CAPITAL ONE FINANCIAL CORPORATION
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 "Part I-Item 1.
Business-Forward-Looking Statements" for more information on the forward-looking
statements in this 2019 Annual Report on Form 10-K ("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 "Part I-Item 1.
Business-Overview-Cybersecurity Incident" and "Note 18-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 I-Item 1A. Risk Factors" in this Report. Unless otherwise
specified, references to notes to our consolidated financial statements refer to
the notes to our consolidated financial statements as of December 31, 2019
included in this Report.
Management monitors a variety of key indicators to evaluate our business results
and financial condition. The following MD&A is intended to provide the reader
with an understanding of our results of operations, financial condition and
liquidity by focusing on changes from year to year in certain key measures used
by management to evaluate performance, such as profitability, growth and credit
quality metrics. MD&A is provided as a supplement to, and should be read in
conjunction with, our audited consolidated financial statements as of and for
the year ended December 31, 2019 and accompanying notes. MD&A is organized in
the following sections:
• Executive Summary and Business Outlook • Capital Management • Consolidated Results of Operations
• Risk Management
• Consolidated Balance Sheets Analysis • Credit Risk Profile • Off-Balance Sheet Arrangements
• Liquidity Risk Profile
• Business Segment Financial Performance • Market Risk Profile • Critical Accounting Policies and Estimates • Supplemental Tables • Accounting Changes and Developments • Glossary and Acronyms
EXECUTIVE SUMMARY AND BUSINESS OUTLOOK
Financial Highlights We reported net income of$5.5 billion ($11.05 per diluted common share) on total net revenue of$28.6 billion for 2019. In comparison, we reported net income of$6.0 billion ($11.82 per diluted common share) on total net revenue of$28.1 billion for 2018, and$2.0 billion ($3.49 per diluted common share) on total net revenue of$27.2 billion for 2017. Our common equity Tier 1 capital ratio as calculated under the Basel III Standardized Approach was 12.2% and 11.2% as ofDecember 31, 2019 and 2018, respectively. See "MD&A-Capital Management " below for additional information. OnJune 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. Through the end of 2019, we repurchased approximately$1.4 billion of shares of our common stock under the 2019 Stock Repurchase Program. See "MD&A-Capital Management-Dividend Policy and Stock Purchases" for additional information. OnJuly 29, 2019 , we announced the Cybersecurity Incident. For more information, see "Part I-Item 1. Business-Overview-Cybersecurity Incident" and "Note 18-Commitments, Contingencies, Guarantees and Others." Below are additional highlights of our performance in 2019. These highlights are generally based on a comparison between the results 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 ofDecember 31, 2019 compared to our financial condition and credit performance as ofDecember 31, 2018 . We provide a more detailed discussion of our financial performance in the sections following this "Executive Summary and Business Outlook."
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Discussions of our performance in 2017 and comparisons between 2018 and 2017 can
be found in "Part II-Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ("MD&A") of our Annual Report on Form 10-K
for the fiscal year ended December 31, 2018 .
Total Company Performance
• Earnings: Our net income decreased by $469 million to $5.5 billion in 2019
compared to 2018 primarily driven by:
• higher non-interest expense due to continued investments in technology
and infrastructure, expenses related to the Walmart partnership, and
increased marketing expense;
• higher provision for credit losses largely due to credit deterioration
in our commercial energy loan portfolio and an allowance release in our
auto loan portfolio in 2018; and
• the net impact of the absence of significant activities that occurred
in 2018, including gains from the sales of our exited businesses, a
benefit related to a tax methodology change on rewards costs, an
impairment charge as a result of repositioning our investment
securities portfolio, and a legal reserve build.
These drivers were partially offset by: • higher net interest income due to higher yields on interest-earnings
assets and growth in our loan portfolio, including the acquired Walmart
portfolio, partially offset by higher interest expense from higher
rates paid and growth in our deposit products; and
• an increase in net interchange fees driven by higher purchase volume.
• Loans Held for Investment:
• Period-end loans held for investment increased by
driven by growth in our domestic credit card loan portfolio, including
the acquired Walmart portfolio, as well as growth in our commercial and
auto loan portfolios.
• Average loans held for investment increased by $5.3 billion to $247.5
billion in 2019 compared to 2018 primarily driven by growth in our
commercial, domestic credit card including the acquired Walmartportfolio, and auto loan portfolios, partially offset by the impact of
lower loan balances from the sale of our consumer home loan portfolio.
• Net Charge-Off and Delinquency Metrics: Our net charge-off rate remained
substantially flat at 2.53% in 2019 as the impact of lower loan balances
from the sale of our consumer home loan portfolio was largely offset by
growth in our domestic credit card loan portfolios, including the acquired
Walmart portfolio.
Our 30+ day delinquency rate decreased by 10 basis points to 3.74% as ofDecember 31, 2019 fromDecember 31, 2018 primarily driven by the strong economy and stable underlying credit performance in our domestic credit card loan portfolio, partially offset by the impact of the acquired Walmart portfolio. • Allowance for Loan and Lease Losses: Our allowance for loan and lease losses
remained substantially flat at
allowance release in our domestic credit card loan portfolio largely due to
the strong economy and stable underlying credit performance was offset by an
allowance build due to credit deterioration in our commercial energy loan
portfolio.
Our allowance coverage ratio decreased by 23 basis points to 2.71% as of
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Business Outlook We discuss below our expectations as of the time this Report was filed regarding our total company performance and the performance of our business segments based on market conditions, the regulatory environment and our business strategies. The statements contained in this 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 this Report. 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 2020 which will be separately reported as an adjusting item as it relates
to the Company's financial results.
See "Part I-Item 1. Business-Forward-Looking Statements" in this Report for more information on the forward-looking statements included in this Report and "Part I-Item 1A. Risk Factors" in this Report for factors that could materially influence our results. Total Company Expectations Marketing and Efficiency: • We expect to achieve modest improvements in full-year operating efficiency
ratio, net of adjustments, in 2020, with a bigger move down to 42% in 2021.
• We expect the operating efficiency ratio improvement to drive significant
improvement in our total efficiency ratio by 2021.
• We expect marketing expense for full-year 2020 to be moderately higher than
marketing expense for full-year 2019.
Capital/Current Expected Credit Loss ("CECL"): • We estimate that the adoption of the CECL model will increase our reserves
for credit losses by approximately
phased-in impact of adopting CECL will reduce our common equity Tier 1
capital ratio by 16 basis points in the first quarter of 2020. See
"MD&A-Accounting Changes and Developments" in this Report for additional
information related to the CECL adoption impact.
• We expect the recently finalized Tailoring Rules will provide a tailwind to
our capital reduction under stress and that we believe there is an
opportunity for capital relief under the Stress Capital Buffer Proposed
Rule.
• We expect when we opt-out of the requirement to include in regulatory
capital certain elements of Accumulated other comprehensive income ("AOCI")
under the Tailoring Rules, our common equity Tier 1 ratio will decrease
about 30 basis points.
Business Segment Expectations
Consumer Banking:
• We continue to expect that the annual auto net charge-off rate will increase
gradually as the cycle plays out.
42 Capital One Financial Corporation (COF)
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CONSOLIDATED RESULTS OF OPERATIONS
The section below provides a comparative discussion of our consolidated financial performance for 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 incurred on our interest-bearing liabilities. Interest-earning assets include loans, investment securities and other interest-earning assets, while our interest-bearing liabilities include interest-bearing deposits, securitized debt obligations, senior and subordinated notes, other borrowings and other interest-bearing liabilities. Generally, we include in interest income any past due fees on loans that we deem collectible. Our net interest margin, based on our consolidated results, represents the difference between the yield on our interest-earning assets and the cost of our interest-bearing liabilities, including the notional impact of non-interest-bearing funding. We expect net interest income and our net interest margin to fluctuate based on changes in interest rates and changes in the amount and composition of our interest-earning assets and interest-bearing liabilities.
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Table 1 below presents the average outstanding balance, interest income earned,
interest expense incurred and average yield for 2019, 2018 and 2017 for each
major category of our interest-earning assets and interest-bearing liabilities.
Nonperforming loans are included in the average loan balances below.
Table 1: Average Balances, Net Interest Income and Net Interest Margin
Year Ended December 31,
2019 2018 2017
Interest Average Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
(Dollars in millions) Balance Expense Rate Balance Expense Rate Balance Expense Rate
Assets:
Interest-earning assets:
Loans:(1)
Credit card $ 114,256 $ 17,688 15.48 % $ 109,820 $ 16,948 15.43 % $ 103,468 $ 15,735 15.21 %
Consumer banking 60,708 5,082 8.37 65,146 4,904 7.53 74,865 4,984 6.66
Commercial banking(2) 73,572 3,306 4.49 68,221 3,033 4.45 68,150 2,630 3.86
Other(3) 16 (214 ) ** 184 (157 ) ** 130 39 30.00
Total loans, including loans
held for sale 248,552 25,862 10.41 243,371 24,728 10.16 246,613 23,388 9.48
Investment securities 81,467 2,411 2.96 79,224 2,211 2.79 68,896 1,711 2.48
Cash equivalents and other
interest-earning assets 11,491 240 2.08 10,143 237 2.33 6,821 123 1.80
Total interest-earning
assets 341,510 28,513 8.35 332,738 27,176 8.17 322,330 25,222 7.82
Cash and due from banks 4,300 3,877 3,457
Allowance for loan and lease
losses (7,176 ) (7,404 ) (7,025 )
Premises and equipment, net 4,289 4,163 3,931
Other assets 32,001 29,662 32,231
Total assets $ 374,924 $ 363,036 $ 354,924
Liabilities and
stockholders' equity:
Interest-bearing
liabilities:
Interest-bearing deposits $ 231,609 $ 3,420 1.48 % $ 221,760 $ 2,598 1.17 % $ 213,949 $ 1,602 0.75 %
Securitized debt obligations 18,020 523 2.90 19,014 496 2.61 18,237 327 1.79
Senior and subordinated
notes 30,821 1,159 3.76 31,295 1,125 3.60 27,866 731 2.62
Other borrowings and
liabilities 3,369 71 2.12 4,028 82 2.04 8,917 102 1.14
Total interest-bearing
liabilities 283,819 5,173 1.82 276,097 4,301 1.56 268,969 2,762 1.03
Non-interest-bearing
deposits 23,456 25,357 25,933
Other liabilities 11,959 11,390 10,492
Total liabilities 319,234 312,844 305,394
Stockholders' equity 55,690 50,192 49,530
Total liabilities and
stockholders' equity $ 374,924 $ 363,036 $ 354,924
Net interest income/spread $ 23,340 6.53 $ 22,875 6.61 $ 22,460 6.79
Impact of non-interest-bearing funding 0.30 0.26 0.18
Net interest margin 6.83 % 6.87 % 6.97 %
__________
(1) Past due fees included in interest income totaled approximately
for 2019 and 2018 and $1.6 billion for 2017.
(2) Some of our commercial loans generate tax-exempt income. Accordingly, wepresent our Commercial Banking interest income and yields on a taxable-
equivalent basis, calculated using the federal statutory rate (21% for 2019
and 2018 and 35% for 2017) 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
corresponding reductions to the Other category.
(3) Interest income/expense of Other represents the impact of hedge accounting
of our loan portfolios and the offsetting reduction of the
taxable-equivalent adjustments of our commercial loans as described above.
** Not meaningful. 44Capital One Financial Corporation (COF)
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Net interest income increased by$465 million to$23.3 billion in 2019 compared to 2018, primarily driven by higher yields on interest-earnings assets and growth in our loan portfolio, including the acquired Walmart portfolio, partially offset by higher interest expense from higher rates paid and growth in our deposit products. Net interest margin decreased by 4 basis points to 6.83% in 2019 compared to 2018 as higher rates on our retail deposits were largely offset by higher yields on interest-earning assets and growth in our loan portfolio. Table 2 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 2: Rate/Volume Analysis of Net Interest Income(1)
2019 vs. 2018 2018 vs. 2017
(Dollars in millions) Total Variance Volume Rate Total Variance Volume Rate
Interest income:
Loans:
Credit card $ 740 $ 687 $ 53 $ 1,213 $ 977 $ 236
Consumer banking 178 (334 ) 512 (80 ) (647 ) 567
Commercial banking(2) 273 240 33 403 3 400
Other(3) (57 ) 50 (107 ) (196 ) (46 ) (150 )
Total loans, including loans held 1,134 643 491 1,340 287 1,053
for sale
Investment securities 200 64 136 500 273 227
Cash equivalents and other 3 28 (25 ) 114 69 45
interest-earning assets
Total interest income 1,337 735 602 1,954 629 1,325
Interest expense:
Interest-bearing deposits 822 120 702 996 61 935
Securitized debt obligations 27 (26 ) 53 169 14 155
Senior and subordinated notes 34 (17 ) 51 394 98 296
Other borrowings and liabilities (11 ) (14 ) 3 (20 ) (56 ) 36
Total interest expense 872 63 809 1,539 117 1,422
Net interest income $ 465 $ 672 $ (207 ) $ 415 $ 512 $ (97 )
__________(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, wepresent our Commercial Banking interest income and yields on a taxable-
equivalent basis, calculated using the federal statutory rate (21% for 2019
and 2018 and 35% for 2017) and state taxes where applicable, with offsetting
reductions to the Other category.
(3) Interest income/expense of Other represents the impact of hedge accounting
of our loan portfolios and the offsetting reduction of the
taxable-equivalent adjustments of our commercial loans as described above.
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Non-Interest Income
Table 3 displays the components of non-interest income for 2019, 2018 and 2017.
Table 3: Non-Interest Income
Year Ended December 31,
(Dollars in millions) 2019 2018 2017
Interchange fees, net $ 3,179 $ 2,823 $ 2,573
Service charges and other customer-related fees 1,330 1,585 1,597
Net securities gains (losses) 26 (209 )
65
Other non-interest income:(1) Mortgage banking revenue 165 661
201
Treasury and other investment income 193 49
126
Other 360 292
215
Total other non-interest income 718 1,002 542 Total non-interest income$ 5,253 $ 5,201 $ 4,777 ________
(1) Includes gains of
compensation plan investments in 2019 and 2018, respectively.
Non-interest income remained relatively flat at$5.3 billion in 2019 as the increase in net interchange fees, driven by higher purchase volume, was largely offset by: • the absence of the significant activities that occurred in 2018, including
the gains from the sales of our exited businesses and the impairment charge
as a result of repositioning our investment securities portfolio; and
• lower service charges and other customer-related fees.
Provision for Credit Losses Our provision for credit losses in each period is driven by net charge-offs, changes to the allowance for loan and lease losses, and changes to the reserve for unfunded lending commitments. We recorded a provision for credit losses of$6.2 billion ,$5.9 billion and$7.6 billion in 2019, 2018 and 2017, respectively. The provision for credit losses as a percentage of net interest income was 26.7%, 25.6% and 33.6% in 2019, 2018 and 2017, respectively. Our provision for credit losses increased by$380 million to$6.2 billion in 2019 compared to 2018 primarily driven by credit deterioration in our commercial energy loan portfolio and an allowance release in our auto loan portfolio in 2018 . 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," and "Note 4-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."
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Non-Interest Expense
Table 4 displays the components of non-interest expense for 2019, 2018 and 2017.
Table 4: Non-Interest Expense
Year Ended December 31,
(Dollars in millions) 2019 2018 2017
Salaries and associate benefits(1) $ 6,388 $ 5,727 $ 5,899
Occupancy and equipment 2,098 2,118 1,939
Marketing 2,274 2,174 1,670
Professional services 1,237 1,145 1,097
Communications and data processing 1,290 1,260 1,177
Amortization of intangibles 112 174
245
Other non-interest expense: Bankcard, regulatory and other fee assessments 362 490 626 Collections 400 413 364 Fraud losses 383 364 334 Other(2) 939 1,037 843 Total other non-interest expense 2,084 2,304 2,167 Total non-interest expense$ 15,483 $ 14,902 $ 14,194 _________
(1) Includes expenses of
deferred compensation plan in 2019 and 2018, respectively. These amounts
have corresponding offsets in other non-interest income.
(2) Includes $38 million of net Cybersecurity Incident expenses in 2019,
consisting of $72 million of expenses and $34 million of insurance
recoveries.
Non-interest expense increased by $581 million to $15.5 billion in 2019 compared
to 2018 primarily due to continued investments in technology and infrastructure,
expenses related to the Walmart partnership, and increased marketing expenses,
partially offset by the absence of a legal reserve build.
Income Taxes
We recorded income tax provisions of $1.3 billion (19.5% effective income tax
rate), $1.3 billion (17.7% effective income tax rate) and $3.4 billion (61.5%
effective income tax rate) in 2019, 2018 and 2017, respectively. Our effective
tax rate on income from continuing operations varies between periods due, in
part, to the impact of the changes in tax credits, tax-exempt income, and
non-deductible expenses relative to our pre-tax earnings.
We recorded discrete tax benefits of $19 million in 2019, discrete tax benefits
of $318 million in 2018 primarily driven by a benefit of $284 million related to
a tax methodology change on rewards costs and discrete tax expenses of $1.7
billion in 2017 primarily consisting of the charges of $1.8 billion for the
estimated impacts of the Tax Act.
The increase in our effective tax rate in 2019 compared to 2018 was primarily
due to a decrease in recorded discrete tax benefit, partially offset by higher
tax credits and lower non-deductible expenses relative to our income.
We provide additional information on items affecting our income taxes and
effective tax rate in "Note 15-Income Taxes".
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CONSOLIDATED BALANCE SHEETS ANALYSIS
Total assets increased by$17.8 billion to$390.4 billion as ofDecember 31, 2019 fromDecember 31, 2018 primarily driven by growth in our domestic credit card loan portfolio, including the acquired Walmart portfolio, as well as growth in our commercial and auto loan portfolios. Total liabilities increased by$11.5 billion to$332.4 billion as ofDecember 31, 2019 fromDecember 31, 2018 primarily driven by deposit growth, partially offset by maturities of our short-term Federal Home Loan Banks ("FHLB") advances. Stockholders' equity increased by$6.3 billion to$58.0 billion as ofDecember 31, 2019 fromDecember 31, 2018 primarily due to our net income of$5.5 billion , changes in accumulated other comprehensive income of$2.4 billion and the net issuance of preferred stock, partially offset by repurchases of common stock under the 2019 Stock Repurchase Program and dividend payments to our stockholders. The following is a discussion of material changes in the major components of our assets and liabilities during 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 includeGovernment National Mortgage Association ("Ginnie Mae") guaranteed securities, 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 inU.S. Treasury and Agency securities represented 96% of our total investment securities portfolio, as of bothDecember 31, 2019 and 2018. OnDecember 31, 2019 , we transferred our entire portfolio of held to maturity securities to available for sale in consideration of changes to regulatory capital requirements under the Tailoring Rules. As a Category III institution, we are no longer required to include in regulatory capital certain elements of AOCI, including unrealized gains and losses from available for sale securities. The impact of this transfer and changes in interest rates increased the fair value of our available for sale securities portfolio by$33.1 billion to$79.2 billion as ofDecember 31, 2019 fromDecember 31, 2018 . See "MD&A-Capital Management " and "Note 2-Investment Securities " for more information. Table 5 presents the amortized cost and fair value for the major categories of our available for sale securities portfolio as ofDecember 31, 2019 , 2018 and 2017. Table 5:Investment Securities December 31, 2019 2018 2017 Amortized Fair Amortized Fair Amortized Fair (Dollars in millions) Cost Value Cost Value Cost Value Investment securities available for sale: U.S. Treasury securities$ 4,122 $ 4,124 $ 6,146 $ 6,144 $ 5,168 $ 5,171 RMBS: Agency 62,003 62,839 32,710 31,903 26,013 25,678 Non-agency 1,235 1,499 1,440 1,742 1,722 2,114 Total RMBS 63,238 64,338 34,150 33,645 27,735 27,792 Agency CMBS 9,303 9,426 4,806 4,739 3,209 3,175 Other securities(1) 1,321 1,325 1,626 1,622 1,516 1,517 Total investment securities$ 77,984 $ 79,213 $ 46,728 $ 46,150 $ 37,628 $ 37,655 available for sale __________
(1) Includes primarily supranational bonds, foreign government bonds and other
asset-backed securities.
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Loans Held for Investment Total loans held for investment consist of both unsecuritized loans and loans held in our consolidated trusts. Table 6 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 ofDecember 31, 2019 and 2018. Table 6: Loans Held for Investment December 31, 2019 December 31, 2018 (Dollars in millions) Loans Allowance Net Loans Loans Allowance Net Loans Credit Card$ 128,236 $ 5,395 $ 122,841 $ 116,361 $ 5,535 $ 110,826 Consumer Banking 63,065 1,038 62,027 59,205 1,048 58,157 Commercial Banking 74,508 775 73,733 70,333 637 69,696 Total$ 265,809 $ 7,208 $ 258,601 $ 245,899 $ 7,220 $ 238,679 Loans held for investment increased by$19.9 billion to$265.8 billion as ofDecember 31, 2019 fromDecember 31, 2018 primarily driven by growth in our domestic credit card loan portfolio, including the acquired Walmart portfolio, as well as growth in our commercial and auto loan portfolios. We provide additional information on the composition of our loan portfolio and credit quality below in "MD&A-Credit Risk Profile," "MD&A-Consolidated Results of Operations" and "Note 3-Loans." Funding Sources Our primary source of funding comes from deposits, as they are a stable and relatively low cost source of funding. In addition to deposits, we also raise funding through the issuance of securitized debt obligations and other debt. Other debt primarily consists of senior and subordinated notes, FHLB advances secured by certain portions of our loan and securities portfolios, and federal funds purchased and securities loaned or sold under agreements to repurchase. Table 7 provides the composition of our primary sources of funding as ofDecember 31, 2019 and 2018. Table 7: Funding Sources Composition December 31, 2019 December 31, 2018 (Dollars in millions) Amount % of Total Amount % of Total Deposits: Consumer Banking$ 213,099 67 %$ 198,607 64 % Commercial Banking 32,134 10 29,480 10 Other(1) 17,464 5 21,677 7 Total deposits 262,697 82 249,764 81 Securitized debt obligations 17,808 6 18,307 6 Other debt 37,889 12 40,598 13 Total funding sources$ 318,394 100 %$ 308,669 100 % __________
(1) Includes brokered deposits of
Total deposits increased by$12.9 billion to$262.7 billion as ofDecember 31, 2019 fromDecember 31, 2018 primarily driven by strong growth as a result of our national banking strategy in our Consumer Banking business. Securitized debt obligations decreased by$499 million to$17.8 billion as ofDecember 31, 2019 fromDecember 31, 2018 primarily driven by net maturities in our credit card securitizations, partially offset by issuances in our auto securitizations. Other debt decreased by$2.7 billion to$37.9 billion as ofDecember 31, 2019 fromDecember 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 "Note 8-Deposits and Borrowings."
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Deferred Tax Assets and Liabilities Deferred tax assets and liabilities represent decreases or increases in taxes expected to be paid in the future because of future reversals of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as from net operating loss and tax credit carryforwards. Deferred tax assets are recognized subject to management's judgment that these future deductions are more likely than not to be realized. We evaluate the recoverability of these future tax deductions by assessing the adequacy of expected taxable income from all sources, including taxable income in carryback years, reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. These sources of income rely heavily on estimates. We use our historical experience and our short and long-range business forecasts to provide insight. Deferred tax assets, net of deferred tax liabilities and valuation allowances, were approximately$1.7 billion as ofDecember 31, 2019 , a decrease of$425 million fromDecember 31, 2018 . The decrease in our net deferred tax assets was primarily driven by the increase in the fair value of our investment securities portfolio. We recorded valuation allowances of$223 million and$245 million as ofDecember 31, 2019 and 2018, respectively. We expect to fully realize the 2019 net deferred tax assets in future periods. If changes in circumstances lead us to change our judgment about our ability to realize deferred tax assets in future years, we will adjust our valuation allowances in the period that our change in judgment occurs and record a corresponding increase or charge to income. We provide additional information on income taxes in "MD&A-Consolidated Results of Operations" and "Note 15 - Income Taxes." OFF-BALANCE SHEET ARRANGEMENTS In the ordinary course of business, we engage in certain activities that are not reflected on our consolidated balance sheets, generally referred to as off-balance sheet arrangements. These activities typically involve transactions with unconsolidated variable interest entities ("VIEs") as well as other arrangements, such as letters of credit, loan commitments and guarantees, to meet the financing needs of our customers and support their ongoing operations. We provide additional information regarding these types of activities in "Note 5-Variable Interest Entities and Securitizations" and "Note 18-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, asset/liability management by our centralized Corporate Treasury group and residual tax expense or benefit to arrive at the consolidated effective tax rate that is not assessed to our primary business segments, are included in the Other category. The results of our individual businesses, which we report on a continuing operations basis, reflect the manner in which management evaluates performance and makes decisions about funding our operations and allocating resources. We may periodically change our business segments or reclassify business segment results based on modifications to our management reporting methodologies and changes in organizational alignment. Our business segment results are intended to reflect each segment as if it were a stand-alone business. We use an internal management and reporting process to derive our business segment results. Our internal management and reporting process employs various allocation methodologies, including funds transfer pricing, to assign certain balance sheet assets, deposits and other liabilities and their related revenue and expenses directly or indirectly attributable to each business segment. Total interest income and non-interest income are directly attributable to the segment in which they are reported. The net interest income of each segment reflects the results of our funds transfer pricing process, which is primarily based on a matched funding concept that takes into consideration market interest rates. Our funds transfer pricing process provides a funds credit for sources of funds, such as deposits generated by our Consumer Banking and Commercial Banking businesses, and a charge for the use of funds by each segment. The allocation process is unique to each business segment and acquired businesses. We regularly assess the assumptions, methodologies and reporting classifications used for segment reporting, which may result in the implementation of refinements or changes in future periods. We 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 onU.S. GAAP. There is no comprehensive
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authoritative body of guidance for management accounting equivalent toU.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 withU.S. GAAP. We summarize our business segment results for the years endedDecember 31, 2019 , 2018 and 2017 and provide a comparative discussion of the results of 2019 and 2018, as well as changes in our financial condition and credit performance metrics as ofDecember 31, 2019 compared toDecember 31, 2018 . We provide a reconciliation of our total business segment results to our reported consolidated results in "Note 17-Business Segments and Revenue from Contracts with Customers." Business Segment Financial Performance Table 8 summarizes our business segment results, which we report based on revenue and income from continuing operations, for the years endedDecember 31, 2019 , 2018 and 2017. We provide information on the allocation methodologies used to derive our business segment results in "Note 17-Business Segments and Revenue from Contracts with Customers." Table 8: Business Segment Results
Year Ended
2019 2018 2017
Total Net Net Income Total Net Total Net Net Income
Revenue(1) (Loss)(2) Revenue(1) Net Income(2) Revenue(1) (Loss)(2)
(Dollars in % of % of % of % of % of % of
millions) Amount Total Amount Total Amount
Total Amount Total Amount Total Amount Total
Credit Card
63 %
26 1,800 30 7,129 26 1,090 51
Commercial 2,814 10 621 11 2,788 10 806 13 2,969 11 676 32
Banking(3)(4)
Other(3)(4) 55 - (14 ) - 389 1 228 4 166 1 (1,569 ) (74 )
Total $ 28,593 100 % $ 5,533 100 % $ 28,076 100 % $ 6,025 100 % $ 27,237 100 % $ 2,117 100 %
__________
(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 (21% for 2019 and 2018 and 35% for 2017) 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
31, 2018, with an offsetting increase in the Other category.
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Credit Card Business The primary sources of revenue for our Credit Card business are net interest income, net interchange income and fees collected from customers. Expenses primarily consist of the provision for credit losses, operating costs and marketing expenses. Our Credit Card business generated net income from continuing operations of$3.1 billion ,$3.2 billion and$1.9 billion in 2019, 2018 and 2017, respectively. Table 9 summarizes the financial results of our Credit Card business and displays selected key metrics for the periods indicated. Table 9: Credit Card Business Results Year Ended December 31, Change (Dollars in millions, except as noted) 2019 2018 2017 2019 vs. 2018 2018 vs. 2017 Selected income statement data: Net interest income $ 14,461 $ 14,167$ 13,648 2 % 4 % Non-interest income 3,888 3,520 3,325 10 6 Total net revenue(1) 18,349 17,687 16,973 4 4 Provision for credit losses 4,992 4,984 6,066 - (18 ) Non-interest expense 9,271 8,542 7,916 9 8 Income from continuing operations (2 ) before income taxes 4,086 4,161 2,991 39 Income tax provision 959 970 1,071 (1 ) (9 ) Income from continuing operations, (2 ) net of tax $ 3,127 $ 3,191$ 1,920 66 Selected performance metrics: Average loans held for $ 114,202 $ 109,820$ 103,468 4 investment(2) 6 Average yield on loans held for 15.49 % 15.43 % 15.21 % 6 bps 22 bps investment(3) Total net revenue margin(4) 16.07 16.11 16.40 (4 ) (29 ) Net charge-offs $ 5,149 $ 5,069$ 5,054 2 % - Net charge-off rate 4.51 % 4.62 % 4.88 % (11 )bps (26 )bps Purchase volume $ 424,765 $ 387,102$ 336,440 10 % 15 % (Dollars in millions, except as noted) December 31, 2019 December 31, 2018 Change Selected period-end data: Loans held for investment(2) $ 128,236 $ 116,361 10 % 30+ day performing delinquency rate 3.89 % 4.00 % (11 )bps 30+ day delinquency rate 3.91 4.01 (10 ) Nonperforming loan rate(5) 0.02 0.02 - Allowance for loan and lease losses $ 5,395 $ 5,535 (3 )% Allowance coverage ratio 4.21 % 4.76 % (55 )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 provision for credit losses.
Total net revenue was reduced by
in 2019, 2018 and 2017, respectively, for the estimated uncollectible amount
of billed finance charges and fees, and related losses. The finance charge
and fee reserve totaled $462 million and $468 million as of December 31,
2019 and 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 dividinginterest 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 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) 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.
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Key factors affecting the results of our Credit Card business for 2019 compared
to 2018, and changes in financial condition and credit performance between
billion in 2019 primarily driven by growth in our domestic credit card loan
portfolio, including the acquired Walmart portfolio.
• Non-Interest Income: Non-interest income increased by
billion in 2019 primarily due to an increase in net interchange fees driven
by higher purchase volume.
• Provision for Credit Losses: The provision for credit losses remained
substantially flat at
the strong economy and stable underlying credit performance and the sale of
certain partnership receivables were largely offset by the allowance build
related to the acquired Walmart portfolio.
• Non-Interest Expense: Non-interest expense increased by
billion in 2019 primarily driven by continued investments in technology and
infrastructure as well as expenses related to the Walmart partnership.
• Loans Held for Investment: Period-end loans held for investment increased by
$11.9 billion to$128.2 billion as ofDecember 31, 2019 fromDecember 31, 2018 and average loans held for investment increased by$4.4 billion to$114.2 billion in 2019 compared to 2018 primarily due to growth in our domestic credit card loan portfolio, including the acquired Walmart portfolio.
• Net Charge-Off and Delinquency Metrics: The net charge-off rate decreased by
11 basis points to 4.51% in 2019 compared to 2018 primarily driven by the
impacts of the acquired Walmart portfolio, the strong economy and stable
underlying credit performance in our domestic credit card loan portfolio.
The 30+ day delinquency rate decreased by 10 basis points to 3.91% as ofDecember 31, 2019 fromDecember 31, 2018 primarily due to the strong economy and stable underlying credit performance in our domestic credit card loan portfolio, partially offset by the impacts of the acquired Walmart portfolio.
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Domestic Card Business The Domestic Card business generated net income from continuing operations of$3.0 billion in both 2019 and 2018 and$1.7 billion in 2017. In 2019, 2018 and 2017, the Domestic Card business accounted for greater than 90% of total net revenue of our Credit Card business. Table 9.1 summarizes the financial results for Domestic Card business and displays selected key metrics for the periods indicated. Table 9.1: Domestic Card Business Results Year Ended December 31, Change (Dollars in millions, except as noted) 2019 2018 2017 2019 vs. 2018 2018 vs. 2017 Selected income statement data: Net interest income $ 13,265 $ 12,926$ 12,504 3 % 3 % Non-interest income 3,684 3,239 3,069 14 6 Total net revenue(1) 16,949 16,165 15,573 5 4 Provision for credit losses 4,671 4,653 5,783 - (20 ) Non-interest expense 8,308 7,621 7,078 9 8 Income from continuing operations 3,970 3,891 2,712 43 before income taxes 2 Income tax provision 925 907 990 2 (8 ) Income from continuing operations, $ 3,045 $ 2,984$ 1,722 2 73 net of tax Selected performance metrics: Average loans held for investment(2) $ 105,270 $ 100,832$ 94,923 4 6 Average yield on loans held for 15.47 % 15.36 % 15.16 % 11 bps 20 bps investment(3) Total net revenue margin(4) 16.10 16.03 16.41 7 (38 ) Net charge-offs $ 4,818 $ 4,782$ 4,739 1 % 1 % Net charge-off rate 4.58 % 4.74 % 4.99 % (16 )bps (25 )bps Purchase volume $ 390,032 $ 354,158$ 306,824 10 % 15 % (Dollars in millions, except as noted) December 31, 2019 December 31, 2018 Change Selected period-end data: Loans held for investment(2) $ 118,606 $ 107,350 10 % 30+ day performing delinquency rate 3.93 % 4.04 % (11 )bps Allowance for loan and lease losses $ 4,997 $ 5,144 (3 )% Allowance coverage ratio 4.21 % 4.79 % (58 )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 dividinginterest 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 total net revenue for the
period by average loans held for investment during the period.
Because our Domestic Card business accounts for the substantial majority of our Credit Card business, the key factors driving the results are similar to the key factors affecting our total Credit Card business. Net income for our Domestic Card business increased in 2019 compared to 2018 primarily driven by: • an increase in net interchange fees due to higher purchase volume; and
• higher net interest income due to growth in our loan portfolio, including
the acquired Walmart portfolio.
These drivers were partially offset by continued investments in technology and infrastructure and expenses related to the Walmart partnership.
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Consumer Banking Business The primary sources of revenue for our Consumer Banking business are net interest income from loans and deposits, net interchange income and service charges and customer-related fees. Expenses primarily consist of the provision for credit losses, operating costs and marketing expenses. Our Consumer Banking business generated net income from continuing operations of$1.8 billion in both 2019 and 2018 and$1.1 billion in 2017. Table 10 summarizes the financial results of our Consumer Banking business and displays selected key metrics for the periods indicated. Table 10: Consumer Banking Business Results Year Ended December 31, Change (Dollars in millions, except as noted) 2019 2018 2017 2019 vs. 2018 2018 vs. 2017 Selected income statement data: Net interest income $ 6,732 $ 6,549$ 6,380 3 % 3 % Non-interest income 643 663 749 (3 ) (11 ) Total net revenue 7,375 7,212 7,129 2 1 Provision for credit losses 938 838 1,180 12 (29 ) Non-interest expense 4,091 4,027 4,233 2 (5 ) Income from continuing operations 2,346 2,347 1,716 - 37 before income taxes Income tax provision 547 547 626 - (13 ) Income from continuing operations, $ 1,799 $ 1,800$ 1,090 - 65 net of tax Selected performance metrics: Average loans held for investment: Auto $ 57,938 $ 55,610$ 51,477 4 8 Home loan(1) - 6,266 19,681 ** (68 ) Retail banking 2,770 3,075 3,463 (10 ) (11 ) Total consumer banking $ 60,708 $ 64,951$ 74,621 (7 ) (13 ) Average yield on loans held for 8.37 % 7.54 % 6.67 % 83 bps 87 bps
investment(2)
Average deposits $ 205,012 $ 193,053$ 185,201 6 % 4 % Average deposits interest rate 1.24 % 0.95 % 0.62 % 29 bps 33 bps Net charge-offs $ 947 $ 981$ 1,038 (3 )% (5 )% Net charge-off rate 1.56 % 1.51 % 1.39 % 5 bps 12 bps Auto loan originations $ 29,251 $ 26,276$ 27,737 11 % (5 )% (Dollars in millions, except as noted) December 31, 2019 December 31, 2018 Change Selected period-end data: Loans held for investment: Auto $ 60,362 $ 56,341 7 % Retail banking 2,703 2,864 (6 ) Total consumer banking $ 63,065 $ 59,205 7 30+ day performing delinquency rate 6.63 % 6.67 % (4 )bps 30+ day delinquency rate 7.34 7.36 (2 ) Nonperforming loan rate 0.81 0.81 - Nonperforming asset rate(3) 0.91 0.90 1 Allowance for loan and lease losses $ 1,038 $ 1,048 (1 )% Allowance coverage ratio 1.65 % 1.77 % (12 )bps Deposits $ 213,099 $ 198,607 7 % __________
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(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 dividinginterest 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 andrepossessed assets. The total nonperforming asset rate is calculated based
on total nonperforming assets divided by the combined period-end total loans
held for investment and repossessed assets.
** Not meaningful.
Key factors affecting the results of our Consumer Banking business for 2019
compared to 2018, and changes in financial condition and credit performance
between
billion in 2019 primarily driven by higher yields and growth in our auto
loan portfolio as well as higher deposit volumes in our Retail Banking
business, partially offset by the reduction in net interest income from the
sale of our consumer home loan portfolio.
Consumer Banking loan yields increased by 83 basis points to 8.37% in 2019 compared to 2018. The increase was primarily driven by changes in product mix due to the sale of our consumer home loan portfolio as well as originated yield improvements in our auto loan portfolio. • Non-Interest Income: Non-interest income remained substantially flat at$643
million in 2019.
• Provision for Credit Losses: The provision for credit losses increased by
release in 2018 largely due to improvements in credit trends in our auto
loan portfolio.
• Non-Interest Expense: Non-interest expense increased by
billion in 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
due to growth in our auto loan portfolio. Average loans held for investment
decreased by
primarily due to the sale of our consumer home loan portfolio, partially
offset by growth in our auto loan portfolio.
• Deposits: Period-end deposits increased by
as of
result of our national banking strategy.
• Net Charge-Off and Delinquency Metrics: The net charge-off rate increased by
5 basis points to 1.56% in 2019 compared to 2018 primarily driven by lower
loan balances due to the sale of our consumer home loan portfolio, partially
offset by lower net charge-offs and growth in our auto loan portfolio.
The 30+ day delinquency rate remained substantially flat at 7.34% as ofDecember 31, 2019 fromDecember 31, 2018 as the impact of growth in our auto loan portfolio was largely offset by higher 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$621 million ,$806 million and$676 million in 2019, 2018 and 2017, respectively.
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Table 11 summarizes the financial results of our Commercial Banking business and displays selected key metrics for the periods indicated. Table 11: Commercial Banking Business Results
Year Ended December 31, Change
(Dollars in millions, except as
noted) 2019 2018 2017 2019 vs. 2018 2018 vs. 2017
Selected income statement data:
Net interest income $ 1,983 $ 2,044 $ 2,261 (3 )% (10 )%
Non-interest income 831 744 708 12 5
Total net revenue(1)(2) 2,814 2,788 2,969 1 (6 )
Provision for credit losses(3) 306 83 301 ** (72 )
Non-interest expense 1,699 1,654 1,603 3 3
Income from continuing operations 809 1,051 1,065 (23 ) (1 )
before income taxes
Income tax provision 188 245 389 (23 ) (37 )
Income from continuing operations, $ 621 $ 806 $ 676 (23 ) 19
net of tax
Selected performance metrics:
Average loans held for investment:
Commercial and multifamily real $ 29,608 $ 27,771 $ 27,370 7 1
estate
Commercial and industrial 42,863 39,188 39,606 9 (1 )
Total commercial lending 72,471 66,959 66,976 8 -
Small-ticket commercial real estate 69 371 442 (81 ) (16 )
Total commercial banking $ 72,540 $ 67,330 $ 67,418 8 -
Average yield on loans held for 4.51 % 4.46 % 3.87 % 5 bps 59 bps
investment(1)(4)
Average deposits $ 31,229 $ 32,175$ 33,947 (3 )% (5 )% Average deposits interest rate 1.18 % 0.72 % 0.39 % 46 bps 33 bps Net charge-offs $ 156 $ 56$ 465 179 % (88 )% Net charge-off rate 0.22 % 0.08 % 0.69 % 14 bps (61 )bps (Dollars in millions, except as noted) December 31, 2019 December 31, 2018 Change Selected period-end data: Loans held for investment: Commercial and multifamily real $ 30,245 $ 28,899 5 % estate Commercial and industrial 44,263 41,091 8 Total commercial lending 74,508 69,990 6 Small-ticket commercial real estate - 343 ** Total commercial banking $ 74,508 $ 70,333 6 Nonperforming loan rate 0.60 % 0.44 % 16 bps Nonperforming asset rate(5) 0.60 0.45 15 Allowance for loan and lease $ 775 $ 637 22 % losses(3) Allowance coverage ratio 1.04 % 0.91 % 13 bps Deposits $ 32,134 $ 29,480 9 % Loans serviced for others 38,481 32,588 18 __________
(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 (21% for 2019 and 2018 and 35% for 2017) 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
31, 2018, with an offsetting increase in the Other category.
