off (recovery) rate	0.09		%	(0.04		)%	13	bps	0.08		%	0.04		%	4	bps
(Dollars in millions, except as noted)	June 30, 2019			December 31, 2018			Change
Selected period-end data:
Loans held for investment:
Commercial and multifamily real estate	$	29,861		$	28,899		3	%
Commercial and industrial	42,125			41,091			3
Total commercial lending	71,986			69,990			3
Small-ticket commercial real estate	6			343			(98	)
Total commercial banking	$	71,992		$	70,333		2
Nonperforming loan rate	0.50		%	0.44		%	6	bps
Nonperforming asset rate(5)	0.50			0.45			5
Allowance for loan and lease losses(3)	$	736		$	637		16	%
Allowance coverage ratio	1.02		%	0.91		%	11	bps
Deposits	$	30,761		$	29,480		4	%
Loans serviced for others	35,609			32,588			9

__________

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

⁽²⁾  In the first quarter of 2019, we made a change in how revenue is measured in our Commercial Banking business by revising the allocation of tax benefits on certain tax-advantaged investments. As such, prior period results have been recast to conform with the current period presentation. The result of this measurement change reduced the previously reported total net revenue in our Commercial Banking business by $32 million and $62 million for the second quarter and first six months of 2018, with an offsetting increase in the Other category.  

27 Capital One Financial Corporation (COF)

⁽³⁾  The provision for losses on unfunded lending commitments is included in the provision for credit losses in our consolidated statements of income and the related reserve for unfunded lending commitments is included in other liabilities on our consolidated balance sheets. Our reserve for unfunded lending commitments totaled $140 million and $118 million as of June 30, 2019 and December 31, 2018, respectively.

⁽⁴⁾  Average yield on loans held for investment is calculated by dividing annualized interest income for the period by average loans held for investment during the period. Interest income excludes various allocations including funds transfer pricing that assigns certain balance sheet assets, deposits and other liabilities and their related revenue and expenses attributable to each business segment.

⁽⁵⁾  Nonperforming assets consist of nonperforming loans, real estate owned (“REO”) and other foreclosed assets. The total nonperforming asset rate is calculated based on total nonperforming assets divided by the combined period-end total loans held for investment, REO and other foreclosed assets.

^**  Not meaningful.

Key factors affecting the results of our Commercial Banking business for the second quarter and first six months of 2019 compared to the second quarter and first six months of 2018, and changes in financial condition and credit performance between June 30, 2019 and December 31, 2018 include the following:

• Net Interest Income: Net interest income was substantially flat at $514 million in the second quarter of 2019 and decreased by $20 million to $1.0 billion in the first six months of 2019 primarily driven by lower average deposit balances, higher rates paid and lower loan margins, partially offset by growth across our commercial loan portfolios.

• Non-Interest Income: Non-interest income remained substantially flat at $200 million in the second quarter of 2019 and $387 million in the first six months of 2019.

• Provision for Credit Losses: Provision for credit losses increased by $48 million to $82 million in the second quarter of 2019 and increased by $131 million to $151 million in the first six months of 2019 primarily driven by an allowance build.

• Non-Interest Expense: Non-interest expense increased by $18 million to $427 million in the second quarter of 2019 and increased by $32 million to $844 million in the first six months of 2019 primarily driven by higher operating expenses associated with continued investments in technology and other business initiatives.

• Loans Held for Investment: Period-end loans held for investment increased by $1.7 billion to $72.0 billion as of June 30, 2019 from December 31, 2018, and average loans held for investment increased by $5.6 billion to $72.0 billion in the second quarter of 2019 compared to the second quarter of 2018 and increased by $5.9 billion to $71.7 billion in the first six months of 2019 compared to the first six months of 2018 primarily driven by growth across our commercial loan portfolios.

• Deposits: Period-end deposits increased by $1.3 billion to $30.8 billion as of June 30, 2019, from December 31, 2018 primarily driven by new business growth.

• Net Charge-Off and Nonperforming Metrics: The net charge-off rate increased by 13 basis points to 0.09% in the second quarter of 2019 and increased by 4 basis points to 0.08% in the first six months of 2019.

The nonperforming loan rate increased by 6 basis points to 0.50% as of June 30, 2019 from December 31, 2018 primarily driven by some isolated credit deterioration.

Other Category

Other includes unallocated amounts related to our centralized Corporate Treasury group activities, such as management of our corporate investment portfolio, asset/liability management and certain capital management activities. Other also includes:

• unallocated corporate revenue and expenses that do not directly support the operations of the business segments or for which the business segments are not considered financially accountable in evaluating their performance, such as certain restructuring charges;

• offsets related to certain line-item reclassifications;

• residual tax expense or benefit to arrive at the consolidated effective tax rate that is not assessed to our primary business segments; and

• foreign exchange-rate fluctuations on foreign currency-denominated balances.

28 Capital One Financial Corporation (COF)

Table 13 summarizes the financial results of our Other category for the periods indicated.

Table 13: Other Category Results

	Three Months Ended June 30,								Six Months Ended June 30,
(Dollars in millions)	2019			2018			Change		2019			2018			Change
Selected income statement data:
Net interest income (loss)	$	(8	)	$	29		**		$	25		$	68		(63	)%
Non-interest income (loss)	(26		)	373			**		(31		)	346			**
Total net revenue (loss) (1)(2)	(34		)	402			**		(6		)	414			**
Benefit for credit losses	—			(47		)	**		—			(48		)	**
Non-interest expense	97			148			(34	)%	186			279			(33	)
Income (loss) from continuing operations before income taxes	(131		)	301			**		(192		)	183			**
Income tax provision (benefit)	(109		)	63			**		(215		)	(32		)	**
Income (loss) from continuing operations, net of tax	$	(22	)	$	238		**		$	23		$	215		(89	)

__________

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

⁽²⁾  In the first quarter of 2019, we made a change in how revenue is measured in our Commercial Banking business by revising the allocation of tax benefits on certain tax-advantaged investments. As such, prior period results have been recast to conform with the current period presentation. The result of this measurement change reduced the previously reported total net revenue in our Commercial Banking business by $32 million and $62 million for the second quarter and first six months of 2018, with an offsetting increase in the Other category.

** Not meaningful.

Net loss from continuing operations recorded in the Other category was $22 million in the second quarter of 2019 and net income was $23 million for the first six months of 2019, compared to net income of $238 million and $215 million in the second quarter and first six months of 2018, respectively, primarily driven by the absence of the net gain from the sale of our consumer home loan portfolio in the second quarter of 2018.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in accordance with U.S. GAAP requires management to make a number of judgments, estimates and assumptions that affect the amount of assets, liabilities, income and expenses on the consolidated financial statements. Understanding our accounting policies and the extent to which we use management judgment and estimates in applying these policies is integral to understanding our financial statements. We provide a summary of our significant accounting policies under “Note 1—Summary of Significant Accounting Policies” in our 2018 Form 10-K.

We have identified the following accounting policies as critical because they require significant judgments and assumptions about highly complex and inherently uncertain matters and the use of reasonably different estimates and assumptions could have a material impact on our results of operations or financial condition. These critical accounting policies govern:

• Loan loss reserves

• Asset impairment

• Fair value of financial instruments

• Customer rewards reserve

We evaluate our critical accounting estimates and judgments on an ongoing basis and update them as necessary, based on changing conditions. There have been no changes to our critical accounting policies and estimates described in our 2018 Form 10-K under “MD&A—Critical Accounting Policies and Estimates.”

29 Capital One Financial Corporation (COF)

ACCOUNTING CHANGES AND DEVELOPMENTS

See “Note 1—Summary of Significant Accounting Policies” for information on the accounting standards we adopted in 2019 and the expected impacts of accounting standards issued but not adopted as of June 30, 2019.

CAPITAL MANAGEMENT

The level and composition of our capital are determined by multiple factors, including our consolidated regulatory capital requirements and internal risk-based capital assessments such as internal stress testing and economic capital. The level and composition of our capital may also be influenced by rating agency guidelines, subsidiary capital requirements, business environment, conditions in the financial markets and assessments of potential future losses due to adverse changes in our business and market environments.

Capital Standards and Prompt Corrective Action

We are subject to capital adequacy standards adopted by the Board of Governors of the Federal Reserve System (“Federal Reserve”), Office of the Comptroller of the Currency (“OCC”) and Federal Deposit Insurance Corporation (“FDIC”) (collectively, the “Federal Banking Agencies”), including the capital rules that implemented the Basel III capital framework (“Basel III Capital Rule”) developed by the Basel Committee on Banking Supervision (“Basel Committee”). The Basel III Capital Rule includes the “Basel III Standardized Approach” and the “Basel III Advanced Approaches.” Moreover, the Banks, as insured depository institutions, are subject to Prompt Corrective Action (“PCA”) capital regulations.

We entered parallel run under Basel III Advanced Approaches on January 1, 2015, during which we are required to calculate capital ratios under both the Basel III Standardized Approach and the Basel III Advanced Approaches, though we continue to use the Standardized Approach for purposes of meeting regulatory capital requirements. Under the Basel III Capital Rule, when we complete our parallel run for the Advanced Approaches, our minimum risk-based capital requirement will be determined by the greater of our risk-weighted assets under the Basel III Standardized Approach and the Basel III Advanced Approaches. Once we exit parallel run, based on clarification of the Basel III Capital Rule from our regulators, any amount by which our expected credit losses exceed eligible credit reserves, as each term is defined under the Basel III Capital Rule, will be deducted from our Basel III Standardized Approach numerator, subject to transition provisions. Inclusive of this impact, based on current capital rules and our business mix, we estimate that our Basel III Advanced Approaches ratios will be lower than our Basel III Standardized Approach ratios. However, there is uncertainty whether this will remain the case, or whether we will remain subject to the Basel III Advanced Approaches in light of potential changes to the United States capital rules.

The Basel III Capital Rule also introduced the supplementary leverage ratio for all Advanced Approaches banking organizations with a minimum requirement of 3.0%. The supplementary leverage ratio compares Tier 1 capital to total leverage exposure, which includes all on-balance sheet assets and certain off-balance sheet exposures, including derivatives and unused commitments. Given that we are in our Basel III Advanced Approaches parallel run, we calculate the ratio based on Tier 1 capital under the Standardized Approach.

The Market Risk Rule supplements both the Basel III Standardized Approach and the Basel III Advanced Approaches by requiring institutions subject to the Market Risk Rule to adjust their risk-based capital ratios to reflect the market risk in their trading portfolios. As of June 30, 2019, the Company and CONA are subject to the Market Risk Rule. See “MD&A—Market Risk Profile” below for additional information.

For the description of the regulatory capital rules we are subject to, see “Part I—Item 1. Business—Supervision and Regulation” in our 2018 Form 10-K.

30 Capital One Financial Corporation (COF)

Table 14 provides a comparison of our regulatory capital ratios under the Basel III Standardized Approach, the regulatory minimum capital adequacy ratios and the PCA well-capitalized level for each ratio, where applicable, as of June 30, 2019 and December 31, 2018.

Table 14: Capital Ratios under Basel III⁽¹⁾⁽²⁾

	June 30, 2019						December 31, 2018
	Capital Ratio		Minimum Capital Adequacy		Well- Capitalized		Capital Ratio		Minimum Capital Adequacy		Well- Capitalized
Capital One Financial Corp:
Common equity Tier 1 capital(3)	12.3	%	4.5	%	N/A		11.2	%	4.5	%	N/A
Tier 1 capital(4)	13.8		6.0		6.0	%	12.7		6.0		6.0	%
Total capital(5)	16.2		8.0		10.0		15.1		8.0		10.0
Tier 1 leverage(6)	11.4		4.0		N/A		10.7		4.0		N/A
Supplementary leverage(7)	9.7		3.0		N/A		9.0		3.0		N/A
COBNA:
Common equity Tier 1 capital(3)	15.5		4.5		6.5		15.3		4.5		6.5
Tier 1 capital(4)	15.5		6.0		8.0		15.3		6.0		8.0
Total capital(5)	17.6		8.0		10.0		17.6		8.0		10.0
Tier 1 leverage(6)	14.0		4.0		5.0		14.0		4.0		5.0
Supplementary leverage(7)	11.4		3.0		N/A		11.5		3.0		N/A
CONA:
Common equity Tier 1 capital(3)	13.9		4.5		6.5		13.0		4.5		6.5
Tier 1 capital(4)	13.9		6.0		8.0		13.0		6.0		8.0
Total capital(5)	15.0		8.0		10.0		14.2		8.0		10.0
Tier 1 leverage(6)	9.4		4.0		5.0		9.1		4.0		5.0
Supplementary leverage(7)	8.4		3.0		N/A		8.0		3.0		N/A

__________

⁽¹⁾  Capital requirements that are not applicable are denoted by “N/A.”

