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Capital One Financial Corp  (NYSE:COF)
Q1 2019 Earnings Call
April 25, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Capital One First Quarter 2019 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. (Operator Instructions)

I would now like to turn the call over to Mr. Jeff Norris, Senior Vice President of Finance. Sir, you may begin.

Jeff Norris -- Senior Vice President of Finance

Thanks very much, Leanne, and welcome everyone to Capital One's First Quarter 2019 Earnings Conference Call. As usual, we are webcasting live over the Internet. To access the call on the Internet, please log on to Capital One's website at capitalone.com and follow the links from there. In addition to the press release and financials, we have included a presentation summarizing our first quarter 2019 results. With me today are Mr. Richard Fairbank, Capital One's Chairman and Chief Executive Officer; and Mr. Scott Blackley, Capital One's Chief Financial Officer. Rich and Scott will walk you through this presentation. To access a copy of the presentation and press release, please go to Capital One's website, click on Investors, then click on quarterly earnings release.

Please note that this presentation may contain forward-looking statements. Information regarding Capital One's financial performance and any forward-looking statements contained in today's discussion and the materials speak only as of the particular date or dates indicated in the materials. Capital One does not undertake any obligation to update or revise any of this information whether as a result of new information, future events or otherwise. Numerous factors could cause our actual results to differ materially from those described in forward-looking statements. And for more information on these factors, please see the section titled forward-looking information in the earnings release presentation and the risk factors section in our annual and quarterly reports accessible at the Capital One website and filed with the SEC.

Now I'll turn the call over to Mr. Blackley. Scott?

Scott Blackley -- Chief Financial Officer

Thanks, Jeff. I'll begin tonight with Slide 3. Capital One earned $1.4 billion or $2.86 per share in the first quarter. Net of adjusting items earnings per share were $2.90. The only adjusting item we had in the quarter was $25 million of launch and integration cost associated with our Walmart partnership.

Slide 13 outlines the financial impacts of this adjusting item. Pre-provision GAAP earnings increased 18% on a linked-quarter basis and 2% year-over-year to $3.4 billion. Revenue of $7.1 billion was 1% higher than Q4 '18 and 3% higher than a year ago. Relative to the prior quarter non-interest expense was down 11% largely from a lack of Q4 seasonal spending. Compared to the prior year non-interest expense was higher by 3% driven by increased marketing spend as operating expenses remained flat.

Provision for credit losses increased 3% on a linked-quarter basis driven by an allowance build in the quarter. Charge-offs were relatively flat as they were modestly offsetting seasonal changes in our Auto and Domestic Card businesses. On a year-over-year basis, provision costs were higher by 1% driven by a larger allowance build in the quarter, partially offset by lower charge-offs in our Domestic Card business.

Let me take a moment to explain the quarterly movements in allowance across our businesses which are detailed in Table eight of our earnings supplement. Reserves in our commercial business increased by $55 million driven by the establishment of reserves related to a few specific credits and loan growth. Our credit card business saw an allowance increase of $25 million, driven by a build in International Card partially offset by small released in Domestic Card. In our consumer business there was a build of $14 million, driven by growth and portfolio mix in our auto business.

Turning to Slide 4. Net interest margin was 6.86% down seven basis points year-over-year. The strong growth in Capital One's 360 deposit products drove an increase in our average deposit costs, which was the key driver of the year-over-year decrease in our net interest margin. We continue to expect deposit cost to be a headwind in NIM throughout 2019. I also want to provide a reminder about Q2 NIM seasonality. Recall that net interest margin declined by 27 basis points from Q1 to Q2 last year and around half of that decline was attributable to normal seasonal factors.

Turning to Slide 5. Our common equity Tier 1 capital ratio on a Basel III standardized basis was 11.9%. We continue to view our capital need to be around 11% CET1. We are keeping a close eye on how CECL will impact CCAR stress testing, which could impact our review of our future capital need.

We continue to believe that we have sufficient capital and earnings power to support growth. The Walmart portfolio acquisition later this year, the phased-in impacts of adopting CECL on January 1, 2020, as well as a 2019 CCAR capital distribution requested meaningfully higher than 2018, of course, which is subject to regulatory approval.

Before I turn the call over to Rich, let me take a moment to update you on our Walmart partnership. We now expect the acquired portfolio will be in the low $8 billion range at closing. Adjusting for this portfolio size we now expect the day one allowance build to be around $100 million. Of course the actual balance is acquired and the day one allowance build will depend on the program performance between now and close.

We continue to expect that in 2019 we will incur $225 million in onetime expenses to launch the new originations program and integrate the acquired portfolio. And that the overall Walmart partnership inclusive of those costs will have returns and resilience in line with our domestic credit card business.

And with that, I'll turn the call over to Rich. Rich?

Richard D. Fairbank -- Chairman and Chief Executive Officer

Thank you, Scott, and good evening. Slide 8 summarizes first quarter results for our credit card business. First quarter pre-tax income was up 7% from the prior year, as the positive impacts of revenue growth and lower provision for credit losses were partially offset by higher non-interest expense. Credit card segment results and trends are largely driven by the performance of our Domestic Card business, which is shown on Slide 9.

In the first quarter, Domestic Card ending loan balances were up $2.5 billion or about 3% compared to the first quarter of last year. Average loans grew about 2%. Revenue increased 4% from the first quarter of 2018 driven by purchase volume growth and loan growth. Revenue margin increased 21 basis points to 16.15% for the quarter. Non-interest expense was up about 6% compared to the prior year quarter.