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(3) The provision for losses on unfunded lending commitments is included in the
provision for credit losses in our consolidated statements of income and the
related reserve for unfunded lending commitments is included in other
liabilities on our consolidated balance sheets. Our reserve for unfunded
lending commitments totaled
of December 31, 2019 , 2018 and 2017, respectively.
(4) Average yield on loans held for investment is calculated by dividinginterest 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 and other foreclosed
assets. The total nonperforming asset rate is calculated based on total
nonperforming assets divided by the combined period-end total loans held for
investment and other foreclosed assets.
** Not meaningful.
Key factors affecting the results of our Commercial Banking business for 2019
compared to 2018, and changes in financial condition and credit performance
between
billion in 2019 primarily driven by lower margin on loans and deposits,
partially offset by growth across our commercial loan portfolios.
• Non-Interest Income: Non-interest income increased by
million in 2019 primarily driven by higher revenue from our capital markets,
treasury management products, and agency businesses.
• Provision for Credit Losses: Provision for credit losses increased by
million to
our commercial energy loan portfolio.
• Non-Interest Expense: Non-interest expense increased by
billion in 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
$4.2 billion to$74.5 billion as ofDecember 31, 2019 fromDecember 31, 2018 , and average loans held for investment increased by$5.2 billion to
commercial loan portfolios.
• Deposits: Period-end deposits increased by
of
growth.
• Net Charge-Off and Nonperforming Metrics: The net charge-off rate increased
by 14 basis points to 0.22% in 2019 primarily driven by charge-offs in our
commercial energy loan portfolio.
The nonperforming loan rate increased by 16 basis points to 0.60% as ofDecember 31, 2019 fromDecember 31, 2018 primarily driven by downgrades in our commercial energy loan portfolio. Other Category Other includes unallocated amounts related to our centralized Corporate Treasury group activities, such as management of our corporate investment portfolio, asset/liability management and certain capital management activities. Other also includes: • unallocated corporate revenue and expenses that do not directly support the
operations of the business segments or for which the business segments are
not considered financially accountable in evaluating their performance, such
as certain restructuring charges;
• offsets related to certain line-item reclassifications;
• residual tax expense or benefit to arrive at the consolidated effective tax
rate that is not assessed to our primary business segments; and
• foreign exchange-rate fluctuations on foreign currency-denominated balances.
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Table 12 summarizes the financial results of our Other category for the periods
indicated.
Table 12: Other Category Results
Year Ended December 31, Change
(Dollars in millions) 2019 2018 2017 2019 vs. 2018 2018 vs. 2017
Selected income statement data:
Net interest income $ 164 $ 115 $ 171 43 % (33 )%
Non-interest income (loss) (109 ) 274 (5 ) ** **
Total net revenue(1)(2) 55 389 166 (86 ) 134
Provision (benefit) for credit - (49 ) 4 ** **
losses
Non-interest expense(3) 422 679 442 (38 ) 54 Loss from continuing operations (367 ) (241 ) (280 ) 52 (14 ) before income taxes Income tax provision (benefit) (353 ) (469 ) 1,289 (25 ) **
Income (loss) from continuing
**
operations, net of tax
__________
(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 (21% for 2019 and 2018 and 35% for 2017) 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
31, 2018, with an offsetting increase in the Other category.
(3) Includes $38 million of net Cybersecurity Incident expenses in 2019,
consisting of $72 million of expenses and $34 million of insurance
recoveries.
** Not meaningful.
Net loss from continuing operations recorded in the Other category was $14
million in 2019 compared to net income of $228 million in 2018, primarily driven
by the net impact of the absence of significant activities that occurred in
2018, including gains from the sales of our exited businesses, a benefit related
to a tax methodology change on rewards costs, an impairment charge as a result
of repositioning our investment securities portfolio, and a legal reserve build.
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."
We have identified the following accounting estimates as critical because they
require significant judgments and assumptions about highly complex and
inherently uncertain matters and the use of reasonably different estimates and
assumptions could have a material impact on our results of operations or
financial condition. Our critical accounting policies and estimates are as
follows:
• Loan loss reserves
• Asset impairment
• Fair value of financial instruments
• Customer rewards reserve
We evaluate our critical accounting estimates and judgments on an ongoing basis and update them as necessary, based on changing conditions. Management has discussed our critical accounting policies and estimates with the Audit Committee of the Board of Directors.
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Loan Loss Reserves We maintain an allowance for loan and lease losses that represents management's estimate of incurred loan and lease losses inherent in our credit card, consumer banking and commercial banking loans held for investment as of each balance sheet date. We also separately reserve for contractually binding unfunded lending commitments. We build our allowance for loan and lease losses and reserve for unfunded lending commitments through the provision for credit losses, which is driven by charge-offs, changes in the allowance for loan and lease losses and changes in the reserve for unfunded lending commitments. The allowance for loan and lease losses was$7.2 billion as ofDecember 31, 2019 andDecember 31, 2018 . We have an established process, using analytical tools and management judgment, to determine our allowance for loan and lease losses. Establishing the allowance each quarter involves evaluating many factors including, but not limited to, historical loss and recovery experience, recent trends in delinquencies and charge-offs, risk ratings, the impact of bankruptcy filings, the value of collateral underlying secured loans, account seasoning, changes in our credit evaluation, underwriting and collection management policies, seasonality, credit bureau scores, general economic conditions, changes in the legal and regulatory environment and uncertainties in forecasting and modeling techniques used in estimating our allowance for loan and lease losses. Key factors that have a significant impact on our allowance for loan and lease losses include assumptions about employment levels, home prices and the valuation of commercial properties, automobiles and other collateral. We have a governance framework intended to ensure that our estimate of the allowance for loan and lease losses is appropriate. Our governance framework provides for oversight of methods, models, qualitative adjustments, process controls and results. At least quarterly, representatives from the Finance and Risk Management organizations review and assess our allowance methodologies, key assumptions and the appropriateness of the allowance for loan and lease losses. Groups independent of our estimation functions participate in the review and validation process. Tasks performed by these groups include periodic review of the rationale for and quantification of judgmental inputs and adjustments to results. We have a model policy, established by an independent Model Risk Office, which governs the validation of models and related supporting documentation to ensure the appropriate use of models for estimating credit losses. The Model Risk Office validates all models and requires ongoing monitoring of their performance. In addition to the allowance for loan and lease losses, we review and assess our estimate of probable losses related to contractually binding unfunded lending commitments on a quarterly basis. The factors impacting our assessment generally align with those considered in our evaluation of the allowance for loan and lease losses for the Commercial Banking business. Changes to the reserve for losses on unfunded lending commitments are recorded through the provision for credit losses in the consolidated statements of income and to other liabilities on the consolidated balance sheets. Although we examine a variety of externally available data, as well as our internal loan performance data, to determine our allowance for loan and lease losses and reserve for unfunded lending commitments, our estimation process is subject to risks and uncertainties, including a reliance on historical loss and trend information that may not be representative of current conditions and indicative of future performance. Accordingly, our actual credit loss experience may not be in line with our expectations. We provide additional information on the methodologies and key assumptions used in determining our allowance for loan and lease losses for each of our loan portfolio segments in "Note 1-Summary of Significant Accounting Policies." We provide information on the components of our allowance, disaggregated by impairment methodology, and changes in our allowance in "Note 4-Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments." Finance Charge and Fee Reserves Finance charges and fees on credit card loans are recorded in revenue when earned. Billed finance charges and fees on credit card loans are included in loans held for investment net of amounts that we consider uncollectible. Unbilled finance charges and fees on credit card loans are included in interest receivable. We continue to accrue finance charges and fees on credit card loans until the account is charged-off. When we do not expect full payment of billed finance charges and fees, we reduce the balance of our credit card loan receivables and revenue by the amount of finance charges and fees billed but not expected to be collected. Total net revenue was reduced by$1.4 billion ,$1.3 billion and$1.4 billion in 2019, 2018 and 2017, respectively, for the estimated uncollectible amount of billed finance charges and fees. The finance charge and fee reserve totaled$462 million and$468 million as ofDecember 31, 2019 and 2018, respectively.
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We review and assess the adequacy of the uncollectible finance charge and fee reserve on a quarterly basis. Our methodology for estimating the uncollectible portion of billed finance charges and fees is consistent with the methodology we use to estimate the allowance for incurred losses on the principal portion of our credit card loan receivables. Asset Impairment In addition to our loan portfolio, we review other assets for impairment on a regular basis in accordance with applicable accounting guidance. This process requires significant management judgment and involves various estimates and assumptions. Below we describe our process for assessing impairment of goodwill and the key estimates and assumptions involved in this process.Goodwill Goodwill represents the excess of the fair value of the consideration transferred in a business combination, plus the fair value of any non-controlling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date.Goodwill totaled$14.7 billion and$14.5 billion as ofDecember 31, 2019 and 2018, respectively. We did not recognize any goodwill impairment in 2019 and 2018. See "Note 6-Goodwill and Intangible Assets" for additional information. We perform our goodwill impairment test annually onOctober 1 at a reporting unit level. We also are required to test goodwill for impairment whenever events or circumstances indicate it is more-likely-than-not that an impairment may have occurred. We have four reporting units: Credit Card, Auto, Other Consumer Banking and Commercial Banking. The goodwill impairment test is a two-step process. The first step involves a comparison of the estimated fair value of a reporting unit to its carrying amount, including goodwill. If the estimated fair value exceeds its carrying amount, goodwill of the reporting unit is not impaired. If the estimated fair value of a reporting unit is below its carrying amount, management must estimate the fair value of the assets and liabilities of that reporting unit's balance sheet based on applicable accounting guidance in order to measure the impairment. For the purpose of our goodwill impairment testing, we calculate the carrying amount of a reporting unit using an allocated capital approach based on each reporting unit's specific regulatory capital requirements, economic capital requirements, and underlying risks. The carrying amount for a reporting unit is the sum of its respective capital requirements, goodwill and intangibles balances. We then compare the carrying amount to our total consolidated stockholders' equity to assess the reasonableness of our methodology. The total carrying amount of our four reporting units was$50.5 billion , as compared to consolidated stockholder's equity of$58.2 billion as ofOctober 1, 2019 . The$7.7 billion excess in consolidated stockholder's equity was primarily attributable to capital allocated to our Other category and other future capital needs such as dividends, share buybacks or other strategic initiatives. Determining the fair value of a reporting unit is a subjective process that requires the use of estimates and the exercise of significant judgment. We calculated the fair value of our reporting units using a discounted cash flow ("DCF") calculation, a form of the income approach. This income approach calculation used projected cash flows based on each reporting unit's internal forecast and the perpetuity growth method to calculate terminal values. Our DCF analysis required management to make estimates about future loan, deposit and revenue growth, as well as credit losses and capital rates. These cash flows and terminal values were then discounted using discount rates based on our external cost of capital with adjustments for the risk inherent in each reporting unit. The reasonableness of the DCF approach was assessed by reference to a market-based approach using comparable market multiples and recent market transactions where available. The results of the 2019 annual impairment test for the Credit Card, Auto, Other Consumer Banking and Commercial Banking reporting units indicated that the estimated fair values of these four reporting units substantially exceeded their carrying amounts. Assumptions used in estimating the fair value of a reporting unit are judgmental and inherently uncertain. A significant change in the economic conditions of a reporting unit, such as declines in business performance, increases in credit losses, increases in capital requirements, deterioration of market conditions, adverse impacts of regulatory or legislative changes or increases in the estimated cost of capital, could cause the estimated fair values of our reporting units to decline in the future, and increase the risk of a goodwill impairment in a future period. Fair Value Fair value, also referred to as an exit price, is defined as the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The fair value accounting guidance provides a
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three-level fair value hierarchy for classifying financial instruments. This
hierarchy is based on the markets in which the assets or liabilities trade and
whether the inputs to the valuation techniques used to measure fair value are
observable or unobservable. The fair value measurement of a financial asset or
liability is assigned a level based on the lowest level of any input that is
significant to the fair value measurement in its entirety. The three levels of
the fair value hierarchy are described below:
Level 1: Valuation is based on quoted prices (unadjusted) in active markets for
identical assets or liabilities.
Level 2: Valuation is based on observable market-based inputs other than Level 1
prices, such as quoted prices for similar assets or liabilities, quoted prices
in markets that are not active, or other inputs that are observable or can be
corroborated by observable market data for substantially the full term of the
assets or liabilities.
Level 3: Valuation is generated from techniques that use significant assumptions
not observable in the market. Valuation techniques include pricing models,
discounted cash flow methodologies or similar techniques.
The degree of management judgment involved in determining the fair value of a
financial instrument is dependent upon the availability of quoted prices in
active markets or observable market parameters. When quoted prices and
observable data in active markets are not fully available, management judgment
is necessary to estimate fair value. Changes in market conditions, such as
reduced liquidity in the capital markets or changes in secondary market
activities, may reduce the availability and reliability of quoted prices or
observable data used to determine fair value.
We have developed policies and procedures to determine when markets for our
financial assets and liabilities are inactive if the level and volume of
activity has declined significantly relative to normal conditions. If markets
are determined to be inactive, it may be appropriate to adjust price quotes
received. When significant adjustments are required to price quotes or inputs,
it may be appropriate to utilize an estimate based primarily on unobservable
inputs.
Significant judgment may be required to determine whether certain financial
instruments measured at fair value are classified as Level 2 or Level 3. In
making this determination, we consider all available information that market
participants use to measure the fair value of the financial instrument,
including observable market data, indications of market liquidity and
orderliness, and our understanding of the valuation techniques and significant
inputs used. Based upon the specific facts and circumstances of each instrument
or instrument category, judgments are made regarding the significance of the
Level 3 inputs to the instruments' fair value measurement in its entirety. If
Level 3 inputs are considered significant, the instrument is classified as Level
3. The process for determining fair value using unobservable inputs is generally
more subjective and involves a high degree of management judgment and
assumptions. We discuss changes in the valuation inputs and assumptions used in
determining the fair value of our financial instruments, including the extent to
which we have relied on significant unobservable inputs to estimate fair value
and our process for corroborating these inputs, in "Note 16-Fair Value
Measurement."
We have a governance framework and a number of key controls that are intended to
ensure that our fair value measurements are appropriate and reliable. Our
governance framework provides for independent oversight and segregation of
duties. Our control processes include review and approval of new transaction
types, price verification, and review of valuation judgments, methods, models,
process controls and results.
Groups independent of our trading and investing functions participate in the
review and validation process. Tasks performed by these groups include periodic
verification of fair value measurements to determine if assigned fair values are
reasonable, including comparing prices from vendor pricing services to other
available market information.
Our Fair Value Committee ("FVC"), which includes representation from business
areas, Risk Management and Finance, provides guidance and oversight to ensure an
appropriate valuation control environment. The FVC regularly reviews and
approves our fair valuations to ensure that our valuation practices are
consistent with industry standards and adhere to regulatory and accounting
guidance.
We have a model policy, established by an independent Model Risk Office, which
governs the validation of models and related supporting documentation to ensure
the appropriate use of models for pricing and fair value measurements. The Model
Risk Office validates all models and requires ongoing monitoring of their
performance.
The fair value governance process is set up in a manner that allows the
Chairperson of the FVC to escalate valuation disputes that cannot be resolved by
the FVC to a more senior committee called the Valuations Advisory Committee
("VAC") for resolution. The VAC is chaired by the Chief Financial Officer and
includes other members of senior management. The VAC convenes to review
escalated valuation disputes.
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Customer Rewards Reserve We offer products, primarily credit cards, which include programs that allow members to earn rewards based on account activity that can be redeemed for cash (primarily in the form of statement credits), gift cards, travel, or coverage of eligible charges. The amount of rewards that a customer earns varies based on the terms and conditions of the rewards program and product. The majority of our rewards do not expire and there is no limit on the amount of rewards an eligible card member can earn. Customer rewards costs, which we generally record as an offset to interchange income, are driven by various factors such as card member purchase volume, the terms and conditions of the rewards program, and rewards redemption cost. We establish a customer rewards reserve that reflects management's estimate of rewards earned that are expected to be redeemed and the estimated redemption cost. We use financial models to estimate ultimate redemption rates of rewards earned to date by current card members based on historical redemption trends, current enrollee redemption behavior, card product type, year of program enrollment, enrollment tenure and card spend levels. Our current assumption is that the vast majority of all rewards earned will eventually be redeemed. We use a weighted-average redemption cost during the previous twelve months, adjusted as appropriate for recent changes in redemption costs, including the mix of rewards redeemed, to estimate future redemption costs. We continually evaluate our reserve and assumptions based on developments in redemption patterns, changes to the terms and conditions of the rewards program and other factors. We recognized customer rewards expense of$4.9 billion ,$4.4 billion and$3.7 billion in 2019, 2018 and 2017, respectively. Our customer rewards reserve, which is included in other liabilities on our consolidated balance sheets, totaled$4.7 billion and$4.3 billion as ofDecember 31, 2019 and 2018, respectively. ACCOUNTING CHANGES AND DEVELOPMENTS
Accounting Standards Issued but Not Adopted as of
Adoption Timing and
Standard Guidance Financial Statements
Impacts
Cloud Computing Aligns the requirements We adopted this guidance
ASU No. 2018-15, for capitalizing in the first quarter of
Intangibles-Goodwill and implementation costs 2020 using the prospective
Other-Internal-Use incurred in a hosting method of adoption.
Software (Subtopic arrangement that is a Our adoption of this
350-40): Customer's service contract with the standard did not have a
Accounting for requirements for material impact on our
Implementation Costs capitalizing consolidated financial
Incurred in a Cloud implementation costs statements.
Computing Arrangement incurred to develop or
That Is a Service obtain internal-use
Contract software (and hosting
Issued August 2018 arrangements that include
an internal-use software
license).
Goodwill Impairment Test Eliminates the second step We adopted this guidance
Simplification from the current goodwill in the first quarter of
ASU No. 2017-04, impairment test. 2020 using the prospective
Intangibles-Goodwill and Under the current method of adoption.
Other (Topic 350): guidance, the first step Our adoption of this
Simplifying the Test for compares a reporting standard did not have a
Goodwill Impairment unit's carrying value to material impact on our
Issued January 2017 its fair value. If the consolidated financial
carrying value exceeds statements.
fair value, an entity
performs the second step,
which assigns the
reporting unit's fair
value to its assets and
liabilities, including
unrecognized assets and
liabilities, in the same
manner as required in
purchase accounting.
Under the new guidance,
any impairment of a
reporting unit's goodwill
is determined based on the
amount by which the
reporting unit's carrying
value exceeds its fair
value, limited to the
amount of goodwill
allocated to the reporting
unit.
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Adoption Timing and
Standard Guidance Financial Statements
Impacts
Current Expected Credit Requires use of the We adopted this guidance
Loss ("CECL") current expected credit in the first quarter of
ASU No. 2016-13, loss model that is based 2020, using the modified
Financial on expected losses (net of retrospective method of
Instruments-Credit Losses expected recoveries), adoption. Prior to
(Topic 326): Measurement rather than incurred adopting this guidance, we
of Credit Losses on losses, to determine our completed evaluations of
Financial Instruments allowance for credit data requirements and
Issued June 2016 losses on financial assets necessary changes to our
measured at amortized credit loss estimation
cost, certain net methods, processes,
investments in leases and systems and controls. We
certain off-balance sheet also completed model
arrangements. validations and multiple
Replaces current tests of our full
accounting for purchased end-to-end allowance
credit-impaired ("PCI") processes.
and impaired loans. As a result of our
Amends the adoption, we estimate an
other-than-temporary increase to our reserves
impairment model for for credit losses of $2.9
available for sale debt billion, an increase to
securities to require that our deferred tax assets of
credit losses be recorded $698 million , and a
through an allowance decrease to our retained
approach, rather than earnings of $2.2 billion .
through permanent These amounts are subject
write-downs for credit to change as we finalize
losses and subsequent our adoption efforts.
accretion of positive
changes through interest
income over time.
See "Note 1-Summary of Significant Accounting Policies" for information on the
accounting standards we adopted in 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"). Moreover, the
Banks, as insured depository institutions, are subject to Prompt Corrective
Action ("PCA") capital regulations.
The Basel III Capital Rule includes the "Basel III Standardized Approach" and
the "Basel III Advanced Approaches." We entered parallel run under Basel III
Advanced Approaches on January 1, 2015 , during which we were required to
calculate capital ratios under both the Basel III Standardized Approach and the
Basel III Advanced Approaches, though we used the Standardized Approach for
purposes of meeting regulatory capital requirements.
In October 2019 , the Federal Banking Agencies amended the Basel III Capital Rule
to provide for tailored application of certain capital requirements across
different categories of banking institutions ("Tailoring Rules"). As a bank
holding company ("BHC") with total consolidated assets of at least $250 billion
that does not exceed any of the applicable risk-based thresholds, we are a
Category III institution under the Tailoring Rules. As such, we are no longer
subject to the Basel III Advanced Approaches and certain associated capital
requirements, such as the requirement to include in regulatory capital certain
elements of AOCI.
In July 2019 , the Federal Banking Agencies finalized certain changes in the
Basel III Capital Rule for institutions not subject to the Basel III Advanced
Approaches, including Capital One ("Capital Simplification Rule"). These
changes, effective January 1, 2020 , generally raise the threshold above which
institutions subject to the Capital Simplification Rule must deduct certain
assets from their common equity Tier 1 capital, including certain deferred tax
assets, mortgage servicing assets, and investments in unconsolidated financial
institutions. While the higher thresholds will not impact our current capital
levels, in stress scenarios they may provide a benefit by enabling us to include
more deferred tax assets in our common equity Tier 1 capital. All else equal, we
anticipate that the Tailoring Rules and Capital Simplification Rule will, taken
together, decrease our capital requirements.
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The Basel III Capital Rule requires banking institutions to maintain a capital conservation buffer, composed of common equity Tier 1 capital, of 2.5% above the regulatory minimum ratios. In addition, Category III institutions, including the Company and the Banks, are subject to certain capital requirements formerly applicable only to Basel III Advanced Approaches banking organizations. Category III institutions are subject to a supplementary leverage ratio of 3.0% and their capital conservation buffer may be supplemented by an incremental countercyclical capital buffer of up to 2.5% composed of common equity Tier 1 capital and set at the discretion of the Federal Banking Agencies. As ofDecember 31, 2019 , the countercyclical capital buffer was zero percent inthe 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. The Market Risk Rule requires institutions subject to the rule to adjust their risk-based capital ratios to reflect the market risk in their trading portfolios. As ofDecember 31, 2019 , the Company and CONA are subject to the Market Risk Rule. See "MD&A-Market Risk Profile" below for additional information. InDecember 2018 , the Federal Banking Agencies revised theBasel III Capital Rule to identify which credit loss allowances under the CECL model are eligible for inclusion in regulatory capital and to provide banking organizations the option to phase in over a three-year transition period endingJanuary 1, 2023 the day-one adverse effects on regulatory capital that may result from the adoption of the CECL model ("CECL Transition Election"). The CECL model became applicable to us as ofJanuary 1, 2020 and we intend to make the CECL Transition Election effective in the first quarter of 2020. 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. 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 ofDecember 31, 2019 and 2018, respectively. For the description of the regulatory capital rules we are subject to, see "Part I-Item 1. Business-Supervision and Regulation."
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OnDecember 31, 2019 , we transferred our entire portfolio of held to maturity securities to available for sale in consideration of changes to regulatory capital requirements under the Tailoring Rules, which no longer require Category III institutions to include in regulatory capital certain elements of AOCI, including unrealized gains and losses from available for sale securities. On the date of transfer, these securities had a fair value of$33.2 billion , including pre-tax unrealized gains of$1.2 billion recognized in AOCI ($888 million after-tax). Inclusive of this transfer, the AOCI associated with our available for sale securities portfolio increased our common equity Tier 1 ratio by approximately 30 basis points as ofDecember 31, 2019 , see "MD&A-Executive Summary and Business Outlook" for more information. Table 13 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 ofDecember 31, 2019 and 2018. Table 13: Capital Ratios under Basel III(1) December 31, 2019 December 31, 2018 Minimum Minimum Capital Capital Well- Capital Capital Well- Ratio Adequacy Capitalized Ratio Adequacy CapitalizedCapital One Financial Corp : Common equity Tier 1 capital(2) 12.2 % 4.5 % N/A 11.2 % 4.5 % N/A Tier 1 capital(3) 13.7 6.0 6.0 % 12.7 6.0 6.0 % Total capital(4) 16.1 8.0 10.0 15.1 8.0 10.0 Tier 1 leverage(5) 11.7 4.0 N/A 10.7 4.0 N/A Supplementary leverage(6) 9.9 3.0 N/A 9.0 3.0 N/A COBNA: Common equity Tier 1 capital(2) 16.1 4.5 6.5 15.3 4.5 6.5 Tier 1 capital(3) 16.1 6.0 8.0 15.3 6.0 8.0 Total capital(4) 18.1 8.0 10.0 17.6 8.0 10.0 Tier 1 leverage(5) 14.8 4.0 5.0 14.0 4.0 5.0 Supplementary leverage(6) 12.1 3.0 N/A 11.5 3.0 N/A CONA: Common equity Tier 1 capital(2) 13.4 4.5 6.5 13.0 4.5 6.5 Tier 1 capital(3) 13.4 6.0 8.0 13.0 6.0 8.0 Total capital(4) 14.5 8.0 10.0 14.2 8.0 10.0 Tier 1 leverage(5) 9.2 4.0 5.0 9.1 4.0 5.0 Supplementary leverage(6) 8.2 3.0 N/A 8.0 3.0 N/A __________
(1) Capital requirements that are not applicable are denoted by "N/A." (2) Common equity Tier 1 capital ratio is a regulatory capital measure
calculated based on common equity Tier 1 capital divided by risk-weighted
assets.
(3) Tier 1 capital ratio is a regulatory capital measure calculated based on
Tier 1 capital divided by risk-weighted assets.
(4) Total capital ratio is a regulatory capital measure calculated based on
total capital divided by risk-weighted assets.
(5) Tier 1 leverage ratio is a regulatory capital measure calculated based on
Tier 1 capital divided by adjusted average assets.
(6) Supplementary leverage ratio is a regulatory capital measure calculated
based on Tier 1 capital divided by total leverage exposure.
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Table 14 presents regulatory capital under the Basel III Standardized Approach and regulatory capital metrics as ofDecember 31, 2019 and 2018. Table 14:Regulatory Risk-Based Capital Components and Regulatory Capital Metrics (Dollars in millions)December 31 ,
2019
$ 52,001 $ 48,570
Adjustments:
AOCI, net of tax 1,156 (1,263 )
Goodwill, net of related deferred tax liabilities (14,465 ) (14,373 )
Intangible assets, net of related deferred tax liabilities (170 ) (254 )
Other (360 ) 391
Common equity Tier 1 capital 38,162 33,071
Tier 1 capital instruments 4,853 4,360
Tier 1 capital 43,015 37,431
Tier 2 capital instruments 3,377 3,483
Qualifying allowance for loan and lease losses 3,956 3,731
Tier 2 capital 7,333 7,214
Total capital $ 50,348 $ 44,645
Regulatory Capital Metrics
Risk-weighted assets $ 313,155 $ 294,950
Adjusted average assets 368,511 350,606
Total leverage exposure 435,976 414,701
Capital Planning and Regulatory Stress Testing
On June 27, 2019 , the Federal Reserve completed its 2019 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. The Board of Directors also
authorized the dividend on our common stock of $0.40 per share in each quarter
in 2019. For the description of the regulatory capital planning rules we are
subject to, see "Part I-Item 1. Business-Supervision and Regulation."
Equity Offerings and Transactions
On September 11, 2019 , we issued 60,000,000 depositary shares, each representing
a 1/40th interest in a share of Fixed Rate Non-Cumulative Perpetual Preferred
Stock, Series I, $0.01 par value, with a liquidation preference of $25 per
depositary share ("Series I Preferred Stock"). The net proceeds of the offering
of Series I Preferred Stock were approximately $1.5 billion , after deducting
underwriting commissions and offering expenses. Dividends on the Series I
Preferred Stock are payable quarterly in arrears at a rate of 5.00% per annum.
On December 2, 2019 , we redeemed all outstanding shares of our Fixed Rate 6.25%
Non-Cumulative Perpetual Preferred Stock Series C and Fixed Rate 6.70%
Non-Cumulative Perpetual Preferred Stock Series D. The redemption reduced our
net income available to common shareholders by $31 million in the fourth quarter
and full year of 2019.
On January 31, 2020 , we issued 50,000,000 depositary shares, each representing a
1/40th interest in a share of Fixed Rate Non-Cumulative Perpetual Preferred
Stock, Series J, $0.01 par value, with a liquidation preference of $25 per
depositary share ("Series J Preferred Stock"). The net proceeds of the offering
of Series J Preferred Stock were approximately $1.2 billion , after deducting
underwriting commissions and offering expenses. Dividends on the Series J
Preferred Stock are payable quarterly in arrears at a rate of 4.80% per annum.
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OnJanuary 31, 2020 , we announced that we will redeem all outstanding shares of our Fixed Rate 6.00% Non-Cumulative Perpetual Preferred Stock Series B onMarch 2, 2020 . The redemption will reduce our net income available to common stockholders by approximately$20 million in the first quarter of 2020. Dividend Policy and Stock Purchases For the year endedDecember 31, 2019 , we declared and paid common stock dividends of$757 million , or$1.60 per share, and preferred stock dividends of$282 million . The following table summarizes the dividends paid per share on our various preferred stock series in each quarter of 2019. Table 15: Preferred Stock Dividends Paid Per Share Per Annum Dividend 2019 Series Description Issuance Date Dividend Rate Frequency Q4 Q3 Q2 Q1 Series B 6.00% August 20, 2012 6.00% Quarterly$15.00 $15.00 $15.00 $15.00 Non-Cumulative Series C(1) 6.25% June 12, 2014 6.25 Quarterly 15.63 15.63 15.63 15.63 Non-Cumulative Series D(1) 6.70% October 31, 2014 6.70 Quarterly 16.75 16.75 16.75 16.75 Non-Cumulative Series E Fixed-to-Floating Rate May 14, 2015 5.55% through Semi-Annually 27.75 - 27.75 - Non-Cumulative 5/31/2020; through 3-mo. LIBOR+ 5/31/2020; 380 bps Quarterly thereafter thereafter Series F 6.20% August 24, 2015 6.20 Quarterly 15.50 15.50 15.50 15.50 Non-Cumulative Series G 5.20% July 29, 2016 5.20 Quarterly 13.00 13.00 13.00 13.00 Non-Cumulative Series H 6.00% November 29, 2016 6.00 Quarterly 15.00 15.00 15.00 15.00 Non-Cumulative Series I 5.00% September 11, 2019 5.00 Quarterly 11.11 - - - Non-Cumulative __________
(1) On
Series D preferred stock.
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 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 ofDecember 31, 2019 , funds available for dividend payments from COBNA and CONA were$3.3 billion and$4.7 billion , respectively. There can be no assurance that we will declare and pay any dividends to stockholders. Consistent with our 2019 Stock Repurchase Program which was announced onJune 27, 2019 , our Board of Directors authorized the repurchase of up to$2.2 billion of shares of common stock beginning in the third quarter of 2019 through the end of the second quarter of 2020. Through the end of 2019, we repurchased approximately$1.4 billion of shares of our common stock under the 2019 Stock Repurchase Program. 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."
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RISK MANAGEMENT
Risk Management Framework
Our Risk Management Framework (the "Framework") sets consistent expectations for
risk management across the Company. It also sets expectations for our "Three
Lines of Defense" model, which defines the roles, responsibilities and
accountabilities for taking and managing risk across the Company. Accountability
for overseeing an effective Framework resides with our Board of Directors either
directly or through its committees.
The "First Line of Defense" consists of any line of business or function that is
accountable for risk taking and is responsible for: (i) engaging in activities
designed to generate revenue or reduce expenses; (ii) providing operational
support or servicing to any business function for the delivery of products or
services to customers; or (iii) providing technology services in direct support
of first line business areas. Each line of business or first line function is
responsible for managing the risks associated with their activities, including
identifying, assessing, measuring, monitoring, controlling, and reporting the
risks within its business activities, consistent with the risk framework. The
"Second Line of Defense" consists of two types of functions: Independent Risk
Management ("IRM") and Support Functions. IRM oversees risk-taking activities
and assesses risks and issues independent from the first line of defense.
Support Functions are centers of specialized expertise (e.g., Human Resources,
Accounting, Legal) that provide support services to the Company. The "Third Line
of Defense" is comprised of the Internal Audit and Credit Review functions. The
third line provides independent and objective assurance to senior management and
to the Board of Directors that the first and second lines of defense have
systems and governance processes which are well-designed and working as
intended, and that the Framework is appropriate for our size, complexity and
risk profile.
Our Framework consists of the following nine elements:
Governance and Accountability
Strategy and Risk Alignment
Assessment, Measurement Aggregation,
Risk Identification and Response Monitoring and Testing Reporting and
Escalation
Capital and Liquidity Management (including Stress Testing)
Risk Data and Enabling Technology
Culture and Talent Management
Governance and Accountability
This element of the Framework sets the foundation for the methods for governing
risk taking and the interactions within and among our three lines of defense.
We established a risk governance structure and accountabilities to effectively
and consistently oversee the management of risks across the Company. Our Board
of Directors, Chief Executive Officer and management establish the tone at the
top regarding the culture of the Company, including management of risk.
Management reinforces expectations at the various levels of the organization.
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Strategy and Risk Alignment Our strategy is informed by and aligned with risk appetite, from development to execution. The Chief Executive Officer develops the strategy with input from the first, second, and third lines of defense, as well as the Board of Directors. The strategic planning process should consider relevant changes to the Company's overall risk profile. Our Board of Directors approves a Risk Appetite Statement for the Company to set forth the high-level principles that govern risk taking at the Company. The Risk Appetite Statement defines the Board of Directors' tolerance for certain risk outcomes at an enterprise level and enables senior management to manage and report within these boundaries. This Risk Appetite Statement is also supported by risk category specific risk appetite statements as well as metrics and, where appropriate, Board Limits and Board Notification Thresholds. Risk Identification The first line of defense and certain Support Functions, where appropriate, are expected to identify new and emerging risks across the relevant risk categories associated with their business activities and objectives, in consultation with IRM. Risk identification also must be informed by major changes in infrastructure or organization, introduction of new products and services, acquisitions of businesses, or substantial changes in the internal or external environment. IRM and certain Support Functions, where appropriate, provide effective challenge in the risk identification process. IRM is also responsible for identifying our material aggregate risks on an ongoing basis. Assessment, Measurement and Response Management is responsible for assessing risks associated with our activities. Risks identified should be assessed to understand the severity of each risk and likelihood of occurrence under both normal and stressful conditions, as appropriate. Risk severity is measured through modeling and other quantitative estimation approaches, as well as qualitative approaches, based on management judgment. As part of the risk assessment process, the first and second lines of defense also evaluate the effectiveness of the existing control environment and mitigation strategies. Management is responsible for determining the appropriate risk response. Risks may be mitigated, accepted, transferred, or avoided. Actions taken to respond to the risk may include implementing new controls, enhancing existing controls, developing additional mitigation strategies to reduce the impact of the risk, and/or monitoring the risk. Monitoring and Testing Management periodically monitors risks to evaluate and measure how the risk is affecting our strategy and business objectives, in alignment with risk appetite. The scope and frequency of monitoring activities depends on the results of relevant risk assessments, as well as specific business risk operations and activities. The first line of defense is responsible for evaluating the effectiveness of risk management practices and controls through testing and other activities. IRM and Support Functions, as appropriate, assess the first line of defense's evaluation of risk management, which may include conducting effective challenge, performing independent monitoring, or conducting risk or control validations. The third line of defense provides independent assurance for first and second line risk management practices and controls to provide assurance. Aggregation, Reporting and Escalation Risk aggregation supports strategic decision making and risk management practices through collectively reporting risks across different levels of the Company and providing a comprehensive view of performance against risk appetite. Material risks, emerging risks, aggregate risks, risk appetite metrics, and other measures across all risk categories are reported to the appropriate governance forum no less than quarterly. Material risks are reported to the Board of Directors and senior management committees no less than quarterly. Capital and Liquidity Management (including Stress Testing) Our capital management processes are linked to its risk management practices, including the enterprise-wide identification, assessment, and measurement of risks to ensure that all relevant risks are incorporated in the assessment of the Company's capital
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adequacy. We use identified risks to inform key aspects of the Company's capital
planning, including the development of stress scenarios, the assessment of the
adequacy of post-stress capital levels, and the appropriateness of potential
capital actions considering the Company's capital objectives. We quantify
capital needs through stress testing, regulatory capital, economic capital, and
assessments of market considerations. In assessing its capital adequacy, we
identify how and where our material risks are accounted for within the capital
planning process. Monitoring and escalation processes exist for key capital
thresholds and metrics to continuously monitor capital adequacy.
Risk Data and Enabling Technology
Risk data and technology provides the basis for risk reporting and is used in
decision making and to monitor and review changes to our risk profile. There is
a core Governance, Risk Management and Compliance system which is used as the
system of record for risks, controls, issues, and events for our risk categories
and supports the analysis, aggregation, and reporting capabilities across the
categories.
Culture and Talent Management
The Framework must be supported with the right culture, talent, and skills to
enable effective risk management across the Company.
Every associate at the Company is responsible for risk management; however,
associates with specific risk management skills and expertise within the first,
second, and third lines of defense are critical to ensure appropriate risk
management across the enterprise.