⁽²⁾  Ratios as of June 30, 2019 are preliminary. As we continue to validate our data, the calculations are subject to change until we file our June 30, 2019 Form FR Y-9C—Consolidated Financial Statements for Holding Companies and Call Reports.

⁽³⁾  Common equity Tier 1 capital ratio is a regulatory capital measure calculated based on common equity Tier 1 capital divided by risk-weighted assets.

⁽⁴⁾  Tier 1 capital ratio is a regulatory capital measure calculated based on Tier 1 capital divided by risk-weighted assets.

⁽⁵⁾  Total capital ratio is a regulatory capital measure calculated based on total capital divided by risk-weighted assets.

⁽⁶⁾  Tier 1 leverage ratio is a regulatory capital measure calculated based on Tier 1 capital divided by adjusted average assets.

⁽⁷⁾  Supplementary leverage ratio is a regulatory capital measure calculated based on Tier 1 capital divided by total leverage exposure.

31 Capital One Financial Corporation (COF)

Table 15 presents regulatory capital under the Basel III Standardized Approach and regulatory capital metrics as of June 30, 2019 and December 31, 2018.

Table 15: Regulatory Risk-Based Capital Components and Regulatory Capital Metrics

(Dollars in millions)	June 30, 2019			December 31, 2018
Regulatory Capital Under Basel III Standardized Approach
Common equity excluding AOCI	$	51,236		$	48,570
Adjustments:
AOCI(1)	170			(1,263		)
Goodwill, net of related deferred tax liabilities	(14,365		)	(14,373		)
Intangible assets, net of related deferred tax liabilities	(194		)	(254		)
Other	(401		)	391
Common equity Tier 1 capital	36,446			33,071
Tier 1 capital instruments	4,360			4,360
Tier 1 capital	40,806			37,431
Tier 2 capital instruments	3,379			3,483
Qualifying allowance for loan and lease losses	3,734			3,731
Tier 2 capital	7,113			7,214
Total capital	$	47,919		$	44,645
Regulatory Capital Metrics
Risk-weighted assets	$	295,255		$	294,950
Adjusted average assets	356,518			350,606
Total leverage exposure	421,139			414,701

__________

⁽¹⁾  Amounts presented are net of tax.

The Company exceeded the minimum capital requirements and each of the Banks exceeded the minimum regulatory requirements and were well capitalized under PCA requirements as of both June 30, 2019 and December 31, 2018.

The Basel III Capital Rule requires banks to maintain a capital conservation buffer, composed of common equity Tier 1 capital, of 2.5% above the regulatory minimum ratios. For banks subject to the Advanced Approaches, including the Company and the Banks, the capital conservation buffer may be supplemented by an incremental countercyclical capital buffer of up to 2.5% composed of common equity Tier 1 capital and set at the discretion of the Federal Banking Agencies. As of June 30, 2019, the countercyclical capital buffer was zero percent in the United States. A determination to increase the countercyclical capital buffer generally would be effective twelve months after the announcement of such an increase, unless the Federal Banking Agencies set an earlier effective date.

For 2019, the minimum capital requirement plus capital conservation buffer and countercyclical capital buffer for common equity Tier 1 capital, Tier 1 capital and total capital ratios is 7.0%, 8.5% and 10.5%, respectively, for the Company and the Banks. A common equity Tier 1 capital ratio, Tier 1 capital ratio, or total capital ratio below the applicable regulatory minimum ratio plus the applicable capital conservation buffer and the applicable countercyclical buffer (if set to an amount greater than zero percent) might restrict a bank’s ability to distribute capital and make discretionary bonus payments. As of June 30, 2019, the Company and each of the Banks were all above the applicable combined thresholds.

32 Capital One Financial Corporation (COF)

Capital Planning and Regulatory Stress Testing

On June 27, 2019, the Federal Reserve completed its 2019 Comprehensive Capital Analysis and Review (“CCAR”) and did not object to our proposed adjusted capital plan. As a result of this non-objection to our capital plan, the Board of Directors authorized the repurchase of up to $2.2 billion of shares of our common stock beginning in the third quarter of 2019 through the end of the second quarter of 2020. We expect to maintain the quarterly dividend on our common stock of $0.40 per share, subject to the approval of the Board of Directors. For the description of the regulatory capital planning rules we are subject to, see “Part I—Item 1. Business—Supervision and Regulation” in our 2018 Form 10-K.

Dividend Policy and Stock Purchases

In the first six months of 2019, we declared and paid common stock dividends of $383 million, or $0.80 per share, and preferred stock dividends of $132 million. The following table summarizes the dividends paid per share on our various preferred stock series in the first six months of 2019.

Table 16: Preferred Stock Dividends Paid Per Share

Series	Description	Issuance Date	Per Annum Dividend Rate	Dividend Frequency	2019
					Q2	Q1
Series B	6.00% Non-Cumulative	August 20, 2012	6.00%	Quarterly	$15.00	$15.00
Series C	6.25% Non-Cumulative	June 12, 2014	6.25	Quarterly	15.63	15.63
Series D	6.70% Non-Cumulative	October 31, 2014	6.70	Quarterly	16.75	16.75
Series E	Fixed-to-Floating Rate Non-Cumulative	May 14, 2015	5.55% through 5/31/2020; 3-mo. LIBOR+ 380 bps thereafter	Semi-Annually through 5/31/2020; Quarterly thereafter	27.75	—
Series F	6.20% Non-Cumulative	August 24, 2015	6.20	Quarterly	15.50	15.50
Series G	5.20% Non-Cumulative	July 29, 2016	5.20	Quarterly	13.00	13.00
Series H	6.00% Non-Cumulative	November 29, 2016	6.00	Quarterly	15.00	15.00

The declaration and payment of dividends to our stockholders, as well as the amount thereof, are subject to the discretion of our Board of Directors and depend upon our results of operations, financial condition, capital levels, cash requirements, future prospects and other factors deemed relevant by the Board of Directors. As a bank holding company (“BHC”), our ability to pay dividends is largely dependent upon the receipt of dividends or other payments from our subsidiaries. Regulatory restrictions exist that limit the ability of the Banks to transfer funds to our BHC. As of June 30, 2019, funds available for dividend payments from COBNA and CONA were $2.0 billion and $4.7 billion, respectively. There can be no assurance that we will declare and pay any dividends to stockholders. Consistent with our 2018 Stock Repurchase Program, our Board of Directors authorized the repurchase of up to $1.2 billion of shares of common stock beginning in the third quarter of 2018 through the end of the second quarter of 2019. We completed the 2018 Stock Repurchase Program in the fourth quarter of 2018.

The timing and exact amount of any future common stock repurchases will depend on various factors, including regulatory approval, market conditions, opportunities for growth, our capital position and the amount of retained earnings. Our stock repurchase program does not include specific price targets, may be executed through open market purchases or privately negotiated transactions, including utilizing Rule 10b5-1 programs, and may be suspended at any time. For additional information on dividends and stock repurchases, see “Part I—Item 1. Business—Supervision and Regulation—Dividends, Stock Repurchases and Transfers of Funds” in our 2018 Form 10-K.

33 Capital One Financial Corporation (COF)

RISK MANAGEMENT

Risk Framework

The risk framework was refined at the end of the second quarter of 2019 to enhance risk management and more fully articulate alignment with regulatory guidance and industry practices.

We use a risk framework to provide an overall enterprise-wide approach for effectively managing risk. We execute against our risk framework with the “Three Lines of Defense” risk management model to structure the roles, responsibilities and accountabilities in the organization for taking and managing risk.

The “First Line of Defense” consists of any line of business or function that is accountable for risk taking and is responsible for: (i) engaging in activities designed to generate revenue or reduce expenses; (ii) providing operational support or servicing to any business function for the delivery of products or services to customers; or (iii) providing technology services in direct support of first line business areas. Each line of business or first line function is responsible for managing the risks associated with their activities, including identifying, assessing, measuring, monitoring, controlling, and reporting the risks within its business activities, consistent with the risk framework. The “Second Line of Defense” consists of two types of functions: Independent Risk Management (“IRM”) and Support Functions. IRM oversees risk-taking activities and assesses risks and issues independent from the first line of defense. Support Functions are centers of specialized expertise (e.g., Human Resources, Accounting, Legal) that provide support services to the enterprise. The “Third Line of Defense” is comprised of the Internal Audit and Credit Review functions. The third line provides independent and objective assurance to senior management and to the Board of Directors that the first and second lines of defense have systems and governance processes which are well-designed and working as intended, and that the risk framework is appropriate for the size, complexity and risk profile of Capital One.

The risk framework is also used to guide design of risk programs and performance of risk activity within each risk category and across the entire enterprise.

There are nine elements that comprise the risk framework:

• Governance and Accountability

• Strategy and Risk Alignment

• Identification

• Assessment, Measurement and Response

• Monitoring and Testing

• Aggregation, Reporting and Escalation

• Capital and Liquidity Management (including Stress Testing)

• Risk Data and Enabling Technology

• Culture and Talent Management

We provide additional discussion of our risk management principles, roles and responsibilities, framework and risk appetite under “MD&A—Risk Management” in our 2018 Form 10-K.

CREDIT RISK PROFILE

Our loan portfolio accounts for the substantial majority of our credit risk exposure. Our lending activities are governed under our credit policy and are subject to independent review and approval. Below we provide information about the composition of our loan portfolio, key concentrations and credit performance metrics.

We also engage in certain non-lending activities that may give rise to credit and counterparty settlement risk, including purchasing securities for our investment securities portfolio, entering into derivative transactions to manage our market risk exposure and to

34 Capital One Financial Corporation (COF)

accommodate customers, extending short-term advances on syndication activity (including bridge financing transactions we have underwritten), depositing certain operational cash balances in other financial institutions, executing certain foreign exchange transactions and extending customer overdrafts. We provide additional information on credit risk related to our investment securities portfolio under “MD&A—Consolidated Balance Sheets Analysis—Investment Securities” and credit risk related to derivative transactions in “Note 9—Derivative Instruments and Hedging Activities.”

Portfolio Composition of Loans Held for Investment

We provide a variety of lending products. Our primary products include credit cards, auto loans and commercial lending products. We sold all of our consumer home loan portfolio and the related servicing during 2018. For information on our lending policies and procedures, including our underwriting criteria for our primary loan products, see “MD&A—Credit Risk Profile” in our 2018 Form 10-K.

Our loan portfolio consists of loans held for investment, including loans held in our consolidated trusts, and loans held for sale.  Loans and the related credit metrics presented in this section exclude loans held for sale, which are carried at lower of cost or fair value and totaled $1.8 billion and $1.2 billion as of June 30, 2019 and December 31, 2018, respectively.

Table 17 presents the composition of our portfolio of loans held for investment by portfolio segment as of June 30, 2019 and December 31, 2018.

Table 17: Portfolio Composition of Loans Held for Investment

	June 30, 2019				December 31, 2018
(Dollars in millions)	Loans		% of Total		Loans		% of Total
Credit Card:
Domestic credit card	$	102,959	42.1	%	$	107,350	43.6	%
International card businesses	9,182		3.8		9,011		3.7
Total credit card	112,141		45.9		116,361		47.3
Consumer Banking:
Auto	57,556		23.6		56,341		22.9
Retail banking	2,771		1.1		2,864		1.2
Total consumer banking	60,327		24.7		59,205		24.1
Commercial Banking:
Commercial and multifamily real estate	29,861		12.2		28,899		11.8
Commercial and industrial	42,125		17.2		41,091		16.7
Total commercial lending	71,986		29.4		69,990		28.5
Small-ticket commercial real estate	6		—		343		0.1
Total commercial banking	71,992		29.4		70,333		28.6
Total loans held for investment	$	244,460	100.0	%	$	245,899	100.0	%

35 Capital One Financial Corporation (COF)

Commercial Loans

Table 18 summarizes our commercial loans held for investment portfolio by industry classification as of June 30, 2019 and December 31, 2018. Industry classifications below are based on our interpretation of the North American Industry Classification System codes as they pertain to each individual loan.