Operating expenses increased as we began to ramp up operational capabilities for a smooth Walmart conversion and launch later this year. The larger driver of increased non-interest expense was higher marketing.

For years we have worked tirelessly to build a franchise at the highest end of the marketplace, heavy spenders. Heavy spenders are hard to get but exceptionally valuable to have. They are long-term annuities that pay off on the bottom line with strong interchange revenue, loan balances from occasional revolving, very low charge-offs and very low attrition. They can't be bought with just marketing. They have to be earned with great products and exceptional customer experience leading digital capabilities and a trusted brand. Great marketing then tells the story. We are seeing accelerating traction growing our heavy spenders franchise. Account originations have grown to record levels over the last two quarters. Led by heavy spenders Domestic Card purchase volume growth was 8.3% from the prior year quarter or 10.3% if normalized for two fewer processing days in the fourth -- in the first quarter of 2019.

Net interchange growth was 18% aided by a favorable rewards liability adjustment. Excluding that net interchange growth was in line with purchase volume growth. Notably we've been able to grow our spender franchise without sacrificing revenue margin. Our growth has not just been with heavy spenders. In the first quarter, overall Branded Card account originations grew 16% year-over-year. Branded Card's exclude all private label and co-branded cards.

Loan growth is also picking up even as we continue to be cautious on credit lines. Domestic Card loan growth was 2.6% year-over-year, including 4% growth in Branded Card loans offset by some shrinkage in partnerships. Strong credit performance continue to be a driver of Domestic Card results in the first quarter. The charge-off rate for the quarter was down, excuse me, was 5.04% down 22 basis points from the first quarter of 2018. Growth math continues to be a good guy. Credit performance on the loans booked during our growth surge in 2014, 2015 and 2016 continued to improve year-over-year and drove the year-over-year improvement in the overall Domestic Card charge-off rate.

Pulling up in the first quarter competition in the credit card marketplace was relatively stable and rational and our Domestic Card business delivered strong results and gained momentum.

Slide 10 summarizes first quarter results for our Consumer Banking business. Both ending loans and average loans decreased about 21% compared to the prior year quarter driven by the home loans portfolio sale in 2018. Ending loans in our auto business were up 3% year-over-year. Auto originations declined and loan growth decelerated as competitive intensity in auto increased in the quarter.

Ending deposits in the consumer bank were up 6% versus the prior year quarter with a 38 basis point increase in average deposit interest rate. We're making digital banking easy with our award-winning mobile banking experience powered by the rollout of our national banking strategy, our strongest deposit growth is in Capital One 360 products driving a product mix shift toward higher rate deposit products.

Over the past year the changing product mix, rising interest rates and increasing competition have put upward pressure on deposit rates. Looking ahead, we expect further increases in average deposit interest rate as faster growth in higher rate deposits continue to change our product mix.

Consumer Banking revenue increased about 3% from the first quarter of last year. Growth in auto loans and retail deposits was partially offset by the revenue reduction from the home loans portfolio sale. Non-interest expense was essentially flat compared to the prior year quarter.

Provision for credit losses was also essentially flat from the first quarter of 2018. The auto charge-off rate improved modestly compared to the prior year quarter and we had a modest allowance build in the first quarter. Better-than-expected auction values continue to support strong auto credit. Over the longer-term we continue to expect that the auto charge-off rate will increase gradually as the cycle plays out.

Moving to Slide 11, I'll discuss our Commercial Banking business. First quarter ending loan balances were up 8% year-over-year. Growth in average loans was 10%. Linked quarter growth was more modest with ending loans up about 1% and average loans up about 3%. Commercial bank ending deposits were down 9% from the prior year. Over the past year commercial deposit customers have rotated out of deposits and into higher-yielding investments in the rising interest rate environment. First quarter revenue was down 2% from the prior year quarter driven by lower average deposit balances. The revenue benefit of higher average loan balances was offset by lower loan margins.

Non-interest expense was up 3% compared to the prior year quarter as we continue to invest in technology and other business initiatives. Provision for credit losses increased compared to the first quarter of 2018. When we actually posted a net benefit from credit performance because of an unusually large allowance release. This year we posted an allowance build in the first quarter driven by loan growth and the establishment of reserves related to a few specific credits.

The credit performance of our Commercial Banking business remains strong. The charge-off rate for the quarter was 0.08%. The commercial bank criticized performing loan rate for the quarter was 2.9% and the criticized nonperforming loan rate was 0.5%.

Pulling up, increasing competition from nonbanks continues to drive less favorable terms in the commercial lending marketplace. We are keeping a watchful eye on market conditions and staying disciplined in our underwriting and origination choices.

In the first quarter, Capital One continue to post solid results as we invest to grow and to drive our digital transformation. Compared to the first quarter of 2018, revenue non-interest expense pre-provision earnings and earnings per share all increased. Provision for credit losses was essentially flat. First quarter marketing expense declined from the unusually elevated level in the fourth quarter, but was up compared to the prior year quarter. Our marketing investments are building our momentum and creating great value.

In our Domestic Card business, marketing is strengthening our heavy spender franchise and driving strong year-over-year growth in new accounts purchase volume and net interchange revenue. In our Consumer Banking business our national advertising brand and compelling digital customer experience enabled us to post strong retail deposit growth without being the industry price leader.