Risk Categories
We apply our Framework to protect the Company from the eight major categories of
risk that we are exposed to through our business activities. Our eight major
categories of risk are:
Major Categories of Risk
The risk to current or anticipated earnings or capital arising from
violations of laws, rules, or regulations. Compliance risk can also
Compliance arise from nonconformance with prescribed practices, internal policies
and procedures, contractual obligations, or ethical standards that
reinforce those laws, rules, or regulations
The risk to current or projected financial condition and resilience
Credit arising from an obligor's failure to meet the terms of any contract
with the Company or otherwise perform as agreed
The risk of material adverse impact due to new and changed laws and
regulations; interpretations of law; drafting,interpretation, and
Legal enforceability of contracts; adverse decisions or consequences arising
from litigation or regulatory actions; the establishment, management,
and governance of the legal entity structure; and the failure to seek
or follow appropriate legal counsel when needed
The risk that the Company will not be able to meet its futureLiquidity financial obligations as they come due, or invest in future asset
growth because of an inability to obtain funds at areasonable price
within a reasonable time
The risk that an institution's earnings or the economic value of
Market equity could be adversely impacted by changes in interest rates,
foreign exchange rates, or other market factors
The risk of loss, capital impairment, adverse customerexperience, or Operational reputational impact resulting from failure to comply with policies and
procedures, failed internal processes or systems, or from external
events
The risk to market value, recruitment and retention of talented
Reputation associates and maintenance of a loyal customer base due to the
negative perceptions of our internal and externalconstituents
regarding our business strategies and activities
The risk of a material impact on current or anticipated earnings,
capital, franchise, or enterprise value arising from the Company's
competitive and market position and evolving forces in the industry
Strategic that can affect that position; lack of responsiveness to these
conditions; strategic decisions to change the Company'sscale, market
position, or operating model; or, failure to appropriately consider
implementation risks inherent in the Company's strategy
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We provide an overview of how we manage our eight major categories of risk below. Compliance Risk Management We recognize that compliance requirements for financial institutions are increasingly complex and that there are heightened expectations from our regulators and our customers. In response, we continuously evaluate the regulatory environment and proactively adjust our compliance program to fully address these expectations. Our Compliance Management Program establishes expectations for determining compliance requirements, assessing the risk of new product offerings, creating appropriate controls and training to address requirements, monitoring for control performance, and independently testing for adherence to compliance requirements. The program also establishes regular compliance reporting to senior business leaders, the executive committee and the Board of Directors. The Chief Compliance Officer is responsible for establishing and overseeing our Compliance Management Program. Business areas incorporate compliance requirements and controls into their business policies, standards, processes and procedures. They regularly monitor and report on the efficacy of their compliance controls and our Corporate Compliance team periodically independently tests to validate the effectiveness of business controls. Credit Risk Management We recognize that we are exposed to cyclical changes in credit quality. Consequently, we try to ensure our credit portfolio is resilient to economic downturns. Our most important tool in this endeavor is sound underwriting. In unsecured consumer loan underwriting, we generally assume that loans will be subject to an environment in which losses are higher than those prevailing at the time of underwriting. In commercial underwriting, we generally require strong cash flow, collateral, covenants and guarantees. In addition to sound underwriting, we continually monitor our portfolio and take steps to collect or work out distressed loans. The Chief Risk Officer, in conjunction with the Consumer and Commercial Chief Credit Officers, is responsible for establishing credit risk policies and procedures, including underwriting and hold guidelines and credit approval authority, and monitoring credit exposure and performance of our lending related transactions. Our Consumer and Commercial Chief Credit Officers are responsible for evaluating the risk implications of credit strategy and the oversight of credit for both the existing portfolio and any new credit investments. They also have formal approval authority for various types and levels of credit decisions, including individual commercial loan transactions. Division Presidents within each segment are responsible for managing the credit risk within their divisions and maintaining processes to control credit risk and comply with credit policies and guidelines. In addition, the Chief Risk Officer establishes policies, delegates approval authority and monitors performance for non-loan credit exposure entered into with financial counterparties or through the purchase of credit sensitive securities in our investment portfolio. Our credit policies establish standards in five areas: customer selection, underwriting, monitoring, remediation and portfolio management. The standards in each area provide a framework comprising specific objectives and control processes. These standards are supported by detailed policies and procedures for each component of the credit process. Starting with customer selection, our goal is to generally provide credit on terms that generate above hurdle returns. We use a number of quantitative and qualitative factors to manage credit risk, including setting credit risk limits and guidelines for each of our lines of business. We monitor performance relative to these guidelines and report results and any required mitigating actions to appropriate senior management committees and our Board of Directors. Legal Risk Management The General Counsel provides legal evaluation and advice to the Company and business areas and to risk management functions such as Compliance and Internal Audit. This evaluation and advice is based on an assessment of the internal business area practices and activities and of the controls the business has in place to mitigate risks. Liquidity Risk Management We manage liquidity risk by applying our Liquidity Adequacy Framework (the "Liquidity Framework"). The Liquidity Framework uses internal and regulatory stress testing and the evaluation of other balance sheet metrics to confirm that we maintain a fortified balance sheet that is resilient to uncertainties that may arise as a consequence of systemic, idiosyncratic, or combined liquidity events. We continuously monitor market and economic conditions to evaluate emerging stress conditions and to develop appropriate action plans in accordance with our Contingency Funding Plan and our Recovery Plan, which include the Company's policies,
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procedures and action plans for managing liquidity stress events. The Liquidity Framework enables us to manage our liquidity risk in accordance with regulatory requirements. Additionally, the Liquidity Framework establishes governing principles that apply to the management of liquidity risk. We use these principles to monitor, measure and report liquidity risk; to develop funding and investment strategies that enable us to maintain an adequate level of liquidity to support our businesses and satisfy regulatory requirements; and to protect us from a broad range of liquidity events should they arise. The Chief Risk Officer, in conjunction with the Chief Market and Liquidity Risk Officer, is responsible for the establishment of liquidity risk management policies and standards for governance and monitoring of liquidity risk at a corporate level. We assess liquidity strength by evaluating several different balance sheet metrics under severe stress scenarios to ensure we can withstand significant funding degradation through idiosyncratic, systemic, and combined liquidity stress scenarios. Management reports liquidity metrics to appropriate senior management committees and our Board of Directors no less than quarterly. We seek to mitigate liquidity risk strategically and tactically. From a strategic perspective, we have acquired and built deposit gathering businesses and actively monitor our funding concentration. From a tactical perspective, we have accumulated a sizable liquidity reserve comprised of cash and cash equivalents, high-quality, unencumbered securities and committed collateralized credit lines. We also continue to maintain access to secured and unsecured debt markets through regular issuance. This combination of stable and diversified funding sources and our stockpile of liquidity reserves enable us to maintain confidence in our liquidity position. Market Risk Management The Chief Financial Officer and the Chief Risk Officer are responsible for the establishment of market risk management policies and standards for the governance and monitoring of market risk at a corporate level. Market risk is inherent from the financial instruments associated with our business operations and activities including loans, deposits, securities, short-term borrowings, long-term debt and derivatives. We manage market risk exposure, which is principally driven by balance sheet interest rate risk, centrally and establish quantitative risk limits to monitor and control our exposure. We recognize that interest rate and foreign exchange risk is present in our business due to the nature of our assets and liabilities. Banks typically manage the trade-off between near-term earnings volatility and market value volatility by targeting moderate levels of each. In addition to using industry accepted techniques to analyze and measure interest rate and foreign exchange risk, we perform sensitivity analysis to identify our risk exposures under a broad range of scenarios. Investment securities and derivatives are the main levers for the management of interest rate risk. In addition, we also use derivatives to manage our foreign exchange risk. The market risk positions for the Company and each of the Banks are calculated separately and in aggregate, and analyzed against pre-established limits. Results are reported to the Asset Liability Committee monthly and to the Risk Committee of the Board of Directors no less than quarterly. Management is authorized to utilize financial instruments as outlined in our policy to actively manage market risk exposure. Operational Risk Management We recognize the criticality of managing operational risk on both a strategic and day-to-day basis and that there are heightened expectations from our regulators and our customers. We have implemented appropriate operational risk management policies, standards, processes and controls to enable the delivery of high quality and consistent customer experiences and to achieve business objectives in a controlled manner. The Chief Operational Risk Officer is responsible for establishing and overseeing our Operational Risk Management Program. In accordance with Basel III Advanced Approaches requirements, the program establishes practices for assessing the operational risk profile and executing key control processes for operational risks. These risks include topics such as internal and external fraud, cyber and technology risk, data management, model risk, third party management, and business continuity. Operational Risk Management enforces these practices and delivers reporting of operational risk results to senior business leaders, the executive committee and the Board of Directors.
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Reputation Risk Management We recognize that reputation risk is of particular concern for financial institutions and, increasingly, technology companies, in the current environment. Areas of concern have expanded to include company policies, practices and values and, with the growing use of social and digital platforms, public corporations face a new level of scrutiny and channels for activism and advocacy. The heightened expectations of internal and external stakeholders have made corporate culture, values and conduct pressure points for individuals and advocates voicing concerns or seeking change. We manage both strategic and tactical reputation issues and build our relationships with government officials, media, community and consumer advocates, customers and other constituencies to help strengthen the reputations of both our Company and industry. Our actions include implementing pro-customer practices in our business and serving low to moderate income communities in our market area consistent with a quality bank and an innovative technology leader. The Executive Vice President of External Affairs is responsible for managing our overall reputation risk program. Day-to-day activities are controlled by the frameworks set forth in our Reputation Risk Management Policy and other risk management policies.Strategic Risk Management We monitor external market and industry developments to identify potential areas of strategic opportunity or risk. These items provide input for development of the Company's strategy led by the Chief Executive Officer and other senior executives. Through the ongoing development and vetting of the corporate strategy, the Chief Risk Officer identifies and assesses risks associated with the strategy across all risk categories and monitors them throughout the year. CREDIT RISK PROFILE Our loan portfolio accounts for the substantial majority of our credit risk exposure. Our lending activities are governed under our credit policy and are subject to independent review and approval. Below we provide information about the composition of our loan portfolio, key concentrations and credit performance metrics. We also engage in certain non-lending activities that may give rise to credit and counterparty settlement risk, including purchasing securities for our investment securities portfolio, entering into derivative transactions to manage our market risk exposure and to accommodate customers, extending short-term advances on syndication activity including bridge financing transactions we have underwritten, depositing certain operational cash balances in other financial institutions, executing certain foreign exchange transactions and extending customer overdrafts. We provide additional information 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." Primary Loan Products We provide a variety of lending products. Our primary loan 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. • Credit cards: We originate both prime and subprime credit cards through a
variety of channels. Our credit cards generally have variable interest
rates. Credit card accounts are primarily underwritten using an automated
underwriting system based on predictive models that we have developed. The
underwriting criteria, which are customized for individual products andmarketing programs, are established based on an analysis of the net present
value of expected revenues, expenses and losses, subject to further analysis
using a variety of stress conditions. Underwriting decisions are generally
based on credit bureau information, including payment history, debt burden
and credit scores, such as FICO scores, and on other factors, such as
applicant income. We maintain a credit card securitization program and
selectively sell charged-off credit card loans.
• Auto: We originate both prime and subprime auto loans through a network of
auto dealers and direct marketing. Our auto loans generally have fixed
interest rates and loan terms of 75 months or less, but can go up to 84
months. Loan size limits are customized by program and are generally less
than
customized for individual products and marketing programs and based on
analysis of net present value of expected revenues, expenses and losses,
subject to maintaining resilience under a variety of stress conditions.
Underwriting decisions are generally based on an applicant's income,
estimated net disposable income, and credit bureau information including
FICO scores, along with collateral characteristics such as loan-to-value
("LTV") ratio. We maintain an auto securitization program.
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• Commercial: We offer a range of commercial lending products, including loans
secured by commercial real estate and loans to middle market commercial and
industrial companies. Our commercial loans may have a fixed or variable
interest rate; however, the majority of our commercial loans have variable
rates. Our underwriting standards require an analysis of the borrower's
financial condition and prospects, as well as an assessment of the industry
in which the borrower operates. Where relevant, we evaluate and appraise
underlying collateral and guarantees. We maintain underwriting guidelines
and limits for major types of borrowers and loan products that specify,
where applicable, guidelines for debt service coverage, leverage, LTV ratio
and standard covenants and conditions. We assign a risk rating and establish
a monitoring schedule for loans based on the risk profile of the borrower,
industry segment, source of repayment, the underlying collateral and
guarantees, if any, and current market conditions. Although we generally
retain the commercial loans we underwrite, we may syndicate positions for
risk mitigation purposes, including bridge financing transactions we have
underwritten. In addition, we originate and service multifamily commercial
real estate loans which are sold to government-sponsored enterprises.
Portfolio Composition and Maturity Profile of Loans Held for Investment Our loan portfolio consists of loans held for investment, including loans held in our consolidated trusts, and loans held for sale. Table 16 presents the composition of our portfolio of loans held for investment by portfolio segment as ofDecember 31, 2019 and 2018. The information presented in this section exclude loans held for sale, which totaled$400 million and$1.2 billion as ofDecember 31, 2019 and 2018, respectively. Table 16: Portfolio Composition of Loans Held for Investment December 31, 2019 December 31, 2018 (Dollars in millions) Loans % of Total Loans % of Total Credit Card: Domestic credit card$ 118,606 44.6 %$ 107,350 43.6 % International card businesses 9,630 3.6 9,011 3.7 Total credit card 128,236 48.2 116,361 47.3 Consumer Banking: Auto 60,362 22.7 56,341 22.9 Retail banking 2,703 1.0 2,864 1.2 Total consumer banking 63,065 23.7 59,205 24.1 Commercial Banking: Commercial and multifamily real estate 30,245 11.4 28,899 11.8 Commercial and industrial 44,263 16.7 41,091 16.7 Total commercial lending 74,508 28.1 69,990 28.5 Small-ticket commercial real estate - - 343 0.1 Total commercial banking 74,508 28.1 70,333 28.6 Total loans held for investment$ 265,809 100.0 %$ 245,899 100.0 % 75Capital One Financial Corporation (COF)
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Table 17 presents the maturities of our loans held for investment portfolio as ofDecember 31, 2019 . Table 17: Loan Maturity Schedule December 31, 2019 Due Up to > 1 Year (Dollars in millions) 1 Year to 5 Years > 5 Years Total Fixed rate: Credit card(1)$ 1,816 $ 14,450 -$ 16,266 Consumer banking 740 38,127$ 23,179 62,046 Commercial banking 1,630 5,107 8,187 14,924 Total fixed-rate loans 4,186 57,684 31,366 93,236 Variable rate: Credit card(1) 111,969 1 - 111,970 Consumer banking 1,010 8 1 1,019 Commercial banking 12,783 37,304 9,497 59,584 Total variable-rate loans 125,762 37,313 9,498 172,573 Total loans$ 129,948 $ 94,997 $ 40,864 $ 265,809 __________
(1) Due to the revolving nature of credit card loans, we report the majority of
our variable-rate credit card loans as due in one year or less. We report
fixed-rate credit card loans with introductory rates that expire after a
certain period of time as due in one year or less. We assume that the rest
of our remaining fixed-rate credit card loans will mature within one to
three years.
Geographic Composition
We market our credit card products throughout the United States , Canada and the
United Kingdom . Our credit card loan portfolio is geographically diversified due
to our product and marketing approach. The table below presents the geographic
profile of our credit card loan portfolio as of December 31, 2019 and 2018.
Table 18: Credit Card Portfolio by Geographic Region
December 31, 2019 December 31, 2018
% of % of
(Dollars in millions) Amount Total Amount Total
Domestic credit card:
California $ 12,538 9.8 % $ 11,591 10.0 %
Texas 9,353 7.3 8,173 7.0
Florida 8,093 6.3 7,086 6.1
New York 7,941 6.2 7,400 6.4
Illinois 5,195 4.1 4,761 4.1
Pennsylvania 4,979 3.9 4,575 3.9
Ohio 4,388 3.4 3,967 3.4
New Jersey 3,915 3.1 3,641 3.1
Michigan 3,811 3.0 3,544 3.0
Other 58,393 45.4 52,612 45.3
Total domestic credit card 118,606 92.5 107,350 92.3
International card businesses:
Canada 6,493 5.1 6,023 5.1
United Kingdom 3,137 2.4 2,988
2.6
Total international card businesses 9,630 7.5 9,011 7.7 Total credit card$ 128,236 100.0 %$ 116,361 100.0 % 76Capital One Financial Corporation (COF)
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Our auto loan portfolio is geographically diversified inthe United States due to our product and marketing approach. Retail banking includes small business loans and other consumer lending products originated through our branch network. The table below presents the geographic profile of our auto loan and retail banking portfolios as ofDecember 31, 2019 and 2018. Table 19: Consumer Banking Portfolio byGeographic Region December 31, 2019 December 31, 2018 (Dollars in millions) Amount % of Total Amount % of Total Auto: Texas$ 7,675 12.2 %$ 7,264 12.3 % California 6,918 11.0 6,352 10.7 Florida 5,013 7.9 4,623 7.8 Georgia 2,757 4.4 2,665 4.5 Ohio 2,652 4.2 2,502 4.2 Pennsylvania 2,334 3.7 2,167 3.7 Illinois 2,239 3.6 2,171 3.7 Louisiana 2,104 3.3 2,174 3.7 Other 28,670 45.4 26,423 44.6 Total auto 60,362 95.7 56,341 95.2 Retail banking: New York 793 1.3 837 1.4 Louisiana 708 1.1 772 1.3 Texas 595 1.0 647 1.1 New Jersey 194 0.3 201 0.3 Maryland 155 0.2 161 0.3 Virginia 125 0.2 137 0.2 Other 133 0.2 109 0.2 Total retail banking 2,703 4.3 2,864
4.8
Total consumer banking
We originate commercial loans in most regions ofthe United States . The table below presents the geographic profile of our commercial loan portfolio by segment as ofDecember 31, 2019 and 2018. Table 20: Commercial Banking Portfolio byGeographic Region December 31, 2019 Commercial and Commercial Total Multifamily % of and % of Commercial % of (Dollars in millions) Real Estate Total Industrial Total Banking Total Geographic concentration:(1) Northeast$ 17,139 56.7 %$ 7,899 17.8 %$ 25,038 33.6 % Mid-Atlantic 3,024 10.0 5,927 13.4 8,951 12.0 South 4,087 13.5 16,403 37.1 20,490 27.5 Other 5,995 19.8 14,034 31.7 20,029 26.9 Total$ 30,245 100.0 %$ 44,263 100.0 %$ 74,508 100.0 % 77Capital One Financial Corporation (COF)
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December 31, 2018
Commercial
and Commercial Small-Ticket Total
Multifamily % of and % of Commercial % of Commercial % of
(Dollars in millions) Real Estate Total Industrial Total Real Estate Total Banking Total
Geographic concentration:(1)
Northeast $ 15,562 53.8 % $ 7,573 18.4 % $ 213 62.1 % $ 23,348 33.2 %
Mid-Atlantic 3,410 11.8 4,710 11.5 12 3.5 8,132 11.6
South 4,247 14.7 15,367 37.4 20 5.8 19,634 27.9
Other 5,680 19.7 13,441 32.7 98 28.6 19,219 27.3
Total $ 28,899 100.0 % $ 41,091 100.0 % $ 343 100.0 % $ 70,333 100.0 %
__________
(1) Geographic concentration is generally determined by the location of the
borrower's business or the location of the collateral associated with the
loan. Northeast consists of CT, MA, ME, NH, NJ, NY, PA and VT. Mid-
consists of DC, DE, MD,
MO, MS, NC, SC, TN and TX.
Commercial Loans by Industry Table 21 summarizes our commercial loans held for investment portfolio by industry classification as ofDecember 31, 2019 and 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 21: Commercial Loans by Industry December 31, December 31, (Percentage of portfolio) 2019 2018 Real estate 39 % 40 % Finance 16 16 Healthcare 12 12 Business services 6 5 Oil and gas 5 5 Public administration 4 4 Educational services 4 4 Retail trade 4 3 Construction and land 2 2 Other 8 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. Trends in delinquency rates are the key credit quality indicator for our credit card and retail banking loan portfolios as changes in delinquency rates can provide an early warning of changes in potential future credit losses. The key indicator we monitor when assessing the credit quality and risk of our auto loan portfolio is borrower credit scores as they provide insight into the borrower risk profile, which is an indication of potential future credit losses. The key credit quality indicator for our commercial loan portfolios is our internal risk ratings as we generally classify loans that have been delinquent for an extended period of time and other loans with significant risk of loss as nonperforming. In addition to these credit quality indicators, we also manage and monitor other credit quality metrics such as level of nonperforming loans and net charge-offs rates. We underwrite most consumer loans using proprietary models, which typically include credit bureau data, such as borrower credit scores, application information and, where applicable, collateral and deal structure data. We continuously adjust our management of credit lines and collection strategies based on customer behavior and risk profile changes. We also use borrower credit scores for subprime classification, for competitive benchmarking and, in some cases, to drive product segmentation decisions.
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Table 22 provides details on the credit scores of our domestic credit card and
auto loan portfolios as of
December 31 , December
31,
(Percentage of portfolio) 2019 2018 Domestic credit card-Refreshed FICO scores:(1) Greater than 660 67 % 67 % 660 or below 33 33 Total 100 % 100 % Auto-At origination FICO scores:(2) Greater than 660 48 % 50 % 621 - 660 20 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 3-Loans" in this Report for
additional credit quality information, and see "Note 1-Summary of Significant
Accounting Policies" for information on our accounting policies for delinquent
and nonperforming loans, charge-offs and troubled debt restructurings ("TDRs")
for each of our loan categories.
Delinquency Rates
We consider the entire balance of an account to be delinquent if the minimum
required payment is not received by the customer's due date, measured at each
balance sheet date. Our 30+ day delinquency metrics include all loans held for
investment that are 30 or more days past due, whereas our 30+ day performing
delinquency metrics include loans that are 30 or more days past due but are
currently classified as performing and accruing interest. The 30+ day
delinquency and 30+ day performing delinquency metrics are the same for domestic
credit card loans, as we continue to classify these loans as performing until
the account is charged off, typically when the account is 180 days past due. See
"Note 1-Summary of Significant Accounting Policies" for information on our
policies for classifying loans as nonperforming for each of our loan categories.
We provide additional information on our credit quality metrics above under
"MD&A-Business Segment Financial Performance."
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Table 23 presents our 30+ day performing delinquency rates and 30+ day delinquency rates of our portfolio of loans held for investment, by portfolio segment, as ofDecember 31, 2019 and 2018. Table 23: 30+ Day Delinquencies December 31, 2019 December 31, 2018 30+ Day Performing 30+ Day Performing Delinquencies 30+ Day Delinquencies Delinquencies 30+ Day Delinquencies (Dollars in millions) Amount Rate(1) Amount Rate(1) Amount Rate(1) Amount Rate(1) Credit Card: Domestic credit card(2)$ 4,656 3.93 %$ 4,656 3.93 %$ 4,335 4.04 %$ 4,335 4.04 % International card 335 3.47 353 3.66 317 3.52 333 3.70 businesses Total credit card 4,991 3.89 5,009 3.91 4,652 4.00 4,668 4.01 Consumer Banking: Auto 4,154 6.88 4,584 7.59 3,918 6.95 4,309 7.65 Retail banking 28 1.02 43 1.59 29 1.01 51 1.77 Total consumer banking 4,182 6.63 4,627 7.34 3,947 6.67 4,360 7.36 Commercial Banking: Commercial and multifamily 63 0.21 67 0.22 119 0.41 140 0.49 real estate Commercial and industrial 101 0.23 244 0.55 176 0.43 279 0.68 Total commercial lending 164 0.22 311 0.42 295 0.42 419 0.60 Small-ticket commercial real - - - - 1 0.39 7 1.84
estate
Total commercial banking 164 0.22 311 0.42 296 0.42 426 0.61 Total$ 9,337 3.51$ 9,947 3.74$ 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 PCI loans as applicable.
(2) The Walmart acquisition increased the domestic credit card 30+ day
performing delinquency rate by 17 basis points as of
Table 24 presents our 30+ day delinquent loans, by aging and geography, as ofDecember 31, 2019 and 2018. Table 24: Aging and Geography of 30+ Day Delinquent Loans December 31, 2019 December 31, 2018 (Dollars in millions) Amount Rate(1) Amount Rate(1) Delinquency status: 30 - 59 days$ 4,444 1.67 %$ 4,282 1.73 % 60 - 89 days 2,537 0.95 2,430 0.99 > 90 days 2,966 1.12 2,742 1.12 Total$ 9,947 3.74 %$ 9,454 3.84 % Geographic region: Domestic$ 9,594 3.61 %$ 9,121 3.70 % International 353 0.13 333 0.14 Total$ 9,947 3.74 %$ 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.
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Table 25 summarizes loans that were 90+ days delinquent as to interest or principal, and still accruing interest as ofDecember 31, 2019 and 2018. These loans consist primarily of credit card accounts between 90 days and 179 days past due. As permitted by regulatory guidance issued by theFederal 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 25: 90+ Day Delinquent Loans Accruing InterestDecember 31, 2019 December 31 ,
2018
(Dollars in millions) Amount Rate(1) Amount Rate(1) Loan category: Credit card$ 2,407 1.88 %$ 2,233 1.92 % Geographic region: Domestic$ 2,277 0.89 %$ 2,111 0.89 % International 130 1.34 122 1.35 Total$ 2,407 0.91$ 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
other foreclosed assets. Nonperforming loans include loans that have been placed
on nonaccrual status. See "Note 1-Summary of Significant Accounting Policies"
for information on our policies for classifying loans as nonperforming for each
of our loan categories.
Table 26 presents our nonperforming loans, by portfolio segment, and other
nonperforming assets as of December 31, 2019 and 2018. We do not classify loans
held for sale as nonperforming. We provide additional information on our credit
quality metrics in "MD&A-Business Segment Financial Performance."
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Table 26: Nonperforming Loans and Other Nonperforming Assets(1)
December 31, 2019 December 31, 2018
(Dollars in millions) Amount Rate Amount Rate
Nonperforming loans held for investment:(2)
Credit Card:
International card businesses $ 25 0.26 % $ 22 0.25 %
Total credit card 25 0.02 22 0.02
Consumer Banking:
Auto 487 0.81 449 0.80
Retail banking 23 0.87 30 1.04
Total consumer banking 510 0.81 479 0.81
Commercial Banking:
Commercial and multifamily real estate 38 0.12 83 0.29
Commercial and industrial 410 0.93 223 0.54
Total commercial lending 448 0.60 306 0.44
Small-ticket commercial real estate - - 6 1.80
Total commercial banking 448 0.60 312 0.44
Total nonperforming loans held for investment(3) $ 983 0.37 $ 813 0.33
Other nonperforming assets(4) 63 0.02 59 0.02
Total nonperforming assets $ 1,046 0.39
__________
(1) We recognized interest income for loans classified as nonperforming of
million and
foregone related to nonperforming loans was
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, including PCI loans as applicable.
(3) Excluding the impact of domestic credit card loans, nonperforming loans as a
percentage of total loans held for investment was 0.67% and 0.59% as of
(4) The denominators used in calculating nonperforming asset rates consist of
total loans held for investment and other nonperforming assets.
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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" for
information on our charge-off policy for each of our loan categories.
Table 27 presents our net charge-off amounts and rates, by portfolio segment, in
2019, 2018 and 2017.
Table 27: Net Charge-Offs (Recoveries)
Year Ended December 31,
2019 2018 2017
(Dollars in millions) Amount Rate(1) Amount Rate(1) Amount Rate(1)
Credit Card:
Domestic credit card(2) $ 4,818 4.58 % $ 4,782 4.74 % $ 4,739 4.99 %
International card businesses 331 3.71 287 3.19 315 3.69
Total credit card 5,149 4.51 5,069 4.62 5,054 4.88
Consumer Banking:
Auto 876 1.51 912 1.64 957 1.86
Retail banking 71 2.57 70 2.26 66 1.92
Home loan - - (1 ) (0.02 ) 15 0.08
Total consumer banking 947 1.56 981 1.51 1,038 1.39
Commercial Banking:
Commercial and multifamily real estate 1 - 2 0.01 1 -
Commercial and industrial 155 0.36 54 0.14 463 1.17
Total commercial lending 156 0.22 56 0.08 464 0.69
Small-ticket commercial real estate - - - 0.02 1 0.24
Total commercial banking 156 0.22 56 0.08 465 0.69
Other loans - - 6 34.09 5 9.70
Total net charge-offs $ 6,252 2.53 $ 6,112 2.52 $ 6,562 2.67
Average loans held for investment $ 247,450 $ 242,118 $ 245,565 __________
(1) Net charge-off (recovery) rates are calculated by dividing net charge-offs
(recoveries) by average loans held for investment for the period for each
loan category.
(2) The Walmart acquisition reduced the domestic credit card net charge-off rate
by 8 basis points for the year ended December 31, 2019 .
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Troubled Debt Restructurings As part of our loss mitigation efforts, we may provide short-term (three to twelve months) or long-term (greater than twelve months) modifications to a borrower experiencing financial difficulty to improve long-term collectability of the loan and to avoid the need for repossession or foreclosure of collateral. Table 28 presents our recorded investment of loans modified in TDRs as ofDecember 31, 2019 and 2018, which excludes loan modifications that do not meet the definition of a TDR, and PCI loans, which we track and report separately. Table 28: Troubled Debt Restructurings December 31, 2019 December 31, 2018 % of Total % of Total (Dollars in millions) Amount Modifications Amount Modifications Credit card$ 831 50.3 %$ 855 53.2 % Consumer banking: Auto 346 20.9 339 21.1 Retail banking 24 1.5 33 2.1 Total consumer banking 370 22.4 372 23.2 Commercial banking 451 27.3 379 23.6 Total$ 1,652 100.0 %$ 1,606 100.0 % Status of TDRs: Performing$ 1,347 81.5 %$ 1,433 89.2 % Nonperforming 305 18.5 173 10.8 Total$ 1,652 100.0 %$ 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 3-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. 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.
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Impaired loans totaled$1.9 billion and$1.8 billion as ofDecember 31, 2019 and 2018, respectively. These amounts include TDRs of$1.7 billion and$1.6 billion as ofDecember 31, 2019 and 2018, respectively. We provide additional information on our impaired loans, including the allowance for loan and lease losses established for these loans, in "Note 3-Loans" and "Note 4-Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments." 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." Table 29 presents changes in our allowance for loan and lease losses and reserve for unfunded lending commitments for 2019 and 2018, and details by portfolio segment for the provision for credit losses, charge-offs and recoveries.
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Table 29: Allowance for Loan and Lease Losses and Reserve for Unfunded Lending
Commitments Activity
Credit Card Consumer Banking
Total
International Card Total Home Retail Consumer
(Dollars in millions) Domestic Card Businesses Credit Card Auto Loan Banking Banking Commercial Banking Other(1) 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 (6,152 ) (505 ) (6,657 ) (1,746 ) - (86 ) (1,832 ) (119 ) (7 ) (8,615 )
Recoveries(2) 1,370 218 1,588 834 1 16 851 63 1 2,503
Net charge-offs (4,782 ) (287 ) (5,069 ) (912 ) 1 (70 ) (981 ) (56 ) (6 ) (6,112 )
Provision (benefit) for loan
and lease losses 4,653 331 4,984 783 (6 ) 64 841 82 (49 ) 5,858
Allowance build (release)
for loan and lease losses (129 ) 44 (85 ) (129 ) (5 ) (6 ) (140 ) 26 (55 ) (254 )
Other changes(1)(3) - (28 ) (28 ) - (53 ) (1 ) (54 ) - 54 (28 )
Balance as of December 31,
2018 5,144 391 5,535 990 - 58 1,048 637 - 7,220
Reserve for unfunded lending
commitments:
Balance as of December 31,
2017 - - - - - 7 7 117 - 124
Provision (benefit) for
losses on unfunded lending
commitments - - - - - (3 ) (3 ) 1 - (2 )
Balance as of December 31,
2018 - - - - - 4 4 118 - 122
Combined allowance and
reserve as of December 31,
2018 $ 5,144 $ 391 $ 5,535 $ 990 $ - $ 62 $ 1,052 $ 755 $ - $ 7,342
Allowance for loan and lease
losses:
Balance as of December 31, $ 5,144 $ 391 $ 5,535 $ 990 $ - $ 58 $ 1,048 $ 637 $ - $ 7,220
2018
Charge-offs (6,189 ) (522 ) (6,711 ) (1,829 ) - (88 ) (1,917 ) (181 ) - (8,809 )
Recoveries(2) 1,371 191 1,562 953 - 17 970 25 - 2,557
Net charge-offs (4,818 ) (331 ) (5,149 ) (876 ) - (71 ) (947 ) (156 ) - (6,252 )
Provision for loan and lease 4,671 321 4,992 870 - 67 937 294 - 6,223
losses
Allowance build (release) (147 ) (10 ) (157 ) (6 ) - (4 ) (10 ) 138 - (29 )
for loan and lease losses
Other changes(3) - 17 17 - - - - - - 17
Balance as of December 31, 4,997 398 5,395 984 - 54 1,038 775 - 7,208
2019
Reserve for unfunded lending
commitments:
Balance as of December 31, - - - - - 4 4 118 - 122
2018
Provision for losses on - - - - - 1 1 12 - 13
unfunded lending commitments
Balance as of December 31, - - - - - 5 5 130 - 135
2019
Combined allowance and reserve as of December 31,$ 4,997 $ 398$ 5,395 $ 984 $ -$ 59 $ 1,043 $ 905 $ -$ 7,343 2019 __________
(1) In 2018, we sold all of our consumer home loan portfolio and recognized a
gain of approximately
benefit for credit losses of
(2) 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.
(3) Represents foreign currency translation adjustments and the net impact of
loan transfers and sales where applicable.
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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 30 presents the allowance coverage ratios as ofDecember 31, 2019 and 2018. Table 30: Allowance Coverage Ratios December 31, 2019 December 31, 2018 Allowance for Allowance Allowance for Allowance Loan and Lease Coverage Loan and Lease Coverage (Dollars in millions) Losses Amount(1) Ratio Losses Amount(1) Ratio Credit Card $ 5,395$ 5,009 107.70 % $ 5,535$ 4,668 118.56 % Consumer banking 1,038 4,627 22.42 1,048 4,360 24.04 Commercial banking 775 448 173.20 637 312 204.25 Total $ 7,208 265,809 2.71 $ 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 remains substantially flat at$7.2 billion as an allowance release in our domestic credit card loan portfolio largely due to the strong economy and stable underlying credit performance was offset by an allowance build due to credit deterioration in our commercial energy loan portfolio. Our allowance coverage ratio decreased by 23 basis points to 2.71% as ofDecember 31, 2019 fromDecember 31, 2018 primarily driven by the strong economy and stable underlying credit performance in our domestic credit card loan portfolio and the impacts from partner loss sharing arrangements, offset by higher reserves in our commercial banking business. LIQUIDITY RISK PROFILE We have established liquidity practices that are intended to ensure that we have sufficient asset-based liquidity to cover our funding requirements and maintain adequate reserves to withstand the potential impact of deposit attrition or diminished liquidity in the funding markets. In addition to our cash position, we maintain reserves in the form of investment securities and certain loans that are either readily-marketable or pledgeable. Table 31 below presents the composition of our liquidity reserves as ofDecember 31, 2019 and 2018. Table 31: Liquidity Reserves December 31, (Dollars in millions) December 31, 2019 2018 Cash and cash equivalents $ 13,407$ 13,186 Investment securities portfolio: Investment securities available for sale, at fair value 79,213 46,150 Investment securities held to maturity, at fair value - 36,619 Total investment securities portfolio 79,213 82,769 FHLB borrowing capacity secured by loans 10,835 10,003 Outstanding FHLB advances and letters of credit secured by loans (7,210 ) (9,726 ) Investment securities encumbered for Public Funds and others (5,688 ) (6,631 ) Total liquidity reserves $ 90,557$ 89,601 Our liquidity reserves increased by$956 million to$90.6 billion as ofDecember 31, 2019 fromDecember 31, 2018 primarily driven by a decrease in our FHLB advances outstanding. See "MD&A-Risk Management" for additional information on our management of liquidity risk.
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Liquidity Coverage Ratio
We are subject to the Liquidity Coverage Ratio Rule ("LCR Rule") as implemented
by the Federal Reserve and OCC. The LCR Rule requires us to calculate our LCR
daily. It also requires the Company to publicly disclose, on a quarterly basis,
its LCR, certain related quantitative liquidity metrics, and a qualitative
discussion of its LCR. Our average LCR during the fourth 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. Under the Tailoring Rules, we are subject to a reduced LCR
requirement, which we do not expect will have a significant impact on the
Company's publicly disclosed LCR. See "Part I-Item 1. Business-Supervision and
Regulation" for additional information.
Borrowing Capacity
We maintain a shelf registration with the U.S. Securities and Exchange
Commission ("SEC") so that we may periodically offer and sell an indeterminate
aggregate amount of senior or subordinated debt securities, preferred stock,
depositary shares, common stock, purchase contracts, warrants and units. There
is no limit under this shelf registration to the amount or number of such
securities that we may offer and sell, subject to market conditions. In
addition, we also maintain a shelf registration that allows us to periodically
offer and sell up to $25 billion of securitized debt obligations from our credit
card loan securitization trust and a shelf registration that allows us to
periodically offer and sell up to $20 billion from our auto loan securitization
trusts.
In addition to our issuance capacity under the shelf registration statements, we
also have access to FHLB advances and the Federal Reserve Discount Window. The
ability to borrow utilizing these sources is based on membership status and the
amount is dependent upon the Banks' ability to post collateral. As of
December 31, 2019 , we pledged both loans and securities to FHLB to secure a
maximum borrowing capacity of $18.7 billion , of which $11.5 billion was still
available to us to borrow. Our FHLB membership is supported by our investment in
FHLB stock of $328 million and $415 million as of December 31, 2019 and 2018,
respectively, which was determined in part based on our outstanding advances. As
of December 31, 2019 , we pledged loans to secure a borrowing capacity of $5.3
billion under the Federal Reserve Discount Window. Our membership with the
Federal Reserve is supported by our investment in Federal Reserve stock, which
totaled $1.3 billion as of both December 31, 2019 and 2018.
Funding
Our primary source of funding comes from deposits, as they are a stable and
relatively low cost source of funding. In addition to deposits, we raise funding
through the issuance of senior and subordinated notes, securitized debt
obligations, federal funds purchased, securities loaned or sold under agreements
to repurchase, and FHLB advances secured by certain portions of our loan and
securities portfolios. A key objective in our use of these markets is to
maintain access to a diversified mix of wholesale funding sources. See
"MD&A-Consolidated Balance Sheets Analysis-Funding Sources Composition" for
additional information on our primary sources of funding.
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Deposits
Table 32 provides a comparison of average balances, interest expense and average deposit interest rates for the years endedDecember 31, 2019 , 2018 and 2017. Table 32: Deposits Composition and Average Deposits Interest Rates Year Ended December 31, 2019 2018 2017 Average Average Average Average Interest Deposits Average Interest Deposits Average Interest Deposits (Dollars in millions) Balance Expense Interest Rate Balance Expense Interest Rate Balance Expense Interest Rate Interest-bearing checking$ 34,343 $ 289 0.84 % 0.63 % 0.51 % accounts(1)$ 38,843 $ 245 $ 44,537 $ 227 Saving deposits(2) 154,910 2,048 1.32 149,443 1,603 1.07 144,273 982 0.68 Time deposits less than 27,202 746 2.74 2.37 1.60$100,000 25,535 606 21,030 337 Total interest-bearing 216,455 3,083 1.42 1.15 0.74 core deposits 213,821 2,454 209,840 1,546 Time deposits of$100,000 15,154 337 2.22 1.87 1.50 or more 7,672 143 3,661 54 Foreign deposits - - - 267 1 0.41 448 2 0.38 Total interest-bearing$ 231,609 $ 3,420 1.48 1.17 0.75 deposits$ 221,760 $ 2,598 $ 213,949 $ 1,602 __________
(1) Includes negotiable order of withdrawal accounts.
(2) Includes money market deposit accounts.
TheFDIC limits the acceptance of brokered deposits by well-capitalized insured depository institutions and, with a waiver from theFDIC , by adequately-capitalized institutions. COBNA and CONA were well-capitalized, as defined under the federal banking regulatory guidelines, as ofDecember 31, 2019 and 2018, respectively. See "Part I-Item 1. Business-Supervision and Regulation" for additional information. We provide additional information on the composition of deposits in "MD&A-Consolidated Balance Sheets Analysis-Funding Sources Composition" and "Note 8-Deposits and Borrowings." Table 33 presents the contractual maturities of large-denomination domestic time deposits of$100,000 or more as ofDecember 31, 2019 and 2018. Our funding and liquidity management activities factor into the expected maturities of these deposits. Table 33: Maturities of Large-Denomination Domestic Time Deposits-$100,000 or MoreDecember 31, 2019 2018
(Dollars in millions) Amount % of Total Amount % of Total
Up to three months
3,564 20.4 2,493 22.0
Total $ 17,457 100.0 % $ 11,349 100.0 %
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 $2.1 billion to $7.3 billion as of December 31, 2019
from December 31, 2018 driven by maturities of our short-term FHLB advances.
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Our long-term debt, which primarily consists of securitized debt obligations, senior and subordinated notes, and long-term FHLB advances, decreased by$1.1 billion to$48.4 billion as ofDecember 31, 2019 fromDecember 31, 2018 driven by maturities exceeding issuances. We provide more information on our securitization activity in "Note 5-Variable Interest Entities and Securitizations." The following table summarizes issuances of securitized debt obligations, senior and subordinated notes, and FHLB advances and their respective maturities or redemptions for the years endedDecember 31, 2019 , 2018 and 2017. Table 34: Long-Term Funding Issuances Maturities/Redemptions Year Ended December 31, Year Ended December 31, (Dollars in millions) 2019 2018 2017 2019 2018 2017 Securitized debt obligations(1)$ 6,673 $ 1,000 $ 8,474 $ 7,285 $ 2,673 $ 7,233 Senior and subordinated notes 4,161 5,250 10,300 5,344 5,055 2,804 FHLB advances - 750 25,180 251 9,108 33,750 Total$ 10,834 $ 7,000 $ 43,954 $ 12,880 $ 16,836 $ 43,787 __________
(1) Includes$2.5 billion of securitized debt assumed in theCabela's acquisition for the year endedDecember 31, 2017 . 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 35 provides a summary of the credit ratings for the senior unsecured long-term debt ofCapital One Financial Corporation , COBNA and CONA as ofDecember 31, 2019 and 2018. Table 35: Senior Unsecured Long-Term Debt Credit Ratings December 31, 2019 December 31, 2018 Capital One Capital One Financial Financial Corporation COBNA CONA 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 ofFebruary 14, 2020 , Moody's Investors Service ("Moody's"), S&P and Fitch Ratings ("Fitch") have us on a stable outlook. Contractual Obligations In the normal course of business, we enter into various contractual obligations that may require future cash payments that affect our short-term and long-term liquidity and capital resource needs. Our future cash outflows primarily relate to deposits, borrowings and operating leases. Table 36 summarizes, by remaining contractual maturity, our significant contractual cash obligations as ofDecember 31, 2019 . The actual timing and amounts of future cash payments may differ from the amounts presented below due to a number of factors, such as discretionary debt repurchases. Table 36 excludes short-term obligations such as trade payables, commitments to fund certain equity investments, obligations for pension and post-retirement benefit plans, and representation and warranty reserves, which are discussed in more detail in "Note 5-Variable Interest Entities and Securitizations," "Note 14-Employee Benefit Plans" and "Note 18-Commitments, Contingencies, Guarantees and Others."
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Table 36: Contractual Obligations
December 31, 2019
Up to > 1 Years > 3 Years
(Dollars in millions) 1 Year to 3 Years to 5 Years > 5 Years Total
Interest-bearing time deposits(1)(2) $ 28,186 $ 12,887 $ 3,775 $ 110 $ 44,958
Securitized debt obligations(2) 5,433 8,549 2,256 1,570 17,808
Other debt:
Federal funds purchased and securities
loaned or sold under agreements to
repurchase 314 - - - 314
Senior and subordinated notes 4,398 9,046 8,707 8,321 30,472
Other borrowings(3) 7,022 40 23 18 7,103
Total other debt(2) 11,734 9,086 8,730 8,339 37,889
Operating leases 310 535 437 782 2,064
Purchase obligations(4) 470 769 553 400 2,192
Total $ 46,133 $ 31,826 $ 15,751 $ 11,201 $ 104,911
__________
(1) Includes only those interest-bearing deposits which have a contractual
maturity date.