Table 18: Commercial Loans by Industry

(Percentage of portfolio)	June 30, 2019		December 31, 2018
Real estate	39	%	40	%
Finance	16		16
Healthcare	11		12
Business services	6		5
Oil and gas	5		5
Public administration	4		4
Educational services	4		4
Retail trade	3		3
Construction and land	3		2
Other	9		9
Total	100	%	100	%

Credit Risk Measurement

We closely monitor economic conditions and loan performance trends to assess and manage our exposure to credit risk. Key metrics we track in evaluating the credit quality of our loan portfolio include delinquency and nonperforming asset rates, as well as net charge-off rates and our internal risk ratings of larger-balance commercial loans. Trends in delinquency rates are one of the primary indicators of credit risk within our consumer loan portfolios, particularly in our credit card loan portfolios, as changes in delinquency rates can provide an early warning of changes in credit losses. The primary indicator of credit risk in our commercial loan portfolios is our internal risk ratings. Because we generally classify loans that have been delinquent for an extended period of time and other loans with significant risk of loss as nonperforming, the level of nonperforming assets represents another indicator of the potential for future credit losses. In addition to delinquency rates, the geographic distribution of our loans provides insight as to the exposure of the portfolio to regional economic conditions.

We underwrite most consumer loans using proprietary models, which are typically based on credit bureau data, including borrower credit scores, along with application information and, where applicable, collateral and deal structure data. We continuously adjust our management of credit lines and collection strategies based on customer behavior and risk profile changes. We also use borrower credit scores for subprime classification, for competitive benchmarking and, in some cases, to drive product segmentation decisions. 

36 Capital One Financial Corporation (COF)

Table 19 provides details on the credit scores of our domestic credit card and auto loan portfolios as of June 30, 2019 and December 31, 2018.

Table 19: Credit Score Distribution

(Percentage of portfolio)	June 30, 2019		December 31, 2018
Domestic credit card—Refreshed FICO scores:(1)
Greater than 660	68	%	67	%
660 or below	32		33
Total	100	%	100	%
Auto—At origination FICO scores:(2)
Greater than 660	49	%	50	%
621 - 660	19		19
620 or below	32		31
Total	100	%	100	%

__________

⁽¹⁾  Percentages represent period-end loans held for investment in each credit score category. Domestic card credit scores generally represent FICO scores. These scores are obtained from one of the major credit bureaus at origination and are refreshed monthly thereafter. We approximate non-FICO credit scores to comparable FICO scores for consistency purposes. Balances for which no credit score is available or the credit score is invalid are included in the 660 or below category.

⁽²⁾  Percentages represent period-end loans held for investment in each credit score category. Auto credit scores generally represent average FICO scores obtained from three credit bureaus at the time of application and are not refreshed thereafter. Balances for which no credit score is available or the credit score is invalid are included in the 620 or below category.

We present information in the section below on the credit performance of our loan portfolio, including the key metrics we use in tracking changes in the credit quality of our loan portfolio. See “Note 4—Loans” in this Report for additional credit quality information, and see “Note 1—Summary of Significant Accounting Policies” in our 2018 Form 10-K for information on our accounting policies for delinquent and nonperforming loans, charge-offs and troubled debt restructurings (“TDRs”) for each of our loan categories.

Delinquency Rates

We consider the entire balance of an account to be delinquent if the minimum required payment is not received by the customer’s due date, measured at each balance sheet date. Our 30+ day delinquency metrics include all loans held for investment that are 30 or more days past due, whereas our 30+ day performing delinquency metrics include loans that are 30 or more days past due but are currently classified as performing and accruing interest. The 30+ day delinquency and 30+ day performing delinquency metrics are the same for domestic credit card loans, as we continue to classify these loans as performing until the account is charged off, typically when the account is 180 days past due. See “Note 1—Summary of Significant Accounting Policies” in our 2018 Form 10-K for information on our policies for classifying loans as nonperforming for each of our loan categories. We provide additional information on our credit quality metrics above under “MD&A—Business Segment Financial Performance.”

37 Capital One Financial Corporation (COF)

Table 20 presents our 30+ day performing delinquency rates and 30+ day delinquency rates of our portfolio of loans held for investment, by portfolio segment, as of June 30, 2019 and December 31, 2018.

Table 20: 30+ Day Delinquencies

	June 30, 2019								December 31, 2018
	30+ Day Performing Delinquencies				30+ Day Delinquencies				30+ Day Performing Delinquencies				30+ Day Delinquencies
(Dollars in millions)	Amount		Rate(1)		Amount		Rate(1)		Amount		Rate(1)		Amount		Rate(1)
Credit Card:
Domestic credit card	$	3,503	3.40	%	$	3,503	3.40	%	$	4,335	4.04	%	$	4,335	4.04	%
International card businesses	312		3.40		329		3.59		317		3.52		333		3.70
Total credit card	3,815		3.40		3,832		3.42		4,652		4.00		4,668		4.01
Consumer Banking:
Auto	3,512		6.10		3,820		6.64		3,918		6.95		4,309		7.65
Retail banking	26		0.93		45		1.62		29		1.01		51		1.77
Total consumer banking	3,538		5.87		3,865		6.41		3,947		6.67		4,360		7.36
Commercial Banking:
Commercial and multifamily real estate	41		0.14		50		0.17		119		0.41		140		0.49
Commercial and industrial	307		0.73		432		1.02		176		0.43		279		0.68
Total commercial lending	348		0.48		482		0.67		295		0.42		419		0.60
Small-ticket commercial real estate	—		—		4		**		1		0.39		7		1.84
Total commercial banking	348		0.48		486		0.67		296		0.42		426		0.61
Total	$	7,701	3.15		$	8,183	3.35		$	8,895	3.62		$	9,454	3.84

__________

⁽¹⁾  Delinquency rates are calculated by dividing delinquency amounts by period-end loans held for investment for each specified loan category, including purchased credit-impaired (“PCI”) loans as applicable.

^**  Not meaningful.

Table 21 presents our 30+ day delinquent loans, by aging and geography, as of June 30, 2019 and December 31, 2018.

Table 21: Aging and Geography of 30+ Day Delinquent Loans

	June 30, 2019				December 31, 2018
(Dollars in millions)	Amount		Rate(1)		Amount		Rate(1)
Delinquency status:
30 – 59 days	$	3,878	1.59	%	$	4,282	1.73	%
60 – 89 days	2,137		0.87		2,430		0.99
> 90 days	2,168		0.89		2,742		1.12
Total	$	8,183	3.35	%	$	9,454	3.84	%
Geographic region:
Domestic	$	7,854	3.21	%	$	9,121	3.70	%
International	329		0.14		333		0.14
Total	$	8,183	3.35	%	$	9,454	3.84	%

__________

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

38 Capital One Financial Corporation (COF)

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

Table 22: 90+ Day Delinquent Loans Accruing Interest

	June 30, 2019				December 31, 2018
(Dollars in millions)	Amount		Rate(1)		Amount		Rate(1)
Loan category:
Credit card	$	1,763	1.57	%	$	2,233	1.92	%
Commercial banking	6		0.01		—		—
Total	$	1,769	0.72		$	2,233	0.91
Geographic region:
Domestic	$	1,650	0.70	%	$	2,111	0.89	%
International	119		1.29		122		1.35
Total	$	1,769	0.72		$	2,233	0.91

__________

⁽¹⁾  Delinquency rates are calculated by dividing delinquency amounts by period-end loans held for investment for each specified loan category, including PCI loans as applicable.

Nonperforming Loans and Nonperforming Assets

Nonperforming assets consist of nonperforming loans, repossessed assets and foreclosed properties. Nonperforming loans include loans that have been placed on nonaccrual status. See “Note 1—Summary of Significant Accounting Policies” in our 2018 Form 10-K for information on our policies for classifying loans as nonperforming for each of our loan categories.

Table 23 presents our nonperforming loans, by portfolio segment, and other nonperforming assets as of June 30, 2019 and December 31, 2018. We do not classify loans held for sale as nonperforming, as they are recorded at the lower of cost or fair value. We provide additional information on our credit quality metrics above under “MD&A—Business Segment Financial Performance.”

39 Capital One Financial Corporation (COF)

Table 23: Nonperforming Loans and Other Nonperforming Assets⁽¹⁾

	June 30, 2019				December 31, 2018
(Dollars in millions)	Amount		Rate		Amount		Rate
Nonperforming loans held for investment:(2)
Credit Card:
International card businesses	$	23	0.25	%	$	22	0.25	%
Total credit card	23		0.02		22		0.02
Consumer Banking:
Auto	369		0.64		449		0.80
Retail banking	28		1.02		30		1.04
Total consumer banking	397		0.66		479		0.81
Commercial Banking:
Commercial and multifamily real estate	43		0.14		83		0.29
Commercial and industrial	311		0.74		223		0.54
Total commercial lending	354		0.49		306		0.44
Small-ticket commercial real estate	6		**		6		1.80
Total commercial banking	360		0.50		312		0.44
Total nonperforming loans held for investment(3)	$	780	0.32		$	813	0.33
Other nonperforming assets(4)	51		0.02		59		0.02
Total nonperforming assets	$	831	0.34		$	872	0.35

__________

⁽¹⁾  We recognized interest income for loans classified as nonperforming of $12 million and $11 million in the first six months of 2019 and 2018, respectively. Interest income foregone related to nonperforming loans was $39 million and $31 million in the first six months of 2019 and 2018, respectively. Foregone interest income represents the amount of interest income in excess of recognized interest income that would have been recorded during the period for nonperforming loans as of the end of the period had the loans performed according to their contractual terms.

⁽²⁾  Nonperforming loan rates are calculated based on nonperforming loans for each category divided by period-end total loans held for investment for each respective category.

⁽³⁾  Excluding the impact of domestic credit card loans, nonperforming loans as a percentage of total loans held for investment was 0.55% and 0.59% as of June 30, 2019 and December 31, 2018, respectively.

⁽⁴⁾  The denominators used in calculating nonperforming asset rates consist of total loans held for investment and other nonperforming assets.

^**  Not meaningful.

40 Capital One Financial Corporation (COF)

Net Charge-Offs

Net charge-offs consist of the unpaid principal balance of loans held for investment that we determine to be uncollectible, net of recovered amounts. We charge off loans as a reduction to the allowance for loan and lease losses when we determine the loan is uncollectible and record subsequent recoveries of previously charged-off amounts as increases to the allowance for loan and lease losses. Uncollectible finance charges and fees are reversed through revenue and certain fraud losses are recorded in other non-interest expense. Generally, costs to recover charged-off loans are recorded as collection expenses as incurred and included in our consolidated statements of income as a component of other non-interest expense. Our charge-off policy for loans varies based on the loan type. See “Note 1—Summary of Significant Accounting Policies” in our 2018 Form 10-K for information on our charge-off policy for each of our loan categories.

Table 24 presents our net charge-off amounts and rates, by portfolio segment, in the second quarter and first six months of 2019 and 2018.