Turning to 2019. Marketing will as always depend on our continuous assessment of opportunities in the competitive marketplace. With the momentum we have we expect full year marketing for 2019 to be modestly higher than in full year 2018 with more normal seasonal patterns than the exaggerated patterns we saw last year.

In closing tonight, I'd like to pull-up and provide some context on our digital transformation and the impact we expected to have on key aspects of our longer-term financial performance. When we try to envision the future of banking, we don't start with how banking works or what other banks are doing. We look at how technology is changing our lives. Just look at the technology and applications you use everyday. What is common to all of them is they provide you with instant solutions customized for you. What powers that? Tech companies that are built on modern technology stack leveraging the power of Big Data and machine learning in real-time.

Banking is headed to the same destination. Consumers will demand it. Technology competition will necessitate it. The challenge is banks aren't built to deliver those capabilities. What we're doing at Capital One is building a technology company that does banking. Instead of a bank that just uses technology. Our transformation stands on the shoulders of everything we have built in our 25-year journey at Capital One. While we didn't use the term back then, we were in original fintech. It is striking that our battle cry at the founding of our company was to build the tech company that does banking. The reason that we declared the same battle cry six years ago, is that we realized that the world had changed so much, that we needed to yet again build sweepingly new infrastructure and capabilities from the ground up.

We are now six years into this latest technology transformation. Our progress is accelerating. We've hired thousands of engineers and built a scale engineering organization. We have deeply embedded designers, data scientists and product managers into our business. We work in agile. We harness the power of highly flexible APIs and micro services to deliver and deploy software. We have embraced the public cloud and are well on our way to migrating our applications and data to the cloud. We are now considered one of the most cloud forward companies in the world.

Our technology transformation is motivated by many things beyond cost faster to market, better products, better customer experience, better risk management, more effective operations, more growth. We are already seeing significant benefits across the company. But an important beneficiary will be the economics of our business. Digital productivity gains are driving operating leverage.

Since our journey began, operating efficiency ratio has improved by 400 basis points even as we have continued to invest in our transformation. We are operating today with one foot in the legacy data center environment and one foot in the cloud as we work to complete our cloud journey. As we migrate an increasing percentage of our applications and data to the cloud, we will have all those costs and at the same time until we fully exit our data centers, we also bear the significant legacy cost as well.

We expect to complete the exit of our data centers by the end of 2020, which should generate significant cost and efficiency improvement opportunities beginning in 2021. Until then we will continue to drive for operating efficiency improvement even with the elevated cost of straddling both environments. We expect to achieve modest improvements in full year operating efficiency ratio, net of adjustments in both 2019 and 2020. Adjusting items in 2019 include onetime Walmart launch and integration expenses. We expect full year operating efficiency ratio, net of adjustments to improve to 42% in 2021. Powered by the exit of our data centers, continuing technology innovation and Walmart. And we expect this operating efficiency improvement to drive significant improvement in total efficiency ratio by 2021 as well.

The improvements in efficiency are -- but one of many benefits we will enjoy from our technology transformation. We are well positioned to succeed in a rapidly changing marketplace and create long-term shareholder value.

Now Scott and I would be happy to answer your questions.

Jeff Norris -- Senior Vice President of Finance

Thank you, Rich. We'll now start the Q& A session. As a courtesy to other investors and analysts that may wish to ask a question, please limit yourself to one question plus a single follow-up. If you have any follow-up questions after the Q&A session, the investor relations team will be available after the call. Leanne, let's start the Q& A.

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question comes from Eric Wasserstrom with UBS.

Eric Wasserstrom -- UBS -- Analyst

Great. Thanks very much. Rich, in -- just a follow-up on the marketing commentary. You, last quarter you signaled that you're focusing on acquiring accounts but keeping lines low in anticipation or maybe some potential change in the credit environment, but what give you the flexibility to increase lines at a future date. Is that still the strategy or is there any change to that approach?

Richard D. Fairbank -- Chairman and Chief Executive Officer

So, Eric, we are being cautious online. Let me tell you about how that works. It means that we want to see more validation before extending more line. And in fact, with every passing month we are seeing increasing validation in the performance of recent vintages. And this orders well for more line extensions over time.

Eric Wasserstrom -- UBS -- Analyst

Great. And maybe just to follow-up on that. We've seen some information of data that points to some weakening in credit in kind of mid-FICO modestly better than median income cohorts. Are you seeing any like -- anything like that or just more broadly, are you seeing any particular subpopulations where there is evidence of deteriorating asset quality?

Richard D. Fairbank -- Chairman and Chief Executive Officer

Eric, I think that we noticed and we've seen this -- we're kind of on the lookout for it, but we have now with the benefit of hindsight seen some degradation of performance of consumers for a given FICO score. This isn't the Capital One thing. In fact, it isn't even an industry origination thing. This is really a -- we can see this all the way just sort of looking at bureau data. And the reason that we sort of hypothesize this is, well, let me tell you, our hypothesis for this -- this modest effect, but I think it's important to note is that given the how long derogatory data stays on the credit bureaus. The derogatory data from the great recession has over the last few years been rolling off. And so, our hypothesis has been and one of the reasons for our own conservatism has been -- we maybe looking at data that might not paint the full picture of a consumers sort of credit history. So we've been on the lookout for that. We have seen the effect sort of by FICO score. Different people would have a different hypothesis for the effect.