(2) These amounts represent the carrying value of the obligations and do not
include amounts related to contractual interest obligations. Total
contractual interest obligations were approximately $4.1 billion as of
interest rates as of
maturity date of each liability and include the impact of hedge accounting
where applicable.
(3) Other borrowings primarily consists of FHLB advances.
(4) Represents substantial agreements to purchase goods or services that areenforceable and legally binding and specify all significant terms. Purchase
obligations are included through the termination date of the agreements even
if the contract is renewable.
MARKET RISK PROFILE
Market risk is the risk of economic loss in the value of our financial instruments due to changes in market factors. Our primary market risk exposures include interest rate risk, foreign exchange risk and commodity pricing risk. We are exposed to market risk primarily from the following operations and activities: • Traditional banking activities of deposit gathering and lending;
• Asset/liability management activities including the management of investment
securities, short-term and long-term borrowings and derivatives;
• Foreign operations in the
• Customer accommodation activities within our Commercial Banking business.
We have enterprise-wide risk management policies and limits, approved by our Board of Directors, which govern our market risk management activities. Our objective is to manage our exposure to market risk in accordance with these policies and limits based on prevailing market conditions and long-term expectations. We provide additional information below about our primary sources of market risk, our market risk management strategies and the measures that we use to evaluate these exposures. Interest Rate Risk Interest rate risk represents exposure to financial instruments whose values vary with the level or volatility of interest rates. We are exposed to interest rate risk primarily from the differences in the timing between the maturities or re-pricing of assets and liabilities. We manage our interest rate risk primarily by entering into interest rate swaps and other derivative instruments, including caps, floors, options, futures and forward contracts. We use various industry standard market risk measurement techniques and analyses to measure, assess and manage the impact of changes in interest rates on our net interest income and our economic value of equity and changes in foreign exchange rates on our non-dollar-denominated funding and non-dollar equity investments in foreign operations.
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Net Interest Income Sensitivity Our net interest income sensitivity measure estimates the impact on our projected 12-month baseline interest rate-sensitive revenue resulting from movements in interest rates. Interest rate-sensitive revenue consists of net interest income and certain components of other non-interest income significantly impacted by movements in interest rates, including changes in the fair value of freestanding interest rate derivatives. In addition to our existing assets and liabilities, we incorporate expected future business growth assumptions, such as loan and deposit growth and pricing, and plans for projected changes in our funding mix in our baseline forecast. In measuring the sensitivity of interest rate movements on our projected interest rate-sensitive revenue, we assume a hypothetical instantaneous parallel shift in the level of interest rates detailed in Table 37 below. At the current level of interest rates, our interest rate sensitive revenue is expected to increase modestly in higher rate scenarios and decrease modestly in lower rate 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 exposures, resulting from movements in interest rates. Our economic value of equity sensitivity measure is calculated based on our existing assets and liabilities, including derivatives, and does not incorporate business growth assumptions or projected balance sheet changes. Key assumptions used in the calculation include projecting rate sensitive prepayments for mortgage securities, loans and other assets, term structure modeling of interest rates, discount spreads, and deposit volume and pricing assumptions. In measuring the sensitivity of interest rate movements on our economic value of equity, we assume a hypothetical instantaneous parallel shift in the level of interest rates detailed in Table 37 below. Our current economic value of equity sensitivity profile demonstrates that our economic value of equity generally decreases as interest rates decrease from the current levels. Table 37 shows the estimated percentage impact on our projected baseline net interest income and economic value of equity calculated under the methodology described above as ofDecember 31, 2019 and 2018. In instances where a declining interest rate scenario would result in a rate less than 0%, we assume a rate of 0% for that scenario. Table 37: Interest Rate Sensitivity AnalysisDecember 31 ,
2019 2018
Estimated impact on projected baseline net interest income: +200 basis points 1.8 % (0.8 )% +100 basis points 1.3 (0.2 ) +50 basis points 1.1 0.0 -50 basis points (0.5 ) (0.3 ) -100 basis points (1.7 ) (1.0 ) Estimated impact on economic value of equity: +200 basis points (3.6 ) (7.1 ) +100 basis points 0.5 (2.9 ) +50 basis points 0.8 (1.2 ) -50 basis points (2.4 ) 0.2 -100 basis points (6.6 ) (0.8 ) In addition to these industry standard measures, we also consider the potential impact of alternative interest rate scenarios, such as stressed rate shocks as well as steepening and flattening yield curve scenarios in our internal interest rate risk management decisions. Limitations of Market Risk Measures The interest rate risk models that we use in deriving these measures incorporate contractual information, internally-developed assumptions and proprietary modeling methodologies, which project borrower and depositor behavior patterns in certain interest rate environments. Other market inputs, such as interest rates, market prices and interest rate volatility, are also critical components of our interest rate risk measures. We regularly evaluate, update and enhance these assumptions, models and analytical tools as we believe appropriate to reflect our best assessment of the market environment and the expected behavior patterns of our existing assets and liabilities.
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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 ("EUR")-denominated borrowings.
Our non-dollar denominated intercompany funding and EUR-denominated borrowings
expose our earnings to foreign exchange transaction risk. We manage these
transaction risks by using forward foreign currency derivatives and
cross-currency swaps to hedge our exposures. We measure our foreign exchange
transaction risk exposures by applying a 1% U.S. dollar appreciation shock
against the value of the non-dollar denominated intercompany funding and
EUR-denominated borrowings and their related hedges, which shows the impact to
our earnings from foreign exchange risk. Our intercompany funding outstanding
was 761 million GBP and 756 million GBP as of December 31, 2019 and 2018,
respectively, and 6.6 billion CAD and 6.5 billion CAD as of December 31, 2019
and 2018, respectively. Our EUR-denominated borrowings outstanding were 1.2
billion EUR as of December 31, 2019 .
Our non-dollar equity investments in foreign operations expose our balance sheet
to translation risk in AOCI and our capital ratios. We manage our AOCI exposure
by entering into foreign currency derivatives designated as net investment
hedges. We measure these exposures by applying a 30% U.S. dollar appreciation
shock, which we believe approximates a significant adverse shock over a one-year
time horizon, against the value of the 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 1.6 billion GBP as of both
December 31, 2019 and 2018, and 1.4 billion CAD and 1.2 billion CAD as of
December 31, 2019 and 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 measure the market risk in
our customer accommodation derivative activities on a daily basis. VaR is a
statistical risk measure used to estimate the potential loss from movements
observed in the recent market environment. We employ an historical simulation
approach using the most recent 500 business days and use a 99 percent confidence
level and a holding period of one business day. As a result of offsetting our
customer exposures with other counterparties, we believe that our net exposure
to market risk in our customer accommodation derivatives is minimal. For further
information on our risk related to customer accommodation derivatives, see "Note
9-Derivative Instruments and Hedging Activities."
London Interbank Offered Rate ("LIBOR") Transition
On July 27, 2017 , the U.K. Financial Conduct Authority , the regulator for the
administration of LIBOR, announced that LIBOR would be transitioned as an
interest rate benchmark and that it will no longer compel banks to contribute
LIBOR data beyond December 31, 2021 . It is unclear what rate or rates may
develop as accepted alternatives to LIBOR, or what the effect of any such
changes may have on the markets for LIBOR-based financial instruments. In the
U.S. , the Federal Reserve Board and the Federal Reserve Bank of New York
established the Alternative Reference Rates Committee ("ARRC"), a group of
private market participants and ex-officio members representing banking and
financial sector regulators. ARRC has recommended the Secured Overnight
Financing Rate ("SOFR") as the preferred alternative rate for certain U.S.
dollar derivative and cash instruments. We have exposures to LIBOR, including
loans, derivative contracts, unsecured debt, securitizations, vendor agreements
and other instruments with attributes that are either directly or indirectly
dependent on LIBOR. To facilitate an orderly transition from LIBOR,
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we have established a company-wide, cross-functional initiative to oversee and
manage our transition away from LIBOR and other Interbank Offered Rates
("IBORs") to alternative reference rates. We have made progress on our
transition efforts as we:
• implemented a robust governance framework and transition planning;
• completed initial assessment of exposures in products, legal contracts,
systems, models and processes;
• included LIBOR transition language ("fallback language") for new legal
contracts/agreements; and
• issued our first debt security with a SOFR-based floating rate component
in
We also continue to focus our transition efforts on: • reviewing existing legal contracts/agreements and assessing fallback
language impacts;
• monitoring of our LIBOR exposure;
• assessing internal operational readiness and risk management;
• implementing necessary updates to our infrastructure including systems,
models, valuation tools and processes;
• engaging with our clients, industry working groups, and regulators; and
• monitoring developments associated with LIBOR alternatives and industry
practices related to LIBOR-indexed instruments.
For a further discussion of the various risks we face in connection with the expected replacement of LIBOR on our operations, see "Part I-Item 1A. Risk Factors-Uncertainty regarding, and transition away from, LIBOR may adversely affect our business".
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Table of Contents SUPPLEMENTAL TABLES
Table A-Loans Held for Investment Portfolio Composition
December 31,
(Dollars in millions) 2019 2018 2017 2016 2015
Credit Card:
Domestic credit card $ 118,606 $ 107,350 $ 105,293 $ 97,120 $ 87,939
International card businesses 9,630 9,011 9,469 8,432 8,186
Total credit card 128,236 116,361 114,762 105,552 96,125
Consumer Banking:
Auto 60,362 56,341 53,991 47,916 41,549
Home loan - - 17,633 21,584 25,227
Retail banking 2,703 2,864 3,454 3,554 3,596
Total consumer banking 63,065 59,205 75,078 73,054 70,372
Commercial Banking:
Commercial and multifamily real estate 30,245 28,899 26,150 26,609 25,518
Commercial and industrial 44,263 41,091 38,025 39,824 37,135
Total commercial lending 74,508 69,990 64,175 66,433 62,653
Small-ticket commercial real estate - 343 400 483 613
Total commercial banking 74,508 70,333 64,575 66,916 63,266
Other loans - - 58 64 88
Total loans $ 265,809 $ 245,899 $ 254,473 $ 245,586 $ 229,851 95
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Table B-Performing Delinquencies
December 31,
2019 2018 2017 2016 2015
(Dollars in millions) Loans(1)(2) Rate(3) Loans(1)(2) Rate(3) Loans(1)(2) Rate(3) Loans(1)(2) Rate(3) Loans(1)(2) Rate(3)
Delinquent loans:
30 - 59 days $ 4,417 1.66 % $ 4,255 1.73 % $ 3,908 1.53 % $ 3,416 1.39 % $ 3,042 1.33 %
60 - 89 days 2,513 0.94 2,406 0.98 2,086 0.82 1,833 0.75 1,636 0.71
90 - 119 days 975 0.37 866 0.35 862 0.34 771 0.31 603 0.26
120 - 149 days 813 0.31 736 0.30 734 0.29 628 0.26 493 0.21
150 or more days 619 0.23 632 0.26 637 0.25 537 0.22 409 0.18
Total $ 9,337 3.51 % $ 8,895 3.62 % $ 8,227 3.23 % $ 7,185 2.93 % $ 6,183 2.69 %
By geographic area:
Domestic $ 9,002 3.38 % $ 8,578 3.49 % $ 7,883 3.10 % $ 6,902 2.81 % $ 5,939 2.58 %
International 335 0.13 317 0.13 344 0.13 283 0.12 244 0.11
Total $ 9,337 3.51 % $ 8,895 3.62 % $ 8,227 3.23 % $ 7,185 2.93 % $ 6,183 2.69 %
Total loans held for $ 265,809 $ 245,899 $ 254,473 $ 245,586 $ 229,851
investment
__________(1) Credit card loan balances are reported net of the finance charge and fee
reserve, which totaled
million and
respectively.
(2) Performing TDRs totaled $1.3 billion , $1.4 billion , $1.9 billion , $1.6
billion and
respectively.
(3) Delinquency rates are calculated by dividing loans in each delinquency
status category and geographic region as of the end of the period by the
total loan portfolio.
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Table C-Nonperforming Loans and Other Nonperforming Assets
December 31,
(Dollars in millions) 2019 2018 2017 2016 2015
Nonperforming loans held for investment:
Credit Card:
International card businesses $ 25 $ 22 $ 24 $ 42 $ 53
Total credit card 25 22 24 42 53
Consumer Banking:
Auto 487 449 376 223 219
Home loan - - 176 273 311
Retail banking 23 30 35 31 28
Total consumer banking 510 479 587 527 558
Commercial Banking:
Commercial and multifamily real estate 38 83 38 30 7
Commercial and industrial 410 223 239 988 538
Total commercial lending 448 306 277 1,018 545
Small-ticket commercial real estate - 6 7 4 5
Total commercial banking 448 312 284 1,022 550
Other loans - - 4 8 9
Total nonperforming loans held for investment
63 59 153 280 324
Total nonperforming assets $ 1,046 $ 872 $ 1,052 $ 1,879 $ 1,494
Total nonperforming loans(1) 0.37 % 0.33 % 0.35 % 0.65 % 0.51 %
Total nonperforming assets(2) 0.39 0.35 0.41 0.76 0.65
__________
(1) Nonperforming loan rate is calculated based on total nonperforming loans
divided by period-end total loans held for investment.
(2) The denominator used in calculating the total nonperforming assets ratio
consists of total loans held for investment and total other nonperforming
assets.
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Table D-Net Charge-Offs
Year Ended December 31,
(Dollars in millions) 2019 2018 2017 2016 2015
Average loans held for investment $ 247,450 $ 242,118 $ 245,565 $ 233,272 $ 210,745
Net charge-offs 6,252 6,112 6,562 5,062 3,695
Net charge-off rate 2.53 % 2.52 % 2.67 % 2.17 % 1.75 %
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Table E-Summary of Allowance for Loan and Lease Losses and Reserve for Unfunded
Lending Commitments
December 31,
(Dollars in millions) 2019 2018 2017 2016 2015
Allowance for loan and lease losses:
Balance at beginning of period $ 7,220 $ 7,502 $ 6,503 $ 5,130 $ 4,383
Charge-offs:
Credit card (6,711 ) (6,657 ) (6,321 ) (5,019 ) (4,028 )
Consumer banking (1,917 ) (1,832 ) (1,677 ) (1,226 ) (1,082 )
Commercial banking (181 ) (119 ) (481 ) (307 ) (76 )
Other - (7 ) (34 ) (3 ) (7 )
Total charge-offs (8,809 ) (8,615 ) (8,513 ) (6,555 ) (5,193 )
Recoveries:
Credit card 1,562 1,588 1,267 1,066 1,110
Consumer banking 970 851 639 406 351
Commercial banking 25 63 16 15 29
Other - 1 29 6 8
Total recoveries 2,557 2,503 1,951 1,493 1,498
Net charge-offs (6,252 ) (6,112 ) (6,562 ) (5,062 ) (3,695 )
Provision for credit losses 6,223 5,858 7,563 6,491 4,490
Allowance build (release) for loan and lease (29 ) (254 ) 1,001 1,429 795
losses
Other changes 17 (28 ) (2 ) (56 ) (48 )
Balance at end of period $ 7,208 $ 7,220 $ 7,502 $ 6,503 $ 5,130
Reserve for unfunded lending commitments:
Balance at beginning of period $ 122 $ 124 $ 136 $ 168 $ 113
Provision (benefit) for losses on unfunded 13 (2 ) (12 ) (32 ) 46
lending commitments
Other changes - - - - 9
Balance at end of period 135 122 124 136 168
Combined allowance and reserve at end of $ 7,343 $ 7,342 $ 7,626 $ 6,639 $ 5,298
period
Allowance for loan and lease losses as a 2.71 % 2.94 % 2.95 % 2.65 % 2.23 %
percentage of loans held for investment
Combined allowance and reserve by geographic
distribution:
Domestic $ 6,945 $ 6,951 $ 7,251 $ 6,262 $ 4,999
International 398 391 375 377 299
Total $ 7,343 $ 7,342 $ 7,626 $ 6,639 $ 5,298
Combined allowance and reserve by portfolio
segment:
Credit card $ 5,395 $ 5,535 $ 5,648 $ 4,606 $ 3,654
Consumer banking 1,043 1,052 1,249 1,109 875
Commercial banking 905 755 728 922 765
Other - - 1 2 4
Total $ 7,343 $ 7,342 $ 7,626 $ 6,639 $ 5,298
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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 F-Reconciliation of Non-GAAP Measures
December 31,
(Dollars in millions, except as noted) 2019 2018 2017 2016 2015
Tangible Common Equity (Period-End)
Stockholders' equity $ 58,011 $ 51,668 $ 48,730 $ 47,514 $ 47,284
Goodwill and intangible assets(1) (14,932 ) (14,941 ) (15,106 ) (15,420 ) (15,701 )
Noncumulative perpetual preferred stock (4,853 ) (4,360 ) (4,360 ) (4,360 ) (3,294 )
Tangible common equity $ 38,226 $ 32,367 $ 29,264 $ 27,734 $ 28,289
Tangible Common Equity (Average)
Stockholders' equity $ 55,690 $ 50,192 $ 49,530 $ 48,753 $ 47,713
Goodwill and intangible assets(1) (14,927 ) (15,017 ) (15,308 ) (15,550 ) (15,273 )
Noncumulative perpetual preferred stock (4,729 ) (4,360 ) (4,360 ) (3,591 ) (2,641 )
Tangible common equity $ 36,034 $ 30,815 $ 29,862 $ 29,612 $ 29,799
Tangible Assets (Period-End)
Total assets $ 390,365 $ 372,538 $ 365,693 $ 357,033 $ 334,048
Goodwill and intangible assets(1) (14,932 ) (14,941 ) (15,106 ) (15,420 ) (15,701 )
Tangible assets $ 375,433 $ 357,597 $ 350,587 $ 341,613 $ 318,347
Tangible Assets (Average)
Total assets $ 374,924 $ 363,036 $ 354,924 $ 339,974 $ 313,474
Goodwill and intangible assets(1) (14,927 ) (15,017 ) (15,308 ) (15,550 ) (15,273 )
Tangible assets $ 359,997 $ 348,019 $ 339,616 $ 324,424 $ 298,201
Non-GAAP Ratio
Tangible common equity(2) 10.2 % 9.1 % 8.3 % 8.1 % 8.9 %
__________
(1) Includes impact of related deferred taxes.
(2) Tangible common equity ("TCE") ratio is a non-GAAP measure calculated based
on TCE divided by tangible assets.
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Table G-Selected Quarterly Financial Information
(Dollars in millions, except per 2019 2018 share data and as noted) (unaudited) Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Summarized results of operations: Interest income $ 7,270 $ 7,075 $ 7,076 $ 7,092 $ 7,048 $ 6,895 $ 6,596 $ 6,637 Interest expense 1,204 1,338 1,330 1,301 1,228 1,109 1,045 919 Net interest income 6,066 5,737 5,746 5,791 5,820 5,786 5,551 5,718 Provision for credit losses 1,818 1,383 1,342 1,693 1,638 1,268 1,276 1,674 Net interest income after 4,248 4,354 4,404 4,098 4,182 4,518 4,275 4,044 provision for credit losses Non-interest income 1,361 1,222 1,378 1,292 1,193 1,176 1,641 1,191 Non-interest expense 4,161 3,872 3,779
3,671 4,132 3,773 3,424 3,573 Income from continuing operations 1,448 1,704 2,003
1,719 1,243 1,921 2,492 1,662 before income taxes Income tax provision (benefit)
270 375 387 309 (21 ) 420 575 319
Income from continuing operations, 1,178 1,329 1,616
1,410 1,264 1,501 1,917 1,343 net of tax Income (loss) from discontinued
(2 ) 4 9 2 (3 ) 1 (11 ) 3
operations, net of tax
Net income 1,176 1,333 1,625 1,412 1,261 1,502 1,906 1,346 Dividends and undistributed earnings allocated to
(7 ) (10 ) (12 ) (12 ) (9 ) (9 ) (12 ) (10 ) participating securities Preferred stock dividends
(97 ) (53 ) (80 ) (52 ) (80 ) (53 ) (80 ) (52 ) Issuance cost for redeemed
(31 ) - - - - - - -
preferred stock
Net income available to common $ 1,041 $ 1,270 $ 1,533 $ 1,348 $ 1,172 $ 1,440 $ 1,814 $ 1,284
stockholders
Common share statistics:
Basic earnings per common
share:(1)
Net income from continuing $ 2.26 $ 2.70 $ 3.24 $ 2.87 $ 2.50 $ 3.01 $ 3.76 $ 2.63 operations Income (loss) from discontinued
- 0.01 0.02 - (0.01 ) - (0.02 ) 0.01operations
Net income per basic common share $ 2.26 $ 2.71 $ 3.26
$ 2.87 $ 2.49 $ 3.01 $ 3.74 $ 2.64 Diluted earnings per common share:(1) Net income from continuing $ 2.25 $ 2.68 $ 3.22
$ 2.86 $ 2.49 $ 2.99 $ 3.73 $ 2.61 operations Income (loss) from discontinued
- 0.01 0.02 - (0.01 ) - (0.02 ) 0.01operations
Net income per diluted common $ 2.25 $ 2.69 $ 3.24
$ 2.86 $ 2.48 $ 2.99 $ 3.71 $ 2.62
share
Weighted-average common shares
outstanding
(in millions):
Basic common shares 460.9 469.5 470.8 469.4 470.0 477.8 485.1 486.9
Diluted common shares 463.4 471.8 473.0 471.6 472.7 480.9 488.3 490.8
Balance sheet (average balances):
Loans held for investment $ 258,870 $ 246,147 $ 242,653 $ 241,959 $ 241,371 $ 236,766 $ 240,758 $ 249,726
Interest-earning assets 349,150 340,949 338,026 337,793 334,714 330,272 333,495 330,183
Total assets 383,162 374,905 371,095 370,394 365,243 360,937 363,929 362,049
Interest-bearing deposits 236,250 232,063 230,452 227,572 222,827 221,431 223,079 219,670
Total deposits 260,040 255,082 253,634 251,410 247,663 246,720 248,790 245,270
Borrowings 51,442 49,413 49,982 53,055 53,994 51,684 52,333 54,588
Common equity 52,641 52,566 50,209 48,359 46,753 46,407 45,466 44,670
Total stockholders' equity 58,148 57,245 54,570 52,720 51,114 50,768 49,827 49,031
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Table of Contents Glossary and Acronyms 2019 Stock Repurchase Program: On June 27, 2019, we announced that our Board of Directors authorized the repurchase of up to $2.2 billion of shares of our common stock from the third quarter of 2019 through the end of the second quarter of 2020. Annual Report: References to our "2019 Form 10-K" or "2019 Annual Report" are to our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. Banks: Refers to COBNA and CONA. Basel Committee: The Basel Committee on Banking Supervision. Basel III Advanced Approaches: The Basel III Advanced Approaches is mandatory for those institutions with consolidated total assets of $250 billion or more or consolidated total on-balance sheet foreign exposure of $10 billion or more. The Basel III Capital Rule modified the Advanced Approaches version of Basel II to create the Basel III Advanced Approaches. Basel III Capital Rule: The Federal Banking Agencies issued a rule in July 2013 implementing the Basel III capital framework developed by the Basel Committee as well as certain Dodd-Frank Act and other capital provisions. Basel III Standardized Approach: The Basel III Capital Rule modified Basel I to create the Basel III Standardized Approach, which requires for Basel III Advanced Approaches banking organizations that have yet to exit parallel run to use the Basel III Standardized Approach to calculate regulatory capital, including capital ratios, subject to transition provisions.Cabela's acquisition: On September 25, 2017, we completed the acquisition fromSynovus Bank of credit card assets and the related liabilities ofWorld's Foremost Bank , a wholly-owned subsidiary ofCabela's Incorporated. Capital One or the Company: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, net of any related reserves. Loans held for sale are recorded at either fair value (if we elect the fair value option) or at the lower of cost or fair value. 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. 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.
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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 the LCR Rule.
Leverage ratio: Tier 1 capital divided by average assets after certain
adjustments, as defined by the regulators.
Liquidity risk: The risk that the Company will not be able to meet its future
financial obligations as they come due, or invest in future asset growth because
of an inability to obtain funds at a reasonable price within a reasonable time
period.
Loan-to-value ("LTV") ratio: The relationship, expressed as a percentage,
between the principal amount of a loan and the appraised value of the collateral
securing the loan.
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.
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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 ("MSRs"): The right to service a mortgage loan when
the underlying loan is sold or securitized. Servicing includes collections for
principal, interest and escrow payments from borrowers and accounting for and
remitting principal and interest payments to investors.
Net charge-off rate: represents (annualized) net charge-offs divided by average
loans held for investment for the period.
Net interest margin: represents (annualized) net interest income divided by
average interest-earning assets for the period.
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.
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.
Subprime: For purposes of lending in our Credit Card business, we generally
consider FICO scores of 660 or below, or other equivalent risk scores, to be
subprime. For purposes of auto lending in our Consumer Banking business, we
generally consider FICO scores of 620 or below to be subprime.
Tailoring Rules: In October 2019, the Federal Banking Agencies released final
rules that provide for tailored application of certain capital, liquidity, and
stress testing requirements across different categories of banking
institutions. As a bank holding company with total consolidated assets of at
least $250 billion that does not exceed any of the applicable risk-based
thresholds, we are a Category III institution under the Tailoring Rules.
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Tangible common equity: A non-GAAP financial measure. Common equity less
goodwill and intangible assets adjusted for deferred tax liabilities associated
with non-tax deductible intangible assets and tax deductible goodwill.
Tax Act: The Act to provide for reconciliation pursuant to titles II and V of
the concurrent resolution on the budget for fiscal year 2018 enacted on December
22, 2017.
Troubled debt restructuring ("TDR"): A TDR is deemed to occur when the
contractual terms of a loan agreement are modified by granting a concession to a
borrower that is experiencing financial difficulty.
Unfunded commitments: Legally binding agreements to provide a defined level of
financing until a specified future date.
U.K. PPI Reserve: U.K. payment protection insurance customer refund reserve.
U.S. GAAP: Accounting principles generally accepted in the United States of
America . Accounting rules and conventions defining acceptable practices in
preparing financial statements in the U.S.
Variable interest entity ("VIE"): An entity that (i) lacks enough equity
investment at risk to permit the entity to finance its activities without
additional financial support from other parties; (ii) has equity owners that
lack the right to make significant decisions affecting the entity's operations;
and/or (iii) has equity owners that do not have an obligation to absorb or the
right to receive the entity's losses or return.
Walmart acquisition: On October 11, 2019, we completed the acquisition of the
existing portfolio of Walmart's cobrand and private label credit card
receivables.
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Table of Contents Acronyms AWS:Amazon Web Services, Inc. AML: Anti-money laundering AOCI: Accumulated other comprehensive income ARM: Adjustable rate mortgage ARRC: Alternative Reference Rates Committee ASU: Accounting Standards Update ASC: Accounting Standards Codification BHC: Bank holding company bps: Basis points CAD: Canadian dollar CAP: Compliance assurance process CCAR: Comprehensive Capital Analysis and Review CCP: Central Counterparty Clearinghouse, or Central Clearinghouse CCPA: California Consumer Privacy Act of 2018 CDE: Community development entities CECL: Current expected credit lossCFPB : Consumer Financial Protection Bureau CFTC:Commodity Futures Trading Commission CIBC Act: Change in Bank Control Act CMBS: Commercial mortgage-backed securities CME:Chicago Mercantile Exchange COEP:Capital One (Europe) plc COF:Capital One Financial Corporation COSO: Committee of Sponsoring Organizations of the Treadway Commission CRA: Community Reinvestment Act CVA: Credit valuation adjustment DCF: Discounted cash flow DCM: Designated contract market DDOS: Distributed denial of service DIF: Deposit insurance fund DRP: Dividend Reinvestment and Stock Purchase Plan DRR: Designated reserve ratio DVA: Debit valuation adjustment EGRRCPA: Economic Growth, Regulatory Relief, and Consumer Protection Act EU:European Union EUR: Euro Fannie Mae: Federal National Mortgage Association FASB: Financial Accounting Standards BoardFCA :U.K. Financial Conduct Authority FCAC:Financial Consumer Agency of Canada FCM: Futures commission merchantFDIC :Federal Deposit Insurance Corporation
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FDICIA: The Federal Deposit Insurance Corporation Improvement Act of 1991FFIEC :Federal Financial Institutions Examination Council FHC: Financial holding company FHLB: Federal Home Loan Banks FIS: Fidelity Information Services FinCEN:Financial Crimes Enforcement Network FIRREA: Financial Institutions Reform, Recovery and Enforcement Act Fitch: Fitch Ratings FOS:Financial Ombudsman Service Freddie Mac: Federal Home Loan Mortgage Corporation FSOC: Financial Stability Oversight Council FVC: Fair Value Committee GAAP: Generally accepted accounting principles in theU.S. GBP: Great British pound GDPR: General Data Protection RegulationGinnie Mae :Government National Mortgage Association G-SIBs: Global systemically important banks GSE or Agency: Government-sponsored enterprise IBOR: Interbank Offered Rate IRM: Independent Risk ManagementIRS : Internal Revenue Service LCH: LCH Group LCR: Liquidity coverage ratio LIBOR: London Interbank Offered Rate MDL: Multi-district litigation Moody's: Moody's Investors Service MSRs: Mortgage servicing rights NSFR: Net stable funding ratio NYSE: New York Stock Exchange 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 PCAOB:Public Company Accounting Oversight Board (United States ) PCI: Purchased credit-impaired PCCR: Purchased credit card relationship PIPEDA: Personal Information Protection and Electronic Documents Act PPI: Payment protection insurance PSU: Performance share unit RMBS: Residential mortgage-backed securities RSU: Restricted stock unit S&P:Standard & Poor's SEC :U.S. Securities and Exchange Commission
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SEF: Swap execution facility SOFR: Secured Overnight Financing Rate TCE: Tangible common equity TDR: Troubled debt restructuring TILA: Truth in Lending Act TSYS: Total Systems Services, Inc.U.K. :United Kingdom U.S. :United States of America VAC: Valuations Advisory Committee 108Capital One Financial Corporation (COF)
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Item 7A. Quantitative and Qualitative Disclosures about Market Risk For a discussion of the quantitative and qualitative disclosures about market risk, see "MD&A-Market Risk Profile."
Item 8. Financial Statements and Supplementary Data
Page
Consolidated Financial Statements
114
Consolidated Statements of Income
115
Consolidated Statements of Comprehensive Income
116
Consolidated Balance Sheets
117
Consolidated Statements of Changes in Stockholders' Equity
118
Consolidated Statements of Cash Flows
119
Notes to Consolidated Financial Statements
120
Note 1-Summary of Significant Accounting Policies
120
Note 2-Investment Securities
134
Note 3-Loans
139
Note 4-Allowance for Loan and Lease Losses and Reserve for Unfunded
148
Lending Commitments
Note 5-Variable Interest Entities and Securitizations 151 Note 6-Goodwill and Intangible Assets 155 Note 7-Premises, Equipment and Lease s 158 Note 8-Deposits and Borrowings 160 Note 9-Derivative Instruments and Hedging Activities 162 Note 10-Stockholders' Equity 170 Note 11-Regulatory and Capital Adequacy 174 Note 12-Earnings Per Common Share 176 Note 13-Stock-Based Compensation Plans 177 Note 14-Employee Benefit Plans 179 Note 15-Income Taxes 181 Note 16-Fair Value Measurement 185 Note 17-Business Segments and Revenue from Contracts with Customers 194 Note 18-Commitments, Contingencies, Guarantees and Others 198 Note 19-Capital One Financial Corporation (Parent Company Only) 202 Note 20-Related Party Transactions 204 Note 21-Business Developments 205 109Capital One Financial Corporation (COF)
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MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Capital One Financial Corporation (the "Company" or "Capital
One") is responsible for establishing and maintaining adequate internal control
over financial reporting and for the assessment of the effectiveness of internal
control over financial reporting. Internal control over financial reporting is a
process designed by, or under the supervision of, the Company's principal
executive and principal financial officers, or persons performing similar
functions, and effected by the Company's Board of Directors, management and
other personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
reporting purposes in accordance with U.S. generally accepted accounting
principles.
Capital One's internal control over financial reporting includes those policies
and procedures that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the Company's assets; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
the Company's receipts and expenditures are being made only in accordance with
authorizations of the Company's management and directors; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company's assets that could have a
material effect on its financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Management conducted an assessment of the effectiveness of the Company's
internal control over financial reporting as of December 31, 2019, based on the
framework in "2013 Internal Control-Integrated Framework" issued by the
Committee of Sponsoring Organizations of the Treadway Commission ("COSO"),
commonly referred to as the "2013 Framework."
Based on this assessment, management concluded that, as of December 31, 2019,
the Company's internal control over financial reporting was effective based on
the criteria established by COSO in the 2013 Framework. Additionally, based upon
management's assessment, the Company determined that there were no material
weaknesses in its internal control over financial reporting as of December 31,
2019.
The effectiveness of the Company's internal control over financial reporting as
of December 31, 2019, has been audited by Ernst & Young LLP , an independent
registered public accounting firm, as stated in their accompanying report, which
expresses an unqualified opinion on the effectiveness of the Company's internal
control over financial reporting as of December 31, 2019.
/s/ RICHARD D. FAIRBANK
Richard D. Fairbank
Chair, Chief Executive Officer and President
/s/ R. SCOTT BLACKLEY
R. Scott Blackley
Chief Financial Officer
February 20, 2020
110 Capital One Financial Corporation (COF)
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Capital One Financial
Corporation :
Opinion on Internal Control over Financial Reporting
We have audited Capital One Financial Corporation's internal control over
financial reporting as of December 31, 2019, based on criteria established in
Internal Control- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 framework) (the COSO criteria).
In our opinion, Capital One Financial Corporation (the "Company") maintained, in
all material respects, effective internal control over financial reporting as of
December 31, 2019, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States ) (PCAOB), the consolidated balance
sheets of Capital One Financial Corporation as of December 31, 2019 and 2018,
the related consolidated statements of income, comprehensive income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2019, and the related notes, and our report dated February
20, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
The Company's management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting included in the accompanying
Management's Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the Company's internal control over
financial reporting based on our audit. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was
maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Tysons, Virginia
February 20, 2020
111 Capital One Financial Corporation (COF)
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Capital One Financial
Corporation :
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Capital One
Financial Corporation (the "Company") as of December 31, 2019 and 2018, the
related consolidated statements of income, comprehensive income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2019, and the related notes (collectively referred to as the
"consolidated financial statements"). In our opinion, the consolidated financial
statements present fairly, in all material respects, the financial position of
the Company at December 31, 2019 and 2018, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States ) (PCAOB), the Company's internal
control over financial reporting as of December 31, 2019, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (2013 framework) and our
report dated February 20, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on the Company's financial
statements based on our audits. We are a public accounting firm registered with
the PCAOB and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing
procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial statements. Our
audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of
the financial statements. We believe that our audits provide a reasonable basis
for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the
current period audit of the financial statements that were communicated or
required to be communicated to the audit committee and that: (1) relate to
accounts or disclosures that are material to the financial statements and (2)
involved our especially challenging, subjective or complex judgments. The
communication of critical audit matters does not alter in any way our opinion on
the consolidated financial statements, taken as a whole, and we are not, by
communicating the critical audit matters below, providing separate opinions on
the critical audit matters or on the accounts or disclosures to which they
relate.
112 Capital One Financial Corporation (COF)
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Allowance for loan and lease losses - Credit Card and Consumer
Banking
Description At December 31, 2019, the Company's allowance for loan and lease
of the Matter losses (ALLL or allowance) for the credit card and consumer
banking portfolios was $5.4 billion and $1.0 billion,
respectively. As more fully described in Note 1 and Note 4 of
the consolidated financial statements, the ALLL represents
management's best estimate of incurred loan and lease losses in
the held for investment (HFI) loan portfolios as of the balance
sheet date and is comprised of two elements. The first is
'quantitative' and involves the use of complex econometric
statistical loss forecasting models tailored to each portfolio
based on, among other things, historical loss and recovery
experience, recent trends in delinquencies and charge-offs,
underwriting and collection management policies, seasonality,
the value of collateral underlying secured loans, and general
economic conditions. The second is 'qualitative' and involves
factors that represent management's judgment of the imprecision
and risks inherent in the processes not lending themselves to
empirical derivation.
Auditing the allowance for the credit card and consumer banking
portfolios was especially challenging and highly judgmental due
to the significant complexity of the loss forecasting models
used in the quantitative element and the significant judgment
required in establishing the qualitative element. The
qualitative element requires management to make significant
judgments regarding the imprecision and risk inherent in the
process and assumptions used in establishing the allowance,
including modeling assumption and adjustment risks, probable
internal and external events, and uncertainty in the
macroeconomic environment and how that impacts losses.
How We We obtained an understanding, evaluated the design and tested
Addressed the the operating effectiveness of the internal controls over the
Matter in Our ALLL process, including, among others, controls over the
Audit development, operation, and monitoring of loss forecasting
models and management review controls over key assumptions and
qualitative judgments used in reviewing the final credit card
and consumer banking allowance results. Our tests of controls
included observation of certain of management's quarterly ALLL
governance meetings, at which key management judgments,
qualitative adjustments, and final ALLL results are subjected to
critical challenge by management groups independent of the ALLL
calculation.
We involved EY specialists in testing management's credit card
and consumer banking econometric statistical loss forecasting
models including evaluating model methodology, model performance
and testing key modeling assumptions as well as model governance
controls. We compared actual loss history with prior forecasts
at a disaggregated loan portfolio level to evaluate the
reasonableness of management's consumer forecasts (e.g.,
look-back analysis).
We performed quarterly sensitivity analysis on the ALLL,
charge-off and delinquency rates, and coverage ratios used
within each segment of the credit card and consumer banking
allowance. Our audit response also included specific substantive
tests of management's process to measure credit card and
consumer banking qualitative factors. We compared calculations
to external consumer market benchmarks and industry peer data
and compared qualitative factors to prior periods and prior
economic cycles. We also evaluated if the credit card and
consumer banking allowance qualitative factors were applied
based on a comprehensive framework and that all available
information was considered, well-documented, and consistently
applied.
113 Capital One Financial Corporation (COF)
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Goodwill Impairment Assessment
Description At December 31, 2019, the Company's goodwill was $14.7 billion
of the Matter recorded across four reporting units. As discussed in Note 1 and
Note 6 of the consolidated financial statements, goodwill is
tested for impairment at least annually at the reporting unit
level by comparing the fair value of the reporting unit to its
carrying value. Management uses a discounted cash flow analysis
(DCF) to calculate the fair value of its reporting units.
Auditing of the annual goodwill impairment test was especially
challenging, complex, and highly judgmental due to the
significant estimation required in determining the fair value of
the reporting units. The fair value estimate is sensitive to
significant assumptions including prospective financial
information (PFI) and market discount rates. These PFI
assumptions require management to make judgments about future
loan and deposit growth, revenue and expenses, credit losses,
and capital rates. Management utilizes a financial forecasting
process to estimate the PFI and an estimation process to
determine the appropriate discount rates.
How We Our audit procedures related to the goodwill impairment
Addressed the assessment included, among others, testing the design and
Matter in Our operating effectiveness of controls over the Company's PFI
Audit forecasting process and management's impairment assessment
process, including controls over the estimation of discount
rates.
To test the appropriateness of management's assessment process,
we assessed the goodwill impairment methodology and involved EY
valuation specialists to assist in the testing of the
significant assumptions, including testing the Company's
estimate of discount rates, and evaluating thereasonableness of
total fair value through comparison to the Company's market
capitalization and analysis of the resulting premium to
applicable market transactions. We evaluated certain of
management's assumptions with historical performance (e.g.,
trend analysis), current industry and economic trends, changes
in the Company's strategies, and the customer base or product
mix. We also evaluated the consistency of the PFI by comparing
the projections to other analyses used within the organization
and inquiries performed of senior management regarding strategic
plans within each reporting unit. We compared prior year
forecasts to current year actual performance. We performed
sensitivity analyses related to the significant assumptions to
evaluate the change in the fair value of the reporting units
resulting from changes in the assumptions. We also recalculated
the reconciliation of the fair value of all reporting units to
the market capitalization of the Company and then assessed the
resulting premium.
/s/
We have served as the Company's auditor since 1994.