Table 24: Net Charge-Offs (Recoveries)

	Three Months Ended June 30,									Six Months Ended June 30,
	2019				2018					2019				2018
(Dollars in millions)	Amount		Rate(1)		Amount			Rate(1)		Amount		Rate(1)		Amount			Rate(1)
Credit Card:
Domestic credit card	$	1,240	4.86	%	$	1,166		4.72	%	$	2,534	4.95	%	$	2,487		4.99	%
International card businesses	80		3.63		94			4.14		150		3.41		150			3.32
Total credit card	1,320		4.76		1,260			4.67		2,684		4.83		2,637			4.85
Consumer Banking:
Auto	155		1.09		182			1.32		358		1.26		390			1.42
Retail banking	17		2.42		16			2.07		35		2.49		32			1.97
Home loan	—		—		—			—		—		—		(1		)	(0.02	)
Total consumer banking	172		1.15		198			1.19		393		1.32		421			1.19
Commercial Banking:
Commercial and industrial	16		0.15		(7		)	(0.07	)	30		0.14		12			0.06
Total commercial banking	16		0.09		(7		)	(0.04	)	30		0.08		12			0.04
Other loans	—		—		8			**		—		—		7			46.30
Total net charge-offs	$	1,508	2.48		$	1,459		2.42		$	3,107	2.56		$	3,077		2.51
Average loans held for investment	$	242,653			$	240,758				$	242,307			$	245,218

__________

⁽¹⁾  Net charge-off (recovery) rates are calculated by dividing annualized net charge-offs (recoveries) by average loans held for investment for the period for each loan category.

^**  Not meaningful.

Troubled Debt Restructurings

As part of our loss mitigation efforts, we may provide short-term (three to twelve months) or long-term (greater than twelve months) modifications to a borrower experiencing financial difficulty to improve long-term collectability of the loan and to avoid the need for repossession or foreclosure of collateral.

41 Capital One Financial Corporation (COF)

Table 25 presents our recorded investment of loans modified in TDRs as of June 30, 2019 and December 31, 2018, which excludes loan modifications that do not meet the definition of a TDR, and PCI loans, which we track and report separately.

Table 25: Troubled Debt Restructurings

	June 30, 2019				December 31, 2018
(Dollars in millions)	Amount		% of Total Modifications		Amount		% of Total Modifications
Credit card	$	826	51.2	%	$	855	53.2	%
Consumer banking:
Auto	334		20.7		339		21.1
Retail banking	32		2.0		33		2.1
Total consumer banking	366		22.7		372		23.2
Commercial banking	420		26.1		379		23.6
Total	$	1,612	100.0	%	$	1,606	100.0	%
Status of TDRs:
Performing	$	1,396	86.6	%	$	1,433	89.2	%
Nonperforming	216		13.4		173		10.8
Total	$	1,612	100.0	%	$	1,606	100.0	%

In our Credit Card business, the majority of our credit card loans modified in TDRs involve reducing the interest rate on the account and placing the customer on a fixed payment plan not exceeding 60 months. The effective interest rate in effect immediately prior to the loan modification is used as the effective interest rate for purposes of measuring impairment using the present value of expected cash flows. If the customer does not comply with the modified payment terms, then the credit card loan agreement may revert to its original payment terms, generally resulting in any loan outstanding reflected in the appropriate delinquency category and charged off in accordance with our standard charge-off policy.

In our Consumer Banking business, the majority of our loans modified in TDRs receive an extension, an interest rate reduction or principal reduction, or a combination of these concessions. In addition, TDRs also occur in connection with bankruptcy of the borrower. In certain bankruptcy discharges, the loan is written down to the collateral value and the charged-off amount is reported as principal reduction. Impairment is determined using the present value of expected cash flows or a collateral evaluation for certain auto loans where the collateral value is lower than the recorded investment.

In our Commercial Banking business, the majority of loans modified in TDRs receive an extension, with a portion of these loans receiving an interest rate reduction or a gross balance reduction. The impairment on modified commercial loans is generally determined based on the underlying collateral value.

We provide additional information on modified loans accounted for as TDRs, including the performance of those loans subsequent to modification, in “Note 4—Loans.”

Impaired Loans

A loan is considered to be impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due from the borrower in accordance with the original contractual terms of the loan. Generally, we report loans as impaired based on the method for measuring impairment in accordance with applicable accounting guidance. Loans defined as individually impaired include larger-balance commercial nonperforming loans and TDRs. Loans held for sale are not reported as impaired, as these loans are recorded at lower of cost or fair value. Impaired loans also exclude PCI loans, which are accounted for based on expected cash flows because this accounting methodology takes into consideration future credit losses expected to be incurred.

Impaired loans totaled $1.9 billion and $1.8 billion as of June 30, 2019 and December 31, 2018, respectively. These amounts include TDRs of $1.6 billion as of both June 30, 2019 and December 31, 2018. We provide additional information on our impaired loans, including the allowance for loan and lease losses established for these loans, in “Note 4—Loans” and “Note 5—Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments.”

42 Capital One Financial Corporation (COF)

Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments

Our allowance for loan and lease losses represents management’s best estimate of incurred loan and lease credit losses inherent to our held for investment portfolio as of each balance sheet date. The allowance for loan and lease losses is increased through the provision for credit losses and reduced by net charge-offs. We provide additional information on the methodologies and key assumptions used in determining our allowance for loan and lease losses under “Note 1—Summary of Significant Accounting Policies” in our 2018 Form 10-K.

Table 26 presents changes in our allowance for loan and lease losses and reserve for unfunded lending commitments for the second quarter and first six months of 2019 and 2018, and details by portfolio segment for the provision for credit losses, charge-offs and recoveries.

43 Capital One Financial Corporation (COF)

Table 26: Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments Activity

	Three Months Ended June 30, 2019
	Credit Card									Consumer Banking
(Dollars in millions)	Domestic Card			International Card Businesses			Total Credit Card			Auto			Retail Banking			Total Consumer Banking			Commercial Banking			Total
Allowance for loan and lease losses:
Balance as of March 31, 2019	$	5,141		$	427		$	5,568		$	1,002		$	60		$	1,062		$	683		$	7,313
Charge-offs	(1,580		)	(131		)	(1,711		)	(401		)	(22		)	(423		)	(23		)	(2,157		)
Recoveries(1)	340			51			391			246			5			251			7			649
Net charge-offs	(1,240		)	(80		)	(1,320		)	(155		)	(17		)	(172		)	(16		)	(1,508		)
Provision for loan and lease losses	1,024			71			1,095			150			15			165			69			1,329
Allowance build (release) for loan and lease losses	(216		)	(9		)	(225		)	(5		)	(2		)	(7		)	53			(179		)
Other changes(2)	—			(1		)	(1		)	—			—			—			—			(1		)
Balance as of June 30, 2019	4,925			417			5,342			997			58			1,055			736			7,133
Reserve for unfunded lending commitments:
Balance as of March 31, 2019	—			—			—			—			4			4			127			131
Provision for losses on unfunded lending commitments	—			—			—			—			—			—			13			13
Balance as of June 30, 2019	—			—			—			—			4			4			140			144
Combined allowance and reserve as of June 30, 2019	$	4,925		$	417		$	5,342		$	997		$	62		$	1,059		$	876		$	7,277

	Six Months Ended June 30, 2019
	Credit Card									Consumer Banking
(Dollars in millions)	Domestic Card			International Card Businesses			Total Credit Card			Auto			Retail Banking			Total Consumer Banking			Commercial Banking			Total
Allowance for loan and lease losses:
Balance as of December 31, 2018	$	5,144		$	391		$	5,535		$	990		$	58		$	1,048		$	637		$	7,220
Charge-offs	(3,232		)	(261		)	(3,493		)	(850		)	(44		)	(894		)	(43		)	(4,430		)
Recoveries(1)	698			111			809			492			9			501			13			1,323
Net charge-offs	(2,534		)	(150		)	(2,684		)	(358		)	(35		)	(393		)	(30		)	(3,107		)
Provision for loan and lease losses	2,315			169			2,484			365			35			400			129			3,013
Allowance build (release) for loan and lease losses	(219		)	19			(200		)	7			—			7			99			(94		)
Other changes(2)	—			7			7			—			—			—			—			7
Balance as of June 30, 2019	4,925			417			5,342			997			58			1,055			736			7,133
Reserve for unfunded lending commitments:
Balance as of December 31, 2018	—			—			—			—			4			4			118			122
Provision for losses on unfunded lending commitments	—			—			—			—			—			—			22			22
Balance as of June 30, 2019	—			—			—			—			4			4			140			144
Combined allowance and reserve as of June 30, 2019	$	4,925		$	417		$	5,342		$	997		$	62		$	1,059		$	876		$	7,277

44 Capital One Financial Corporation (COF)

	Three Months Ended June 30, 2018
	Credit Card									Consumer Banking
(Dollars in millions)	Domestic Card			International Card Businesses			Total Credit Card			Auto			Home Loan(3)			Retail Banking			Total Consumer Banking			Commercial Banking			Other(3)			Total
Allowance for loan and lease losses:
Balance as of March 31, 2018	$	5,332		$	394		$	5,726		$	1,137		$	53		$	63		$	1,253		$	587		$	1		$	7,567
Charge-offs	(1,549		)	(130		)	(1,679		)	(393		)	—			(21		)	(414		)	(7		)	(9		)	(2,109		)
Recoveries(1)	383			36			419			211			—			5			216			14			1			650
Net charge-offs	(1,166		)	(94		)	(1,260		)	(182		)	—			(16		)	(198		)	7			(8		)	(1,459		)
Provision (benefit) for loan and lease losses	1,094			77			1,171			105			—			14			119			30			(47		)	1,273
Allowance build (release) for loan and lease losses	(72		)	(17		)	(89		)	(77		)	—			(2		)	(79		)	37			(55		)	(186		)
Other changes(2)(3)	—			(13		)	(13		)	—			(53		)	(1		)	(54		)	—			54			(13		)
Balance as of June 30, 2018	5,260			364			5,624			1,060			—			60			1,120			624			—			7,368
Reserve for unfunded lending commitments:
Balance as of March 31, 2018	—			—			—			—			—			6			6			108			—			114
Provision (benefit) for losses on unfunded lending commitments	—			—			—			—			—			(1		)	(1		)	4			—			3
Balance as of June 30, 2018	—			—			—			—			—			5			5			112			—			117
Combined allowance and reserve as of June 30, 2018	$	5,260		$	364		$	5,624		$	1,060		$	—		$	65		$	1,125		$	736		$	—		$	7,485

	Six Months Ended June 30, 2018
	Credit Card									Consumer Banking
(Dollars in millions)	Domestic Card			International Card Businesses			Total Credit Card			Auto			Home Loan(3)			Retail Banking			Total Consumer Banking			Commercial Banking			Other(3)			Total
Allowance for loan and lease losses:
Balance as of December 31, 2017	$	5,273		$	375		$	5,648		$	1,119		$	58		$	65		$	1,242		$	611		$	1		$	7,502
Charge-offs	(3,246		)	(258		)	(3,504		)	(803		)	—			(42		)	(845		)	(28		)	(8		)	(4,385		)
Recoveries(1)	759			108			867			413			1			10			424			16			1			1,308
Net charge-offs	(2,487		)	(150		)	(2,637		)	(390		)	1			(32		)	(421		)	(12		)	(7		)	(3,077		)
Provision (benefit) for loan and lease losses	2,474			153			2,627			331			(6		)	28			353			25			(48		)	2,957
Allowance build (release) for loan and lease losses	(13		)	3			(10		)	(59		)	(5		)	(4		)	(68		)	13			(55		)	(120		)
Other changes(2)(3)	—			(14		)	(14		)	—			(53		)	(1		)	(54		)	—			54			(14		)
Balance as of June 30, 2018	5,260			364			5,624			1,060			—			60			1,120			624			—			7,368
Reserve for unfunded lending commitments:
Balance as of December 31, 2017	—			—			—			—			—			7			7			117			—			124
Benefit for losses on unfunded lending commitments	—			—			—			—			—			(2		)	(2		)	(5		)	—			(7		)
Balance as of June 30, 2018	—			—			—			—			—			5			5			112			—			117
Combined allowance and reserve as of June 30, 2018	$	5,260		$	364		$	5,624		$	1,060		$	—		$	65		$	1,125		$	736		$	—		$	7,485

__________

⁽¹⁾  The amount and timing of recoveries is impacted by our collection strategies, which are based on customer behavior and risk profile and include direct customer communications, repossession of collateral, the periodic sale of charged-off loans as well as additional strategies, such as litigation.

⁽²⁾  Represents foreign currency translation adjustments and the net impact of loan transfers and sales where applicable.

⁽³⁾  In 2018, we sold all of our consumer home loan portfolio.The impact included a benefit for credit losses of $46 million in the second quarter of 2018 which was reflected in the Other category.