Now in terms of what we do, we build the comprehensive credit models that are far beyond sort of just a snapshot of bureau score. And so, I think, we feel very good about our credit, the recent vintages the performance of fact, my comments earlier about validation with respect to performance, making us more comfortable with some line increases is indicative of that same point. But the part of the context for our caution has been not only sort of how deep we are in the cycle, but also the -- this is the time period when there is sort of less information than there once was on the bureau and we all need to be careful consumers of that information as we make our credit decisions.

Jeff Norris -- Senior Vice President of Finance

Next question please?

Operator

And we'll take our next question from Sanjay Sakhrani from KBW.

Sanjay Sakhrani -- Keefe Bruyette & Woods -- Analyst

Thanks. Appreciate the color on the cloud migration and the cost reductions from closing the data centers. I guess two questions on that. One, Rich, can you just talk about what competitive advantage it gives you from moving to the cloud and sort of the functionality there? And then secondly on the 42% in 2021, is it fair to assume that there could be an expansion that's more greater than normal in the future, because you get more leverage off of that, maybe Scott, you could address that? Thank you.

Scott Blackley -- Chief Financial Officer

So we've talked for years about the benefits of going to the cloud. And I think there are many benefits and ironically the costs are not really at the top of the list. Our -- what we hypothesized and we are finding, is that things are faster the scalability is much greater the time it takes to provision a hardware and software environment is much faster. The ability to scale up and down basically on demand. The ability to tap into the world's innovation that is going on in that segment and also benefits in security and reliability. And along the way there are economic benefits as well. So it's a pretty compelling case.

The big issue and the issue that all American corporations faced is not G on paper is -- are there a lot of benefits from going to the cloud. The big question is how on earth are we going to get there from here. And that requires confronting really for most companies, decades and decades of heritage in terms of who they are, the talent, the infrastructure, the way the company works culture. And it is -- the big issue is the journey.

And therefore, the big news for Capital One is that we are announcing that, we have line of sight to the completion of that journey. That's not the completion of our entire tech transformation in the sense. We will probably always be in a tech transformation because the world is in one, but it's a very important milestone for Capital One to arrive at this destination, but it's really a story of journey. And that is -- that's what American companies are really going to have to confront each of them in their own way as they decide what they want to be when they grow up from a technology point of view. With respect to the 42% of use that -- explain your question again when you said will that expand?

Sanjay Sakhrani -- Keefe Bruyette & Woods -- Analyst

Yeah, I guess, is there more leveragibility of that 42%, because you're moving to the cloud. And you're not as the goal data center intensive?

Richard D. Fairbank -- Chairman and Chief Executive Officer

No. I think that the -- the full year run rate benefits of getting out of the straddle and being a fully on the cloud are reflected in the 42 number. I think from there -- we have always said basically the more we transform comprehensively into a digital company, the more benefits that can accrue over time in terms of the economics of the business. With respect to the -- I think the number reflects the full benefit of getting out of the data centers and being in one environment and not two. I think the longer journey of Capital One is keep going to continue to be one where we derive, continue to drive our customers to digital and drive our company to digital. And the many benefits that I sited one of which is economics should continue to manifest themselves.

Jeff Norris -- Senior Vice President of Finance

Next question, please?

Operator

And we'll take our next potion from Don Fandetti with Wells Fargo.

Donald Fandetti -- Wells Fargo Securities -- Analyst

Scott, you had mentioned that the targeted capital return will be meaningfully higher in 2019. Can you elaborate a little bit on that in terms of your priorities buybacks dividends and if you can maybe sort of better quantify where that payout ratio target might go?

Scott Blackley -- Chief Financial Officer

Yeah, Don. Thanks for the question. We are closing out Q1 at around 11.9% CET1. So we are in a position where we'll -- where above our 11% capital need. And, I would expect that we're going to accrete more capital in Q2, because as you may recall we have already completed our 2018 CCAR share repurchase program. So I would -- we're not going to be in a position of distributing more capital before we get Fed approval on our 2019 plan. I'm not going to comment on CCAR at this point. I just don't want to get ahead of the Fed release, so I'm not going to give you any more details about that.

I will just say in general, and I'm going to reiterate some of the points I made in my talking points. But we are in a really good position I believe to fund organic growth to fund the Walmart acquisition. We've got the first phase of CECL coming in 2020 which we're going to need to support through capital. And then taking all those things and looking at the earnings power that we have and our capital position today, I feel pretty good that we're going to be able to have a distribution -- a capital distribution that is quite higher than what we had last year in our CCAR plan.

Donald Fandetti -- Wells Fargo Securities -- Analyst

Okay. And lastly, it looks like the delinquency rate on a year-over-year basis in Domestic Cards, is sort of creeping up a little bit each month. Can you talk a little bit about your expectations going forward?

Scott Blackley -- Chief Financial Officer

Yeah. So Don, our -- let me start with our credit losses. Our losses are still improving on a year-over-year basis. While as you point out, our delinquencies were about 4% higher than the year-ago quarter. There is some idiosyncratic drivers of that increase. For example, we changed loss recognition timing for the Cabela's portfolio to align with Capital One practices back in October of 2018. This had only a slight effect to our overall credit metrics, but it impacts the year-over-year delinquency comparison by a few percentage points interestingly. This quarter may also have some effects from government shutdown, including delays to some tax refund payments, which contribute to the seasonal movements in our credit metrics this time of year. So I wouldn't read too much into delinquencies in this slightly noisy quarter.