Tysons,Virginia February 20, 2020 114Capital One Financial Corporation (COF)
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CAPITAL ONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
(Dollars in millions, except per share-related data) 2019 2018 2017
Interest income:
Loans, including loans held for sale $ 25,862 $ 24,728 $ 23,388
Investment securities 2,411 2,211 1,711
Other 240 237 123
Total interest income 28,513 27,176 25,222
Interest expense:
Deposits 3,420 2,598 1,602
Securitized debt obligations 523 496 327
Senior and subordinated notes 1,159 1,125 731
Other borrowings 71 82 102
Total interest expense 5,173 4,301 2,762
Net interest income 23,340 22,875 22,460
Provision for credit losses 6,236 5,856 7,551
Net interest income after provision for credit losses 17,104 17,019 14,909
Non-interest income:
Interchange fees, net 3,179 2,823 2,573
Service charges and other customer-related fees 1,330 1,585 1,597
Net securities gains (losses) 26 (209 ) 65
Other 718 1,002 542
Total non-interest income 5,253 5,201 4,777
Non-interest expense:
Salaries and associate benefits 6,388 5,727 5,899
Occupancy and equipment 2,098 2,118 1,939
Marketing 2,274 2,174 1,670
Professional services 1,237 1,145 1,097
Communications and data processing 1,290 1,260 1,177
Amortization of intangibles 112 174 245
Other 2,084 2,304 2,167
Total non-interest expense 15,483 14,902 14,194
Income from continuing operations before income taxes 6,874 7,318 5,492
Income tax provision 1,341 1,293 3,375
Income from continuing operations, net of tax 5,533 6,025 2,117
Income (loss) from discontinued operations, net of tax 13 (10 ) (135 )
Net income 5,546 6,015 1,982
Dividends and undistributed earnings allocated to
participating securities (41 ) (40 ) (13 )
Preferred stock dividends (282 ) (265 ) (265 )
Issuance cost for redeemed preferred stock (31 ) 0 0
Net income available to common stockholders $ 5,192 $ 5,710 $ 1,704
Basic earnings per common share:
Net income from continuing operations $ 11.07 $ 11.92 $ 3.80
Income (loss) from discontinued operations 0.03 (0.02 ) (0.28 )
Net income per basic common share $ 11.10 $ 11.90 $ 3.52
Diluted earnings per common share:
Net income from continuing operations $ 11.02 $ 11.84 $ 3.76
Income (loss) from discontinued operations 0.03 (0.02 ) (0.27 )
Net income per diluted common share $ 11.05 $ 11.82 $ 3.49
See Notes to Consolidated Financial Statements.
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CAPITAL ONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year Ended December 31,
(Dollars in millions) 2019 2018 2017
Net income $ 5,546 $ 6,015 $ 1,982
Other comprehensive income (loss), net of tax:
Net unrealized gains (losses) on securities available for sale 650 (459 ) 21
Net changes in securities held to maturity 26 447 97
Net unrealized gains (losses) on hedging relationships 772 (74 ) (203 )
Foreign currency translation adjustments 70 (39 ) 84
Other 13 (11 ) 24
Other comprehensive income (loss), net of tax 1,531 (136 ) 23
Comprehensive income $ 7,077 $ 5,879 $ 2,005
See Notes to Consolidated Financial Statements.
116 Capital One Financial Corporation (COF)
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CAPITAL ONE FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
(Dollars in millions, except per share-related data) 2019 2018
Assets:
Cash and cash equivalents:
Cash and due from banks $ 4,129 $ 4,768
Interest-bearing deposits and other short-term investments 9,278 8,418
Total cash and cash equivalents 13,407 13,186
Restricted cash for securitization investors 342 303
Investment securities:
Securities available for sale 79,213 46,150
Securities held to maturity 0 36,771
Total investment securities 79,213 82,921
Loans held for investment:
Unsecuritized loans held for investment 231,992 211,702
Loans held in consolidated trusts 33,817 34,197
Total loans held for investment 265,809 245,899
Allowance for loan and lease losses (7,208 ) (7,220 )
Net loans held for investment 258,601 238,679
Loans held for sale ($251 million carried at fair value at
December 31, 2019) 400 1,192
Premises and equipment, net 4,378 4,191
Interest receivable 1,758 1,614
Goodwill 14,653 14,544
Other assets 17,613 15,908
Total assets $ 390,365 $ 372,538
Liabilities:
Interest payable $ 439 $ 458
Deposits:
Non-interest-bearing deposits 23,488 23,483
Interest-bearing deposits 239,209 226,281
Total deposits 262,697 249,764
Securitized debt obligations 17,808 18,307Other debt: Federal funds purchased and securities loaned or sold under agreements to repurchase
314 352
Senior and subordinated notes 30,472 30,826
Other borrowings 7,103 9,420
Total other debt 37,889 40,598
Other liabilities 13,521 11,743
Total liabilities 332,354 320,870Commitments, contingencies and guarantees (see Note 18) Stockholders' equity: Preferred stock (par value $.01 per share; 50,000,000 shares authorized; 4,975,000 and 4,475,000 shares issued and outstanding as of December 31, 2019 and 2018, respectively)
0 0
Common stock (par value $.01 per share; 1,000,000,000 shares authorized; 672,969,391 and 667,969,069 shares issued as of December 31, 2019 and 2018, respectively, 456,562,399 and 467,717,306 shares outstanding as of December 31, 2019 and 2018, respectively)
7 7
Additional paid-in capital, net 32,980 32,040
Retained earnings 40,340 35,875
Accumulated other comprehensive income (loss) 1,156 (1,263 )
(16,472 ) (14,991 )
Total stockholders' equity 58,011 51,668
Total liabilities and stockholders' equity $ 390,365 $ 372,538
See Notes to Consolidated Financial Statements. 117Capital One Financial Corporation (COF)
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CAPITAL ONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated
Preferred Stock Common Stock Additional Other Total
Paid-In Retained Comprehensive Treasury Stockholders'
(Dollars in millions) Shares Amount Shares Amount Capital Earnings Income (Loss) Stock Equity
Balance as of December
31, 2016 4,475,000 $ 0 653,736,607 $ 7 $ 31,157 $ 29,766 $ (949 ) $ (12,467 ) $ 47,514
Comprehensive income 1,982 23 2,005
Dividends-common stock(1) 42,613 0 3 (783 ) (780 )
Dividends-preferred stock (265 ) (265 )
Purchases of treasury
stock (240 ) (240 )
Issuances of common stock
and restricted stock, net
of forfeitures 4,057,555 0 164 164
Exercises of stock
options and warrants 3,888,152 0 124 124
Compensation expense for
restricted stock awards,
restricted stock units
and stock options 208 208
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) 6,015 (136 ) 5,879 Dividends-common stock(1) 35,813 0 3 (776 ) (773 ) Dividends-preferred stock (265 ) (265 ) Purchases of treasury stock (2,284 ) (2,284 ) Issuances of common stock and restricted stock, net of forfeitures 4,183,783 0 175 175 Exercises of stock options and warrants 2,024,546 0 38 38 Compensation expense for restricted stock awards, restricted stock units and stock options 168
168
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 5,546 1,531
7,077
Effects from transfer of securities held to maturity to available for sale 888
888
Dividends-common stock(1) 49,963 0 4 (757 ) (753 ) Dividends-preferred stock (282 ) (282 ) Purchases of treasury stock (1,481 ) (1,481 ) Issuances of common stock and restricted stock, net of forfeitures 4,678,940 0 199 199 Exercises of stock options 271,419 0 17 17 Issuances of preferred stock 1,500,000 0 1,462 1,462 Redemptions of preferred stock (1,000,000 ) 0 (969 ) (31 ) (1,000 ) Compensation expense for restricted stock units and stock options 227 227 Balance as of December 31, 2019 4,975,000 $ 0 672,969,391 $ 7 $ 32,980 $ 40,340 $ 1,156 $ (16,472 ) $ 58,011 __________
(1) We declared dividend per share on our common stock of $0.40 in each quarter
of 2019, 2018 and 2017.
See Notes to Consolidated Financial Statements.
118 Capital One Financial Corporation (COF)
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CAPITAL ONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
(Dollars in millions) 2019 2018 2017
Operating activities:
Income from continuing operations, net of tax $ 5,533 $ 6,025 $ 2,117
Income (loss) from discontinued operations, net of tax 13 (10 ) (135 )
Net income 5,546 6,015 1,982
Adjustments to reconcile net income to net cash from
operating activities:
Provision for credit losses 6,236 5,856 7,551
Depreciation and amortization, net 3,339 2,396 2,440
Deferred tax provision (benefit) (296 ) 714 1,434
Net securities losses (gains) (26 ) 209 (65 )
Gain on sales of loans (50 ) (548 ) (72 )
Stock-based compensation expense 239 170 244
Other 0 (125 ) (8 )
Loans held for sale:
Originations and purchases (9,798 ) (9,039 ) (8,929 )
Proceeds from sales and paydowns 10,668 8,442 9,595
Changes in operating assets and liabilities:
Changes in interest receivable (63 ) (74 ) (157 )
Changes in other assets 662 476 (714 )
Changes in interest payable (19 ) 45 85
Changes in other liabilities 194 (1,553 ) 1,157
Net change from discontinued operations 7 (6 ) (361 )
Net cash from operating activities 16,639 12,978 14,182
Investing activities:
Securities available for sale:
Purchases (12,105 ) (14,022 ) (12,412 )
Proceeds from paydowns and maturities 8,553 7,510 7,213
Proceeds from sales 4,780 6,399 8,181
Securities held to maturity:
Purchases (396 ) (19,166 ) (5,885 )
Proceeds from paydowns and maturities 5,050 2,419 2,594
Loans:
Net changes in loans held for investment (21,280 ) 1,015 (12,315 )
Principal recoveries of loans previously charged off 2,557 2,503 1,951
Net purchases of premises and equipment (887 ) (874 ) (1,018 )
Net cash paid for acquisition activities (8,393 ) (600 ) (3,187 )
Net cash from other investing activities (877 ) (802 ) (663 )
Net cash from investing activities (22,998 ) (15,618 ) (15,541 )
Year Ended December 31,
(Dollars in millions) 2019 2018 2017
Financing activities:
Deposits and borrowings:
Changes in deposits $ 12,643 $ 6,077 $ 6,993
Issuance of securitized debt obligations 6,656 997 5,983
Maturities and paydowns of securitized debt obligations (7,285 ) (2,673 ) (7,233 )
Issuance of senior and subordinated notes and long-term
FHLB advances 4,142 5,977 35,426
Maturities and paydowns of senior and subordinated notes
and long-term FHLB advances (5,595 ) (14,163 ) (36,554 )
Changes in other borrowings (2,104 ) 8,671 (400 )
Common stock:
Net proceeds from issuances 199 175 164
Dividends paid (753 ) (773 ) (780 )
Preferred stock:
Net proceeds from issuances 1,462 0 0
Dividends paid (282 ) (265 ) (265 )
Redemptions (1,000 ) 0 0
Purchases of treasury stock (1,481 ) (2,284 ) (240 )
Proceeds from share-based payment activities 17 38 124
Net cash from financing activities 6,619 1,777 3,218 Changes in cash, cash equivalents and restricted cash for securitization investors
260 (863 ) 1,859
Cash, cash equivalents and restricted cash for
securitization investors, beginning of the period 13,489 14,352 12,493
Cash, cash equivalents and restricted cash for
securitization investors, end of the period $ 13,749 $ 13,489 $ 14,352
Supplemental cash flow information:
Non-cash items:
Net transfers from loans held for investment to loans
held for sale $ 1,589 $ 855 $ 674 Transfers from securities held to maturity to securities available for sale
33,187 0 0
Securitized debt obligations assumed in acquisition 0 0 2,484
Loans held for sale acquired by assuming other
borrowings 0 0 283
Interest paid 4,790 3,933 2,772
Income tax paid 626 407 1,187
See Notes to Consolidated Financial Statements.
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The CompanyCapital One Financial Corporation , a Delaware Corporation established in 1994 and headquartered inMcLean, Virginia , is a diversified financial services holding company with banking and non-banking subsidiaries.Capital One Financial Corporation and its subsidiaries (the "Company") offer a broad array of financial products and services to consumers, small businesses and commercial clients through digital channels, branches, Cafés and other distribution channels. As of December 31, 2019, our principal subsidiaries included: •Capital One Bank (USA ), National Association ("COBNA"), which offers credit and debit card products, other lending products and deposit products; and
•
banking products and financial services to consumers, small businesses and
commercial clients.
The Company is hereafter collectively referred to as "we," "us" or "our." COBNA and CONA are collectively referred to as the "Banks." We also offer products outside ofthe United States of America ("U.S.") principally throughCapital One (Europe) plc ("COEP"), an indirect subsidiary of COBNA organized and located in theUnited Kingdom ("U.K."), and through a branch of COBNA inCanada . COEP has authority, among other things, to provide credit card loans. Our branch of COBNA inCanada also has the authority to provide credit card loans. Our principal operations are organized for management reporting purposes into three major business segments, which are defined primarily based on the products and services provided or the types of customer served: Credit Card, Consumer Banking and Commercial Banking. We provide details on our business segments, the integration of recent acquisitions, if any, into our business segments and the allocation methodologies and accounting policies used to derive our business segment results in "Note 17-Business Segments and Revenue from Contracts with Customers." Basis of Presentation and Use of Estimates The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in theU.S. ("U.S. GAAP"). The preparation of the consolidated financial statements in conformity withU.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and in the related disclosures. These estimates are based on information available as of the date of the consolidated financial statements. While management makes its best judgments, actual amounts or results could differ from these estimates. Certain prior period amounts have been reclassified to conform to the current period presentation. Principles of Consolidation The consolidated financial statements include the accounts ofCapital One Financial Corporation and all other entities in which we have a controlling financial interest. We determine whether we have a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity ("VOE") or a variable interest entity ("VIE"). All significant intercompany account balances and transactions have been eliminated. Voting Interest Entities VOEs are entities that have sufficient equity and provide the equity investors voting rights that give them the power to make significant decisions relating to the entity's operations. Since a controlling financial interest in an entity is typically obtained through ownership of a majority voting interest, we consolidate our majority-owned subsidiaries and other voting interest entities in which we hold, directly or indirectly, more than 50% of the voting rights or where we exercise control through other contractual rights. Investments in which we do not hold a controlling financial interest but have significant influence over the entity's financial and operating decisions (generally defined as owning a voting interest of 20% to 50%) are accounted for under the equity method. If we own less than 20% of a voting interest entity, we measure equity investments at fair value with changes in fair value recorded
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
through net income, except those that do not have a readily determinable fair
value (for which a measurement alternative is applied). We report equity
investments in other assets on our consolidated balance sheets and include our
share of income or loss and dividends from those investments in other
non-interest income in our consolidated statements of income.
Variable Interest Entities
VIEs are entities that, by design, either (i) lack sufficient equity to permit
the entity to finance its activities without additional subordinated financial
support from other parties; or (ii) have equity investors that do not have the
ability to make significant decisions relating to the entity's operations
through voting rights, or do not have the obligation to absorb the expected
losses, or do not have the right to receive the residual returns of the entity.
The entity that is deemed the primary beneficiary of a VIE is required to
consolidate the VIE. An entity is deemed to be the primary beneficiary of a VIE
if that entity has both (i) the power to direct the activities of the VIE that
most significantly impact the VIE's economic performance; and (ii) the
obligation to absorb losses or the right to receive benefits that could
potentially be significant to the VIE.
In determining whether we are the primary beneficiary of a VIE, we consider both
qualitative and quantitative factors regarding the nature, size and form of our
involvement with the VIE, such as our role in establishing the VIE and our
ongoing rights and responsibilities; our economic interests, including debt and
equity investments, servicing fees and other arrangements deemed to be variable
interests in the VIE; the design of the VIE, including the capitalization
structure, subordination of interests, payment priority, relative share of
interests held across various classes within the VIE's capital structure and the
reasons why the interests are held by us.
We perform on-going reassessments to evaluate whether changes in an entity's
capital structure or changes in the nature of our involvement with the entity
result in a change to the VIE designation or a change to our consolidation
conclusion. See "Note 5-Variable Interest Entities and Securitizations" for
further details.
Cash and Cash Equivalents
Cash and cash equivalents include cash and due from banks, interest-bearing
deposits and other short-term investments, all of which, if applicable, have
stated maturities of three months or less when acquired.
Securities Resale and Repurchase Agreements
Securities purchased under resale agreements and securities loaned or sold under
agreements to repurchase, principally U.S. government and agency obligations,
are not accounted for as sales but as collateralized financing transactions and
recorded at the amounts at which the securities were acquired or sold, plus
accrued interest. We continually monitor the market value of these securities
and deliver additional collateral to or obtain additional collateral from
counterparties, as appropriate. See "Note 8-Deposits and Borrowings" for further
details.
Investment Securities
Our investment 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. The accounting and
measurement framework for our investment securities differs depending on the
security classification. We classify securities as available for sale or held to
maturity based on our investment strategy and management's assessment of our
intent and ability to hold the securities until maturity. Securities that we may
sell prior to maturity in response to changes in our investment strategy,
liquidity needs, interest rate risk profile or for other reasons are classified
as available for sale. Securities that we have the intent and ability to hold
until maturity are classified as held to maturity.
We report securities available for sale on our consolidated balance sheets at
fair value with unrealized gains or losses recorded, net of tax, as a component
of accumulated other comprehensive income ("AOCI"). We report securities held to
maturity on our consolidated balance sheets at carrying value, which generally
equals amortized cost. Amortized cost reflects historical cost adjusted for
amortization of premiums, accretion of discounts and any previously recorded
impairments. Investment securities transferred into the held to maturity
category from the available for sale category are recorded at fair value at the
date of transfer. Any unrealized gains or losses at the transfer date are
thereafter included in AOCI. Such unrealized gains or losses are accreted over
the remaining life of the security and are expected to offset the amortization
of the related premium or discount created upon the investment securities
transfer into the held to maturity category, with no expected impact on future
net income.
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unamortized premiums, discounts and other basis adjustments are recognized in
interest income over the contractual lives of the securities using the effective
interest method. We record purchases and sales of investment securities on a
trade date basis. Realized gains or losses from the sale of debt securities are
computed using the first in first out method of identification, and are included
in non-interest income in our consolidated statements of income. If we intend to
sell an available for sale security in an unrealized loss position or it is more
likely than not that we will be required to sell the security prior to recovery
of its amortized cost basis, the entire difference between the amortized cost
basis of the security and its fair value is recognized in our consolidated
statements of income.
We regularly evaluate our securities whose fair values have declined below
amortized cost to assess whether the decline in fair value represents an other
than temporary impairment ("OTTI"). We discuss our assessment and accounting for
OTTI in "Note 2-Investment Securities." We discuss the techniques we use in
determining the fair value of our investment securities in "Note 16-Fair Value
Measurement."
Our investment portfolio also includes certain acquired debt securities that
were deemed to be credit impaired at the acquisition date, and therefore are
accounted for in accordance with accounting guidance for purchased
credit-impaired ("PCI") loans and debt securities. These securities are recorded
at fair value at the acquisition date using the estimated cash flows we expect
to collect discounted by the prevailing market interest rate. The difference
between the contractually required payments due and the undiscounted cash flows
we expect to collect at acquisition, considering the impact of prepayments, is
referred to as the nonaccretable difference. The nonaccretable difference
reflects estimated future credit losses expected to be incurred over the life of
the security, and is recorded as a discount to the related debt security on our
consolidated balance sheet. The excess of the undiscounted cash flows expected
to be collected over the estimated fair value of credit-impaired debt securities
at acquisition is referred to as the accretable yield, which is accreted into
interest income using an effective yield method over the remaining life of the
security. Further decreases in expected cash flows attributable to credit result
in the recognition of OTTI. Significant increases in expected cash flows are
recognized prospectively over the remaining life of the security as an
adjustment to the accretable yield. See the "Loans Acquired" section of this
Note for further discussion of accounting guidance for PCI loans and debt
securities.
Loans
Our loan portfolio consists of loans held for investment, including loans
underlying our consolidated securitization trusts, and loans held for sale, and
is divided into three portfolio segments: credit card, consumer banking and
commercial banking loans. Credit card loans consist of domestic and
international credit card loans. Consumer banking loans consist of auto and
retail banking loans. Commercial banking loans consist of commercial and
multifamily real estate as well as commercial and industrial loans.
Loan Classification
Upon origination or purchase, we classify loans as held for investment or held
for sale based on our investment strategy and management's intent and ability
with regard to the loans, which may change over time. The accounting and
measurement framework for loans differs depending on the loan classification,
whether we elect the fair value option, whether the loans are originated or
purchased and whether purchased loans are considered credit-impaired at the date
of acquisition. The presentation within the consolidated statements of cash
flows is based on management's intent at acquisition or origination. Cash flows
related to loans held for investment are included in cash flows from investing
activities on our consolidated statements of cash flows. Cash flows related to
loans held for sale are included in cash flows from operating activities on our
consolidated statements of cash flows.
Loans Held for Investment
Loans that we have the ability and intent to hold for the foreseeable future and
loans associated with consolidated securitization transactions are classified as
held for investment. Loans classified as held for investment, except PCI loans
described below, are reported at their amortized cost, which is the outstanding
principal balance, adjusted for any unearned income, unamortized deferred fees
and costs, unamortized premiums and discounts and charge-offs. Credit card loans
also include billed finance charges and fees, net of the estimated uncollectible
amount.
Interest income is recognized on performing loans held for investment on an
accrual basis. We defer loan origination fees and direct loan origination costs
on originated loans, premiums and discounts on purchased loans and loan
commitment fees. We recognize these amounts in interest income as yield
adjustments over the life of the loan and/or commitment period using the
effective interest method. For credit card loans, loan origination fees and
direct loan origination costs are amortized on a straight-
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
line basis over a 12-month period. Loans held for investment are subject to our
allowance for loan and lease losses methodology described below under "Allowance
for Loan and Lease Losses."
Loans Held for Sale
Loans purchased or originated with the intent to sell or for which we do not
have the ability and intent to hold for the foreseeable future are classified as
held for sale. Multifamily commercial real estate loans originated with the
intent to sell to government-sponsored enterprises are accounted for under the
fair value option. We elect the fair value option on these loans as part of our
management of interest rate risk with corresponding forward sale commitments.
Loan origination fees and direct loan origination costs are recognized as
incurred and are reported in other non-interest income in the consolidated
statements of income. Interest income is calculated based on the loan's stated
rate of interest and is reported in interest income in the consolidated
statements of income. Fair value adjustments are recorded in other non-interest
income in the consolidated statements of income.
All other loans classified as held for sale are recorded at the lower of cost or
fair value. Loan origination fees, direct loan origination costs and any
discounts and premiums are deferred until the loan is sold and are then
recognized as part of the total gain or loss on sale. The fair value of these
loans is determined on an aggregate portfolio basis for each loan type. Fair
value adjustments are recorded in other non-interest income in the consolidated
statements of income.
If a loan is transferred from held for investment to held for sale, then on the
transfer date, any decline in fair value related to credit is recorded as a
charge-off. Subsequent to transfer, we report write-downs or recoveries in fair
value up to the carrying value at the date of transfer and realized gains or
losses on loans held for sale in our consolidated statements of income as a
component of other non-interest income.
We calculate the gain or loss on loan sales as the difference between the
proceeds received and the carrying value of the loans sold, net of the fair
value of any residual interests retained.
Loans Acquired
All purchased loans, including loans transferred in a business combination, are
initially recorded at fair value, which includes consideration of expected
future losses, as of the date of the acquisition. To determine the fair value of
loans at acquisition, we estimate discounted contractual cash flows due using an
observable market rate of interest, when available, adjusted for factors that a
market participant would consider in determining fair value. In determining fair
value, contractual cash flows are adjusted to include prepayment estimates based
upon trends in default rates and loss severities. The difference between the
fair value and the contractual cash flows is recorded as a loan discount or
premium at acquisition. Subsequent to acquisition, the loans are classified and
accounted for as either held for investment or held for sale based on
management's ability and intent with regard to the loans. Loans held for
investment are subject to our allowance for loan and lease losses methodology
described below under "Allowance for Loan and Lease Losses." We account for
purchased loans under the accounting guidance for purchased credit-impaired
loans and debt securities, which is based upon expected cash flows, if the
purchased loans have a discount attributable, at least in part, to credit
deterioration and they are not specifically scoped out of the guidance. We refer
to these purchased loans that are subsequently accounted for based on expected
cash flows to be collected as "PCI loans." Other purchased loans that do not
meet the criteria described above or are specifically scoped out of this
guidance are accounted for based on contractual cash flows.
Loans Acquired and Accounted for Based on Expected Cash Flows
For PCI loans, the excess of cash flows expected to be collected over the
estimated fair value of purchased loans is referred to as the accretable yield.
This amount is not recorded on our consolidated balance sheets, but is accreted
into interest income over the life of the loan, or pool of loans, using the
effective interest method. The difference between total contractual payments on
the loans and all expected cash flows represents the nonaccretable difference or
the amount of principal and interest not considered collectible. We may
aggregate loans acquired in the same fiscal quarter into one or more pools if
the loans have common risk characteristics. A pool is then accounted for as a
single asset, with a single composite interest rate and an aggregate fair value
and expected cash flows.
Subsequent to acquisition, changes in the estimated cash flows expected to be
collected may result in changes in the accretable yield and nonaccretable
difference or reclassifications from the nonaccretable difference to the
accretable yield. Decreases in
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
expected cash flows resulting from credit deterioration subsequent to
acquisition will generally result in an impairment charge recognized in our
provision for credit losses and an increase in the allowance for loan and lease
losses. Significant increases in the cash flows expected to be collected would
first reduce any previously recorded allowance for loan and lease losses. The
excess over the recorded allowance for loan and lease losses would result in a
reclassification to the accretable yield from the nonaccretable difference and
an increase in interest income recognized over the remaining life of the loan or
pool of loans. Disposals of loans in the form of sales to third parties, receipt
of payment in full or in part by the borrower, and foreclosure of the
collateral, result in removal of the loan from the PCI loans portfolio. See
"Note 3-Loans" for additional information.
Loan Modifications and Restructurings
As part of our loss mitigation efforts, we may provide modifications to a
borrower experiencing financial difficulty to improve the long-term
collectability of the loan and to avoid the need for foreclosure or repossession
of collateral, if any. A loan modification in which a concession is granted to a
borrower experiencing financial difficulty is accounted for and reported as a
troubled debt restructuring ("TDR"). Our loan modifications typically include an
extension of the loan term, a reduction in the interest rate, a reduction in the
loan balance, or a combination of these concessions. We describe our accounting
for and measurement of impairment on TDR loans below under "Impaired Loans." See
"Note 3-Loans" for additional information on our loan modifications and
restructurings.
Delinquent and Nonperforming Loans
The entire balance of a loan is considered contractually delinquent if the
minimum required payment is not received by the first statement cycle date equal
to or following the due date specified on the customer's billing statement.
Delinquency is reported on loans that are 30 or more days past due. Interest and
fees continue to accrue on past due loans until the date the loan is placed on
nonaccrual status, if applicable. We generally place loans on nonaccrual status
when we believe the collectability of interest and principal is not reasonably
assured.
Nonperforming loans generally include loans that have been placed on nonaccrual
status. We do not report loans classified as held for sale as nonperforming.
Our policies for classifying loans as nonperforming, by loan category, are as
follows:
• Credit card loans: As permitted by regulatory guidance issued by the Federal
Financial Institutions Examination Council ("FFIEC"), our policy is
generally to exempt credit card loans from being classified as
nonperforming, as these loans are generally charged off in the period theaccount becomes 180 days past due. Consistent with industry conventions, we
generally continue to accrue interest and fees on delinquent credit card
loans until the loans are charged-off.
• Consumer banking loans: We classify consumer banking loans as nonperforming
when we determine that the collectability of all interest and principal on
the loan is not reasonably assured, generally when the loan becomes 90 days
past due.
• Commercial banking loans: We classify commercial banking loans as
nonperforming as of the date we determine that the collectability of all
interest and principal on the loan is not reasonably assured.
• Modified loans and troubled debt restructurings: Modified loans, including
TDRs, that are current at the time of the restructuring remain on accrual
status if there is demonstrated performance prior to the restructuring and
continued performance under the modified terms is expected. Otherwise, the
modified loan is classified as nonperforming.
• PCI loans: PCI loans are not classified as delinquent or nonperforming.
Interest and fees accrued but not collected as of the date a loan is placed on nonaccrual status are reversed against earnings. In addition, the amortization of net deferred loan fees is suspended. Interest and fee income is subsequently recognized only upon the receipt of cash payments. However, if there is doubt regarding the ultimate collectability of loan principal, cash received is generally applied against the principal balance of the loan. Nonaccrual loans are generally returned to accrual status when all principal and interest is current and repayment of the remaining contractual principal and interest is reasonably assured, or when the loan is both well-secured and in the process of collection and collectability is no longer doubtful.
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Impaired Loans
A loan is considered 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 held for sale are not
reported as impaired, as these loans are recorded at either fair value (if we
elect the fair value option) or at the lower of cost or fair value. Impaired
loans also exclude PCI loans, as these loans are accounted for based on expected
cash flows at acquisition because this accounting methodology takes into
consideration future credit losses.
Loans defined as individually impaired, based on applicable accounting guidance,
include larger-balance nonperforming loans and TDR loans. Loans modified in a
TDR continue to be reported as impaired until maturity. Our policies for
identifying loans as individually impaired, by loan category, are as follows:
• Credit card loans: Credit card loans that have been modified in a troubled
debt restructuring are identified and accounted for as individually
impaired.
• Consumer banking loans: Consumer loans that have been modified in a troubled
debt restructuring are identified and accounted for as individually
impaired.
• Commercial banking loans: Commercial loans classified as nonperforming and
commercial loans that have been modified in a troubled debt restructuring
are reported as individually impaired.
The majority of individually impaired loans are evaluated for an asset-specific allowance. We generally measure impairment and the related asset-specific allowance for individually impaired loans based on the difference between the recorded investment of the loan and the present value of the expected future cash flows, discounted at the original effective interest rate of the loan at the time of modification. If the loan is collateral dependent, we measure impairment based upon the fair value of the underlying collateral, which we determine based on the current fair value of the collateral less estimated selling costs. Loans are identified as collateral dependent if we believe the collateral will be the primary source of repayment. Charge-Offs We charge off loans as a reduction to the allowance for loan and lease losses when we determine the loan is uncollectible and we record subsequent recoveries of previously charged off amounts as an increase to the allowance for loan and lease losses. We exclude accrued and unpaid finance charges and fees and certain fraud losses from charge-offs. Costs to recover charged-off loans are recorded as collection expense and included in our consolidated statements of income as a component of other non-interest expense as incurred. Our charge-off time frames by loan type are presented below. • Credit card loans: We generally charge off credit card loans in the period
the account becomes 180 days past due. We charge off delinquent credit card
loans for which revolving privileges have been revoked as part of loan
workouts when the account becomes 120 days past due. Credit card loans in
bankruptcy are generally charged-off by the end of the month following 30
days after the receipt of a complete bankruptcy notification from the
bankruptcy court. Credit card loans of deceased account holders are
generally charged off 5 days after receipt of notification.
• Consumer banking loans: We generally charge off consumer banking loans at
the earlier of the date when the account is a specified number of days past
due or upon repossession of the underlying collateral. Our charge-off period
for auto loans is 120 days past due. Small business banking loans generally
charge off at 120 days past due based on the date unpaid principal loan
amounts are deemed uncollectible. Auto loans that have not been previously
charged off where the borrower has filed for bankruptcy and the loan has not
been reaffirmed charge off in the period that the loan is 60 days from the
bankruptcy notification date, regardless of delinquency status. Auto loans
that have not been previously charged off and have been discharged under
Chapter 7 bankruptcy are charged off at the end of the month in which the
bankruptcy discharge occurs. Remaining consumer loans generally are charged
off within 40 days of receipt of notification from the bankruptcy court.
Consumer loans of deceased account holders are charged off by the end of the
month following 60 days of receipt of notification.
• Commercial banking loans: We charge off commercial loans in the period we
determine that the unpaid principal loan amounts are uncollectible.
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• PCI loans: We do not record charge-offs on PCI loans that are meeting or
exceeding our performance expectations as of the date of acquisition, as the
fair values of these loans already reflect a discount for expected future
credit losses. We record charge-offs on PCI loans only if actual losses
exceed estimated credit losses incorporated into the fair value recorded at
acquisition.
Allowance for Loan and Lease Losses
We maintain an allowance for loan and lease losses ("allowance") that represents
management's best estimate of incurred loan and lease losses inherent in our
loans held for investment portfolio as of each balance sheet date. The provision
for credit losses reflects credit losses we believe have been incurred and will
eventually be recognized over time in our charge-offs. Charge-offs of
uncollectible amounts are deducted from the allowance and subsequent recoveries
are added back.
Management performs a quarterly analysis of our loan portfolio to determine if
impairment has occurred and to assess the adequacy of the allowance based on
historical and current trends as well as other factors affecting credit losses.
We apply documented systematic methodologies to separately calculate the
allowance for our credit card, consumer banking and commercial banking loan
portfolios. Our allowance for loan and lease losses consists of three components
that are allocated to cover the estimated probable losses in each loan portfolio
based on the results of our detailed review and loan impairment assessment
process: (i) a component for loans collectively evaluated for impairment; (ii)
an asset-specific component for individually impaired loans; and (iii) a
component related to PCI loans that have experienced significant decreases in
expected cash flows subsequent to acquisition. Each of our allowance components
is supplemented by an amount that represents management's qualitative judgment
of the imprecision and risks inherent in the processes and assumptions used in
establishing the allowance. Management's judgment involves an assessment of
subjective factors, such as process risk, modeling assumption and adjustment
risks, and probable internal and external events that will likely impact losses.
Our credit card and consumer banking loan portfolios consist of smaller-balance,
homogeneous loans. The consumer banking loan portfolio is divided into two
primary portfolio segments: auto loans and retail banking loans. The credit card
and consumer banking loan portfolios are further divided by our business units
into groups based on common risk characteristics, such as origination year,
contract type, interest rate, credit bureau score and geography, which are
collectively evaluated for impairment. The commercial banking loan portfolio is
primarily composed of larger-balance, non-homogeneous loans. These loans are
subject to individual reviews that result in internal risk ratings. In assessing
the risk rating of a particular loan, among the factors we consider are the
financial condition of the borrower, geography, collateral performance,
historical loss experience and industry-specific information that management
believes is relevant in determining the occurrence of a loss event and measuring
impairment. These factors are based on an evaluation of historical and current
information, and involve subjective assessment and interpretation. Emphasizing
one factor over another or considering additional factors could impact the risk
rating assigned to that loan.
The component of the allowance related to credit card and consumer banking loans
that we collectively evaluate for impairment is based on a statistical
calculation, which is supplemented by management judgment as described above.
Because of the homogeneous nature of our consumer banking loan portfolios, the
allowance is based on the aggregated portfolio segment evaluations. The
allowance is established through a process that begins with estimates of
incurred losses in each pool based upon various statistical analyses. Loss
forecast models are utilized to estimate probable losses incurred and consider
several portfolio indicators including, but not limited to, historical loss
experience, account seasoning, the value of collateral underlying secured loans,
estimated foreclosures or defaults based on observable trends, delinquencies,
bankruptcy filings, unemployment, credit bureau scores and general economic and
business trends. Management believes these factors are relevant in estimating
probable losses incurred and also considers an evaluation of overall portfolio
credit quality based on indicators such as changes in our credit evaluation,
underwriting and collection management policies, the effect of other external
factors such as competition and legal and regulatory requirements, general
economic conditions and business trends, and uncertainties in forecasting and
modeling techniques used in estimating our allowance. We update our credit card
and consumer banking loss forecast models and portfolio indicators on a
quarterly basis to incorporate information reflective of the current economic
environment.
The component of the allowance for commercial banking loans that we collectively
evaluate for impairment is based on our historical loss experience for loans
with similar risk characteristics and consideration of the current credit
quality of the portfolio, which is supplemented by management judgment as
described above. We apply internal risk ratings to commercial banking loans,
which we use to assess credit quality and derive a total loss estimate based on
an estimated probability of default ("default rate") and loss given default
("loss severity"). Management may also apply judgment to adjust the loss factors
derived, taking into consideration both quantitative and qualitative factors,
including general economic conditions, industry-specific and geographic
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trends, portfolio concentrations, trends in internal credit quality indicators,
and current and past underwriting standards that have occurred but are not yet
reflected in the historical data underlying our loss estimates.
The asset-specific component of the allowance covers smaller-balance homogeneous
credit card and consumer banking loans whose terms have been modified in a TDR
and larger-balance nonperforming, non-homogeneous commercial banking loans. As
discussed above under "Impaired Loans," we generally measure the asset-specific
component of the allowance based on the difference between the recorded
investment of individually impaired loans and the present value of expected
future cash flows. The asset-specific component of the allowance for
smaller-balance impaired loans is calculated on a pool basis using historical
loss experience for the respective class of assets. The asset-specific component
of the allowance for larger-balance impaired loans is individually calculated
for each loan. Key considerations in determining the allowance include the
borrower's overall financial condition, resources and payment history, prospects
for support from financially responsible guarantors, and when applicable, the
estimated realizable value of any collateral.
Applicable accounting guidance prohibits the carry over or creation of valuation
allowances in the initial accounting for impaired loans acquired. See
"Note 3-Loans" for information on loan portfolios associated with acquisitions.
In addition to the allowance, we also estimate probable losses related to
contractually binding unfunded lending commitments. The provision for unfunded
lending commitments is included in the provision for credit losses in our
consolidated statements of income and the related reserve is included in other
liabilities on our consolidated balance sheets. Unfunded lending commitments are
subject to individual reviews and are analyzed and segregated by risk according
to our internal risk rating scale, which we use to assess credit quality and
derive a total loss estimate. We assess these risk classifications, taking into
consideration both quantitative and qualitative factors, including historical
loss experience, utilization assumptions, current economic conditions,
performance trends within specific portfolio segments and other pertinent
information to estimate the reserve for unfunded lending commitments.
Determining the appropriateness of the allowance and the reserve for unfunded
lending commitments is complex and requires judgment by management about the
effect of matters that are inherently uncertain. Subsequent evaluations of the
loan portfolio, in light of the factors then prevailing, may result in
significant changes in the allowance and the reserve for unfunded lending
commitments in future periods. See "Note 4-Allowance for Loan and Lease Losses
and Reserve for Unfunded Lending Commitments" for additional information.
Securitization of Loans
Our loan securitization activities primarily involve the securitization of
credit card and auto loans, which provides a source of funding for us. See
"Note 5-Variable Interest Entities and Securitizations" for additional details.
Loan securitization involves the transfer of a pool of loan receivables from our
portfolio to a trust. The trust then sells an undivided interest in the pool of
loan receivables to third-party investors through the issuance of debt
securities and transfers the proceeds from the debt issuance to us as
consideration for the loan receivables transferred. The debt securities are
collateralized by the loan receivables transferred from our portfolio. We remove
loans from our consolidated balance sheets when securitizations qualify as sales
to non-consolidated VIEs, recognize assets retained and liabilities assumed at
fair value and record a gain or loss on the transferred loans. Alternatively,
when the transfer does not qualify as a sale but instead is considered a secured
borrowing, the assets will remain on our consolidated balance sheets with an
offsetting liability recognized for the amount of proceeds received.
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Premises, Equipment and Leases
Premises and Equipment
Premises and equipment, including leasehold improvements, are carried at cost
less accumulated depreciation and amortization. Land is carried at cost. We
capitalize direct costs incurred during the application development stage of
internally developed software projects. Depreciation and amortization expenses
are calculated using the straight-line method over the estimated useful lives of
the assets. Useful lives for premises and equipment are estimated as follows:
Premises and Equipment Useful Lives
Buildings and improvements 5-39 years
Furniture and equipment 3-10 years
Computer software 3 years
Leasehold improvements Lesser of the useful
life or the remaining
lease term
Expenditures for maintenance and repairs are expensed as incurred and gains or
losses upon disposition are recognized in our consolidated statements of income
as realized. See "Note 7-Premises, Equipment and Leases" for additional
information.
Leases
Lease classification is determined at inception for all lease transactions with
an initial term greater than one year. Operating leases are included as
right-of-use ("ROU") assets within other assets, and operating lease liabilities
are classified as other liabilities on our consolidated balance sheets. Finance
leases are included in premises and equipment, and other borrowings on our
consolidated balance sheets. Our operating lease expense is included in
occupancy and equipment within non-interest expense in our consolidated
statements of income. Lease expense for minimum lease payments are recognized on
a straight-line basis over the lease term. See "Note 7-Premises, Equipment and
Leases" for additional information.
Goodwill and Intangible Assets
Goodwill represents the excess of the acquisition price of an acquired business
over the fair value of assets acquired and liabilities assumed and is assigned
to one or more reporting units at the date of acquisition. A reporting unit is
defined as an operating segment, or a business unit that is one level below an
operating segment. We have four reporting units: Credit Card, Auto, Other
Consumer Banking and Commercial Banking. Goodwill is not amortized but is tested
for impairment at the reporting unit level annually or more frequently if
adverse circumstances indicate that it is more likely than not that the carrying
amount of a reporting unit exceeds its fair value. These indicators could
include a sustained, significant decline in the Company's stock price, a decline
in expected future cash flows, significant disposition activity, a significant
adverse change in the economic or business environment, and the testing for
recoverability of a significant asset group, among others.
Intangible assets with finite useful lives are amortized on either an
accelerated or straight-line basis over their estimated useful lives and are
evaluated for impairment whenever events or changes in circumstances indicate
the carrying amount of the assets may not be recoverable. See "Note 6-Goodwill
and Intangible Assets" for additional information.
Mortgage Servicing Rights
Mortgage servicing rights ("MSRs") are initially recorded at fair value when
mortgage loans are sold or securitized in the secondary market and the right to
service these loans is retained for a fee. Commercial MSRs are subsequently
accounted for under the amortization method. We evaluate for impairment as of
each reporting date and recognize any impairment in other non-interest income.
See "Note 6-Goodwill and Intangible Assets" for additional information.