45 Capital One Financial Corporation (COF)

Allowance coverage ratios are calculated based on the allowance for loan and lease losses for each specified portfolio segment divided by period-end loans held for investment within the specified loan category. Table 27 presents the allowance coverage ratios as of June 30, 2019 and December 31, 2018.

Table 27: Allowance Coverage Ratios

	June 30, 2019						December 31, 2018
(Dollars in millions)	Allowance for loan and lease losses		Amount(1)		Allowance coverage ratio		Allowance for loan and lease losses		Amount(1)		Allowance coverage ratio
Credit Card	$	5,342	$	3,832	139.38	%	$	5,535	$	4,668	118.56	%
Consumer banking	1,055		3,865		27.30		1,048		4,360		24.04
Commercial banking	736		360		204.52		637		312		204.25
Total	$	7,133	244,460		2.92		$	7,220	245,899		2.94

__________

⁽¹⁾  Represents period-end 30+ day delinquent loans for our credit card and consumer banking loan portfolios, nonperforming loans for our commercial banking loan portfolio and total loans held for investment for the total ratio.

Our allowance for loan and lease losses decreased by $87 million to $7.1 billion and the allowance coverage ratio decreased by 2 basis points to 2.92% as of June 30, 2019 from December 31, 2018 primarily driven by an allowance release in our domestic credit card loan portfolio largely due to the strong economy, stable underlying credit performance and the impact of the sale of certain partnership receivables, partially offset by an allowance build in our commercial loan portfolio.

LIQUIDITY RISK PROFILE

We have established liquidity practices that are intended to ensure that we have sufficient asset-based liquidity to cover our funding requirements and maintain adequate reserves to withstand the potential impact of deposit attrition or diminished liquidity in the funding markets. In addition to our cash position, we maintain reserves in the form of available for sale securities, held to maturity securities and certain loans that are either readily-marketable or pledgeable.

Table 28 below presents the composition of our liquidity reserves as of June 30, 2019 and December 31, 2018.

Table 28: Liquidity Reserves

(Dollars in millions)	June 30, 2019			December 31, 2018
Cash and cash equivalents	$	15,111		$	13,186
Investment securities portfolio:
Investment securities available for sale, at fair value	45,658			46,150
Investment securities held to maturity, at fair value	36,541			36,619
Total investment securities portfolio	82,199			82,769
FHLB borrowing capacity secured by loans	8,699			10,003
Outstanding FHLB advances and letters of credit secured by loans	(353		)	(9,726		)
Investment securities encumbered for Public Funds and others	(6,112		)	(6,631		)
Total liquidity reserves	$	99,544		$	89,601

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

46 Capital One Financial Corporation (COF)

Liquidity Coverage Ratio

We are subject to the Liquidity Coverage Ratio Rule (“LCR Rule”) as implemented by the Federal Reserve and OCC. The LCR Rule requires us to calculate our LCR daily and to publicly disclose, on a quarterly basis, our LCR, certain related quantitative liquidity metrics, and a qualitative discussion of our LCR. Our average LCR during the second quarter of 2019 exceeded the LCR Rule requirement of 100%. The calculation and the underlying components are based on our interpretations, expectations and assumptions of relevant regulations, as well as interpretations provided by our regulators, and are subject to change based on changes to future regulations and interpretations. See “Part I—Item 1. Business—Supervision and Regulation” in our 2018 Form 10-K for additional information.

Borrowing Capacity

We maintain a shelf registration with the SEC so that we may periodically offer and sell an indeterminate aggregate amount of senior or subordinated debt securities, preferred stock, depositary shares, common stock, purchase contracts, warrants and units. There is no limit under this shelf registration to the amount or number of such securities that we may offer and sell, subject to market conditions. In addition, we also maintain a shelf registration that allows us to periodically offer and sell up to $25 billion of securitized debt obligations from our credit card loan securitization trust and a shelf registration that allows us to periodically offer and sell up to $20 billion from our auto loan securitization trusts.

In addition to our issuance capacity under the shelf registration statements, we also have access to FHLB advances. The ability to draw down funding is based on membership status and the amount is dependent upon the Banks’ ability to post collateral. As of June 30, 2019, we pledged both loans and securities to FHLB to secure a maximum borrowing capacity of $17.7 billion, of which $17.4 billion was still available to us to borrow. Our FHLB membership is supported by our investment in FHLB stock of $30 million and $415 million as of June 30, 2019 and December 31, 2018, respectively, which was determined in part based on our outstanding advances. In addition, we have access to the Federal Reserve Discount Window through which we had a borrowing capacity of $6.4 billion as of June 30, 2019. Our membership with the Federal Reserve is supported by our investment in Federal Reserve stock, totaling $1.3 billion as of both June 30, 2019 and December 31, 2018.

Funding

Our primary source of funding comes from deposits, as they are a stable and relatively low cost source of funding. In addition to deposits, we raise funding through the issuance of senior and subordinated notes, securitized debt obligations, brokered deposits, federal funds purchased, securities loaned or sold under agreements to repurchase, and FHLB advances secured by certain portions of our loan and securities portfolios. A key objective in our use of these markets is to maintain access to a diversified mix of wholesale funding sources. See “MD&A—Consolidated Balance Sheets Analysis—Funding Sources Composition” for additional information on our primary sources of funding.

47 Capital One Financial Corporation (COF)

Deposits

Table 29 provides a comparison of average balances, interest expense and average deposit interest rates for the second quarter and first six months of 2019 and 2018.

Table 29: Deposits Composition and Average Deposits Interest Rates

	Three Months Ended June 30,
	2019						2018
(Dollars in millions)	Average Balance		Interest Expense		Average Deposits Interest Rate		Average Balance		Interest Expense		Average Deposits Interest Rate
Interest-bearing checking accounts(1)	$	34,780	$	77	0.89	%	$	40,329	$	60	0.60	%
Saving deposits(2)	154,524		526		1.37		150,150		378		1.01
Time deposits less than $100,000	26,214		182		2.78		25,604		153		2.40
Total interest-bearing core deposits	215,518		785		1.46		216,083		591		1.10
Time deposits of $100,000 or more	14,934		85		2.29		6,612		30		1.80
Foreign deposits	—		—		—		384		1		0.38
Total interest-bearing deposits	$	230,452	$	870	1.51		$	223,079	$	622	1.12

	Six Months Ended June 30,
	2019						2018
(Dollars in millions)	Average Balance		Interest Expense		Average Deposits Interest Rate		Average Balance		Interest Expense		Average Deposits Interest Rate
Interest-bearing checking accounts(1)	$	34,759	$	148	0.86	%	$	41,213	$	118	0.58	%
Saving deposits(2)	154,029		1,025		1.34		148,689		713		0.97
Time deposits less than $100,000	26,249		358		2.75		25,450		280		2.22
Total interest-bearing core deposits	215,037		1,531		1.44		215,352		1,111		1.04
Time deposits of $100,000 or more	13,983		156		2.25		5,648		49		1.74
Foreign deposits	—		—		—		384		1		0.41
Total interest-bearing deposits	$	229,020	$	1,687	1.47		$	221,384	$	1,161	1.05

__________

⁽¹⁾  Includes negotiable order of withdrawal accounts.

⁽²⁾  Includes money market deposit accounts.

The FDIC limits the acceptance of brokered deposits by well-capitalized insured depository institutions and, with a waiver from the FDIC, by adequately-capitalized institutions. COBNA and CONA were well-capitalized, as defined under the federal banking regulatory guidelines, as of June 30, 2019 and December 31, 2018, respectively. See “Part I—Item 1. Business—Supervision and Regulation” in our 2018 Form 10-K for additional information. We provide additional information on the composition of deposits under “MD&A—Consolidated Balance Sheets Analysis—Funding Sources Composition” and in “Note 8—Deposits and Borrowings.”

Short-Term Borrowings and Long-Term Debt

We access the capital markets to meet our funding needs through the issuance of senior and subordinated notes, securitized debt obligations, and federal funds purchased and securities loaned or sold under agreements to repurchase. In addition, we may utilize short-term and long-term FHLB advances secured by certain of our investment securities, multifamily real estate loans, and commercial real estate loans.

Our short-term borrowings include those borrowings with an original contractual maturity of one year or less and do not include the current portion of long-term debt. The short-term borrowings, which consist of short-term FHLB advances and federal funds purchased, securities loaned or sold under agreements to repurchase, decreased by $9.0 billion to $359 million as of June 30, 2019 from December 31, 2018 driven by maturities of our short-term FHLB advances.

48 Capital One Financial Corporation (COF)

Our long-term debt, which primarily consists of securitized debt obligations, senior and subordinated notes, and long-term FHLB advances, decreased by $629 million to $48.9 billion as of June 30, 2019 from December 31, 2018, primarily driven by securitized debt maturities outpacing issuances. We provide more information on our securitization activity in “Note 6—Variable Interest Entities and Securitizations.”

The following table summarizes issuances of securitized debt obligations, senior and subordinated notes, and FHLB advances and their respective maturities or redemptions for the second quarter and first six months of 2019 and 2018.

Table 30: Long-Term Funding

	Issuances				Maturities/Redemptions
	Three Months Ended June 30,				Three Months Ended June 30,
(Dollars in millions)	2019		2018		2019		2018
Securitized debt obligations	$	1,123	$	1,000	$	3,537	$	—
Senior and subordinated notes	1,411		2,000		750		—
FHLB advances	—		—		1		2
Total	$	2,534	$	3,000	$	4,288	$	2

	Issuances				Maturities/Redemptions
	Six Months Ended June 30,				Six Months Ended June 30,
(Dollars in millions)	2019		2018		2019		2018
Securitized debt obligations	$	2,623	$	1,000	$	4,126	$	1,250
Senior and subordinated notes	2,661		5,250		2,500		2,600
FHLB advances	—		—		251		8,607
Total	$	5,284	$	6,250	$	6,877	$	12,457

Credit Ratings

Our credit ratings impact our ability to access capital markets and our borrowing costs. Rating agencies base their ratings on numerous factors, including liquidity, capital adequacy, asset quality, quality of earnings and the probability of systemic support. Significant changes in these factors could result in different ratings.

Table 31 provides a summary of the credit ratings for the senior unsecured long-term debt of Capital One Financial Corporation, COBNA and CONA as of June 30, 2019 and December 31, 2018.

Table 31: Senior Unsecured Long-Term Debt Credit Ratings

	June 30, 2019			December 31, 2018
	Capital One Financial Corporation	COBNA	CONA	Capital One Financial Corporation	COBNA	CONA
Moody’s	Baa1	Baa1	Baa1	Baa1	Baa1	Baa1
S&P	BBB	BBB+	BBB+	BBB	BBB+	BBB+
Fitch	A-	A-	A-	A-	A-	A-

As of July 24, 2019, Moody’s Investors Service (“Moody’s”), Standard & Poor’s (“S&P”) and Fitch Ratings (“Fitch”) have us on a stable outlook.

MARKET RISK PROFILE

Market risk is the risk of possible economic loss in the value of our financial instruments due to changes in market factors. Our primary market risk exposures include interest rate risk, foreign exchange risk and commodity pricing risk. We are exposed to market risk primarily from the following operations and activities:

• Traditional banking activities of deposit gathering and lending;

49 Capital One Financial Corporation (COF)

• Asset/liability management activities including the management of investment securities, short-term and long-term borrowings and derivatives;

• Foreign operations in the U.K. and Canada within our Credit Card business; and

• Customer accommodation activities within our Commercial Banking business.

We have enterprise-wide risk management policies and limits, approved by our Board of Directors, which govern our market risk management activities. Our objective is to manage our exposure to market risk in accordance with these policies and limits based on prevailing market conditions and long-term expectations. We provide additional information below about our primary sources of market risk , our market risk management strategies and the measures that we use to evaluate these exposures.

Interest Rate Risk

Interest rate risk represents exposure to financial instruments whose value vary with the level or volatility of interest rates. We are exposed to interest rate risk primarily from the differences in the timing between the maturities or re-pricing of assets and liabilities. We manage our interest rate risk primarily by entering into interest rate swaps and other derivative instruments, including caps, floors, options, futures and forward contracts.