Pulling up, our unique growth math dynamics have been the dominant driver of our credit performance for some time. First driving our card losses up and then down. And growth math continues to be a good guy. Of course, our credit is also impacted by the economy, the competitive cycle, our growth choices and other industry effects. So we would expect a little normalization in terms of overall card industry performance over time. So going forward, we'll have a couple of offsetting drivers of current credit, growth math that will continue to be a good guy and industry normalization that will likely pull in the other direction.

Jeff Norris -- Senior Vice President of Finance

Next question, please?

Operator

And we'll take our next question from Ryan Nash with Goldman Sachs.

Ryan Nash -- Goldman Sachs & Company -- Analyst

Hi, good evening, guys. Rich, on the 42% efficiency target, I mean, clearly that has two sides to the equation in terms of expenses and revenues. So can you maybe size for us how big the cost component of that is just given the fact that the revenue environment could end up being different, better or worse relative to what you're expecting and as of today? And then I guess secondly, given that marketing historically has run somewhere between 600 and 800 basis points of efficiency. Is it safe to say that we'll be looking at an efficiency ratio below 50% over time? Thanks.

Richard D. Fairbank -- Chairman and Chief Executive Officer

So Ryan, we don't. What we try to do in doing this 42%, I mean, we can always create point estimates. The one thing we know about point estimates in our business and by the way we are investors have all experienced this.

Point estimates, the only thing you know is they are not going to be exactly that with respect to a particular metric like revenue. So what we did is go through a matrix of outcomes of different revenues thinking through what, how the cost associated with different revenue outcomes. And sort of the way we think of it is, if you take away the -- that what I'm calling good guys that are coming in 20 -- 2021. Our story really is and this was kind of in our guidance, our general guidance we've been giving over the last couple of years. That the combination of revenue growth and continuing to drive on the cost digital productivity gain, general side, that will drive gradual improvement in operating efficiency.

So the other primary point we are making here is on top of what we think is a gradual improvement that will come from all the things that we do on a revenue and cost side. We're pointing out a few specific good guys that happen to align themselves around the full year 2021. And those good guys are the -- of course, the exit of our data centers by the end of 2020, which should drive significant savings beginning in 2021. Some technology innovation that will enable some specific, some efficiency gains. And then the benefits from the Walmart partnership. And now that also lines up around 2021, because of the revenue sharing structure that we -- in our deal with Walmart.

And as you recall, the revenue sharing is less over the first year of the deal and then it steps up to the full revenue share thereafter. So there is kind of coincidence of where several things sort of align themselves around 2021. So if I pull way up to your question, while we don't know that we'll see how the -- where the revenue and all the metrics that drive operating efficiency where they go over time. I just think a lot of planets align and a lot of things that are we sometimes use the word baking in the oven, things that are kind of really in the works, where we are able to do something. It's a little out of character for Capital One to give such a specific number several years out in the future. But that would be the context behind that, Ryan.

Jeff Norris -- Senior Vice President of Finance

Next question, please?

Richard D. Fairbank -- Chairman and Chief Executive Officer

I'm sorry. He asked the question on the marketing side. So I'm not -- we're not giving a specific number with respect to total efficiency ratio. And that is because marketing, of course, is very driven by the context that we find ourselves in over time and the opportunity to really generate great business when we get there. And that's not a thing that we're going to guide ourselves to several years out in the future. But I think our other point was that the significant -- that the operating efficiency improvement to 42%. Will we expect that this improvement will drive significant improvement in total efficiency ratio by 2021 as well?

Jeff Norris -- Senior Vice President of Finance

Next question, please?

Operator

And we'll take our next question from Chris Brendler with Buckingham.

Chris Brendler -- Buckingham Research Group -- Analyst

Hi, thanks. Good evening. First of all, I express my condolences about the Washington Capitals last night. Tough game.

Richard D. Fairbank -- Chairman and Chief Executive Officer

I'm -- I've been in morning all day. But thank you, thank you very much.

Chris Brendler -- Buckingham Research Group -- Analyst

(inaudible) with you one last year. Right? So I just had a question on the card business, really nice acceleration in non-interest income this quarter up to 13%. Is there anything to call out there? And then related it, looks like subprime mix in the card business ticked up a tiny bit, don't make a big deal out of it. Just wanted to know if it is more macro or is there a decision on the underwriting side? Thanks.

Scott Blackley -- Chief Financial Officer

Yeah, Chris, it's Scott. A couple of things there. So one on interchange. Rich mentioned that we had an adjustment to our rewards liability. That was about $51 million. And so just some context there. Every quarter we update our estimates of the cost of honoring our card rewards. And that estimate always considers changes in consumer redemption patterns and then any updates that happen in terms of terms and conditions. So we usually see some level of adjustment here every quarter. Look sometimes it's an increase, sometimes it's a decrease. This quarter was $51 million release.

Chris Brendler -- Buckingham Research Group -- Analyst

Got you. And then the service fee side there. Is it coming down quite a bit still? Is that a conscious decision?