Foreclosed Property and Repossessed Assets
Foreclosed property and repossessed assets obtained through our lending
activities typically include commercial real estate or personal property, such
as automobiles, and are recorded at net realizable value. For foreclosed
property and repossessed assets, we generally reclassify the loan to repossessed
assets upon repossession of the property in satisfaction of the loan. Net
realizable
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value is the estimated fair value of the underlying collateral less estimated
selling costs and is based on appraisals, when available. Subsequent to initial
recognition, foreclosed property and repossessed assets are recorded at the
lower of our initial cost basis or net realizable value, which is routinely
monitored and updated. Any changes in net realizable value and gains or losses
realized from disposition of the property are recorded in other non-interest
expense. See "Note 16-Fair Value Measurement" for details.
Restricted Equity Investments
We have investments in Federal Home Loan Banks ("FHLB") stock and in the Board
of Governors of the Federal Reserve System ("Federal Reserve") stock. These
investments, which are included in other assets on our consolidated balance
sheets, are not marketable, are carried at cost, and if there is any indicator
of impairment are reviewed for impairment.
Litigation
In accordance with the current accounting standards for loss contingencies, we
establish reserves for litigation-related matters, including mortgage
representation and warranty related matters, that arise from the ordinary course
of our business activities when it is probable that a loss associated with a
claim or proceeding has been incurred and the amount of the loss can be
reasonably estimated. Professional service fees, including lawyers' and experts'
fees, expected to be incurred in connection with a loss contingency are expensed
as services are provided. See "Note 18-Commitments, Contingencies, Guarantees
and Others" for additional information.
Customer Rewards Reserve
We offer products, primarily credit cards, which include programs that allow
members to earn rewards based on account activity that can be redeemed for cash
(primarily in the form of statement credits), gift cards, travel, or covering
eligible charges. The amount of reward that a customer earns varies based on the
terms and conditions of the rewards program and product. When rewards are earned
by a customer, rewards expense is generally recorded as an offset to interchange
income, with a corresponding increase to the customer rewards reserve. The
customer rewards reserve is computed based on the estimated future cost of
earned rewards that are expected to be redeemed and is reduced as rewards are
redeemed. In estimating the customer rewards reserve, we consider historical
redemption and spending behavior, as well as the terms and conditions of the
current rewards programs, among other factors. We expect the vast majority of
all rewards earned will eventually be redeemed. The customer rewards reserve,
which is included in other liabilities on our consolidated balance sheets,
totaled $4.7 billion and $4.3 billion as of December 31, 2019 and 2018,
respectively.
Revenue Recognition
Interest Income and Fees
Interest income and fees on loans and investment securities are recognized based
on the contractual provisions of the underlying arrangements.
Loan origination fees and costs and premiums and discounts on loans held for
investment are deferred and generally amortized into interest income as yield
adjustments over the contractual life and/or commitment period using the
effective interest method. Costs deferred include direct origination costs such
as bounties paid to third parties for new accounts and incentives paid to our
network of auto dealers for loan referrals. In certain circumstances, we elect
to factor prepayment estimates into the calculation of the constant effective
yield necessary to apply the interest method. Prepayment estimates are based on
historical prepayment data, existing and forecasted interest rates, and economic
data. For credit card loans, loan origination fees and direct loan origination
costs are amortized on a straight-line basis over a 12-month period.
Unamortized premiums, discounts and other basis adjustments on investment
securities are recognized in interest income over the contractual lives of the
securities using the effective interest method.
Finance charges and fees on credit card loans are recorded in revenue when
earned. Billed finance charges and fees on credit card loans are included in
loan receivables net of amounts that we consider uncollectible. Unbilled finance
charges and fees on credit card loans are included in interest receivable on our
consolidated balance sheets. Annual membership fees are classified as service
charges and other customer-related fees on our consolidated statements of income
and are deferred and amortized into income over 12 months on a straight-line
basis. We continue to accrue finance charges and fees on credit card loans until
the account is
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charged-off. Our methodology for estimating the uncollectible portion of billed
finance charges and fees is consistent with the methodology we use to estimate
the allowance for incurred principal losses on our credit card loan receivables.
Interchange Income
Interchange income represents fees for standing ready to authorize and providing
settlement on credit and debit card transactions processed through the
MasterCard® ("MasterCard") and Visa® ("Visa") interchange networks. The levels
and structure of interchange rates are set by MasterCard and Visa and can vary
based on cardholder purchase volumes, among other factors. We recognize
interchange income upon settlement with the interchange networks. See
"Note 17-Business Segments and Revenue from Contracts with Customers" for
additional details.
Card Partnership Agreements
We have contractual agreements with certain retailers and other partners to
provide lending and other services to mutual customers. We primarily issue
private-label and cobrand credit card loans to these customers over the term of
the partnership agreements, which typically range from two years to ten years.
Certain partners assist in or perform marketing activities on our behalf and
promote our products and services to their customers. As compensation for
providing these services, we often pay royalties, bounties or other special
bonuses to these partners. Depending upon the nature of the payments, they are
recorded as a reduction of revenue, marketing expenses or other operating
expenses. Credit card partnership agreements may also provide for profit or
revenue sharing which are presented as a reduction of the related revenue line
item when owed to the partner.
When a partner agrees to share a portion of the credit losses associated with
the partnership, we must determine whether to report the sharing of losses on a
gross or net basis in our consolidated financial statements. We evaluate the
contractual provisions for the loss share payments and applicable accounting
guidance to determine how to present the impact of the partnership agreement in
our consolidated financial statements. Our consolidated net income is the same
regardless of how revenue and loss sharing arrangements are reported.
When loss sharing amounts due from partners are presented on a net basis, they
are recorded as a reduction to our provision for credit losses in our
consolidated statements of income and reduce the charge-off amounts that we
report. The allowance for loan and lease losses attributable to these portfolios
is also reduced by the expected reimbursements from these partners for loss
sharing amounts. See "Note 4-Allowance for Loan and Lease Losses and Reserve for
Unfunded Lending Commitments" for additional information related to our loss
sharing arrangements. For loss sharing arrangements presented on a gross basis,
any loss share payments due from the partner are recorded as a part of revenue,
and the allowance for loan and lease losses is not reduced by the expected loss
share reimbursements but rather, an indemnification asset is recorded.
Collaborative Arrangements
A collaborative arrangement is a contractual arrangement that involves a joint
operating activity between two or more parties that are active participants in
the activity. These parties are exposed to significant risks and rewards based
upon the economic success of the joint operating activity. We assess each of our
partnership agreements with profit, revenue or loss sharing payments to
determine if a collaborative arrangement exists and, if so, how revenue
generated from third parties, costs incurred and transactions between
participants in the collaborative arrangement should be accounted for and
reported on our consolidated financial statements. We currently have one
partnership agreement that meets the definition of a collaborative agreement.
We share a fixed percentage of revenues, consisting of finance charges and late
fees, with the partner, and the partner is required to reimburse us for a fixed
percentage of credit losses incurred. Revenues and losses related to the
partner's credit card program and partnership agreement are reported on a net
basis in our consolidated financial statements. Revenue sharing amounts
attributable to the partner are recorded as an offset against total net revenue
in our consolidated statements of income. Interest income was reduced by $1.0
billion, $1.3 billion and $1.2 billion in 2019, 2018 and 2017, respectively, for
amounts earned by the partner, as part of the partnership agreement. The impact
of all of our loss sharing arrangements that are presented on a net basis is
included in "Note 4-Allowance for Loan and Lease Losses and Reserve for Unfunded
Lending Commitments."
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Stock-Based Compensation
We are authorized to issue stock-based compensation to employees and directors
in various forms, primarily as restricted stock units, performance share units,
and stock options. In addition, we also issue cash equity units and cash-settled
restricted stock units which are not counted against the common shares reserved
for issuance or available for issuance because they are settled in cash.
For awards settled in shares, we generally recognize compensation expense on a
straight-line basis over the award's requisite service period based on the fair
value of the award at the grant date. If an award settled in shares contains a
performance condition with graded vesting, we recognize compensation expense
using the accelerated attribution method. Equity units and restricted stock
units that are cash-settled are accounted for as liability awards which results
in quarterly expense fluctuations based on changes in our stock price through
the date that the awards are settled. Awards that continue to vest after
retirement are expensed over the shorter of the time period between the grant
date and the final vesting period or between the grant date and when the
participant becomes retirement eligible. Awards to participants who are
retirement eligible at the grant date are subject to immediate expense
recognition. Stock-based compensation expense is included in salaries and
associate benefits in the consolidated statements of income.
Stock-based compensation expense for equity classified stock options is based on
the grant date fair value, which is estimated using a Black-Scholes option
pricing model. Significant judgment is required when determining the inputs into
the fair value model. For awards other than stock options, the fair value of
stock-based compensation used in determining compensation expense will generally
equal the fair market value of our common stock on the date of grant. Certain
share-settled awards have discretionary vesting conditions which result in the
remeasurement of these awards at fair value each reporting period and the
potential for compensation expense to fluctuate with changes in our stock price.
See "Note 13-Stock-Based Compensation Plans" for additional details.
Marketing Expenses
Marketing expense includes the cost of our various promotional efforts to
attract and retain customers such as advertising, promotional materials, and
certain customer incentives. We expense marketing costs as incurred.
Income Taxes
We recognize the current and deferred tax consequences of all transactions that
have been recognized in the financial statements using the provisions of the
enacted tax laws. Current income tax expense represents our estimated taxes to
be paid or refunded for the current period and includes income tax expense
related to our uncertain tax positions, as well as tax-related interest and
penalties. Deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax basis of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. We record valuation
allowances to reduce deferred tax assets to the amount that is more likely than
not to be realized. We record the effect of remeasuring deferred tax assets and
liabilities due to a change in tax rates or laws as a component of income tax
expense related to continuing operations for the period in which the change is
enacted. We subsequently release income tax effects stranded in AOCI using a
portfolio approach. Income tax benefits are recognized when, based on their
technical merits, they are more likely than not to be sustained upon
examination. The amount recognized is the largest amount of benefit that is more
likely than not to be realized upon settlement. See "Note 15-Income Taxes" for
additional details.
Earnings Per Share
Earnings per share is calculated and reported under the "two-class" method. The
"two-class" method is an earnings allocation method under which earnings per
share is calculated for each class of common stock and participating security
considering both dividends declared or accumulated and participation rights in
undistributed earnings as if all such earnings had been distributed during the
period. We have unvested share-based payment awards which have a right to
receive nonforfeitable dividends. These share-based payment awards are deemed to
be participating securities.
We calculate basic earnings per share by dividing net income, after deducting
dividends on preferred stock and participating securities as well as
undistributed earnings allocated to participating securities, by the average
number of common shares outstanding during the period, net of any treasury
shares. We calculate diluted earnings per share in a similar manner after
consideration of the potential dilutive effect of common stock equivalents on
the average number of common shares outstanding during the period. Common stock
equivalents include warrants, stock options, restricted stock awards and units,
and performance
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share awards and units. Common stock equivalents are calculated based upon the
treasury stock method using an average market price of common shares during the
period. Dilution is not considered when a net loss is reported. Common stock
equivalents that have an antidilutive effect are excluded from the computation
of diluted earnings per share. See "Note 12-Earnings Per Common Share" for
additional details.
Derivative Instruments and Hedging Activities
All derivative financial instruments, whether designated for hedge accounting or
not, are reported at their fair value on our consolidated balance sheets as
either assets or liabilities, with consideration of legally enforceable master
netting arrangements that allow us to net settle positive and negative positions
and offset cash collateral with the same counterparty. We report net derivatives
in a gain position, or derivative assets, on our consolidated balance sheets as
a component of other assets. We report net derivatives in a loss position, or
derivative liabilities, on our consolidated balance sheets as a component of
other liabilities. See "Note 9-Derivative Instruments and Hedging Activities"
for additional details.
Fair Value
Fair value, also referred to as an exit price, is defined as the price that
would be received for an asset or paid to transfer a liability in an orderly
transaction between market participants on the measurement date. The fair value
accounting guidance provides a three-level fair value hierarchy for classifying
financial instruments. This hierarchy is based on whether the inputs to the
valuation techniques used to measure fair value are observable or unobservable.
Fair value measurement of a financial asset or liability is assigned to a level
based on the lowest level of any input that is significant to the fair value
measurement in its entirety. The three levels of the fair value hierarchy are
described below:
Valuation is based on quoted prices (unadjusted) in active markets for
Level 1: identical assets or liabilities.
Level 2: Valuation is based on observable market-based inputs other than Level 1
prices, such as quoted prices for similar assets or liabilities, quoted
prices in markets that are not active, or other inputs that are
observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.Level 3: Valuation is generated from techniques that use significant assumptions
not observable in the market. Valuation techniques includepricing
models, discounted cash flow methodologies or similar techniques.
The accounting guidance for fair value requires that we maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value. The accounting guidance also provides for the irrevocable option to elect, on a contract-by-contract basis, to measure certain financial assets and liabilities at fair value at inception of the contract and record any subsequent changes to fair value in the consolidated statements of income. See "Note 16-Fair Value Measurement" for additional information. Accounting for Acquisitions We account for business combinations under the acquisition method of accounting. Under the acquisition method, tangible and intangible identifiable assets acquired, liabilities assumed and any noncontrolling interest in the acquiree are recorded at fair value as of the acquisition date, with limited exceptions. Transaction costs and costs to restructure the acquired company are expensed as incurred.Goodwill is recognized as the excess of the acquisition price over the estimated fair value of the identifiable net assets acquired. Likewise, if the fair value of the net assets acquired is greater than the acquisition price, a bargain purchase gain is recognized and recorded in other non-interest income. If the acquired set of activities and assets do not meet the accounting definition of a business, the transaction is accounted for as an asset acquisition. In an asset acquisition, the assets acquired are recorded at the purchase price plus any transaction costs incurred and no goodwill is recognized. 132Capital One Financial Corporation (COF)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounting Standards Adopted During the Twelve Months Ended December 31, 2019
Adoption Timing and
Standard Guidance Financial Statements
Impacts
Codification Clarifies the measurement We early adopted Topic 3
Improvements of the hedged item in fair of this guidance in the
Accounting Standards value hedges of interest fourth quarter of 2019 and
Update ("ASU") No. rate risk in partial-term applied the amendments
2019-04, Codification fair value hedges and the retrospectively as of
Improvements to Topic treatment of the basis January 1, 2018 (the date
326, Financial adjustments. we initially applied ASU
Instruments-Credit No. 2017-12).
Losses, Topic 815, Our adoption of this
Derivatives and Hedging, standard did not have a
and Topic 825, Financial material impact on our
Instruments consolidated financial
Topic 3: Codification statements.
Improvements to Update
2017-12 and Other Hedging
Items
Issued April 2019
Premium Amortization on Shortens the amortization We adopted this guidance
Callable Debt period from the in the first quarter of
Accounting Standards contractual life to the 2019 using the modified
Update No. 2017-08, earliest call date for retrospective method of
Receivables-Nonrefundable certain purchased callable adoption.
Fees and Other Costs debt securities held at a Our adoption of this
(Subtopic 310-20): premium. standard did not have a
Premium Amortization on material impact on our
Purchased Callable Debt consolidated financial
Securities statements.
Issued March 2017
Leases Requires lessees to We adopted this guidance
ASU No. 2016-02, Leases recognize right of use in the first quarter of
(Topic 842) assets and lease 2019, using the modified
Issued February 2016 liabilities on their retrospective method of
consolidated balance adoption without restating
sheets and disclose key prior periods.
information about all We elected the practical
their leasing expedients that permitted
arrangements, with certain us to not reassess the
practical expedients. lease classification of
existing leases, whether
existing contracts contain
a lease or the treatment
of initial direct costs on
existing leases.
Upon adoption, we recorded
a lease liability of $1.9
billion and right of use
asset of $1.6 billion,
which is net of other
lease-related balances.
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2-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 includeGovernment National Mortgage Association ("Ginnie Mae") guaranteed securities, Federal National Mortgage Association ("Fannie Mae") and Federal Home Loan Mortgage Corporation ("Freddie Mac") issued securities. The carrying value of our investments inU.S. Treasury and Agency securities represented 96% of our total investment securities portfolio as of both December 31, 2019 and 2018. On December 31, 2019, we transferred our entire portfolio of held to maturity securities to available for sale in consideration of changes to regulatory capital requirements under the Tailoring Rules, which no longer required us to include in regulatory capital certain elements of AOCI, including unrealized gains and losses from available for sale securities. On the date of transfer, these securities had a fair value of $33.2 billion, including pre-tax unrealized gains of $1.2 billion. The table below presents the amortized cost, gross unrealized gains and losses, and fair value of securities available for sale as of December 31, 2019 and 2018. Table 2.1: Investment Securities Available for Sale December 31, 2019 Gross Gross Amortized Unrealized Unrealized Fair (Dollars in millions) Cost Gains Losses Value Investment securities available for sale: U.S. Treasury securities $ 4,122 $ 6 $ (4 ) $ 4,124 RMBS: Agency 62,003 1,120 (284 ) 62,839 Non-agency 1,235 266 (2 ) 1,499 Total RMBS 63,238 1,386 (286 ) 64,338 Agency CMBS 9,303 165 (42 ) 9,426 Other securities(1) 1,321 4 0 1,325 Total investment securities available for sale $ 77,984 $ 1,561 $ (332 ) $ 79,213 December 31, 2018 Gross Gross Amortized Unrealized Unrealized Fair (Dollars in millions) Cost Gains Losses Value Investment securities available for sale: U.S. Treasury securities $ 6,146 $ 15 $ (17 ) $ 6,144 RMBS: Agency 32,710 62 (869 ) 31,903 Non-agency 1,440 304 (2 ) 1,742 Total RMBS 34,150 366 (871 ) 33,645 Agency CMBS 4,806 11 (78 ) 4,739 Other securities(1) 1,626 2 (6 ) 1,622
Total investment securities available for sale $ 46,728 $ 394 $ (972 ) $ 46,150
__________
(1) Includes primarily supranational bonds, foreign government bonds and other
asset-backed securities.
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Investment Securities in a Gross Unrealized Loss Position
The table below provides, by major security type, information about our
securities available for sale in a gross unrealized loss position and the length
of time that individual securities have been in a continuous unrealized loss
position as of December 31, 2019 and 2018.
Table 2.2: Securities in a Gross Unrealized Loss Position
December 31, 2019
Less than 12 Months 12 Months or Longer Total
Gross Gross Gross
Unrealized Unrealized Unrealized
(Dollars in millions) Fair Value Losses Fair Value Losses Fair Value Losses
Investment securities available
for sale:
U.S. Treasury securities $ 2,647 $ (4 ) $ 0 $ 0 $ 2,647 $ (4 )
RMBS:
Agency 10,494 (92 ) 10,567 (192 ) 21,061 (284 )
Non-agency 35 (1 ) 16 (1 ) 51 (2 )
Total RMBS 10,529 (93 ) 10,583 (193 ) 21,112 (286 )
Agency CMBS 2,580 (23 ) 1,563 (19 ) 4,143 (42 )
Other securities 126 0 106 0 232 0
Total investment securities
available for sale in a gross $ 15,882 $ (120 ) $ 12,252 $ (212 ) $ 28,134 $ (332 )
unrealized loss position
December 31, 2018
Less than 12 Months 12 Months or Longer Total
Gross Gross Gross
Unrealized Unrealized Unrealized
(Dollars in millions) Fair Value Losses Fair Value Losses Fair Value Losses
Investment securities available
for sale:
U.S. Treasury securities $ 2,543 $ (3 ) $ 1,076 $ (14 ) $ 3,619 $ (17 )
RMBS:
Agency 7,863 (260 ) 18,118 (609 ) 25,981 (869 )
Non-agency 89 (2 ) 10 0 99 (2 )
Total RMBS 7,952 (262 ) 18,128 (609 ) 26,080 (871 )
Agency CMBS 2,004 (31 ) 1,540 (47 ) 3,544 (78 )
Other securities 244 (1 ) 678 (5 ) 922 (6 )
Total investment securities
available for sale in a gross $ 12,743 $ (297 ) $ 21,422 $ (675 ) $ 34,165 $ (972 )
unrealized loss position
As of December 31, 2019, the amortized cost of approximately 900 securities available for sale exceeded their fair value by $332 million, of which $212 million related to securities that had been in a loss position for 12 months or longer.
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Maturities and Yields of Investment Securities
The table below summarizes, by major security type, the contractual maturities
and weighted-average yields of our investment securities as of December 31,
2019. Because borrowers may have the right to call or prepay certain
obligations, the expected maturities of our securities are likely to differ from
the scheduled contractual maturities presented below. The weighted-average yield
below represents the effective yield for the investment securities and is
calculated based on the amortized cost of each security.
Table 2.3: Contractual Maturities and Weighted-Average Yields of Securities
December 31, 2019
Due > 1 Year Due > 5 Years
Due in through through
(Dollars in millions) 1 Year or Less 5 Years 10 Years Due > 10 Years Total
Fair value of securities
available for sale:
U.S. Treasury securities $ 0 $ 1,476 $ 2,648 $ 0 $ 4,124
RMBS(1):
Agency 0 36 891 61,912 62,839
Non-agency 0 0 0 1,499 1,499
Total RMBS 0 36 891 63,411 64,338
Agency CMBS(1) 2 1,753 3,574 4,097 9,426
Other securities 501 557 267 0 1,325
Total securities available for
sale $ 503 $ 3,822 $ 7,380 $ 67,508 $ 79,213
Amortized cost of securities
available for sale $ 503 $ 3,816 $ 7,334 $ 66,331 $ 77,984
Weighted-average yield for 1.43 % 2.37 % 2.60 % 3.06 % 2.97 %
securities available for sale
__________
(1) As of December 31, 2019, the weighted-average expected maturities of RMBS
and Agency CMBS is 5.4 years for each portfolio.
Other-Than-Temporary Impairment We evaluate all securities in an unrealized loss position at least quarterly, and more often as market conditions require, to assess whether the impairment is other-than-temporary. Our OTTI assessment is based on a discounted cash flow analysis which requires careful use of judgments and assumptions. A number of qualitative and quantitative criteria may be considered in our assessment, as applicable, including the size and the nature of the portfolio; historical and projected performance such as prepayment, default and loss severity for the RMBS portfolio; recent credit events specific to the issuer and/or industry to which the issuer belongs; the payment structure of the security; external credit ratings of the issuer and any failure or delay of the issuer to make scheduled interest or principal payments; the value of underlying collateral; our intent and ability to hold the security; and current and projected market and macro-economic conditions. If we intend to sell a security in an unrealized loss position or it is more likely than not that we will be required to sell the security prior to recovery of its amortized cost basis, the entire difference between the amortized cost basis of the security and its fair value is recognized in earnings. As of December 31, 2019, we had sold all securities previously designated with the intent to sell, and did not intend to sell, nor believe that we will be required to sell, any other security in an unrealized loss position prior to the recovery of its amortized cost basis. For those securities that we do not intend to sell nor expect to be required to sell, an analysis is performed to determine if any of the impairment is due to credit-related factors or whether it is due to other factors, such as interest rates. Credit-related impairment is recognized in earnings, with the remaining unrealized non-credit-related impairment recorded in AOCI. We determine the credit component based on the difference between the security's amortized cost basis and the present value of its expected cash flows, discounted at the security's effective yield.
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Realized Gains and Losses on Securities and OTTI Recognized in Earnings
The following table presents the gross realized gains or losses and proceeds
from the sale of securities available for sale for the years ended December 31,
2019, 2018 and 2017. We did not sell any investment securities that were
classified as held to maturity.
Table 2.4: Realized Gains and Losses on Securities and OTTI Recognized in
Earnings
Year Ended December 31,
(Dollars in millions) 2019 2018 2017
Realized gains (losses):
Gross realized gains $ 44 $ 13 $ 144
Gross realized losses (18 ) (21 ) (74 )
Net realized gains (losses) 26 (8 ) 70
OTTI recognized in earnings:
Credit-related OTTI 0 (1 ) (2 )
Intent-to-sell OTTI 0 (200 ) (3 )
Total OTTI recognized in earnings 0 (201 ) (5 ) Net securities gains (losses) $ 26 $ (209 ) $ 65 Total proceeds from sales
$ 4,780 $ 6,399 $ 8,181
The cumulative credit loss component of the OTTI losses that have been
recognized in our consolidated statements of income related to the securities
that we do not intend to sell was $134 million and $140 million as of
December 31, 2019 and 2018, respectively.
Securities Pledged and Received
We pledged investment securities totaling $14.0 billion and $16.3 billion as of
December 31, 2019 and 2018, respectively. These securities are primarily pledged
to secure FHLB advances and Public Funds deposits, as well as for other purposes
as required or permitted by law. We accepted pledges of securities with a fair
value of approximately $1 million as of both December 31, 2019 and 2018, related
to our derivative transactions.
Purchased Credit-Impaired Debt Securities
The table below presents the outstanding balance and carrying value of the
purchased credit-impaired debt securities as of December 31, 2019 and 2018.
Table 2.5: Outstanding Balance and Carrying Value of Purchased Credit-Impaired
Debt Securities
(Dollars in millions) December 31, 2019 December 31, 2018
Outstanding balance $ 1,501 $ 1,784
Carrying value 1,347 1,537
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Changes in Accretable Yield of Purchased Credit-Impaired Debt Securities
The following table presents changes in the accretable yield related to the
purchased credit-impaired debt securities for the years ended December 31, 2019,
2018 and 2017.
Table 2.6: Changes in the Accretable Yield of Purchased Credit-Impaired Debt
Securities
Year Ended December 31,
(Dollars in millions) 2019 2018 2017
Accretable yield, beginning of period $ 698 $ 826 $ 1,173
Accretion recognized in earnings (166 ) (153 ) (182 )
Reduction due to payoffs, disposals, transfers and other (7 ) (3 ) (157 )
Net reclassifications (to) from nonaccretable difference 19 28 (8 )
Accretable yield, end of period $ 544 $ 698 $ 826
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3-LOANS
Our loan portfolio consists of loans held for investment, including loans held
in our consolidated trusts, and loans held for sale. We further divide our loans
held for investment into three portfolio segments: credit card, consumer banking
and commercial banking. Credit card loans consist of domestic and international
credit card loans. Consumer banking loans consist of auto and retail banking
loans. Commercial banking loans consist of commercial and multifamily real
estate as well as commercial and industrial loans. We sold all of our consumer
home loan portfolio and the related servicing during 2018. The information
presented in this section excludes loans held for sale, which are carried at
either fair value (if we elect the fair value option) or at the lower of cost or
fair value.
We monitor delinquency trends to assess our exposure to credit risk in our loan
portfolio. The table below presents the composition and an aging analysis of our
loans held for investment as of December 31, 2019 and 2018. The delinquency
aging includes all past due loans, both performing and nonperforming.
Table 3.1: Loan Portfolio Composition and Aging Analysis
December 31, 2019
Total
30-59 60-89 > 90 Delinquent PCI Total
(Dollars in millions) Current Days Days Days Loans Loans Loans
Credit Card:
Domestic credit card $ 113,857 $ 1,341 $ 1,038 $ 2,277 $ 4,656 $ 93 $ 118,606
International card 9,277 133 84 136 353 0 9,630
businesses
Total credit card 123,134 1,474 1,122 2,413 5,009 93 128,236
Consumer Banking:
Auto 55,778 2,828 1,361 395 4,584 0 60,362
Retail banking 2,658 24 8 11 43 2 2,703Total consumer banking 58,436 2,852 1,369 406
4,627 2 63,065
Commercial Banking:
Commercial and 30,157 43 20 4 67 21 30,245
multifamily real estate
Commercial and 44,009 75 26 143 244 10 44,263
industrial
Total commercial banking 74,166 118 46 147 311 31 74,508
Total loans(1) $ 255,736 $ 4,444 $ 2,537 $ 2,966 $ 9,947 $ 126 $ 265,809
% of Total loans 96.2 % 1.6 % 1.0 % 1.1 % 3.7 % 0.1 % 100.0 %
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
Total
30-59 60-89 > 90 Delinquent PCI Total
(Dollars in millions) Current Days Days Days Loans Loans Loans
Credit Card:
Domestic credit card $ 103,014 $ 1,270 $ 954 $ 2,111 $ 4,335 $ 1 $ 107,350
International card
businesses 8,678 127 78 128 333 0 9,011
Total credit card 111,692 1,397 1,032 2,239 4,668 1 116,361
Consumer Banking:
Auto 52,032 2,624 1,326 359 4,309 0 56,341
Retail banking 2,809 23 8 20 51 4 2,864
Total consumer banking 54,841 2,647 1,334 379 4,360 4 59,205
Commercial Banking:
Commercial and
multifamily real estate 28,737 101 20 19 140 22 28,899
Commercial and
industrial 40,704 135 43 101 279 108 41,091
Total commercial lending 69,441 236 63 120 419 130 69,990
Small-ticket commercial
real estate 336 2 1 4 7 0 343
Total commercial banking 69,777 238 64 124
426 130 70,333
Total loans(1) $ 236,310 $ 4,282 $ 2,430 $ 2,742 $ 9,454 $ 135 $ 245,899
% of Total loans 96.1 % 1.7 % 1.0 % 1.1 % 3.8 % 0.1 % 100.0 %
__________(1) Loans, other than PCI loans, include unamortized premiums and discounts, and
unamortized deferred fees and costs totaling $1.1 billion and $818 million
as of December 31, 2019 and 2018, respectively.
The following table presents the outstanding balance of loans 90 days or more
past due that continue to accrue interest and loans classified as nonperforming
as of December 31, 2019 and 2018. Nonperforming loans generally include loans
that have been placed on nonaccrual status. PCI loans are excluded from the
table below. See "Note 1-Summary of Significant Accounting Policies" for
additional information on our policies for nonperforming loans and accounting
for PCI loans.
Table 3.2: 90+ Day Delinquent Loans Accruing Interest and Nonperforming Loans
December 31, 2019 December 31, 2018
> 90 Days and Nonperforming > 90 Days and Nonperforming
(Dollars in millions) Accruing Loans Accruing Loans
Credit Card:
Domestic credit card $ 2,277 N/A $ 2,111 N/A
International card businesses 130 $ 25 122 $ 22
Total credit card 2,407 25 2,233 22
Consumer Banking:
Auto 0 487 0 449
Retail banking 0 23 0 30
Total consumer banking 0 510 0 479
Commercial Banking:
Commercial and multifamily real estate 0 38 0 83
Commercial and industrial 0 410 0 223
Total commercial lending 0 448 0 306
Small-ticket commercial real estate 0 0 0 6
Total commercial banking 0 448 0 312
Total $ 2,407 $ 983 $ 2,233 $ 813
% of Total loans held for investment 0.9 % 0.4 % 0.9 % 0.3 %
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Credit Quality Indicators
We closely monitor economic conditions and loan performance trends to assess and
manage our exposure to credit risk. We discuss these risks and our credit
quality indicator for each portfolio segment below.
Credit Card
Our credit card loan portfolio is highly diversified across millions of accounts
and numerous geographies without significant individual exposure. We therefore
generally manage credit risk based on portfolios with common risk
characteristics. The risk in our credit card loan portfolio correlates to broad
economic trends, such as unemployment rates and home values, as well as
consumers' financial condition, all of which can have a material effect on
credit performance. The key indicator we assess in monitoring the credit quality
and risk of our credit card loan portfolio is delinquency trends, including an
analysis of loan migration between delinquency categories over time. Table 3.1
details delinquency trends for our loan portfolios as of December 31, 2019 and
2018.
Consumer Banking
Our consumer banking loan portfolio consists of auto and retail banking loans.
Similar to our credit card loan portfolio, the risk in our consumer banking loan
portfolio correlates to broad economic trends, such as unemployment rates, gross
domestic product and home values, as well as consumers' financial condition, all
of which can have a material effect on credit performance. The key indicator we
monitor when assessing the credit quality and risk of our auto loan portfolio is
borrower credit scores as they measure the creditworthiness of borrowers.
Delinquency trends are the key indicator we assess in monitoring the credit
quality and risk of our retail banking loan portfolio. Table 3.1 details
delinquency trends for our loan portfolios as of December 31, 2019 and 2018.
The table below provides details on the credit scores of our auto loan portfolio
as of December 31, 2019 and 2018.
Table 3.3: Auto Loan Credit Score Distribution - At Origination FICO Scores(1)
December 31, December 31,(Dollars in millions) 2019 2018 Greater than 660 $ 28,773 $ 27,913 621 - 660 11,924 10,729 620 or below 19,665 17,699 Total $ 60,362 $ 56,341 __________
(1) Amounts represent period-end loans held for investment in each credit score
category. Auto credit scores generally represent average FICO scores
obtained from three credit bureaus at the time of application and are not
refreshed thereafter. Balances for which no credit score is available or the
credit score is invalid are included in the 620 or below category.
Commercial Banking We evaluate the credit risk of commercial banking loans using a risk rating system. We assign internal risk ratings to loans based on relevant information about the ability of the borrowers to repay their debt. In determining the risk rating of a particular loan, some of the factors considered are the borrower's current financial condition, historical and projected future credit performance, prospects for support from financially responsible guarantors, the estimated realizable value of any collateral and current economic trends. The scale based on our internal risk rating system is as follows: • Noncriticized: Loans that have not been designated as criticized, frequently
referred to as "pass" loans.
• Criticized performing: Loans in which the financial condition of the obligor
is stressed, affecting earnings, cash flows or collateral values. The
borrower currently has adequate capacity to meet near-term obligations;
however, the stress, left unabated, may result in deterioration of the
repayment prospects at some future date.
• Criticized nonperforming: Loans that are not adequately protected by the
current net worth and paying capacity of the obligor or the collateral
pledged, if any. Loans classified as criticized nonperforming have a
well-defined weakness, or
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
weaknesses, which jeopardize the full repayment of the debt. These loans are
characterized by the distinct possibility that we will sustain a credit loss if
the deficiencies are not corrected and are generally placed on nonaccrual
status.
We use our internal risk rating system for regulatory reporting, determining the
frequency of credit exposure reviews, and evaluating and determining the
allowance for loan and lease losses for commercial loans. Generally, loans that
are designated as criticized performing and criticized nonperforming are
reviewed quarterly by management to determine if they are appropriately
classified/rated and whether any impairment exists. Noncriticized loans are also
generally reviewed, at least annually, to determine the appropriate risk rating.
In addition, we evaluate the risk rating during the renewal process of any loan
or if a loan becomes past due.
The following table presents the internal risk ratings of our commercial banking
loan portfolio as of December 31, 2019 and 2018.
Table 3.4: Commercial Banking Risk Profile by Internal Risk Rating
December 31, 2019
Commercial
and Commercial Total
(Dollars in Multifamily % of and % of Commercial % of
millions) Real Estate Total Industrial Total Banking Total
Internal risk
rating:(1)
Noncriticized $ 29,625 97.9 % $ 42,223 95.4 % $ 71,848 96.5 %
Criticized
performing 561 1.9 1,620 3.7 2,181 2.9
Criticized
nonperforming 38 0.1 410 0.9 448 0.6
PCI loans 21 0.1 10 0.0 31 0.0
Total $ 30,245 100.0 % $ 44,263 100.0 % $ 74,508 100.0 %
December 31, 2018
Commercial
and Commercial Small-Ticket Total
Multifamily % of and %of Commercial % of Commercial % of (Dollars in millions) Real Estate Total Industrial Total Real Estate Total Banking Total Internal risk rating:(1) Noncriticized
$ 28,239 97.7 % $ 39,468 96.1 % $ 336 98.0 % $ 68,043 96.8 % Criticized performing
555 1.9 1,292 3.1 1 0.3 1,848 2.6
Criticized nonperforming 83 0.3 223 0.5 6 1.7 312 0.4
PCI loans 22 0.1 108 0.3 0 0.0 130 0.2
Total $ 28,899 100.0 % $ 41,091 100.0 % $ 343 100.0 % $ 70,333 100.0 %
__________(1) Criticized exposures correspond to the "Special Mention," "Substandard" and
"Doubtful" asset categories defined by bank regulatory authorities.
Impaired Loans
The following table presents information on our impaired loans as of
December 31, 2019 and 2018, and for the years ended December 31, 2019, 2018 and
2017. Impaired loans include loans modified in troubled debt restructurings
("TDRs"), all nonperforming commercial loans and nonperforming home loans with a
specific impairment. Impaired loans without an allowance generally represent
loans that have been charged down to the fair value of the underlying collateral
for which we believe no additional losses have been incurred, or where the fair
value of the underlying collateral meets or exceeds the loan's amortized cost.
PCI loans are excluded from the following table.
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Table 3.5: Impaired Loans
December 31, 2019
Without Total Net Unpaid
With an an Recorded Related Recorded Principal
(Dollars in millions) Allowance Allowance Investment Allowance Investment Balance
Credit Card:
Domestic credit card $ 630 $ 0 $ 630 $ 122 $ 508 $ 620
International card businesses 201 0 201 88 113 195
Total credit card(1) 831 0 831 210 621 815
Consumer Banking:
Auto 305 41 346 24 322 454
Retail banking 39 3 42 4 38 46
Total consumer banking 344 44 388 28 360 500
Commercial Banking:
Commercial and multifamily real 33 34 67 1 66 70
estate
Commercial and industrial 481 125 606 115 491 800
Total commercial banking 514 159 673 116 557 870
Total $ 1,689 $ 203 $ 1,892 $ 354 $ 1,538 $ 2,185
December 31, 2018
Without Total Net Unpaid
With an an Recorded Related Recorded Principal
(Dollars in millions) Allowance Allowance Investment Allowance Investment Balance
Credit Card:
Domestic credit card $ 666 $ 0 $ 666 $ 186 $ 480 $ 654
International card businesses 189 0 189 91 98 183
Total credit card(1) 855 0 855 277 578 837
Consumer Banking:
Auto(2) 301 38 339 22 317 420
Retail banking 42 12 54 5 49 60
Total consumer banking 343 50 393 27 366 480
Commercial Banking:
Commercial and multifamily real 92 28 120 5 115 121
estate
Commercial and industrial 301 169 470 29 441 593
Total commercial lending 393 197 590 34 556 714
Small-ticket commercial real 0 6 6 0 6 9
estate
Total commercial banking 393 203 596 34 562 723
Total $ 1,591 $ 253 $ 1,844 $ 338 $ 1,506 $ 2,040
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended December 31,
2019 2018 2017
Average Interest Average Interest Average Interest
Recorded Income Recorded Income Recorded Income
(Dollars in millions) Investment Recognized Investment Recognized Investment Recognized
Credit Card:
Domestic credit card $ 643 $ 57 $ 655 $ 63 $ 602 $ 63
International card businesses 194 14 184 12 154 11
Total credit card(1) 837 71 839 75 756 74
Consumer Banking:
Auto(2) 339 39 397 45 495 53
Home loan 0 0 91 1 299 5
Retail banking 51 1 59 2 59 1
Total consumer banking 390 40 547 48 853 59
Commercial Banking:
Commercial and multifamily real estate 88 1 93 2 134 4
Commercial and industrial 571 14 621 20 1,118 18
Total commercial lending 659 15 714 22 1,252 22
Small-ticket commercial real estate 4 0 5 0 7 0
Total commercial banking 663 15 719 22 1,259 22
Total $ 1,890 $ 126 $ 2,105 $ 145 $ 2,868 $ 155
__________(1) The period-end and average recorded investments of credit card loans include
finance charges and fees.
(2) 2018 and 2017 amounts include certain TDRs that were recorded as other
assets on our consolidated balance sheets.
Troubled Debt Restructurings
Total recorded TDRs were $1.7 billion and $1.6 billion as of December 31, 2019
and 2018, respectively. TDRs classified as performing in our credit card and
consumer banking loan portfolios totaled $1.1 billion and $1.2 billion as of
December 31, 2019 and 2018, respectively. TDRs classified as performing in our
commercial banking loan portfolio totaled $224 million and $282 million as of
December 31, 2019 and 2018, respectively. Commitments to lend additional funds
on loans modified in TDRs totaled $178 million and $256 million as of
December 31, 2019 and 2018, respectively.