We use various industry standard market risk measurement techniques and analyses to measure, assess and manage the impact of changes in interest rates on our net interest income and our economic value of equity and changes in foreign exchange rates on our non-dollar-denominated earnings and non-dollar equity investments in foreign operations.

Net Interest Income Sensitivity

Our net interest income sensitivity measure estimates the impact on our projected 12-month baseline interest rate-sensitive revenue resulting from movements in interest rates. Interest rate-sensitive revenue consists of net interest income and certain components of other non-interest income significantly impacted by movements in interest rates, including changes in the fair value of free-standing interest rate derivatives. In addition to our existing assets and liabilities, we incorporate expected future business growth assumptions, such as loan and deposit growth and pricing, and plans for projected changes in our funding mix in our baseline forecast. In measuring the sensitivity of interest rate movements on our projected interest rate-sensitive revenue, we assume a hypothetical instantaneous parallel shift in the level of interest rates detailed in Table 32 below. At the current level of interest rates, our net interest income remains largely unchanged in most scenarios and decreases in the -100 and -150 basis points scenarios.

Economic Value of Equity

Our economic value of equity sensitivity measure estimates the impact on the net present value of our assets and liabilities, including derivative hedging activity, resulting from movements in interest rates. Our economic value of equity sensitivity measure is calculated based on our existing assets and liabilities, including derivatives, and do not incorporate business growth assumptions or projected plans for funding mix changes. Key assumptions used in the calculation include projecting rate sensitive prepayments for mortgage securities, loans and other assets, term structure modeling of interest rates, discount spreads, and deposit volume and pricing assumptions. In measuring the sensitivity of interest rate movements on our economic value of equity, we assume a hypothetical instantaneous parallel shift in the level of interest rates detailed in Table 32 below. Our current economic value of equity sensitivity profile demonstrates that our economic value of equity generally decreases as interest rates increase or decrease from the current levels.

50 Capital One Financial Corporation (COF)

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

Table 32: Interest Rate Sensitivity Analysis

	June 30, 2019		December 31, 2018
Estimated impact on projected baseline net interest income:
+200 basis points	0.5	%	(0.8	)%
+100 basis points	0.7		(0.2	)
+50 basis points	0.4		0.0
–50 basis points	(0.8	)	(0.3	)
–100 basis points	(1.8	)	(1.0	)
–150 basis points	(3.3	)	(2.1	)
–200 basis points	N/A		(3.7	)
Estimated impact on economic value of equity:
+200 basis points	(3.6	)	(7.1	)
+100 basis points	(0.5	)	(2.9	)
+50 basis points	0.2		(1.2	)
–50 basis points	(1.8	)	0.2
–100 basis points	(5.6	)	(0.8	)
–150 basis points	(11.7	)	(3.5	)
–200 basis points	N/A		(8.0	)

In addition to these industry standard measures, we continue to factor into our internal interest rate risk management decisions, the potential impact of alternative interest rate scenarios, such as stressed rate shocks, as well as steepening and flattening yield curve scenarios.

Limitations of Market Risk Measures

The interest rate risk models that we use in deriving these measures incorporate contractual information, internally-developed assumptions and proprietary modeling methodologies, which project borrower and depositor behavior patterns in certain interest rate environments. Other market inputs, such as interest rates, market prices and interest rate volatility, are also critical components of our interest rate risk measures. We regularly evaluate, update and enhance these assumptions, models and analytical tools as we believe appropriate to reflect our best assessment of the market environment and the expected behavior patterns of our existing assets and liabilities.

There are inherent limitations in any methodology used to estimate the exposure to changes in market interest rates. The sensitivity analysis described above contemplates only certain movements in interest rates and is performed at a particular point in time based on the existing balance sheet and, in some cases, expected future business growth and funding mix assumptions. The strategic actions that management may take to manage our balance sheet may differ significantly from our projections, which could cause our actual earnings and economic value of equity sensitivities to differ substantially from the above sensitivity analysis.

For further information on our interest rate exposures, see “Note 9—Derivative Instruments and Hedging Activities.”

Foreign Exchange Risk

Foreign exchange risk represents exposure to changes in the values of current holdings and future cash flows denominated in other currencies. We are exposed to foreign exchange risk primarily from the intercompany funding denominated in the pound sterling (“GBP”) and the Canadian dollar (“CAD”) that we provide to our businesses in the U.K. and Canada and net equity investments in those businesses. We are also exposed to foreign exchange risk due to changes in the dollar-denominated value of future earnings and cash flows from our foreign operations and from our Euro-denominated (“EUR”) borrowings.

51 Capital One Financial Corporation (COF)

Our non-dollar denominated intercompany funding and EUR-denominated borrowings expose our earnings to foreign exchange transaction risk. We manage these transaction risks by using forward foreign currency derivatives and cross-currency swaps to hedge our exposures. We measure our foreign exchange transaction risk exposures by applying a 1% U.S. dollar appreciation shock against the value of the non-dollar denominated intercompany funding and EUR-denominated borrowings and their related hedges, which shows the impact to our earnings from foreign exchange risk. Our intercompany funding outstanding was 646 million GBP and 756 million GBP as of June 30, 2019 and December 31, 2018, respectively, and 6.4 billion CAD and 6.5 billion CAD as of June 30, 2019 and December 31, 2018, respectively. Our EUR-denominated borrowings outstanding were 1.25 billion EUR as of June 30, 2019.

Our non-dollar equity investments in foreign operations expose us to translation risk in our AOCI and capital ratios. We manage our AOCI exposure by entering into foreign currency derivatives designated as net investment hedges. We measure these exposures by applying a 30% U.S. dollar appreciation shock, which we believe approximates a significant adverse shock over a one-year time horizon, against the value of the net equity invested in our foreign operations related net investment hedges where applicable. Our gross equity exposures in our U.K. and Canadian operations were 1.7 billion GBP and 1.6 billion GBP as of June 30, 2019 and December 31, 2018, respectively, and 1.3 billion CAD and 1.2 billion CAD as of June 30, 2019 and December 31, 2018, respectively.

As a result of our derivative management activities, we believe our net exposure to foreign exchange risk is minimal.

Risk related to Customer Accommodation Derivatives

We offer interest rate, commodity and foreign currency derivatives as an accommodation to our customers within our Commercial Banking business. We offset the majority of the market risk of these customer accommodation derivatives by entering into offsetting derivatives transactions with other counterparties. We use value-at-risk (“VaR”) as the primary method to both measure the market risk in our customer accommodation derivative activities on a daily basis. VaR is a statistical risk measure used to estimate the potential loss from movements in the recent market environment. We employ a historical simulation approach using the most recent 500 business days and use a 99 percent confidence level and a holding period of one business day. As a result of offsetting our customer exposures with other counterparties, we believe that our net exposure to customer accommodation derivatives is minimal. For further information on our risk related to customer accommodation derivatives, see “Note 9—Derivative Instruments and Hedging Activities.”

52 Capital One Financial Corporation (COF)

SUPERVISION AND REGULATION

In July 2019, the Federal Banking Agencies issued a final rule implementing limited changes to the Basel III Capital Rule, effective April 1, 2020. The changes are generally applicable only to organizations not subject to the Basel III Advanced Approaches. The rule includes revisions to the thresholds above which institutions must deduct certain assets from their common equity Tier 1 capital. These revisions would apply to us if we were no longer subject to the Basel III Advanced Approaches, as currently described in the October 2018 Tailoring Proposed Rule in our 2018 Form 10-K.

We provided additional information on our Supervision and Regulation in our 2018 Form 10-K under “Part I—Item 1. Business—Supervision and Regulation” and our Quarterly Report on Form 10-Q for the period ended March 31, 2019 under “MD&A—Supervision and Regulation.”

FORWARD-LOOKING STATEMENTS

From time to time, we have made and will make forward-looking statements, including those that discuss, among other things, strategies, goals, outlook or other non-historical matters; projections, revenues, income, returns, expenses, capital measures, capital allocation plans, accruals for claims in litigation and for other claims against us; earnings per share, efficiency ratio or other financial measures for us; future financial and operating results; our plans, objectives, expectations and intentions; and the assumptions that underlie these matters.

To the extent that any such information is forward-looking, it is intended to fit within the safe harbor for forward-looking information provided by the Private Securities Litigation Reform Act of 1995.

Numerous factors could cause our actual results to differ materially from those described in such forward-looking statements, including, among other things:

• general economic and business conditions in the U.S., the U.K., Canada or our local markets, including conditions affecting employment levels, interest rates, tariffs, collateral values, consumer income, credit worthiness and confidence, spending and savings that may affect consumer bankruptcies, defaults, charge-offs and deposit activity;

• an increase or decrease in credit losses, including increases due to a worsening of general economic conditions in the credit environment, and the impact of inaccurate estimates or inadequate reserves;

• compliance with financial, legal, regulatory, tax or accounting changes or actions, including the impacts of the Tax Act, the Dodd-Frank Act, and other regulations governing bank capital and liquidity standards;

• our ability to manage effectively our capital and liquidity;

• developments, changes or actions relating to any litigation, governmental investigation or regulatory enforcement action or matter involving us;

• the inability to sustain revenue and earnings growth;

• increases or decreases in interest rates and uncertainty with respect to the interest rate environment;

• our ability to access the capital markets at attractive rates and terms to capitalize and fund our operations and future growth;

• increases or decreases in our aggregate loan balances or the number of customers and the growth rate and composition thereof, including increases or decreases resulting from factors such as shifting product mix, amount of actual marketing expenses we incur and attrition of loan balances;

• the amount and rate of deposit growth;

• changes in deposit costs;

• our ability to execute on our strategic and operational plans;

53 Capital One Financial Corporation (COF)

• restructuring activities or other charges;

• our response to competitive pressures;

• changes in retail distribution strategies and channels, including the emergence of new technologies and product delivery systems;

• our success in integrating acquired businesses and loan portfolios, and our ability to realize anticipated benefits from announced transactions and strategic partnerships;

• the success of our marketing efforts in attracting and retaining customers;

• changes in the reputation of, or expectations regarding, the financial services industry or us with respect to practices, products or financial condition;

• any significant disruption in our operations or in the technology platforms on which we rely, including cybersecurity, business continuity and related operational risks, as well as other security failures or breaches of our systems or those of our customers, partners, service providers or other third parties;

• the potential impact to our business, operations and reputation from, and expenses and uncertainties associated with, the Cybersecurity Incident we announced on July 29, 2019, as discussed in “MD&A—Introduction—Cybersecurity Incident” and “Note 14—Commitments, Contingencies, Guarantees and Others”;

• our ability to maintain a compliance and technology infrastructure suitable for the nature of our business;

• our ability to develop and adapt to rapid changes in digital technology to address the needs of our customers and comply with applicable regulatory standards, including compliance with data protection and privacy standards;

• the effectiveness of our risk management strategies;

• our ability to control costs, including the amount of, and rate of growth in, our expenses as our business develops or changes or as it expands into new market areas;

• the extensive use, reliability and accuracy of the models and data we rely on in our business;

• our ability to recruit and retain talented and experienced personnel;

• the impact from, and our ability to respond to, natural disasters and other catastrophic events;

• changes in the labor and employment markets;

• fraud or misconduct by our customers, employees, business partners or third parties;

• merchants’ increasing focus on the fees charged by credit card networks; and

• other risk factors identified from time to time in our public disclosures, including in the reports that we file with the SEC.

Forward-looking statements often use words such as “will,” “anticipate,” “target,” “expect,” “estimate,” “intend,” “plan,” “goal,” “believe,” “forecast,” “outlook” or other words of similar meaning. Any forward-looking statements made by us or on our behalf speak only as of the date they are made or as of the date indicated, and we do not undertake any obligation to update forward-looking statements as a result of new information, future events or otherwise. For additional information on factors that could materially influence forward-looking statements included in this Report, see the risk factors set forth under “Part II—Item 1A. Risk Factors” in this Report and the risk factors set forth under “Part I—Item 1A. Risk Factors” in our 2018 Form 10-K. You should carefully consider the factors discussed above, and in our Risk Factors or other disclosure, in evaluating these forward-looking statements.