Scott Blackley -- Chief Financial Officer

On the service fees a few things there. On a year-over-year basis a couple of things. One there were a few small ticket one-timer benefits in Q1 '18. And then on an ongoing basis we have exited a number of the subscale businesses that impact that line item as well. So I think that most of that is in the Q1 2018 number, but not in the 2019 number. So I would say that the $353 million of service charge and fee income for Q1 is a pretty clean quarter.

Richard D. Fairbank -- Chairman and Chief Executive Officer

Chris, with respect to subprime mix. Our subprime asset mix of 34% is flat year-over-year and sort of in line with our historical portfolio mix of around one third plus or minus. It is up slightly quarter-over-quarter in line with seasonal trends. And all these numbers there is always rounding, because these are integers. So I think the takeaway that you really should have is there is not a lot of news with respect to the subprime mix.

Jeff Norris -- Senior Vice President of Finance

Next question, please?

Operator

And we'll take our next question from Rick Shane with JP Morgan.

Richard Shane -- JP Morgan -- Analyst

Thanks for taking my questions this afternoon. Rich, I think impulsively when you're talking about account growth, you're bifurcating between heavy spenders and traditional revolvers. Our assumption is that for the heavy spenders that you have to be pretty competitive in terms of line limit. Is that the right way to be thinking about it? And if that's the case when you look at the traditional revolvers, do you think that most of the accounts that you have added, do you have the potential to grow the line limits over time?

Richard D. Fairbank -- Chairman and Chief Executive Officer

Yeah. So I'm glad you asked that question, because they're -- on many dimensions their heavy spenders side of the business is so different from the revolver side of the business. But certainly one of them is credit line. So let me start with heavy spenders. We -- our lines are very competitive, very comparable to the leading players at the top of the market on the spenders side. So there is not a low-line strategy with respect to heavy spenders.

On the revolver side, we have always been very conservative, probably relative to industry practices with respect to credit line. And looking for more validation over time, I think we've raised the bar with respect to validation recently and that's why we've been talking more caution on credit line.

Now, let me talk now about the surge of growth that we've had along that's come -- complements to the surge of marketing that we have had. This is growth that is across the credit -- spectrum. It's actually more upmarket shifted than usual. And that's kind of -- to my points earlier we're especially getting traction at the top of the market. And the way that all of those accounts will play out is very consistent with how spender business is booked. It's expensive to book. It's a great annuity. It grows over time et cetera.

The -- still because of the whole portfolio of what we are booking there is lots of revolver business in there. And it's very -- and it's all pretty much all business that we are looking to build lines with and as we are getting the validation that's what we are doing.

Jeff Norris -- Senior Vice President of Finance

Next question, please?

Operator

And we'll take our next question from Betsy Graseck with Morgan Stanley.

Betsy Graseck -- Morgan Stanley -- Analyst

Hi, good evening.

Richard D. Fairbank -- Chairman and Chief Executive Officer

Hey, Betsy.

Scott Blackley -- Chief Financial Officer

Good evening, Betsy.

Betsy Graseck -- Morgan Stanley -- Analyst

Two questions just starting off one on the cloud. I've heard that the cloud can help deliver much more efficient marketing programs and drive much better efficiency in the marketing itself. So I am just wondering if you're experience that as well? And if that something that we could either expect drive better revenues per marketing dollar invested with use of this tool what potentially even we talked a little bit earlier about driving down the budget, but that's a TBD kind of question. So I'm just wondering if you're seeing that same kind of marketing efficiency improvement that other are?

Richard D. Fairbank -- Chairman and Chief Executive Officer

So, when you say marketing efficiency improvements that others are -- I think there are lot of folks not leveraging the cloud at the moment. And maybe they are enjoying marketing efficiency improvements too. I think there is a lot of things going on in the world of marketing and there is quite an impact that's coming from the major tech companies who are driving a lot of the digital marketing channels and the choices they make to in the world garden of their information, how much they either provide turnkey services for other banks -- for other companies or provide data to facilitate companies own choices. So I think the whole world is getting more capable and more efficient with respect to digital marketing. There is one of the -- what I mentioned earlier that it's kind of easy to write down on a piece of paper what you'd love to do with technology. And the whole problem is how do you get there from here. And marketing is a classic example.

We know the world is exploding in terms of data. Big Data and the ability to leverage more and more information to not only make better decisions, but to make a more customized on a micro really down to the segments of one. The elephant in the room is how do you mobilize massive Big Data in real-time. And I think for most American companies if given enough time. They can do a lot with data. The challenge of when Big Data meets real-time that's where modern technology really separates itself from classic technology. So marketing is on the list of one of the many things that we are driving improvements and look forward to driving more improvements with over time. But I don't want to set an expectation that you will as we fully going the cloud you will suddenly see huge improvements in our marketing efficiency, because frankly with most of the marketing that we are doing -- we're basically in the cloud with respect to the marketing's that we are doing. So that's a journey that has been ongoing. And we look forward to more progress.

Betsy Graseck -- Morgan Stanley -- Analyst

Okay. And then just separately on Walmart. I know You talked about kind of products that you will be launching when that comes over on the consumer side. I'm wondering is there anything that you're working with or planning on doing with them on the business side in B2B or the supplier side of their business model? Or is it going to be fully on consumer? Just help us understand if there is a helper out that relationship could be?

Richard D. Fairbank -- Chairman and Chief Executive Officer

Betsy, at this point, our relationship with Walmart is consumer and credit card.