Loans Modified in TDRs
As part of our loan modification programs to borrowers experiencing financial
difficulty, we may provide multiple concessions to minimize our economic loss
and improve long-term loan performance and collectability. The following tables
present the major modification types, recorded investment amounts and financial
effects of loans modified in TDRs during the years ended December 31, 2019, 2018
and 2017.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Table 3.6: Troubled Debt Restructurings
Year Ended December 31, 2019
Reduced Interest Rate Term Extension Balance Reduction
Average
% of Average % of Term % of Gross
Total Loans TDR Rate TDR Extension TDR Balance
(Dollars in millions) Modified(1) Activity(2) Reduction Activity(2) (Months) Activity(2) Reduction
Credit Card:
Domestic credit card $ 351 100 % 16.60 % 0 % 0 0 % $ 0
International card businesses 173 100 27.28 0 0 0 0
Total credit card 524 100 20.12 0 0 0 0
Consumer Banking:
Auto 268 39 3.63 90 7 1 1
Retail banking 7 11 10.66 54 3 33 0
Total consumer banking 275 38 3.68 89 7 2 1
Commercial Banking:
Commercial and multifamily 39 87 0.00 13 1 0 0
real estate
Commercial and industrial 159 3 0.33 20 8 0 0
Total commercial lending 198 19 0.04 18 7 0 0
Small-ticket commercial real 1 0 0.00 0 0 0 0
estate
Total commercial banking 199 19 0.04 18 7 0 0
Total $ 998 67 16.37 28 7 0 $ 1
Year Ended December 31, 2018
Reduced Interest Rate Term Extension Balance Reduction
Average
% of Average % of Term % of Gross
Total Loans TDR Rate TDR Extension TDR Balance(Dollars in millions) Modified(1) Activity(2) Reduction Activity(2) (Months) Activity(2) Reduction Credit Card: Domestic credit card $ 412 100 % 15.93 % 0 % 0 0 % $ 0 International card 184 100 26.96 0 0 0 0 businesses Total credit card 596 100 19.34 0 0 0 0 Consumer Banking: Auto(3) 227 49 3.88 89 8 1 1 Home loan 6 28 1.78 83 214 0 0 Retail banking 8 16 10.92 43 12 0 0 Total consumer banking 241 48 3.93 87 13 1 1 Commercial Banking: Commercial and multifamily 43 0 0.00 80 5 0 0 real estate Commercial and industrial 170 0 1.03 54 13 0 0 Total commercial lending 213 0 1.03 60 11 0 0 Small-ticket commercial real 3 0 0.00 0 0 0 0 estate Total commercial banking 216 0 1.03 59 11 0 0 Total $ 1,053 68 16.84 32 12 0 $ 1 145 Capital One Financial Corporation (COF)
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended December 31, 2017
Reduced Interest Rate Term Extension Balance Reduction
Average
% of Average % of Term % of Gross
Total Loans TDR Rate TDR Extension TDR Balance(Dollars in millions) Modified(1) Activity(2) Reduction Activity(2) (Months) Activity(2) Reduction Credit Card: Domestic credit card $ 406 100 % 14.50 % 0 % 0 0 % $ 0 International card 169 100 26.51 0 0 0 0 businesses Total credit card 575 100 18.02 0 0 0 0 Consumer Banking: Auto(3) 324 44 3.82 95 6 2 7 Home loan 19 48 2.77 78 233 2 0 Retail banking 13 22 5.77 73 10 0 0 Total consumer banking 356 44 3.79 93 16 2 7 Commercial Banking: Commercial and multifamily 29 7 0.02 26 5 0 0 real estate Commercial and industrial 557 19 0.80 59 17 0 0 Total commercial lending 586 18 0.79 57 16 0 0 Small-ticket commercial real 3 0 0.00 4 0 0 0 estate Total commercial banking 589 18 0.79 57 16 0 0 Total $ 1,520 55 13.19 44 16 0 $ 7 __________
(1) Represents the recorded investment of total loans modified in TDRs at the
end of the period in which they were modified. As not every modification
type is included in the table above, the total percentage of TDR activity
may not add up to 100%. Some loans may receive more than one type of
concession as part of the modification.
(2) Due to multiple concessions granted to some troubled borrowers, percentages
may total more than 100% for certain loan types.
(3) Includes certain TDRs that are recorded as other assets on our consolidated
balance sheets.
Subsequent Defaults of Completed TDR Modifications The following table presents the type, number and recorded investment of loans modified in TDRs that experienced a default during the period and had completed a modification event in the twelve months prior to the default. A default occurs if the loan is either 90 days or more delinquent, has been charged off as of the end of the period presented or has been reclassified from accrual to nonaccrual status.
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Table 3.7: TDRs-Subsequent Defaults
Year Ended December 31,
2019 2018 2017
Number of Number of Number of(Dollars in millions) Contracts Amount Contracts Amount Contracts Amount Credit Card: Domestic credit card 47,086 $ 99 61,070 $ 126 55,121 $ 111 International card businesses 69,470 110 61,014 106 51,641 93 Total credit card 116,556 209 122,084 232 106,762 204 Consumer Banking: Auto 5,575 70 6,980 79 9,446 109 Home loan 0 0 3 1 28 7 Retail banking 24 2 26 2 41 4 Total consumer banking 5,599 72 7,009 82 9,515 120 Commercial Banking: Commercial and multifamily real estate 0 0 1 3 0 0 Commercial and industrial 1 25 26 120 244 269 Total commercial lending 1 25 27 123 244 269 Small-ticket commercial real estate 0 0 0 0 2 1 Total commercial banking 1 25 27 123 246 270 Total 122,156 $ 306 129,120 $ 437 116,523 $ 594 Loans Pledged We pledged loan collateral of $14.6 billion and $15.8 billion to secure the majority of our FHLB borrowing capacity of $18.7 billion and $19.3 billion as of December 31, 2019 and 2018, respectively. We also pledged loan collateral of $6.7 billion and $9.2 billion to secure our Federal Reserve Discount Window borrowing capacity of $5.3 billion and $7.6 billion as of December 31, 2019 and 2018, respectively. In addition to loans pledged, we securitized a portion of our credit card and auto loans. See "Note 5-Variable Interest Entities and Securitizations" for additional information. Finance Charge and Fee Reserve We continue to accrue finance charges and fees on credit card loans until the account is charged off. Our methodology for estimating the uncollectible portion of billed finance charges and fees is consistent with the methodology we use to estimate the allowance for incurred principal losses on our credit card loan receivables. Total net revenue was reduced by $1.4 billion, $1.3 billion and $1.4 billion in 2019, 2018 and 2017, respectively, for the estimated uncollectible amount of billed finance charges and fees, and related losses. The finance charge and fee reserve, which is recorded as a contra asset on our consolidated balance sheets, totaled $462 million and $468 million as of December 31, 2019 and 2018, respectively. Loans Held for Sale Our total loans held for sale was $400 million and $1.2 billion as of December 31, 2019 and 2018, respectively. We originated for sale $9.0 billion and $8.7 billion of commercial multifamily real estate loans in 2019 and 2018, respectively, and $8.4 billion of conforming residential mortgage loans and commercial multifamily real estate loans in 2017. We retained servicing on all of multifamily real estate loans. 147 Capital One Financial Corporation (COF)
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4-ALLOWANCE FOR LOAN AND LEASE LOSSES AND RESERVE FOR UNFUNDED LENDING COMMITMENTS
Our allowance for loan and lease losses represents management's best estimate of
incurred loan and lease losses inherent in our loans held for investment as of
each balance sheet date. In addition to the allowance for loan and lease losses,
we also estimate probable losses related to contractually binding unfunded
lending commitments. The provision for losses on unfunded lending commitments is
included in the provision for credit losses in our consolidated statements of
income and the related reserve for unfunded lending commitments is included in
other liabilities on our consolidated balance sheets. See "Note 1-Summary of
Significant Accounting Policies" for further discussion of our methodology and
policy for determining our allowance for loan and lease losses for each of our
loan portfolio segments, as well as information on our reserve for unfunded
lending commitments.
Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments
Activity
The table below summarizes changes in the allowance for loan and lease losses
and reserve for unfunded lending commitments by portfolio segment for the years
ended December 31, 2019, 2018 and 2017.
Table 4.1: Allowance for Loan and Lease Losses and Reserve for Unfunded Lending
Commitments Activity
Credit Consumer Commercial
(Dollars in millions) Card Banking Banking Other(1) Total
Allowance for loan and lease losses:
Balance as of December 31, 2016 $ 4,606 $ 1,102 $ 793 $ 2 $ 6,503
Charge-offs (6,321 ) (1,677 ) (481 ) (34 ) (8,513 )
Recoveries(2) 1,267 639 16 29 1,951
Net charge-offs (5,054 ) (1,038 ) (465 ) (5 ) (6,562 )
Provision for loan and lease losses 6,066 1,180 313 4 7,563
Allowance build (release) for loan 1,012 142 (152 ) (1 ) 1,001
and lease losses
Other changes(3) 30 (2 ) (30 ) 0 (2 )
Balance as of December 31, 2017 5,648 1,242 611 1 7,502
Reserve for unfunded lending
commitments:
Balance as of December 31, 2016 0 7 129 0 136
Benefit for losses on unfunded 0 0 (12 ) 0 (12 )
lending commitments
Balance as of December 31, 2017 0 7 117 0 124
Combined allowance and reserve as of $ 5,648 $ 1,249 $ 728
$ 1 $ 7,626
December 31, 2017
Allowance for loan and lease losses:
Balance as of December 31, 2017 $ 5,648 $ 1,242 $ 611 $ 1 $ 7,502
Charge-offs (6,657 ) (1,832 ) (119 ) (7 ) (8,615 )
Recoveries(2) 1,588 851 63 1 2,503
Net charge-offs (5,069 ) (981 ) (56 ) (6 ) (6,112 )
Provision (benefit) for loan and 4,984 841 82 (49 ) 5,858
lease losses
Allowance build (release) for loan (85 ) (140 ) 26 (55 ) (254 )
and lease losses
Other changes(1)(3) (28 ) (54 ) 0 54 (28 )
Balance as of December 31, 2018 5,535 1,048 637 0 7,220
Reserve for unfunded lending
commitments:
Balance as of December 31, 2017 0 7 117 0 124
Provision (benefit) for losses on 0 (3 ) 1 0 (2 )
unfunded lending commitments
Balance as of December 31, 2018 0 4 118 0 122
Combined allowance and reserve as of $ 5,535 $ 1,052 $ 755
$ 0 $ 7,342
December 31, 2018
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Credit Consumer Commercial
(Dollars in millions) Card Banking Banking Total Allowance for loan and lease losses: Balance as of December 31, 2018 $ 5,535 $ 1,048 $ 637 $ 7,220 Charge-offs (6,711 ) (1,917 ) (181 ) (8,809 ) Recoveries(2) 1,562 970 25 2,557 Net charge-offs (5,149 ) (947 ) (156 ) (6,252 ) Provision for loan and lease losses 4,992 937 294 6,223 Allowance build (release) for loan and lease (157 ) (10 ) 138 (29 )
losses
Other changes(3) 17 0 0 17 Balance as of December 31, 2019 5,395 1,038 775 7,208 Reserve for unfunded lending commitments: Balance as of December 31, 2018 0 4 118 122 Provision for losses on unfunded lending 0 1 12 13
commitments
Balance as of December 31, 2019 0 5 130 135 Combined allowance and reserve as of $ 5,395 $ 1,043 $ 905 $ 7,343 December 31, 2019 __________
(1) In 2018, we sold all of our consumer home loan portfolio and recognized a
gain of approximately $499 million in the Other category, including a
benefit for credit losses of $46 million.
(2) 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.
(3) Represents foreign currency translation adjustments and the net impact of
loan transfers and sales where applicable.
Components of Allowance for Loan and Lease Losses by Impairment Methodology
The table below presents the components of our allowance for loan and lease
losses by portfolio segment and impairment methodology as of December 31, 2019
and 2018. See "Note 1-Summary of Significant Accounting Policies" for further
discussion of allowance methodologies for each of the loan portfolios.
Table 4.2: Components of Allowance for Loan and Lease Losses by Impairment
Methodology
December 31, 2019
Credit Consumer Commercial
(Dollars in millions) Card Banking Banking Total
Allowance for loan and lease losses:
Collectively evaluated $ 5,185 $ 1,010 $ 659 $ 6,854
Asset-specific 210 28 116 354
Total allowance for loan and lease losses $ 5,395 $ 1,038 $
775 $ 7,208
Loans held for investment:
Collectively evaluated $ 127,312 $ 62,675 $ 73,804 $ 263,791
Asset-specific 831 388 673 1,892
PCI loans 93 2 31 126
Total loans held for investment $ 128,236 $ 63,065 $ 74,508 $ 265,809
Allowance coverage ratio(1) 4.21 % 1.65 % 1.04 % 2.71 %
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
Credit Consumer Commercial
(Dollars in millions) Card Banking Banking Total
Allowance for loan and lease losses:
Collectively evaluated $ 5,258 $ 1,021 $ 603 $ 6,882
Asset-specific 277 27 34 338
Total allowance for loan and lease losses $ 5,535 $ 1,048 $
637 $ 7,220
Loans held for investment:
Collectively evaluated $ 115,505 $ 58,808 $ 69,607 $ 243,920
Asset-specific 855 393 596 1,844
PCI loans 1 4 130 135
Total loans held for investment $ 116,361 $ 59,205 $ 70,333 $ 245,899
Allowance coverage ratio(1) 4.76 % 1.77 % 0.91 % 2.94 %
__________(1) Allowance coverage ratio is calculated by dividing the period-end allowance
for loan and lease losses by period-end loans held for investment within the
specified loan category.
Credit Card Partnership Loss Sharing Arrangements
We have certain credit card partnership agreements that are presented within our
consolidated financial statements on a net basis, in which our partner agrees to
share a portion of the credit losses on the underlying loan portfolio. The
expected reimbursements from these partners, which are netted against our
allowance for loan and lease losses, result in reductions to net charge-offs and
provision for credit losses. See "Note 1-Summary of Significant Accounting
Policies" for further discussion of our credit card partnership agreements.
The table below summarizes the changes in the estimated reimbursements from
these partners for the years ended December 31, 2019, 2018 and 2017. The 2019
amounts below include the impacts of our loss sharing arrangement on the
acquired Walmart portfolio.
Table 4.3: Summary of Credit Card Partnership Loss Sharing Arrangements Impacts
Year Ended December 31,
(Dollars in millions) 2019 2018 2017
Estimated reimbursements from partners, beginning of $ 379 $ 380 $ 228
period
Amounts due from partners which reduced net (600 ) (382 ) (285 )
charge-offs
Amounts estimated to be charged to partners which 1,383 381 437
reduced provision for credit losses
Estimated reimbursements from partners, end of period $ 1,162 $ 379 $ 380
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5-VARIABLE INTEREST ENTITIES AND SECURITIZATIONS
In the normal course of business, we enter into various types of transactions
with entities that are considered to be VIEs. Our primary involvement with VIEs
has been related to our securitization transactions in which we transferred
assets to securitization trusts. We have primarily securitized credit card and
auto loans, which have provided a source of funding for us and enabled us to
transfer a certain portion of the economic risk of the loans or related debt
securities to third parties.
The entity that has a controlling financial interest in a VIE is referred to as
the primary beneficiary and is required to consolidate the VIE. The majority of
the VIEs in which we are involved have been consolidated in our financial
statements.
Summary of Consolidated and Unconsolidated VIEs
The assets of our consolidated VIEs primarily consist of cash, loan receivables
and the related allowance for loan and lease losses, which we report on our
consolidated balance sheets under restricted cash for securitization investors,
loans held in consolidated trusts and allowance for loan and lease losses,
respectively. The assets of a particular VIE are the primary source of funds to
settle its obligations. Creditors of these VIEs typically do not have recourse
to our general credit. Liabilities primarily consist of debt securities issued
by the VIEs, which we report under securitized debt obligations on our
consolidated balance sheets. For unconsolidated VIEs, we present the carrying
amount of assets and liabilities reflected on our consolidated balance sheets
and our maximum exposure to loss. Our maximum exposure to loss is estimated
based on the unlikely event that all of the assets in the VIEs become worthless
and we are required to meet our maximum remaining funding obligations.
The tables below present a summary of VIEs in which we had continuing
involvement or held a variable interest, aggregated based on VIEs with similar
characteristics as of December 31, 2019 and 2018. We separately present
information for consolidated and unconsolidated VIEs.
Table 5.1: Carrying Amount of Consolidated and Unconsolidated VIEs
December 31, 2019
Consolidated Unconsolidated
Carrying Carrying Carrying Carrying Maximum
Amount Amount of Amount Amount of Exposure to
(Dollars in millions) of Assets Liabilities of Assets Liabilities Loss
Securitization-Related VIEs:
Credit card loan securitizations(1) $ 31,112 $ 16,113 $ 0 $ 0 $ 0
Auto loan securitizations 2,282 2,012 0 0 0
Home loan securitizations 0 0 66 0 352
Total securitization-related VIEs 33,394 18,125 66 0 352
Other VIEs:(2)
Affordable housing entities 236 7 4,559 1,289 4,559
Entities that provide capital to 1,889 69 0 0 0
low-income and rural communities
Other 0 0 502 0 502
Total other VIEs 2,125 76 5,061 1,289 5,061
Total VIEs $ 35,519 $ 18,201 $ 5,127 $ 1,289 $ 5,413
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
Consolidated Unconsolidated
Carrying Carrying Carrying Carrying Maximum
Amount Amount of Amount Amount of Exposure to
(Dollars in millions) of Assets Liabilities of Assets Liabilities Loss
Securitization-Related VIEs:
Credit card loan securitizations(1) $ 33,574 $ 18,885 $ 0 $ 0 $ 0
Home loan securitizations 0 0 211 74 554
Total securitization-related VIEs 33,574 18,885 211 74 554
Other VIEs:(2)
Affordable housing entities 243 17 4,238 1,303 4,238
Entities that provide capital to 1,739 117 0 0 0
low-income and rural communities
Other 0 0 353 0 353
Total other VIEs 1,982 134 4,591 1,303 4,591
Total VIEs $ 35,556 $ 19,019 $ 4,802 $ 1,377 $ 5,145
__________(1) Represents the carrying amount of assets and liabilities owned by the VIE,
which includes the seller's interest and repurchased notes held by other
related parties.
(2) In certain investment structures, we consolidate a VIE which in turn holds
as its primary asset an investment in an unconsolidated VIE. In these
instances, we disclose the carrying amount of assets and liabilities on our
consolidated balance sheets as unconsolidated VIEs to avoid duplicating our
exposure, as the unconsolidated VIEs are generally the operating entities
generating the exposure. The carrying amount of assets and liabilities
included in the unconsolidated VIE columns above related to these investment
structures were $2.3 billion of assets and $741 million of liabilities as of
December 31, 2019, and $2.3 billion of assets and $811 million of
liabilities as of December 31, 2018.
Securitization-Related VIEs
In a securitization transaction, assets are transferred to a trust, which
generally meets the definition of a VIE. We engage in securitization activities
as an issuer and an investor. Our primary securitization issuance activity
includes credit card and auto securitizations, conducted through securitization
trusts which we consolidate. Our continuing involvement in these securitization
transactions mainly consists of acting as the primary servicer and holding
certain retained interests.
In our multifamily agency business, we originate multifamily commercial real
estate loans and transfer them to securitization trusts of government-sponsored
enterprises ("GSEs"). We retain the related MSRs and service the transferred
loans pursuant to the guidelines set forth by the GSEs. As an investor, we hold
RMBS and CMBS in our investment securities portfolio, which represent variable
interests in the respective securitization trusts from which those securities
were issued. We do not consolidate the securitization trusts employed in these
transactions as we do not have the power to direct the activities that most
significantly impact the economic performance of these securitization trusts.
Our maximum exposure to loss as a result of our involvement with these VIEs is
the carrying value of MSRs and investment securities on our consolidated balance
sheets. See "Note 6-Goodwill and Intangible Assets" for information related to
our MSRs associated with these securitizations and "Note 2-Investment
Securities" for more information on the securities held in our investment
securities portfolio. We exclude these VIEs from the tables within this note
because we do not consider our continuing involvement with these VIEs to be
significant as we either invest in securities issued by the VIE and were not
involved in the design of the VIE or no transfers have occurred between the VIE
and us. In addition, where we have certain lending arrangements in the normal
course of business with entities that could be VIEs, we have also excluded these
VIEs from the tables presented in this note. See "Note 3-Loans" for additional
information regarding our lending arrangements in the normal course of business.
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The table below presents our continuing involvement in certain securitization-related VIEs as of December 31, 2019 and 2018. Table 5.2: Continuing Involvement in Securitization-Related VIEs
Credit
(Dollars in millions) Card Auto Mortgages
December 31, 2019: Securities held by third-party investors $ 15,798 $ 2,010 $ 962 Receivables in the trust 31,625 2,192
978
Cash balance of spread or reserve accounts 0 7 17 Retained interests Yes Yes Yes Servicing retained Yes Yes No December 31, 2018: Securities held by third-party investors $ 18,307 N/A $ 1,276 Receivables in the trust 34,197 N/A
1,305
Cash balance of spread or reserve accounts 0 N/A 116 Retained interests Yes N/A Yes Servicing retained Yes N/A Yes(1) __________
(1) We previously retained servicing on a portion of our remaining mortgage
loans in mortgage securitizations. During 2019, we sold our entire portfolio
of retained mortgage servicing rights.
Credit Card Securitizations
We securitize a portion of our credit card loans which provides a source of
funding for us. Credit card securitizations involve the transfer of credit card
receivables to securitization trusts. These trusts then issue debt securities
collateralized by the transferred receivables to third-party investors. We hold
certain retained interests in our credit card securitizations and continue to
service the receivables in these trusts. We consolidate these trusts because we
are deemed to be the primary beneficiary as we have the power to direct the
activities that most significantly impact the economic performance of the
trusts, and the right to receive benefits or the obligation to absorb losses
that could potentially be significant to the trusts.
Auto Securitizations
Similar to our credit card securitizations, we securitize a portion of our auto
loans which provides a source of funding for us. Auto securitization involves
the transfer of auto loans to securitization trusts. These trusts then issue
debt securities collateralized by the transferred loans to third-party
investors. We hold certain retained interests and continue to service the loans
in these trusts. We consolidate these trusts because we are deemed to be the
primary beneficiary as we have the power to direct the activities that most
significantly impact the economic performance of the trusts, and the right to
receive benefits or the obligation to absorb losses that could potentially be
significant to the trusts.
Mortgage Securitizations
We had previously securitized mortgage loans by transferring these loans to
securitization trusts that had issued mortgage-backed securities to investors.
These mortgage trusts consist of option-adjustable rate mortgage ("option-ARM")
securitizations and securitizations from our discontinued operations which
include the mortgage origination operations of our wholesale mortgage banking
unit, GreenPoint Mortgage Funding, Inc. ("GreenPoint") and the manufactured
housing operations of GreenPoint Credit, LLC, a subsidiary of GreenPoint
(collectively "GreenPoint securitizations"). We retain rights to certain future
cash flows arising from these securitizations. We do not consolidate the
mortgage securitizations because we do not have the power to direct the
activities that most significantly impact the economic performance of the
trusts, and the right to receive the benefits or the obligation to absorb losses
that could potentially be significant to the trusts.
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other VIEs
Affordable Housing Entities
As part of our community reinvestment initiatives, we invest in private
investment funds that make equity investments in multifamily affordable housing
properties. We receive affordable housing tax credits for these investments. The
activities of these entities are financed with a combination of invested equity
capital and debt. We account for certain of our investments in qualified
affordable housing projects using the proportional amortization method if
certain criteria are met. The proportional amortization method amortizes the
cost of the investment over the period in which the investor expects to receive
tax credits and other tax benefits, and the resulting amortization is recognized
as a component of income tax expense attributable to continuing operations. For
the years ended December 31, 2019 and 2018, we recognized amortization of $554
million and $477 million, respectively, and tax credits of $610 million and $529
million, respectively, associated with these investments within income tax
provision. The carrying value of our equity investments in these qualified
affordable housing projects was $4.4 billion and $4.2 billion as of December 31,
2019 and 2018, respectively. We are periodically required to provide additional
financial or other support during the period of the investments. Our liability
for these unfunded commitments was $1.5 billion as of both December 31, 2019 and
2018, and is largely expected to be paid from 2020 to 2022.
For those investment funds considered to be VIEs, we are not required to
consolidate them if we do not have the power to direct the activities that most
significantly impact the economic performance of those entities. We record our
interests in these unconsolidated VIEs in loans held for investment, other
assets and other liabilities on our consolidated balance sheets. Our maximum
exposure to these entities is limited to our variable interests in the entities
which consisted of assets of approximately $4.6 billion and $4.2 billion as of
December 31, 2019 and 2018, respectively. The creditors of the VIEs have no
recourse to our general credit and we do not provide additional financial or
other support other than during the period that we are contractually required to
provide it. The total assets of the unconsolidated VIE investment funds were
approximately $10.9 billion and $10.8 billion as of December 31, 2019 and 2018,
respectively.
Entities that Provide Capital to Low-Income and Rural Communities
We hold variable interests in entities ("Investor Entities") that invest in
community development entities ("CDEs") that provide debt financing to
businesses and non-profit entities in low-income and rural communities. Variable
interests in the CDEs held by the consolidated Investor Entities are also our
variable interests. The activities of the Investor Entities are financed with a
combination of invested equity capital and debt. The activities of the CDEs are
financed solely with invested equity capital. We receive federal and state tax
credits for these investments. We consolidate the VIEs in which we have the
power to direct the activities that most significantly impact the VIE's economic
performance and where we have the obligation to absorb losses or right to
receive benefits that could be potentially significant to the VIE. We have also
consolidated other investments and CDEs that are not considered to be VIEs, but
where we hold a controlling financial interest. The assets of the VIEs that we
consolidated, which totaled approximately $1.9 billion and $1.7 billion as of
December 31, 2019 and 2018, respectively, are reflected on our consolidated
balance sheets in cash, loans held for investment, and other assets. The
liabilities are reflected in other liabilities. The creditors of the VIEs have
no recourse to our general credit. We have not provided additional financial or
other support other than during the period that we are contractually required to
provide it.
Other
Other VIEs include variable interests that we hold in companies that promote
renewable energy sources and other equity method investments. We were not
required to consolidate these entities because we do not have the power to
direct the activities that most significantly impact their economic performance.
Our maximum exposure to these entities is limited to the investment on our
consolidated balance sheets of $502 million and $353 million as of December 31,
2019 and 2018, respectively. The creditors of the other VIEs have no recourse to
our general credit. We have not provided additional financial or other support
other than during the period that we are contractually required to provide it.
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6-GOODWILL AND INTANGIBLE ASSETS
The table below presents our goodwill, intangible assets and MSRs as of
December 31, 2019 and 2018. Goodwill is presented separately, while intangible
assets and MSRs are included in other assets on our consolidated balance sheets.
Table 6.1: Components of Goodwill, Intangible Assets and MSRs
December 31, 2019
Carrying Net Remaining
Amount of Accumulated Carrying Amortization
(Dollars in millions) Assets Amortization Amount Period
Goodwill $ 14,653 N/A $ 14,653 N/A
Intangible assets:
Purchased credit card relationship 1,932 $ (1,864 ) 68
("PCCR") intangibles 3.9 years
Other(1) 246 (140 ) 106 6.7 years
Total intangible assets 2,178 (2,004 ) 174 5.6 years
Total goodwill and intangible assets $ 16,831 $ (2,004 ) $ 14,827
Commercial MSRs(2) $ 555 $ (255 ) $ 300
December 31, 2018
Carrying Net Remaining
Amount of Accumulated Carrying Amortization
(Dollars in millions) Assets Amortization Amount Period
Goodwill $ 14,544 N/A $ 14,544 N/A
Intangible assets:
PCCR intangibles 2,102 $ (1,952 ) 150 3.7 years
Core deposit intangibles 1,149 (1,148 ) 1 0.2 years
Other(1) 271 (168 ) 103 7.1 years
Total intangible assets 3,522 (3,268 ) 254 5.0 years
Total goodwill and intangible assets $ 18,066 $ (3,268 ) $ 14,798
Commercial MSRs(2) $ 459 $ (185 ) $ 274
__________(1) Primarily consists of intangibles for sponsorship, customer and merchant
relationships, partnership and other contract intangibles and trade name
intangibles.
(2) Commercial MSRs are accounted for under the amortization method on our
consolidated balance sheets. We recorded $70 million and $59 million of
amortization expense for the years ended December 31, 2019 and 2018,
respectively.
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Goodwill
The following table presents changes in the carrying amount of goodwill by each
of our business segments for the years ended December 31, 2019, 2018 and 2017.
We did not recognize any goodwill impairment during 2019, 2018 or 2017.
Table 6.2: Goodwill by Business Segments
Credit Consumer
(Dollars in millions) Card Banking Commercial Banking Total
Balance as of December 31, 2016 $ 5,018 $ 4,600 $ 4,901 $ 14,519
Acquisitions 6 0 0 6
Other adjustments(1) 8 0 0 8
Balance as of December 31, 2017 5,032 4,600 4,901 14,533
Acquisitions 33 0 0 33
Reductions in goodwill related to divestitures 0 0 (17 ) (17 )
Other adjustments(1) (5 ) 0 0 (5 )
Balance as of December 31, 2018 5,060 4,600 4,884 14,544
Acquisitions 25 46 36 107
Reductions in goodwill related to divestitures 0 (1 ) 0 (1 )
Other adjustments(1) 3 0 0 3
Balance as of December 31, 2019 $ 5,088 $ 4,645 $ 4,920 $ 14,653
__________
(1) Represents foreign currency translation adjustments.
The goodwill impairment test, performed as of October 1 of each year, is a two-step test. The first step identifies whether there is potential impairment by comparing the fair value of a reporting unit to its carrying amount, including goodwill. If the fair value of a reporting unit is less than its carrying amount, the second step of the impairment test is required to measure the amount of any potential impairment loss. The fair value of reporting units is calculated using a discounted cash flow methodology, a form of the income approach. The calculation uses projected cash flows based on each reporting unit's internal forecast and uses the perpetuity growth method to calculate terminal values. These cash flows and terminal values are then discounted using appropriate discount rates, which are largely based on our external cost of equity with adjustments for risk inherent in each reporting unit. Cash flows are adjusted, as necessary, in order to maintain each reporting unit's equity capital requirements. Our discounted cash flow analysis requires management to make judgments about future loan and deposit growth, revenue growth, credit losses, and capital rates. The key inputs into the discounted cash flow analysis were consistent with market data, where available, indicating that assumptions used were within a reasonable range of observable market data. Intangible Assets In connection with our acquisitions, we recorded intangible assets including PCCRs, sponsorships, customer and merchant relationships, partnerships, trade names and other contract intangibles. At acquisition, the PCCRs reflect the estimated value of existing credit card holder relationships.
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Intangible assets are typically amortized over their respective estimated useful
lives on either an accelerated or straight-line basis. The following table
summarizes the actual amortization expense recorded for the years ended December
31, 2019, 2018 and 2017 and the estimated future amortization expense for
intangible assets as of December 31, 2019:
Table 6.3: Amortization Expense
Amortization
(Dollars in millions) Expense
Actual for the year ended December 31,
2017 $ 245
2018 174
2019 112
Estimated future amounts for the year ending December 31,
2020 64
2021 32
2022 24
2023 17
2024 11
Thereafter 18
Total estimated future amounts $ 166
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7-PREMISES, EQUIPMENT AND LEASES
Premises and Equipment
The following table presents our premises and equipment as of December 31, 2019
and 2018.
Table 7.1 Components of Premises and Equipment
December 31, December 31,
(Dollars in millions) 2019 2018
Land $ 382 $ 386
Buildings and improvements 3,903 3,994
Furniture and equipment 2,218 2,018
Computer software 1,996 1,847
In progress 689 482
Total premises and equipment, gross 9,188 8,727
Less: Accumulated depreciation and amortization (4,810 ) (4,536 ) Total premises and equipment, net
$ 4,378 $ 4,191
Depreciation and amortization expense was $741 million, $728 million and $662 million for the years ended December 31, 2019, 2018 and 2017, respectively. Leases In the first quarter of 2019, we adopted ASU No. 2016-02, Leases (Topic 842), see "Note 1-Summary of Significant Accounting Policies" for the impacts upon adoption. Our primary involvement with leases is in the capacity as a lessee where we lease premises to support our business. A majority of our leases are operating leases of office space, retail bank branches and Cafés. For real estate leases, we have elected to account for the lease and non-lease components together as a single lease component. Our operating leases expire at various dates through 2071, and many of them require variable lease payments by us, of property taxes, insurance premiums, common area maintenance and other costs. Certain of these leases also have extension or termination options, and we assess the likelihood of exercising such options. If it is reasonably certain that we will exercise the options, then we include the impact in the measurement of our right-of-use assets and lease liabilities. Our right-of-use assets and lease liabilities for operating leases are included in other assets and other liabilities on our consolidated balance sheets. As most of our operating leases do not provide an implicit rate, we use our incremental borrowing rate in determining the present value of lease payments. Our operating lease expense is included in occupancy and equipment within non-interest expense in our consolidated statements of income. Total operating lease expense consists of operating lease cost, which is recognized on a straight-line basis over the lease term, and variable lease cost, which is recognized based on actual amounts incurred. We also sublease certain premises, and sublease income is included in other non-interest income in our consolidated statements of income. The following tables present information about our operating lease portfolio and the related lease costs as of and for the year ended December 31, 2019. Table 7.2 Operating Lease Portfolio (Dollars in millions) December 31, 2019 Right-of-use assets $ 1,433 Lease liabilities 1,756 Weighted-average remaining lease term 8.9 years Weighted-average discount rate 3.3 % 158 Capital One Financial Corporation (COF)
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Table 7.3 Total Operating Lease Expense and Other Information
(Dollars in millions) Year Ended December 31, 2019
Operating lease cost $ 316
Variable lease cost 39
Total lease cost 355
Sublease income (26 )
Net lease cost $ 329Cash paid for amounts included in the measurement of lease liabilities
$ 328
Right-of-use assets obtained in exchange for lease liabilities
112
Right-of-use assets recognized upon adoption of new lease standard 1,601 The following table presents a maturity analysis of our operating leases and a reconciliation of the undiscounted cash flows to our lease liabilities as of December 31, 2019. Table 7.4 Maturities of Operating Leases and Reconciliation to Lease Liabilities (Dollars in millions) December 31, 2019 2020 $ 310 2021 279 2022 256 2023 235 2024 202 Thereafter 782 Total undiscounted lease payments 2,064 Less: Imputed interest (308 ) Total lease liabilities $ 1,756 As of December 31, 2019, we had approximately $96 million and $103 million of right-of-use assets and lease liabilities, respectively, for finance leases with a weighted-average remaining lease term of 5.9 years. These right-of-use assets and lease liabilities are included in premises and equipment, net and other borrowings, respectively, on our consolidated balance sheets. We recognized $27 million of total finance lease expense for the year ended 2019.
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8-DEPOSITS AND BORROWINGS
Our deposits represent our largest source of funding for our assets and
operations, which include checking accounts, money market deposits, negotiable
order of withdrawals, savings deposits and time deposits. We also use a variety
of other funding sources including short-term borrowings, senior and
subordinated notes, securitized debt obligations and other borrowings. In
addition, we utilize FHLB advances, which are secured by certain portions of our
loan and investment securities portfolios. Securitized debt obligations are
presented separately on our consolidated balance sheets, as they represent
obligations of consolidated securitization trusts, while federal funds purchased
and securities loaned or sold under agreements to repurchase, senior and
subordinated notes and other borrowings, including FHLB advances, are included
in other debt on our consolidated balance sheets.
Our total short-term borrowings generally consist of federal funds purchased,
securities loaned or sold under agreements to repurchase, and short-term FHLB
advances. Our long-term debt consists of borrowings with an original contractual
maturity of greater than one year. The following tables summarize the components
of our deposits, short-term borrowings and long-term debt as of December 31,
2019 and 2018. The carrying value presented below for these borrowings includes
unamortized debt premiums and discounts, net of debt issuance costs and fair
value hedge accounting adjustments.
Table 8.1: Components of Deposits, Short-Term Borrowings and Long-Term Debt
December 31, December 31,
(Dollars in millions) 2019 2018
Deposits:
Non-interest-bearing deposits $ 23,488 $ 23,483
Interest-bearing deposits(1) 239,209 226,281
Total deposits $ 262,697 $ 249,764
Short-term borrowings:
Federal funds purchased and securities loaned or sold under $ 314 $ 352
agreements to repurchase
FHLB advances 7,000 9,050
Total short-term borrowings $ 7,314 $ 9,402
December 31,
December 31, 2019 2018
Weighted-
Maturity Stated Average
(Dollars in millions) Dates Interest Rates Interest Rate Carrying Value Carrying Value Long-term debt: Securitized debt obligations 2020-2026 1.66 - 3.01%
2.22 % $ 17,808 $ 18,307
Senior and subordinated notes:
Fixed unsecured senior debt(2) 2020-2029 0.80 - 4.75 3.08 23,302 23,290
Floating unsecured senior debt 2020-2023 2.32 - 3.09 2.70 2,695 2,993
Total unsecured senior debt 3.04 25,997 26,283
Fixed unsecured subordinated debt 2023-2026 3.38 - 4.20 3.78 4,475 4,543
Total senior and subordinated notes 30,472 30,826
Other long-term borrowings:
FHLB advances - - - 0 251
Other borrowings 2020-2035 2.20 - 12.86 3.73 103 119
Total other long-term borrowings 103 370
Total long-term debt $ 48,383 $ 49,503
Total short-term borrowings and long-term debt $ 55,697 $ 58,905
__________
(1) Includes $6.5 billion and $4.0 billion of time deposits in denominations in
excess of the $250,000 federal insurance limit as of December 31, 2019 and
2018, respectively.
(2) Includes $1.4 billion of EUR-denominated unsecured notes as of December 31,
2019.
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the carrying value of our interest-bearing time
deposits, securitized debt obligations and other debt by remaining contractual
maturity as of December 31, 2019.
Table 8.2: Maturity Profile of Borrowings
(Dollars in millions) 2020 2021 2022 2023 2024 Thereafter Total
Interest-bearing time
deposits $ 28,186 $ 7,734 $ 5,153 $ 1,661 $ 2,114 $ 110 $ 44,958 Securitized debt obligations 5,433 2,323 6,226 1,105 1,151
1,570 17,808
Federal funds purchased and
securities loaned or sold
under agreements to
repurchase 314 0 0 0 0 0 314
Senior and subordinated notes 4,398 5,011 4,035 4,279 4,428 8,321 30,472
Other borrowings 7,022 20 20 18 5 18 7,103
Total $ 45,353 $ 15,088 $ 15,434 $ 7,063 $ 7,698 $ 10,019 $ 100,655
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9-DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Use of Derivatives and Accounting for Derivatives We regularly enter into derivative transactions to support our overall risk management activities. Our primary market risks stem from the impact on our earnings and economic value of equity due to changes in interest rates and, to a lesser extent, changes in foreign exchange rates. We manage our interest rate sensitivity by employing several techniques, which include changing the duration and re-pricing characteristics of various assets and liabilities by using interest rate derivatives. We also use foreign currency derivatives to limit our earnings and capital exposures to foreign exchange risk by hedging exposures denominated in foreign currencies. In addition to interest rate and foreign currency derivatives, we may also use a variety of other derivative instruments, including caps, floors, options, futures and forward contracts, to manage our interest rate and foreign exchange risks. We designate these risk management derivatives as either qualifying accounting hedges or free-standing derivatives. Qualifying accounting hedges are further designated as fair value hedges, cash flow hedges or net investment hedges. Free-standing derivatives are economic hedges that do not qualify for hedge accounting. We also offer various interest rate, commodity and foreign currency derivatives as accommodation to our customers within our Commercial Banking business. We enter into these derivatives with our customers primarily to help them manage their interest rate risks, hedge their energy and other commodities exposures, and manage foreign currency fluctuations. We then enter into offsetting derivative contracts with counterparties to economically hedge the majority of our subsequent exposures. See below for additional information on our use of derivatives and how we account for them: • Fair Value Hedges: We designate derivatives as fair value hedges when they
are used to manage our exposure to changes in the fair value of certain
financial assets and liabilities, which fluctuate in value as a result of
movements in interest rates. Changes in the fair value of derivatives
designated as fair value hedges are presented in the same line item on our
consolidated statements of income as the earnings effect of the hedged
items. Our fair value hedges primarily consist of interest rate swaps that
are intended to modify our exposure to interest rate risk on various
fixed-rate financial assets and liabilities.
• Cash Flow Hedges: We designate derivatives as cash flow hedges when they are
used to manage our exposure to variability in cash flows related to
forecasted transactions. Changes in the fair value of derivatives designated
as cash flow hedges are recorded as a component of AOCI. Those amounts are
reclassified into earnings in the same period during which the forecasted
transactions impact earnings and presented in the same line item on our
consolidated statements of income as the earnings effect of the hedged
items. Our cash flow hedges use interest rate swaps and floors that areintended to hedge the variability in interest receipts or interest payments
on some of our variable-rate financial assets or liabilities. We also enter
into foreign currency forward contracts to hedge our exposure to variability
in cash flows related to intercompany borrowings denominated in foreign
currencies.
• Net Investment Hedges: We use net investment hedges to manage the foreign
currency exposure related to our net investments in foreign operations that
have functional currencies other than the U.S. dollar. Changes in the fair
value of net investment hedges are recorded in the translation adjustment
component of AOCI, offsetting the translation gain or loss from those
foreign operations. We execute net investment hedges using foreign currency
forward contracts to hedge the translation exposure of the net investment in
our foreign operations under the forward method.
• Free-Standing Derivatives: Our free-standing derivatives primarily consist
of our customer accommodation derivatives and other economic hedges. The
customer accommodation derivatives and the related offsetting contracts are
mainly interest rate, commodity and foreign currency contracts. The other
free-standing derivatives are primarily used to economically hedge the risk
of changes in the fair value of our commercial mortgage loan origination and
purchase commitments as well as other interests held. Changes in the fair
value of free-standing derivatives are recorded in earnings as a component
of other non-interest income.