54 Capital One Financial Corporation (COF)

SUPPLEMENTAL TABLE

Reconciliation of Non-GAAP Measures

The following non-GAAP measures consist of TCE, tangible assets and metrics computed using these amounts, which include tangible book value per common share, return on average tangible assets, return on average TCE and TCE ratio. We consider these metrics to be key financial performance measures that management uses in assessing capital adequacy and the level of returns generated. While these non-GAAP measures are widely used by investors, analysts and bank regulatory agencies to assess the capital position of financial services companies, they may not be comparable to similarly-titled measures reported by other companies. The following table presents reconciliations of these non-GAAP measures to the applicable amounts measured in accordance with GAAP.

Table A—Reconciliation of Non-GAAP Measures

(Dollars in millions, except as noted)	June 30, 2019			December 31, 2018
Tangible Common Equity (Period-End)
Stockholders’ equity	$	55,767		$	51,668
Goodwill and intangible assets(1)	(14,886		)	(14,941		)
Noncumulative perpetual preferred stock	(4,360		)	(4,360		)
Tangible common equity	$	36,521		$	32,367
Tangible Common Equity (Quarterly Average)
Stockholders’ equity	$	54,570		$	51,114
Goodwill and intangible assets(1)	(14,900		)	(14,953		)
Noncumulative perpetual preferred stock	(4,360		)	(4,360		)
Tangible common equity	$	35,310		$	31,801
Tangible Assets (Period-End)
Total assets	$	373,619		$	372,538
Goodwill and intangible assets(1)	(14,886		)	(14,941		)
Tangible assets	$	358,733		$	357,597
Tangible Assets (Quarterly Average)
Total assets	$	371,095		$	365,243
Goodwill and intangible assets(1)	(14,900		)	(14,953		)
Tangible assets	$	356,195		$	350,290
Non-GAAP Ratio
TCE(2)	10.2		%	9.1		%

__________

⁽¹⁾  Includes impact of related deferred taxes.

⁽²⁾  TCE ratio is a non-GAAP measure calculated based on TCE divided by tangible assets.

55 Capital One Financial Corporation (COF)

Glossary and Acronyms

2018 Stock Repurchase Program: On June 28, 2018, we announced that our Board of Directors authorized the repurchase of up to $1.2 billion of shares of our common stock from the third quarter of 2018 through the end of the second quarter of 2019.

2019 Stock Repurchase Program: On June 27, 2019, we announced that our Board of Directors authorized the repurchase of up to $2.2 billion of shares of our common stock from the third quarter of 2019 through the end of the second quarter of 2020.

Annual Report: References to our “2018 Form 10-K” or “2018 Annual Report” are to our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

Banks: Refers to COBNA and CONA.

Basel Committee: The Basel Committee on Banking Supervision.

Basel III Advanced Approaches: The Basel III Advanced Approaches is mandatory for those institutions with consolidated total assets of $250 billion or more or consolidated total on-balance sheet foreign exposure of $10 billion or more. The Basel III Capital Rule modified the Advanced Approaches version of Basel II to create the Basel III Advanced Approaches.

Basel III Capital Rule: The Federal Banking Agencies issued a rule in July 2013 implementing the Basel III capital framework developed by the Basel Committee as well as certain Dodd-Frank Act and other capital provisions.

Basel III Standardized Approach: The Basel III Capital Rule modified Basel I to create the Basel III Standardized Approach, which requires for Basel III Advanced Approaches banking organizations that have yet to exit parallel run to use the Basel III Standardized Approach to calculate regulatory capital, including capital ratios, subject to transition provisions.

Capital One: Capital One Financial Corporation and its subsidiaries.

Carrying value (with respect to loans): The amount at which a loan is recorded on the consolidated balance sheets. For loans recorded at amortized cost, carrying value is the unpaid principal balance net of unamortized deferred loan origination fees and costs, and unamortized purchase premium or discount. For loans that are or have been on nonaccrual status, the carrying value is also reduced by any net charge-offs that have been recorded and the amount of interest payments applied as a reduction of principal under the cost recovery method. For credit card loans, the carrying value also includes interest that has been billed to the customer. For loans classified as held for sale, carrying value is the lower of carrying value as described in the sentences above, or fair value. For PCI loans, carrying value represents the present value of all expected cash flows including interest that has not yet been accrued, discounted at the effective interest rate, including any valuation allowance for impaired loans.

CECL: In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU requires an impairment model (known as the current expected credit loss (“CECL”) model) that is based on expected rather than incurred losses, with an anticipated result of more timely loss recognition. This guidance is effective for us on January 1, 2020, with early adoption permitted no earlier than January 1, 2019.

COBNA: Capital One Bank (USA), National Association, one of our fully owned subsidiaries, which offers credit and debit card products, other lending products and deposit products.

Common equity Tier 1 capital: Calculated as the sum of common equity, related surplus and retained earnings, and accumulated other comprehensive income net of applicable phase-ins, less goodwill and intangibles net of associated deferred tax liabilities and applicable phase-ins, less other deductions, as defined by regulators.

Company: Capital One Financial Corporation and its subsidiaries.

CONA: Capital One, National Association, one of our fully owned subsidiaries, which offers a broad spectrum of banking products and financial services to consumers, small businesses and commercial clients.

Credit risk: The risk of loss from an obligor’s failure to meet the terms of any contract or otherwise fail to perform as agreed.

Cybersecurity Incident: The unauthorized access by an outside individual who obtained certain types of personal information relating to people who had applied for our credit card products and to our credit card customers that we announced on July 29, 2019.

Derivative: A contract or agreement whose value is derived from changes in interest rates, foreign exchange rates, prices of securities or commodities, credit worthiness for credit default swaps or financial or commodity indices.

56 Capital One Financial Corporation (COF)

Discontinued operations: The operating results of a component of an entity, as defined by Accounting Standards Codification (“ASC”) 205, that are removed from continuing operations when that component has been disposed of or it is management’s intention to sell the component.

Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”): Regulatory reform legislation signed into law on July 21, 2010. This law broadly affects the financial services industry and contains numerous provisions aimed at strengthening the sound operation of the financial services sector.

Exchange Act: The Securities Exchange Act of 1934, as amended.

eXtensible Business Reporting Language (“XBRL”): A language for the electronic communication of business and financial data.

Federal Banking Agencies: The Federal Reserve, Office of the Comptroller of the Currency and Federal Deposit Insurance Corporation.

Federal Reserve: The Board of Governors of the Federal Reserve System.

FICO score: A measure of consumer credit risk provided by credit bureaus, typically produced from statistical modeling software created by FICO (formerly known as “Fair Isaac Corporation”) utilizing data collected by the credit bureaus.

Foreign currency derivative contracts: An agreement to exchange contractual amounts of one currency for another currency at one or more future dates.

Foreign exchange contracts: Contracts that provide for the future receipt or delivery of foreign currency at previously agreed-upon terms.

GSE or Agency: A government-sponsored enterprise or agency is a financial services corporation created by the United States Congress. Examples of U.S. government agencies include Federal National Mortgage Association (“Fannie Mae”), Federal Home Loan Mortgage Corporation (“Freddie Mac”), Government National Mortgage Association (“Ginnie Mae”) and the Federal Home Loan Banks (“FHLB”).

Impaired loans: A loan is considered impaired when, based on current information and events, it is probable that we will not be able to collect all amounts due from the borrower in accordance with the original contractual terms of the loan.

Interest rate sensitivity: The exposure to interest rate movements.

Interest rate swaps: Contracts in which a series of interest rate flows in a single currency are exchanged over a prescribed period. Interest rate swaps are the most common type of derivative contract that we use in our asset/liability management activities.

Investment grade: Represents Moody’s long-term rating of Baa3 or better; and/or a Standard & Poor’s or DBRS long-term rating of BBB- or better; or if unrated, an equivalent rating using our internal risk ratings. Instruments that fall below these levels are considered to be non-investment grade.

Investor entities: Entities that invest in community development entities (“CDE”) that provide debt financing to businesses and non-profit entities in low-income and rural communities.

LCR Rule: In September 2014, the Federal Banking Agencies issued final rules implementing the Basel III Liquidity Coverage Ratio in the United States. The LCR is calculated by dividing the amount of an institution’s high quality, unencumbered liquid assets by its estimated net cash outflow, as defined and calculated in accordance with Final LCR Rule.

Leverage ratio: Tier 1 capital divided by average assets after certain adjustments, as defined by the regulators.

Liquidity risk: The risk that the Company will not be able to meet its future financial obligations as they come due, or invest in future asset growth because of an inability to obtain funds at a reasonable price within a reasonable time period.

Loan-to-value (“LTV”) ratio: The relationship, expressed as a percentage, between the principal amount of a loan and the appraised value of the collateral securing the loan.

Managed presentation: A non-GAAP presentation of financial results that includes reclassifications to present revenue on a fully taxable-equivalent basis. Management uses this non-GAAP financial measure at the segment level, because it believes this provides information to enable investors to understand the underlying operational performance and trends of the particular business segment and facilitates a comparison of the business segment with the performance of competitors.

57 Capital One Financial Corporation (COF)

Market risk: The risk that an institution’s earnings or the economic value of equity could be adversely impacted by changes in interest rates, foreign exchange rates or other market factors.

Master netting agreement: An agreement between two counterparties that have multiple contracts with each other that provides for the net settlement of all contracts through a single payment in the event of default or termination of any one contract.

Mortgage-backed security (“MBS”): An asset-backed security whose cash flows are backed by the principal and interest payments of a set of mortgage loans.

Mortgage servicing rights (“MSR”): The right to service a mortgage loan when the underlying loan is sold or securitized. Servicing includes collections for principal, interest and escrow payments from borrowers and accounting for and remitting principal and interest payments to investors.

Net interest margin: The result of dividing net interest income by average interest-earning assets.

Nonperforming loans: Generally include loans that have been placed on nonaccrual status. We also do not report loans classified as held for sale as nonperforming.

Option-ARM loans: The option-ARM real estate loan product is an adjustable-rate mortgage (“ARM”) loan that initially provides the borrower with the monthly option to make a fully-amortizing, interest-only or minimum fixed payment. After the initial payment option period, usually five years, the recalculated minimum payment represents a fully-amortizing principal and interest payment that would effectively repay the loan by the end of its contractual term.

Other-than-temporary impairment (“OTTI”): An impairment charge taken on a security whose fair value has fallen below the carrying value on the balance sheet and whose value is not expected to recover through the holding period of the security.

Public Funds deposits: Deposits that are derived from a variety of political subdivisions such as school districts and municipalities.

Purchased credit-impaired (“PCI”) loans: Loans acquired in a business combination that were recorded at fair value at acquisition and subsequently accounted for based on cash flows expected to be collected in accordance with ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality.

Purchase volume: Consists of purchase transactions, net of returns, for the period, and excludes cash advance and balance transfer transactions.

Rating agency: An independent agency that assesses the credit quality and likelihood of default of an issue or issuer and assigns a rating to that issue or issuer.

Recorded investment: The amount of the investment in a loan which includes any direct write-down of the investment.

Repurchase agreement: An instrument used to raise short-term funds whereby securities are sold with an agreement for the seller to buy back the securities at a later date.

Restructuring charges: Charges associated with the realignment of resources supporting various businesses, primarily consisting of severance and related benefits pursuant to our ongoing benefit programs and impairment of certain assets related to business locations and activities being exited.

Return on average assets: Calculated based on income from continuing operations, net of tax, for the period divided by average total assets for the period.

Return on average common equity: Calculated based on (i) income from continuing operations, net of tax; (ii) less dividends and undistributed earnings allocated to participating securities; (iii) less preferred stock dividends, for the period, divided by average common equity. Our calculation of return on average common equity may not be comparable to similarly-titled measures reported by other companies.

Return on average tangible common equity: A non-GAAP financial measure calculated based on (i) income from continuing operations, net of tax; (ii) less dividends and undistributed earnings allocated to participating securities; (iii) less preferred stock dividends, for the period, divided by average tangible common equity. Our calculation of return on average tangible common equity may not be comparable to similarly-titled measures reported by other companies.