Jeff Norris -- Senior Vice President of Finance

Next question, please?

Operator

And we will take our next question from Kevin Barker with Piper Jaffrey.

Kevin Barker -- Piper Jaffrey -- Analyst

Thank you. In regards to -- some of the marketing spend that happened ramped up quite a bit in the fourth quarter. We expect a little bit better growth metrics here in the first quarter versus what we seen last year. Could you just talk about what your expectation is for growth? And I believe some of your comments about some of the upmarket customers that you're starting to get traction with as we move through the next couple of quarters?

Richard D. Fairbank -- Chairman and Chief Executive Officer

Excuse me, so Kevin, the -- one thing that I've said for probably those who have been following Capital One for many, many, many years. I've said all along changes in marketing levels don't expect them to in coincident periods or even in immediately adjacent periods, show dramatic effects on especially on metrics like loans. So let me just talk a little bit about what's happening with respect to Capital One. So a reason that we have we don't spend money in marketing just to spend it. One of the comments that I made in the earlier remarks is, you can't buy your way to lots of growth just by spending money and especially at the top of the marketplace with spenders. This is all about earning it and for years we have been putting in place, we've been very committed to building a spender business and investing in the customer experience, the digital experience, the products and the brand to be in a position where along all of those dimensions we are seeing tremendous progress.

And what sort of is happened in recent quarters is the alignment of a lot of progress on this with our spenders business and traction with customers and our brand with non-customers, combined with an actual opportunity that we see in the marketplace. So on the spenders side of the business you see a lot of our marketing is directed at the spenders side of the business and we've had really tremendous traction there as I mentioned. And how that shows up is in significant growth of new accounts. And those accounts or annuities that have great economics over time and the spenders ramp their purchases really literally for years.

It doesn't move the loan growth needle a lot just by the basic numbers and how many heavy spenders there are and the fact that basically it's a numbers thing. So the loan growth is dominated by what happens on the revolver side of the business. And let me comment about that other than the capability, which always exists for any bank to do line increases. And I'll often called that a coiled spring and it's a great opportunity for companies to take advantage of it when they want. It's the ultimate way to really drive growth is through new account originations. That's the prerequisite for loan and revenue growth on the revolver side.

As these customers mature we gradually increase credit lines which translates into loan and revenue growth. And we -- my point has been that we've had really strong account growth. We are getting with every passing month, more validation on the credit performance of advantages. And all of this puts us in a position to capitalize on the -- to turn the account growth into loan growth and revenue growth overtime.

Jeff Norris -- Senior Vice President of Finance

Next question, please?

Operator

And we will take our next question from Moshe Orenbuch with Credit Suisse.

Moshe Orenbuch -- Credit Suisse -- Analyst

Great. Thanks. Most of my questions have been asked and answered. But Rich, I was struck by the commentary about deposit cost growth and growth of the online deposits. And maybe you could talk a little bit about the strategy there because getting more online deposits at higher costs including margin, isn't really in that itself a strategy. What's the plan there? How is that benefit the Company and shareholders?

Richard D. Fairbank -- Chairman and Chief Executive Officer

That the first order for any company is -- for any bank is the need to fund the company. And of course, that -- like there is a lot of different ways to fund the company. Capital One is in -- I love the position Capital One is, in where our strongest and biggest funding sources on the consumer side. Because that's where I think through recession. And if you look at how the Fed rates various types of deposits. If you look at the opportunity to have resilient funding and pricing over time. The top of my list is consumer deposits. So building a -- we already are a national bank in our asset businesses. And we were a local bank in our funding businesses. And then we acquired a national direct bank. So building out a national bank is fundamentally central to the success of Capital One.

Now the way most banks over time, I think, envision, how they're going to grow their deposit business is they do it through acquisition. That's not acquisitions of other banks. While we have done bank acquisitions in the past and they've been -- important part of the strategic and funding migration of our company from a model line specialty finance company. Our future is going to be driven by organic growth of this national bank. And that's different from what most players have done.

Now one way to grow deposits is to get on the league table and have the highest price. And that certainly there is nothing wrong with doing that. What we're trying to do Moshe in a world where there all of banking is centered around a one of two poles, either people have a branch on every corner with quite low rate deposits or they have a direct bank and are paying at the high-end for deposits. And our goal is not only to build a national bank, but to work backwards from where retail banking is going to go which I believe is toward been physical distribution and great digital capabilities and attractive products for consumers.

So we're basically trying to figure out where the market is going to go and just go build that. How will that manifest itself for Capital One and for our financials? Again, very importantly the funding of the company, but over time increasingly building our company as a franchise much of it through cross sell to our own very large customer base. And to not chase the hard-earned money that's available out there. But in fact, really build long-term relationships. And end up as really is the one bank that is really a hybrid of the direct bank on the one side and the branch in every corner bank on the other side.

And we've seen a lot of traction early on with this. But what we are flagging to investors is, there are number of reasons that we expect our deposit cost to go up. As a competition most banks are saying that anyway, but in our particular case the mix effects of this journey and the sort of natural things that happened on the way to building this hybrid bank will be accompanied by higher average deposit costs.

Moshe Orenbuch -- Credit Suisse -- Analyst

And what are the products do you think you'll be able to sell to the bank -- the online bank customers?