Risk-weighted assets: On- and off-balance sheet assets that are assigned to one of several broad risk categories and weighted by factors representing their risk and potential for default.

Securitized debt obligations: A type of asset-backed security and structured credit product constructed from a portfolio of fixed-income assets.

58 Capital One Financial Corporation (COF)

Subprime: For purposes of lending in our Credit Card business, we generally consider FICO scores of 660 or below, or other equivalent risk scores, to be subprime. For purposes of auto lending in our Consumer Banking business, we generally consider FICO scores of 620 or below to be subprime.

Tangible common equity (“TCE”): A non-GAAP financial measure. Common equity less goodwill and intangible assets adjusted for deferred tax liabilities associated with non-tax deductible intangible assets and tax deductible goodwill.

Tax Act: The Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018 enacted on December 22, 2017.

Troubled debt restructuring (“TDR”): A TDR is deemed to occur when the contractual terms of a loan agreement are modified by granting a concession to a borrower that is experiencing financial difficulty.

Unfunded commitments: Legally binding agreements to provide a defined level of financing until a specified future date.

U.K. PPI Reserve: U.K. payment protection insurance customer refund reserve.

U.S. GAAP: Accounting principles generally accepted in the United States of America. Accounting rules and conventions defining acceptable practices in preparing financial statements in the U.S.

Variable interest entity (“VIE”): An entity that (i) lacks enough equity investment at risk to permit the entity to finance its activities without additional financial support from other parties; (ii) has equity owners that lack the right to make significant decisions affecting the entity’s operations; and/or (iii) has equity owners that do not have an obligation to absorb or the right to receive the entity’s losses or return.

59 Capital One Financial Corporation (COF)

Acronyms

AML: Anti-money laundering

AOCI: Accumulated other comprehensive income

ASU: Accounting Standards Update

ASC: Accounting Standards Codification

AWS: Amazon Web Services, Inc.

BHC: Bank holding company

bps: Basis points

CAD: Canadian dollar

CCAR: Comprehensive Capital Analysis and Review

CCP: Central Counterparty Clearinghouse, or Central Clearinghouse

CDE: Community development entities

CECL: Current expected credit loss

CEO: Chief Executive Officer

CFPB: Consumer Financial Protection Bureau

CMBS: Commercial mortgage-backed securities

CME: Chicago Mercantile Exchange

COEP: Capital One (Europe) plc

COF: Capital One Financial Corporation

CVA: Credit valuation adjustment

DVA: Debit valuation adjustment

EU: European Union

Fannie Mae: Federal National Mortgage Association

FASB: Financial Accounting Standards Board

FCA: U.K. Financial Conduct Authority

FCM: Futures commission merchant

FDIC: Federal Deposit Insurance Corporation

FHLB: Federal Home Loan Banks

FinCEN: Financial Crimes Enforcement Network

Fitch: Fitch Ratings

FOS: Financial Ombudsman Service

Freddie Mac: Federal Home Loan Mortgage Corporation

FVC: Fair Value Committee

GAAP: Generally accepted accounting principles in the U.S.

GBP: Great British pound

GDPR: General Data Protection Regulation

Ginnie Mae: Government National Mortgage Association

GSE or Agency: Government-sponsored enterprise

IRM: Independent Risk Management

LCH: LCH Group

LCR: Liquidity coverage ratio

LIBOR: London Interbank Offered Rate

Moody’s: Moody’s Investors Service

MSR: Mortgage servicing rights

60 Capital One Financial Corporation (COF)

OCC: Office of the Comptroller of the Currency

OCI: Other comprehensive income

OTC: Over-the-counter

OTTI: Other-than-temporary impairment

PCA: Prompt corrective action

PCI: Purchased credit-impaired

PCCR: Purchased credit card relationship

PIPEDA: Personal Information Protection and Electronic Documents Act

PPI: Payment protection insurance

REO: Real estate owned

RMBS: Residential mortgage-backed securities

S&P: Standard & Poor’s

SEC: U.S. Securities and Exchange Commission

TCE: Tangible common equity

TDR: Troubled debt restructuring

U.K.: United Kingdom

U.S.: United States of America

VAC: Valuations Advisory Committee

61 Capital One Financial Corporation (COF)

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

62 Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

	Three Months Ended June 30,						Six Months Ended June 30,
(Dollars in millions, except per share-related data)	2019			2018			2019			2018
Interest income:
Loans, including loans held for sale	$	6,383		$	5,989		$	12,751		$	12,123
Investment securities	629			539			1,284			991
Other	64			68			133			119
Total interest income	7,076			6,596			14,168			13,233
Interest expense:
Deposits	870			622			1,687			1,161
Securitized debt obligations	139			124			282			231
Senior and subordinated notes	310			289			624			540
Other borrowings	11			10			38			32
Total interest expense	1,330			1,045			2,631			1,964
Net interest income	5,746			5,551			11,537			11,269
Provision for credit losses	1,342			1,276			3,035			2,950
Net interest income after provision for credit losses	4,404			4,275			8,502			8,319
Non-interest income:
Interchange fees, net	820			723			1,578			1,366
Service charges and other customer-related fees	352			391			705			823
Net securities gains (losses)	15			(1		)	39			7
Other	191			528			348			636
Total non-interest income	1,378			1,641			2,670			2,832
Non-interest expense:
Salaries and associate benefits	1,558			1,430			3,131			2,950
Occupancy and equipment	521			503			1,014			993
Marketing	546			425			1,063			839
Professional services	314			234			605			444
Communications and data processing	329			317			632			623
Amortization of intangibles	29			43			59			87
Other	482			472			946			1,061
Total non-interest expense	3,779			3,424			7,450			6,997
Income from continuing operations before income taxes	2,003			2,492			3,722			4,154
Income tax provision	387			575			696			894
Income from continuing operations, net of tax	1,616			1,917			3,026			3,260
Income (loss) from discontinued operations, net of tax	9			(11		)	11			(8		)
Net income	1,625			1,906			3,037			3,252
Dividends and undistributed earnings allocated to participating securities	(12		)	(12		)	(24		)	(23		)
Preferred stock dividends	(80		)	(80		)	(132		)	(132		)
Net income available to common stockholders	$	1,533		$	1,814		$	2,881		$	3,097
Basic earnings per common share:
Net income from continuing operations	$	3.24		$	3.76		$	6.11		$	6.39
Income (loss) from discontinued operations	0.02			(0.02		)	0.02			(0.02		)
Net income per basic common share	$	3.26		$	3.74		$	6.13		$	6.37
Diluted earnings per common share:
Net income from continuing operations	$	3.22		$	3.73		$	6.08		$	6.35
Income (loss) from discontinued operations	0.02			(0.02		)	0.02			(0.02		)
Net income per diluted common share	$	3.24		$	3.71		$	6.10		$	6.33

63 Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

	Three Months Ended June 30,					Six Months Ended June 30,
(Dollars in millions)	2019		2018			2019			2018
Net income	$	1,625	$	1,906		$	3,037		$	3,252
Other comprehensive income (loss), net of tax:
Net unrealized gains (losses) on securities available for sale	272		(65		)	564			(650		)
Net changes in securities held to maturity	6		8			12			433
Net unrealized gains (losses) on hedging relationships	537		(113		)	814			(431		)
Foreign currency translation adjustments	15		(24		)	45			(17		)
Other	0		0			(2		)	(1		)
Other comprehensive income (loss), net of tax	830		(194		)	1,433			(666		)
Comprehensive income	$	2,455	$	1,712		$	4,470		$	2,586

See Notes to Consolidated Financial Statements.
	64	Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Dollars in millions, except per share-related data)	June 30, 2019			December 31, 2018
Assets:
Cash and cash equivalents:
Cash and due from banks	$	5,184		$	4,768
Interest-bearing deposits and other short-term investments	9,927			8,418
Total cash and cash equivalents	15,111			13,186
Restricted cash for securitization investors	710			303
Investment securities:
Securities available for sale	45,658			46,150
Securities held to maturity	35,475			36,771
Total investment securities	81,133			82,921
Loans held for investment:
Unsecuritized loans held for investment	211,556			211,702
Loans held in consolidated trusts	32,904			34,197
Total loans held for investment	244,460			245,899
Allowance for loan and lease losses	(7,133		)	(7,220		)
Net loans held for investment	237,327			238,679
Loans held for sale, at lower of cost or fair value	1,829			1,192
Premises and equipment, net	4,243			4,191
Interest receivable	1,544			1,614
Goodwill	14,545			14,544
Other assets	17,177			15,908
Total assets	$	373,619		$	372,538
Liabilities:
Interest payable	$	437		$	458
Deposits:
Non-interest-bearing deposits	23,374			23,483
Interest-bearing deposits	231,161			226,281
Total deposits	254,535			249,764
Securitized debt obligations	16,959			18,307
Other debt:
Federal funds purchased and securities loaned or sold under agreements to repurchase	359			352
Senior and subordinated notes	31,822			30,826
Other borrowings	93			9,420
Total other debt	32,274			40,598
Other liabilities	13,647			11,743
Total liabilities	317,852			320,870
Commitments, contingencies and guarantees (see Note 14)
Stockholders’ equity:
Preferred stock (par value $.01 per share; 50,000,000 shares authorized; 4,475,000 shares issued and outstanding as of both June 30, 2019 and December 31, 2018)	0			0
Common stock (par value $.01 per share; 1,000,000,000 shares authorized; 671,406,101 and 667,969,069 shares issued as of June 30, 2019 and December 31, 2018, respectively, 470,333,041 and 467,717,306 shares outstanding as of June 30, 2019 and December 31, 2018, respectively)	7			7
Additional paid-in capital, net	32,262			32,040
Retained earnings	38,386			35,875
Accumulated other comprehensive income (loss)	170			(1,263		)
Treasury stock, at cost (par value $.01 per share; 201,073,060 and 200,251,763 shares as of June 30, 2019 and December 31, 2018, respectively)	(15,058		)	(14,991		)
Total stockholders’ equity	55,767			51,668
Total liabilities and stockholders’ equity	$	373,619		$	372,538

See Notes to Consolidated Financial Statements.
	65	Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

(Dollars in millions)	Preferred Stock			Common Stock			Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total Stockholders’ Equity
	Shares	Amount		Shares	Amount
Balance as of December 31, 2018	4,475,000	$	0	667,969,069	$	7	$	32,040	$	35,875		$	(1,263	)	$	(14,991	)	$	51,668
Cumulative effects from adoption of new lease standard									(11		)							(11		)
Comprehensive income									1,412			603						2,015
Dividends—common stock(1)				32,700	0		3		(194		)							(191		)
Dividends—preferred stock									(52		)							(52		)
Purchases of treasury stock															(65		)	(65		)
Issuances of common stock and restricted stock, net of forfeitures				2,641,635	0		52											52
Exercises of stock options				5,000	0		0											0
Compensation expense for restricted stock units and stock options							65											65
Balance as of March 31, 2019	4,475,000	$	0	670,648,404	$	7	$	32,160	$	37,030		$	(660	)	$	(15,056	)	$	53,481
Comprehensive income									1,625			830						2,455
Dividends—common stock(1)				8,680	0		1		(189		)							(188		)
Dividends—preferred stock									(80		)							(80		)
Purchases of treasury stock															(2		)	(2		)
Issuances of common stock and restricted stock, net of forfeitures				745,017	0		46											46
Exercises of stock options				4,000	0		0											0
Compensation expense for restricted stock units and stock options							55											55
Balance as of June 30, 2019	4,475,000	$	0	671,406,101	$	7	$	32,262	$	38,386		$	170		$	(15,058	)	$	55,767

(Dollars in millions)	Preferred Stock			Common Stock			Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total Stockholders’ Equity
	Shares	Amount		Shares	Amount
Balance as of December 31, 2017	4,475,000	$	0	661,724,927	$	7	$	31,656	$	30,700		$	(926	)	$	(12,707	)	$	48,730
Cumulative effects from adoption of new accounting standards									201			(201		)				0
Comprehensive income (loss)									1,346			(472		)				874
Dividends—common stock(1)				22,467	0		2		(199		)							(197		)
Dividends—preferred stock									(52		)							(52		)
Purchases of treasury stock