Richard D. Fairbank -- Chairman and Chief Executive Officer

Basically, Moshe, we -- between what is available, so first of all let's talk about capabilities for a second. One of the great challenges for a bank is while most of the world is concluded in -- I find people that are not close to banking, of course, assuming well of course banks are going to be digital, they'll probably be entirely digital. I've come to really respect the importance of them and power of some physical presence. But to challenge that any bank that does have a branch on every corner needs to confront, if you're going to build a deposit franchise is how to -- it is having a full suite of banking capabilities, that you can actually pull-off online or on your phone as opposed to having some of them.

And so, we have taken the whole set of activities that can be done in banking, and the vast majority of virtually all of have been hand sloped by the importance, we have put these online and many of them but not all of them on mobile because we don't want to clutter mobile like a NASCAR uniform with every possible banking feature. But on little cat feet overtime, we have really built out a full banking capability that you don't need to have the local physical distribution now we're going to have some physical distribution and we are just locating that physical distribution in iconic locations. So, it has particular region salience, but with this strategy, we hope to capture some of the best of both worlds from the world of direct banking and of local banking.

But what is just taken in the years that we've taken prior to rolling out our national bank has been of course taking the various tech platforms from the banks that we bought, putting them all together and putting their capability on the cloud and integrated and on the cloud building a -- and now building out a broad-based banking capabilities digitally, building a great and now JD Power award-winning for two years in a row banking capability, online banking capability, and importantly also Moshe a credible consistency in our retail banking experience locally. The other thing that we have done is been on the leading end of our branch rationalization, which is very important to the overall economics of this has been physical presence model.

Jeff Norris -- Senior Vice President of Finance

Next question, please?

Operator

And our final question tonight comes from Chris Donat with Sandler O'Neill.

Christopher Donat -- Sandler O'Neill -- Analyst

Good afternoon. Thanks for (inaudible). Just wanted to follow up on the that data center migration and think about the journey you've been on starting six years ago and then taking another couple years to get the end. I'm just curious, if you whatever, you had to do it over again. Do you think you could have shortened with that path? Because it seems to me this might be a competitive advantage that anyone else out there is going to have to keep, it's a decade process roughly. Just want to know what you're thoughts, if you could have done it in less time or if that's just how long it takes to redo to like which you talked earlier about the systems and personnel and infrastructure?

Richard D. Fairbank -- Chairman and Chief Executive Officer

Chris, we're -- one thing I'd said is that, while I denominate our journey into two ways. One is the recent journey which is the six years. We completed six years we are in our seventh for this technology transformation. Importantly it stands on the shoulders of Capital One itself and the heritage of what we built with the talent model. The whole information based strategy the data, the analytics, the technology that went into the whole founding of the company and sort of who we are. So what is striking, and I appreciate your question is that on those shoulders. This journey we're already six years in, and we're looking ahead to getting out of our data centers two years.

Essentially eight years after beginning the tech transformation at Capital One, which is a bit of an advantage starting place. I think there are lots of things we learned along the way, but I think if we did it over the journey is really would be the same because it's a journey that -- it's a talent journey, it's a transforming how software is built, it's a journey that requires confronting the way that we work and this would be the true for any American company that takes this on. Confronting, how the company works, how people work, both on the tech side and across the Company. We have to take on the entangled infrastructure that exists at large banks, including our own is a very, very daunting task. And to set out to rebuild that, not from the top of the tech stack, but really from the bottom, that is a tough undertaking and it is -- I don't think the path could be much shorter than what we've done. But that's why I say the real news isn't the destination, the news is the journey. And we have been -- all in on this journey. And we're in year seven now.

And by the way, the last thing I would say is well we wouldn't change too much. The one thing that we absolutely would choose to do is to do this. Because we are absolutely compelled by the opportunity here. And we can feel the accelerating progress on just about every dimension if you were inside this company you could feel acceleration on what's happening with the customer experience, what's happening in risk management, what's happening with the dynamism of the company, the speed to market, the products -- how customers are feeling about Capital One. The pace of digital adoption by our customers the momentum around transforming how sort of the operations work, the success in partnerships, I think our tech transformation was central to winning the Walmart deal. And our momentum in the sense of possibility in building a national bank. And finally, the economic acceleration of sort of economic opportunity that we talked about on this call.

Jeff Norris -- Senior Key Executive

Thanks everyone for joining us on this conference call today. Thank you for your interest in Capital One. Remember, Investor Relations team will be here this evening to answer any further questions you may have. Have a great night.

Operator

And that does conclude today's conference. Thank you for your participation. You may now disconnect.

Duration: 76 minutes

Call participants:

Jeff Norris -- Senior Vice President of Finance

Scott Blackley -- Chief Financial Officer

Richard D. Fairbank -- Chairman and Chief Executive Officer

Eric Wasserstrom -- UBS -- Analyst

Sanjay Sakhrani -- Keefe Bruyette & Woods -- Analyst

Donald Fandetti -- Wells Fargo Securities -- Analyst

Ryan Nash -- Goldman Sachs & Company -- Analyst

Chris Brendler -- Buckingham Research Group -- Analyst

Richard Shane -- JP Morgan -- Analyst

Betsy Graseck -- Morgan Stanley -- Analyst

Kevin Barker -- Piper Jaffrey -- Analyst

Moshe Orenbuch -- Credit Suisse -- Analyst

Christopher Donat -- Sandler O'Neill -- Analyst

Jeff Norris -- Senior Key Executive

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