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Derivatives Counterparty Credit Risk
Counterparty Types
Derivative instruments contain an element of credit risk that arises from the
potential failure of a counterparty to perform according to the terms of the
contract, including making payments due upon maturity of certain derivative
instruments. We execute our derivative contracts primarily in over-the-counter
("OTC") markets. We also execute minimal amounts of interest rate and commodity
futures in the exchange-traded derivative markets. Our OTC derivatives consist
of both centrally cleared and uncleared bilateral contracts. In our centrally
cleared contracts, our counterparties are central counterparty clearinghouses
("CCPs"), such as the Chicago Mercantile Exchange ("CME") and the LCH Group
("LCH"). In our uncleared bilateral contracts, we enter into agreements directly
with our derivative counterparties.
Counterparty Credit Risk Management
We manage the counterparty credit risk associated with derivative instruments by
entering into legally enforceable master netting arrangements, where possible,
and exchanging collateral with our counterparties, typically in the form of cash
or high-quality liquid securities. The amount of collateral exchanged is
dependent upon the fair value of the derivative instruments as well as the fair
value of the pledged collateral. When valuing collateral, an estimate of the
variation in price and liquidity over time is subtracted in the form of a
"haircut" to discount the value of the collateral pledged. Our exposure to
derivative counterparty credit risk, at any point in time, is equal to the
amount reported as a derivative asset on our balance sheet. The fair value of
our derivatives is adjusted on an aggregate basis to take into consideration the
effects of legally enforceable master netting agreements and any associated cash
collateral received or pledged. See Table 9.3 for our net exposure associated
with derivatives.
The terms under which we collateralize our exposures differ between cleared
exposures and uncleared bilateral exposures.
• CCPs: We clear eligible OTC derivatives with CCPs as part of our regulatory
requirements. Futures commission merchants ("FCMs") serve as the
intermediary between CCPs and us. CCPs require that we post initial and
variation margin through our FCMs to mitigate the risk of non-payment ordefault. Initial margin is required upfront by CCPs as collateral against
potential losses on our cleared derivative contracts and variation margin is
exchanged on a daily basis to account for mark-to-market changes in those
derivative contracts. For CME and LCH-cleared OTC derivatives, we
characterize variation margin cash payments as settlements. Our FCM
agreements governing these derivative transactions include provisions that
may require us to post additional collateral under certain circumstances.
• Bilateral Counterparties: We enter into legally enforceable master netting
agreements and collateral agreements, where possible, with bilateral
derivative counterparties to mitigate the risk of default. We review our
collateral positions on a daily basis and exchange collateral with our
counterparties in accordance with these agreements. These bilateral
agreements typically provide the right to offset exposure with the same
counterparty and require the party in a net liability position to post
collateral. Agreements with certain bilateral counterparties require both
parties to maintain collateral in the event the fair values of derivative
instruments exceed established exposure thresholds. Certain of these
bilateral agreements include provisions requiring that our debt maintain a
credit rating of investment grade or above by each of the major credit
rating agencies. In the event of a downgrade of our debt credit rating below
investment grade, some of our counterparties would have the right to
terminate their derivative contract and close out existing positions.
Credit Risk Valuation Adjustments
We record counterparty credit valuation adjustments ("CVAs") on our derivative
assets to reflect the credit quality of our counterparties. We consider
collateral and legally enforceable master netting agreements that mitigate our
credit exposure to each counterparty in determining CVAs, which may be adjusted
in future periods due to changes in the fair values of the derivative contracts,
collateral, and creditworthiness of the counterparty. We also record debit
valuation adjustments ("DVAs") to adjust the fair values of our derivative
liabilities to reflect the impact of our own credit quality.
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheet Presentation
The following table summarizes the notional amounts and fair values of our
derivative instruments as of December 31, 2019 and 2018, which are segregated by
derivatives that are designated as accounting hedges and those that are not, and
are further segregated by type of contract within those two categories. The
total derivative assets and liabilities are adjusted on an aggregate basis to
take into consideration the effects of legally enforceable master netting
agreements and any associated cash collateral received or pledged. Derivative
assets and liabilities are included in other assets and other liabilities,
respectively, on our consolidated balance sheets, and their related gains or
losses are included in operating activities as changes in other assets and other
liabilities in the consolidated statements of cash flows.
Table 9.1: Derivative Assets and Liabilities at Fair Value
December 31, 2019 December 31, 2018
Notional or Derivative(1) Notional or Derivative(1)
Contractual Contractual
(Dollars in millions) Amount Assets Liabilities Amount Assets Liabilities
Derivatives designated as
accounting hedges:
Interest rate contracts:
Fair value hedges $ 57,587 $ 11 $ 55 $ 53,413 $ 64 $ 28
Cash flow hedges 96,900 321 29 81,200 83 70
Total interest rate contracts 154,487 332 84 134,613 147 98
Foreign exchange contracts:
Fair value hedges 1,402 0 6 0 0 0
Cash flow hedges 6,103 0 113 5,745 184 2
Net investment hedges 2,829 0 102 2,607 178 0
Total foreign exchange contracts 10,334 0 221 8,352 362 2
Total derivatives designated as 164,821 332 305 142,965 509 100
accounting hedges
Derivatives not designated as
accounting hedges:
Customer accommodation:
Interest rate contracts 62,268 552 117 49,386 190 256
Commodity contracts 15,492 758 694 10,673 797 786
Foreign exchange and other 4,674 39 42 1,418 12 11
contracts
Total customer accommodation 82,434 1,349 853 61,477 999 1,053 Other interest rate exposures(2) 6,729 48 30 6,427 29 36 Other contracts 1,562 0 9 1,636 2 12 Total derivatives not designated 90,725 1,397 892 69,540 1,030 1,101 as accounting hedges Total derivatives $ 255,546 $ 1,729 $
1,197 $ 212,505 $ 1,539 $ 1,201 Less: netting adjustment(3)
(633 ) (523 ) (1,079 ) (287 )
Total derivative assets/liabilities $ 1,096 $ 674 $ 460 $ 914
__________
(1) Does not reflect $12 million and $2 million recognized as a net valuation
allowance on derivative assets and liabilities for non-performance risk as
of December 31, 2019 and 2018, respectively. Non-performance risk is
included in derivative assets and liabilities, which are part of other
assets and liabilities on the consolidated balance sheets, and is offset
through non-interest income in the consolidated statements of income.
(2) Other interest rate exposures include commercial mortgage-related
derivatives and interest rate swaps.
(3) Represents balance sheet netting of derivative assets and liabilities, and
related payables and receivables for cash collateral held or placed with the
same counterparty.
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the carrying value of our hedged assets and liabilities in fair value hedges and the associated cumulative basis adjustments included in those carrying values, excluding basis adjustments related to foreign currency risk, as of December 31, 2019 and 2018. Table 9.2: Hedged Items in Fair Value Hedging Relationships
December 31, 2019 December 31, 2018
Cumulative Amount of Basis Adjustments Included in the Carrying
Amount Cumulative Amount of Basis Adjustments Included in the Carrying Amount
Carrying Amount Total Discontinued-Hedging Carrying Amount Total
(Dollars in millions) Assets/(Liabilities) Assets/(Liabilities) Relationships Assets/(Liabilities) Assets/(Liabilities) Discontinued-Hedging Relationships
Line item on our consolidated balance
sheets in which the hedged item is
included:
Investment securities available for $ 10,825 $ 300 $ 52 $ 14,067 $ (6 ) $ (2 )
sale(1)(2)
Interest-bearing deposits (14,310 ) (12 ) 0 (13,101 ) 247 0
Securitized debt obligations (9,403 ) 44 64 (5,887 ) 168 143
Senior and subordinated notes (27,777 ) (458 ) 324 (23,572 ) 315 392 __________
(1) These amounts include the amortized cost basis of our investment securities
designated in hedging relationships for which the hedged item is the last
layer expected to be remaining at the end of the hedging relationship. The
amortized cost basis of this portfolio was $5.9 billion and $8.3 billion,
the amount of the designated hedged items was $3.1 billion and $4.0 billion,
and the cumulative basis adjustment associated with these hedges was $75
million and $26 million as of December 31, 2019 and 2018, respectively.
(2) Carrying value represents amortized cost.
Balance Sheet Offsetting of Financial Assets and Liabilities Derivative contracts and repurchase agreements that we execute bilaterally in the OTC market are generally governed by enforceable master netting arrangements where we generally have the right to offset exposure with the same counterparty. Either counterparty can generally request to net settle all contracts through a single payment upon default on, or termination of, any one contract. We elect to offset the derivative assets and liabilities under netting arrangements for balance sheet presentation where a right of setoff exists. For derivative contracts entered into under master netting arrangements for which we have not been able to confirm the enforceability of the setoff rights, or those not subject to master netting arrangements, we do not offset our derivative positions for balance sheet presentation.
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the gross and net fair values of our derivative
assets, derivative liabilities, resale and repurchase agreements and the related
offsetting amounts permitted under U.S. GAAP as of December 31, 2019 and 2018.
The table also includes cash and non-cash collateral received or pledged in
accordance with such arrangements. The amount of collateral presented, however,
is limited to the amount of the related net derivative fair values or
outstanding balances; therefore, instances of over-collateralization are
excluded.
Table 9.3: Offsetting of Financial Assets and Financial Liabilities
Gross Amounts Offset in the Balance Sheet Securities
Collateral Held
Under Master
Gross Financial Cash Collateral Net Amounts as Netting Net
(Dollars in millions) Amounts Instruments Received Recognized Agreements Exposure
As of December 31, 2019
Derivative assets(1) $ 1,729 $ (347 ) $ (286 ) $ 1,096 $ 0 $ 1,096
As of December 31, 2018
Derivative assets(1) 1,539 (205 ) (874 ) 460 0 460
Securities
Gross Amounts Offset in the Balance Sheet Collateral Pledged
Gross Financial Cash Collateral Net Amounts as Under Master Net
(Dollars in millions) Amounts Instruments Pledged Recognized Netting Agreements Exposure
As of December 31, 2019
Derivative liabilities(1) $ 1,197 $ (347 ) $ (176 ) $ 674 $ 0 $ 674
Repurchase agreements(2) 314 0 0 314 (314 ) 0
As of December 31, 2018
Derivative liabilities(1) 1,201 (205 ) (82 ) 914 0 914
Repurchase agreements(2) 352 0 0 352 (352 ) 0
__________(1) We received cash collateral from derivative counterparties totaling $347
million and $925 million as of December 31, 2019 and 2018, respectively. We
also received securities from derivative counterparties with a fair value of
$1 million as of both December 31, 2019 and 2018, which we have the ability
to re-pledge. We posted $954 million and $633 million of cash collateral as
of December 31, 2019 and 2018, respectively.
(2) Represents customer repurchase agreements that mature the next business day.
As of December 31, 2019 and 2018, we pledged collateral with a fair value of
$320 million and $359 million, respectively, under these customer repurchase
agreements, which were primarily agency RMBS securities.
Income Statement and AOCI Presentation Fair Value and Cash Flow Hedges The net gains (losses) recognized in our consolidated statements of income related to derivatives in fair value and cash flow hedging relationships are presented below for the years ended December 31, 2019, 2018 and 2017. We did not reclassify 2017 amounts to conform to the current period presentation. 166 Capital One Financial Corporation (COF)
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Table 9.4: Effects of Fair Value and Cash Flow Hedge Accounting
Year Ended December 31, 2019
Net Interest Income Non-Interest Income
Investment Loans, Including Interest-bearing Securitized Debt Senior and
(Dollars in millions) Securities Loans Held for Sale Other Deposits Obligations Subordinated Notes Other
Total amounts presented
in our consolidated
statements of income $ 2,411 $ 25,862 $ 240 $ (3,420 ) $ (523 ) $ (1,159 ) $ 718
Fair value hedging
relationships:
Interest rate and
foreign exchange
contracts:
Interest recognized on
derivatives $ (12 ) $ 0 $ 0 $ (108 ) $ (14 ) $ (6 ) $ 0
Gains (losses)
recognized on
derivatives (278 ) 0 0 263 45 704 (9 )
Gains (losses)
recognized on hedged
items(1) 278 0 0 (258 ) (123 ) (801 ) 9
Excluded component of
fair value hedges(2) 0 0 0 0 0 (2 ) 0
Net expense recognized
on fair value hedges $ (12 ) $ 0 $ 0 $ (103 ) $ (92 ) $ (105 ) $ 0
Cash flow hedging
relationships:(3)
Interest rate
contracts:
Realized losses
reclassified from AOCI
into net income $ (8 ) $ (163 ) $ 0 $ 0 $ 0 $ 0 $ 0
Foreign exchange
contracts:
Realized gains
reclassified from AOCI
into net income(4) 0 0 44 0 0 0 (1 )
Net income (expense)
recognized on cash flow
hedges $ (8 ) $ (163 ) $ 44 $ 0 $ 0 $ 0 $ (1 )
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended December 31, 2018
Net Interest Income Non-Interest Income
Investment Loans, Including Interest-bearing Securitized Debt Senior and
(Dollars in millions) Securities Loans Held for Sale Other Deposits Obligations Subordinated Notes Other
Total amounts presented
in our consolidated
statements of income $ 2,211 $ 24,728 $ 237 $ (2,598 ) $ (496 ) $ (1,125 ) $ 1,002
Fair value hedging
relationships:
Interest rate
contracts:
Interest recognized on
derivatives $ (23 ) $ 0 $ 0 $ (76 ) $ (53 ) $ 2 $ 0
Gains (losses)
recognized on
derivatives 34 0 0 (60 ) (61 ) (212 ) 0
Gains (losses)
recognized on hedged
items(1) (33 ) 0 0 52 38 131 0
Net expense recognized
on fair value hedges $ (22 ) $ 0 $ 0 $ (84 ) $ (76 ) $ (79 ) $ 0
Cash flow hedging
relationships:(3)
Interest rate
contracts:
Realized losses
reclassified from AOCI
into net income $ (9 ) $ (82 ) $ 0 $ 0 $ 0 $ 0 $ 0
Foreign exchange
contracts:
Realized gains (losses)
reclassified from AOCI
into net income(4) 0 0 47 0 0 0 (2 )
Net income (expense)
recognized on cash flow
hedges $ (9 ) $ (82 ) $ 47 $ 0 $ 0 $ 0 $ (2 )
__________(1) Includes amortization expense of $171 million and $75 million for the years
ended December 31, 2019 and 2018, respectively, related to basis adjustments
on discontinued hedges.
(2) Changes in fair values of cross-currency swaps attributable to changes in
cross-currency basis spreads are excluded from the assessment of hedgeeffectiveness and recorded in other comprehensive income. The initial value
of the excluded component is recognized in earnings over the life of the
swap under the amortization approach.
(3) See "Note 10-Stockholders' Equity" for the effects of cash flow and net
investment hedges on AOCI and amounts reclassified to net income, net of
tax.
(4) We recognized a loss of $341 million and gain of $191 million for the years
ended December 31, 2019 and 2018 respectively, on foreign exchange contracts
reclassified from AOCI. These amounts were largely offset by the foreign
currency transaction gains (losses) on our foreign currency denominated
intercompany funding included other non-interest income.
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended December
(Dollars in millions) 31, 2017
Derivatives designated as fair value hedges:
Fair value interest rate contracts:
Losses recognized in net income on derivatives $ (212 )
Gains recognized in net income on hedged items 216
Net fair value hedge ineffectiveness gains
4
Derivatives designated as cash flow hedges: Gains reclassified from AOCI into net income: Interest rate contracts 91 Foreign exchange contracts 17 Subtotal 108
Gains recognized in net income due to ineffectiveness: Interest rate contracts
2
Net derivative gains recognized in net income $
110
In the next 12 months, we expect to reclassify to earnings net after-tax losses
of $114 million recorded in AOCI as of December 31, 2019. These amounts will
offset the cash flows associated with the hedged forecasted transactions. The
maximum length of time over which forecasted transactions were hedged was
approximately 6 years as of December 31, 2019. The amount we expect to
reclassify into earnings may change as a result of changes in market conditions
and ongoing actions taken as part of our overall risk management strategy.
Free-Standing Derivatives
The net impacts to our consolidated statements of income related to
free-standing derivatives are presented below for the years ended December 31,
2019, 2018 and 2017. These gains or losses are recognized in other non-interest
income in our consolidated statements of income.
Table 9.5: Gains (Losses) on Free-Standing Derivatives
Year Ended December 31,
(Dollars in millions) 2019 2018 2017
Gains (losses) recognized in other non-interest income:
Customer accommodation:
Interest rate contracts $ 48 $ 25 $ 20
Commodity contracts 17 16 13
Foreign exchange and other contracts 13 7 5
Total customer accommodation 78 48 38
Other interest rate exposures (16 ) 33 61
Other contracts (10 ) (21 ) 0
Total $ 52 $ 60 $ 99
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10-STOCKHOLDERS' EQUITY
Preferred Stock
The following table summarizes our preferred stock outstanding as of
December 31, 2019 and 2018.
Table 10.1: Preferred Stock Outstanding(1)
Total Shares
Outstanding Carrying Value
Redeemable Per Annum Liquidation as of (in millions)
by Issuer Dividend Dividend Preference per December 31, December 31,
Series Description Issuance Date Beginning Rate Frequency Share 2019 December 31, 2019 2018
6.00% September
Series B Non-Cumulative August 20, 2012 1, 2017 6.00% Quarterly $ 1,000 875,000 $ 853 $ 853
6.25% SeptemberSeries C(2) Non-Cumulative June 12, 2014 1, 2019
6.25 Quarterly 1,000 0 0 484
6.70% December 1,
Series D(2) Non-Cumulative October 31, 2014 2019
6.70 Quarterly 1,000 0 0 485
5.55%
through
5/31/2020; Semi-Annually
3-mo. through
LIBOR+ 380 5/31/2020;
Fixed-to-Floating Rate June 1, bps Quarterly Series E Non-Cumulative May 14, 2015 2020 thereafter thereafter
1,000 1,000,000 988 988
6.20% December 1,
Series F Non-Cumulative August 24, 2015 2020 6.20 Quarterly 1,000 500,000 484 484
5.20% December 1,
Series G Non-Cumulative July 29, 2016 2021 5.20 Quarterly 1,000 600,000 583 583
6.00% December 1,
Series H Non-Cumulative November 29, 2016 2021 6.00 Quarterly 1,000 500,000 483 483
5.00% December 1,
Series I Non-Cumulative September 11, 2019 2024 5.00 Quarterly 1,000 1,500,000 1,462 0
Total $ 4,853 $ 4,360
__________
(1) Except for Series E, ownership is held in the form of depositary shares,
each representing a 1/40th interest in a share of fixed-rate non-cumulative
perpetual preferred stock.
(2) On December 2, 2019, we redeemed all outstanding shares of our preferred
stock Series C and Series D.
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accumulated Other Comprehensive Income
Accumulated other comprehensive income primarily consists of accumulated net
unrealized gains or losses associated with securities available for sale,
changes in fair value of derivatives in hedging relationships, and foreign
currency translation adjustments.
The following table includes the AOCI impacts from the adoption of accounting
standards and the changes in AOCI by component for the years ended December 31,
2019, 2018 and 2017.
Table 10.2: Accumulated Other Comprehensive Income (Loss)
Foreign Currency
Securities Available Securities Held to Translation
(Dollars in millions) for Sale Maturity Hedging Relationships(1) Adjustments(2) Other Total AOCI as of December 31, 2016
$ (4 ) $ (621 ) $ (78 ) $ (222 ) $ (24 ) $ (949 )
Other comprehensive income (loss)
before reclassifications 62 0 (95 ) 84 30 81
Amounts reclassified from AOCI into earnings (41 ) 97 (108 ) 0 (6 ) (58 ) Other comprehensive income (loss), net of tax 21 97 (203 ) 84 24
23
AOCI as of December 31, 2017 17 (524 ) (281 ) (138 ) 0 (926 ) Cumulative effects from adoption of new accounting standards 3 (113 ) (63 ) 0 (28 ) (201 ) Transfer of securities held to maturity to available for sale(3) (325 ) 407 0 0 0
82
Other comprehensive income (loss) before reclassifications (293 ) 0 38 (39 ) (8 ) (302 ) Amounts reclassified from AOCI into earnings 159 40 (112 ) 0 (3 )
84
Other comprehensive income (loss), net of tax (459 ) 447 (74 ) (39 ) (11 ) (136 ) AOCI as of December 31, 2018 (439 ) (190 ) (418 ) (177 ) (39 ) (1,263 ) Other comprehensive income before reclassifications 670 0 414 70 17
1,171
Amounts reclassified from AOCI into earnings (20 ) 26 358 0 (4 )
360
Other comprehensive income, net of tax 650 26 772 70 13
1,531
Transfer of securities held to maturity to available for sale, net of tax(4) 724 164 0 0 0
888
AOCI as of December 31, 2019 $ 935 $ 0 $ 354 $ (107 ) $ (26 ) $ 1,156 _________
(1) Includes amounts related to cash flow hedges as well as the excluded
component of cross-currency swaps designated as fair value hedges.
(2) Includes other comprehensive loss of $49 million, gain of $150 million and
loss of $143 million for the years ended December 31, 2019, 2018 and 2017
respectively, from hedging instruments designated as net investment hedges.
(3) In the first quarter of 2018, we made a one-time transfer of held to
maturity securities with a carrying value of $9.0 billion to available forsale as a result of our adoption of ASU No. 2017-12, Derivatives and Hedging
(Topic 815): Targeted Improvements to Accounting for Hedging Activities.
This transfer resulted in an after-tax gain of $82 million ($107 million
pre-tax) to AOCI.
(4) On December 31, 2019, we transferred our entire portfolio of held to
maturity securities to available for sale in consideration of changes to
regulatory capital requirements under the Tailoring Rules.
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents amounts reclassified from each component of AOCI to
our consolidated statements of income for the years ended December 31, 2019,
2018 and 2017.
Table 10.3: Reclassifications from AOCI
(Dollars in
millions) Year Ended December 31,
AOCI Components Affected Income Statement Line Item 2019 2018 2017
Securities
available for sale:
Non-interest income $ 26 $ (209 ) $ 65
Income tax provision 6 (50 ) 24
Net income 20 (159 ) 41
Securities held to
maturity:(1)
Interest income (35 ) (53 ) (150 )
Income tax provision (9 ) (13 ) (53 )
Net income (26 ) (40 ) (97 )
Hedging
relationships:
Interest rate
contracts: Interest income (171 ) (91 ) 145
Foreign exchange
contracts: Interest income 44 47 27
Interest expense (2 ) 0 0
Non-interest income (341 ) 191 1
Income from continuing operations
before income taxes (470 ) 147 173
Income tax provision (112 ) 35 65
Net income (358 ) 112 108
Other:
Non-interest income and
non-interest expense 5 4 9
Income tax provision 1 1 3
Net income 4 3 6
Total reclassifications $ (360 ) $ (84 ) $ 58
__________
(1) The amortization of unrealized holding gains or losses reported in AOCI for
securities held to maturity was largely offset by the amortization of the
premium or discount created from the prior transfer of securities from
available for sale to held to maturity, which occurred at fair value. On
December 31, 2019, we transferred our entire portfolio of held to maturity
securities to available for sale.
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The table below summarizes other comprehensive income (loss) activity and the related tax impact for the years ended December 31, 2019, 2018 and 2017. Table 10.4: Other Comprehensive Income (Loss)
Year Ended December 31,
2019 2018 2017
Before Provision After Before Provision After Before Provision After
(Dollars in millions) Tax (Benefit) Tax Tax (Benefit) Tax Tax (Benefit) Tax
Other comprehensive
income (loss):
Net unrealized gains
(losses) on
securities available
for sale $ 855 $ 205 $ 650 $ (605 ) $ (146 ) $ (459 ) $ 23 $ 2 $ 21
Net changes in
securities held to
maturity 36 10 26 588 141 447 150 53 97
Net unrealized gains
(losses) on hedging
relationships 1,016 244 772 (98 ) (24 ) (74 ) (325 ) (122 ) (203 )
Foreign currency
translation
adjustments(1) 54 (16 ) 70 9 48 (39 ) 3 (81 ) 84
Other 17 4 13 (15 ) (4 ) (11 ) 38 14 24
Other comprehensive
income (loss) $ 1,978 $ 447 $ 1,531 $ (121 ) $ 15 $ (136 ) $ (111 ) $ (134 ) $ 23
__________
(1) Includes the impact of hedging instruments designated as net investment
hedges.
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11-REGULATORY AND CAPITAL ADEQUACY
Regulation and Capital Adequacy
Bank holding companies ("BHCs") and national banks are subject to capital
adequacy standards adopted by the Federal Reserve, Office of the Comptroller of
the Currency and Federal Deposit Insurance Corporation (collectively, the
"Federal Banking Agencies"), including the Basel III Capital Rule. Moreover, the
Banks, as insured depository institutions, are subject to prompt corrective
action ("PCA") capital regulations, which require the Federal Banking Agencies
to take prompt corrective action for banks that do not meet PCA capital
requirements.
We entered parallel run under the Basel III Advanced Approaches on January 1,
2015, during which we calculated capital ratios under both the Basel III
Standardized Approach and the Basel III Advanced Approaches, though we continued
to use the Standardized Approach for purposes of meeting regulatory capital
requirements.
In October 2019, the Federal Banking Agencies amended the Basel III Capital Rule
to provide for tailored application of certain capital requirements across
different categories of banking institutions ("Tailoring Rules"). As a bank
holding company ("BHC") with total consolidated assets of at least $250 billion
that does not exceed any of the applicable risk-based thresholds, we are a
Category III institution under the Tailoring Rules. As such, we are no longer
subject to the Basel III Advanced Approaches and certain associated capital
requirements, such as the requirement to include in regulatory capital certain
elements of AOCI.
Under the Basel III Capital Rule, our regulatory minimum risk-based and leverage
capital requirements include a common equity Tier 1 capital ratio of at least
4.5%, a Tier 1 capital ratio of at least 6.0%, a total capital ratio of at least
8.0%, a Tier 1 leverage capital ratio of at least 4.0%, and a supplementary
leverage ratio of 3.0%.
For additional information about the capital adequacy guidelines we are subject
to, see "Part I -Item 1. Business-Supervision and Regulation."
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table provides a comparison of our regulatory capital amounts and
ratios under the Basel III Standardized Approach subject to the applicable
transition provisions, the regulatory minimum capital adequacy ratios and the
PCA well-capitalized level for each ratio,where applicable, as of December 31,
2019 and 2018.
Table 11.1: Capital Ratios Under Basel III(1)
December 31, 2019 December 31, 2018
Minimum Minimum
Capital Capital Capital Well- Capital Capital Capital Well-
(Dollars in millions) Amount Ratio Adequacy Capitalized Amount Ratio Adequacy Capitalized
Capital One Financial
Corp:
Common equity Tier 1
capital(2) $ 38,162 12.2 % 4.5 % N/A $ 33,071 11.2 % 4.5 % N/A Tier 1 capital(3)
43,015 13.7 6.0 6.0 % 37,431 12.7 6.0 6.0 %
Total capital(4) 50,348 16.1 8.0 10.0 44,645 15.1 8.0 10.0
Tier 1 leverage(5) 43,015 11.7 4.0 N/A 37,431 10.7 4.0 N/A
Supplementary
leverage(6) 43,015 9.9 3.0 N/A 37,431 9.0 3.0 N/A
COBNA:
Common equity Tier 1
capital(2) 17,883 16.1 4.5 6.5 16,378 15.3 4.5 6.5
Tier 1 capital(3) 17,883 16.1 6.0 8.0 16,378 15.3 6.0 8.0
Total capital(4) 20,109 18.1 8.0 10.0 18,788 17.6 8.0 10.0
Tier 1 leverage(5) 17,883 14.8 4.0 5.0 16,378 14.0 4.0 5.0
Supplementary
leverage(6) 17,883 12.1 3.0 N/A 16,378 11.5 3.0 N/A
CONA:
Common equity Tier 1
capital(2) 28,445 13.4 4.5 6.5 25,637 13.0 4.5 6.5
Tier 1 capital(3) 28,445 13.4 6.0 8.0 25,637 13.0 6.0 8.0
Total capital(4) 30,852 14.5 8.0 10.0 27,912 14.2 8.0 10.0
Tier 1 leverage(5) 28,445 9.2 4.0 5.0 25,637 9.1 4.0 5.0
Supplementary
leverage(6) 28,445 8.2 3.0 N/A 25,637 8.0 3.0 N/A
__________(1) Capital requirements that are not applicable are denoted by "N/A." (2) Common equity Tier 1 capital ratio is a regulatory capital measure
calculated based on common equity Tier 1 capital divided by risk-weighted
assets.
(3) Tier 1 capital ratio is a regulatory capital measure calculated based on
Tier 1 capital divided by risk-weighted assets.
(4) Total capital ratio is a regulatory capital measure calculated based on
total capital divided by risk-weighted assets.
(5) Tier 1 leverage ratio is a regulatory capital measure calculated based on
Tier 1 capital divided by adjusted average assets.
(6) Supplementary leverage ratio is a regulatory capital measure calculated
based on Tier 1 capital divided by total leverage exposure.
We 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 December 31, 2019 and 2018. Regulatory restrictions exist that limit the ability of the Banks to transfer funds to our BHC. As of December 31, 2019, funds available for dividend payments from COBNA and CONA were $3.3 billion and $4.7 billion, respectively. Applicable provisions that may be contained in our borrowing agreements or the borrowing agreements of our subsidiaries may limit our subsidiaries' ability to pay dividends to us or our ability to pay dividends to our stockholders. The Federal Reserve requires depository institutions to maintain certain cash reserves against specified deposit liabilities. As of December 31, 2019 and 2018, our reserve requirements totaled $1.7 billion and $1.9 billion, respectively.
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12-EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per
common share. Dividends and undistributed earnings allocated to participating
securities represent the undistributed earnings allocated to participating
securities using the two-class method permitted by U.S. GAAP for computing
earnings per share.
Table 12.1: Computation of Basic and Diluted Earnings per Common Share
Year Ended December 31,
(Dollars and shares in millions, except per share data) 2019 2018 2017
Income from continuing operations, net of tax $ 5,533 $ 6,025 $ 2,117
Income (loss) from discontinued operations, net of tax 13 (10 ) (135 )
Net income 5,546 6,015 1,982
Dividends and undistributed earnings allocated to (41 ) (40 ) (13 )
participating securities
Preferred stock dividends (282 ) (265 ) (265 )
Issuance cost for redeemed preferred stock (31 ) 0 0
Net income available to common stockholders $ 5,192 $ 5,710 $ 1,704
Total weighted-average basic shares outstanding 467.6 479.9 484.2 Effect of dilutive securities: Stock options 1.3 1.6 2.5 Other contingently issuable shares 1.0 1.1 1.2 Warrants(1) 0.0 0.5 0.7 Total effect of dilutive securities 2.3 3.2 4.4 Total weighted-average diluted shares outstanding 469.9 483.1 488.6 Basic earnings per common share: Net income from continuing operations $ 11.07 $ 11.92 $ 3.80 Income (loss) from discontinued operations 0.03 (0.02 ) (0.28 ) Net income per basic common share $ 11.10 $ 11.90 $ 3.52 Diluted earnings per common share:(2) Net income from continuing operations $ 11.02 $ 11.84 $ 3.76 Income (loss) from discontinued operations 0.03 (0.02 ) (0.27 ) Net income per diluted common share $ 11.05 $
11.82 $ 3.49
__________
(1) Represents warrants issued as part of the U.S. Department of Treasury's
Troubled Assets Relief Program which were either exercised or expired on
November 14, 2018.
(2) Excluded from the computation of diluted earnings per share were 69 thousand
shares related to options with exercise price of $86.34, 56 thousand shares
related to options with an exercise price of $86.34 and 233 thousand shares
related to options with exercise prices ranging from $82.08 to $86.34 for
the years ended December 31, 2019, 2018 and 2017, respectively, because
their inclusion would be anti-dilutive.
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13-STOCK-BASED COMPENSATION PLANS
Stock Plans
We have one active stock-based compensation plan available for the issuance of
shares to employees, directors and third-party service providers (if
applicable). As of December 31, 2019, under the Amended and Restated 2004 Stock
Incentive plan ("2004 Plan"), we are authorized to issue 55 million common
shares in various forms, primarily share-settled restricted stock units
("RSUs"), performance share units ("PSUs"), and non-qualified stock options. Of
this amount, approximately 10 million shares remain available for future
issuance as of December 31, 2019. The 2004 Plan permits the use of newly issued
shares or treasury shares upon the settlement of options and stock-based
incentive awards, and we generally settle by issuing new shares.
We also issue cash-settled restricted stock units. These cash-settled units are
not counted against the common shares authorized for issuance or available for
issuance under the 2004 Plan. Cash-settled units vesting during 2019, 2018 and
2017 resulted in cash payments to associates of $15 million, $39 million and $42
million, respectively. There was no unrecognized compensation cost for unvested
cash-settled units as of December 31, 2019.
Total stock-based compensation expense recognized during 2019, 2018 and 2017 was
$239 million, $170 million and $244 million, respectively. The total income tax
benefit for stock-based compensation recognized during 2019, 2018 and 2017 was
$50 million, $34 million and $92 million, respectively.
In addition, we maintain an Associate Stock Purchase Plan ("Purchase Plan"),
which is a compensatory plan under the accounting guidance for stock-based
compensation. We recognized $25 million in compensation expense for 2019 and $23
million for both 2018 and 2017. We also maintain a Dividend Reinvestment and
Stock Purchase Plan ("DRP"), which allows participating stockholders to purchase
additional shares of our common stock through automatic reinvestment of
dividends or optional cash investments.
Restricted Stock Units and Performance Share Units
RSUs represent share-settled awards that do not contain performance conditions
and are granted to certain employees at no cost to the recipient. RSUs generally
vest over three years from the date of grant; however, some RSUs cliff vest on
or shortly after the first or third anniversary of the grant date. RSUs are
subject to forfeiture until certain restrictions have lapsed, including
continued employment for a specified period of time.
PSUs represent share-settled awards that contain performance conditions and are
granted to certain employees at no cost to the recipient. PSUs generally vest
over three years from the date of grant; however, some PSUs cliff vest on or
shortly after the third anniversary of the grant date. The number of PSUs that
step vest over three years can be reduced by 50% or 100% depending on whether
specific performance goals are met during the vesting period. The number of
three-year cliff vesting PSUs that will ultimately vest is contingent upon
meeting specific performance goals over a three-year period. These PSUs also
include an opportunity to receive from 0% to 150% of the target number of common
shares.
A recipient of an RSU or PSU is entitled to receive a share of common stock
after the applicable restrictions lapse and is generally entitled to receive
cash payments or additional shares of common stock equivalent to any dividends
paid on the underlying common stock during the period the RSU or PSU is
outstanding, but is not entitled to voting rights. Generally, the value of RSUs
and PSUs will equal the fair value of our common stock on the date of grant and
the expense is recognized over the vesting period. Certain PSUs have
discretionary vesting conditions and are remeasured at fair value each reporting
period.
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents a summary of 2019 activity for RSUs and PSUs. Table 13.1: Summary of Restricted Stock Units and Performance Share Units
Restricted Stock Units Performance Share Units(1)
Weighted-Average Weighted-Average
Grant Date Grant Date
Fair Value Fair Value
(Shares/units in thousands) Units per Unit Units per Unit
Unvested as of January 1, 2019 3,345 $ 85.01 1,804 $ 87.48
Granted(2) 1,965 83.29 1,018 78.18
Vested (1,450 ) 82.94 (1,012 ) 73.68
Forfeited (190 ) 88.22 (35 ) 90.47
Unvested as of December 31, 2019 3,670 $ 84.74 1,775 $ 89.95
_________
(1) Granted and vested include adjustments for achievement of specific
performance goals for performance share units granted in prior periods.
(2) The weighted-average grant date fair value of RSUs was $100.73 and $86.20 in
2018 and 2017, respectively. The weighted-average grant date fair value of
PSUs was $100.65 and $82.48 in 2018 and 2017, respectively.
The total fair value of RSUs that vested during 2019, 2018 and 2017 was $122
million, $139 million and $110 million, respectively. The total fair value of
PSUs that vested during 2019, 2018 and 2017 was $82 million, $92 million and $90
million, respectively. As of December 31, 2019, the unrecognized compensation
expense related to unvested RSUs $157 million, which is expected to be amortized
over a weighted-average period of approximately 1.8 years; and the unrecognized
compensation related to unvested PSUs was $42 million, which is expected to be
amortized over a weighted-average period of approximately 1 year.
Stock Options
Stock options have a maximum contractual term of ten years. Generally, the
exercise price of stock options will equal the fair market value of our common
stock on the date of grant. Option vesting is determined at the time of grant
and may be subject to the achievement of any applicable performance conditions.
Options generally become exercisable over three years beginning on the first
anniversary of the date of grant; however, some option grants cliff vest on or
shortly after the first or third anniversary of the grant date.
The following table presents a summary of 2019 activity for stock options and
the balance of stock options exercisable as of December 31, 2019.
Table 13.2: Summary of Stock Options Activity
Weighted-
Weighted- Average
Shares Average Remaining Aggregate
(Shares in thousands, and intrinsic value Subject to Exercise Contractual Intrinsic
in millions) Options Price Term Value
Outstanding as of January 1, 2019 3,456 $ 56.03
Granted 0 0.00
Exercised (271 ) 61.83
Forfeited 0 0.00
Expired 0 0.00
Outstanding as of December 31, 2019 3,185 $ 55.54 2.81 years $ 151
Exercisable as of December 31, 2019 3,034 $ 54.01 2.60 years $ 148
There were no stock options granted in 2019 and 2018 and the weighted-average fair value of stock options granted during 2017 was $21.48. The total intrinsic value of stock options exercised during 2019, 2018 and 2017 was $10 million, $94 million and $92 million, respectively.
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14-EMPLOYEE BENEFIT PLANS
Defined Contribution Plan
We sponsor a contributory Associate Savings Plan (the "Plan") in which all
full-time and part-time associates over the age of 18 are eligible to
participate. We make non-elective contributions to each eligible associates'
account and match a portion of associate contributions. We also sponsor a
voluntary non-qualified deferred compensation plan in which select groups of
employees are eligible to participate. We make contributions to this plan based
on participants' deferral of salary, bonuses and other eligible pay. In
addition, we match participants' excess compensation (compensation over the
Internal Revenue Service ("IRS") compensation limit) less deferrals. We
contributed a total of $316 million, $291 million and $282 million to these
plans during the years ended December 31, 2019, 2018 and 2017, respectively.
Defined Benefit Pension and Other Postretirement Benefit Plans
We sponsor a frozen qualified defined benefit pension plan and several
non-qualified defined benefit pension plans. We also sponsor a plan that
provides other postretirement benefits, including medical and life insurance
coverage. Our pension plans and the other postretirement benefit plan are valued
using December 31 as the measurement date each year. Our policy is to amortize
prior service amounts on a straight-line basis over the average remaining years
of service to full eligibility for benefits of active plan participants.
The following table sets forth, on an aggregated basis, changes in the benefit
obligation and plan assets, the funded status and how the funded status is
recognized on our consolidated balance sheets.
Table 14.1: Changes in Benefit Obligation and Plan Assets
Defined Pension Other Postretirement
Benefits Benefits
(Dollars in millions) 2019 2018 2019 2018
Change in benefit obligation:
Accumulated benefit obligation as of January 1, $ 157 $ 178 $ 29 $ 35
Service cost 1 1 0 0
Interest cost 6 6 1 1
Benefits paid (13 ) (15 ) (2 ) (2 )
Actuarial loss (gain) 14 (13 ) (1 ) (5 )
Accumulated benefit obligation as of December 31, $ 165 $ 157 $ 27 $ 29
Change in plan assets:
Fair value of plan assets as of January 1, $ 218 $ 246 $ 6 $ 6
Actual return on plan assets 48 (14 ) 1 0
Employer contributions 1 1 1 2
Benefits paid (13 ) (15 ) (2 ) (2 )
Fair value of plan assets as of December 31, $ 254 $ 218 $ 6 $ 6
Over (under) funded status as of December 31, $ 89 $ 61 $ (21 ) $ (23 )
Defined Pension Other Postretirement
Benefits Benefits
(Dollars in millions) 2019 2018 2019 2018
Balance sheet presentation as of December 31,
Other assets $ 100 $ 71 $ 0 $ 0
Other liabilities (11 ) (10 ) (21 ) (23 )
Net amount recognized as of December 31, $ 89 $ 61 $ (21 ) $ (23 )
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net periodic benefit gain for our defined benefit pension plans and other
postretirement benefit plan totaled $10 million, $12 million and $8 million in
2019, 2018 and 2017, respectively. We recognized a pre-tax gain of $18 million
and $15 million in other comprehensive income for our defined benefit pension
plans and other postretirement benefit plan in 2019 and 2017, respectively,
compared to a pre-tax loss of $17 million in 2018.
Pre-tax amounts recognized in AOCI that have not yet been recognized as a
component of net periodic benefit cost consist of net actuarial loss of $41
million and $64 million for our defined benefit pension plans as of December 31,
2019 and 2018, respectively, and net actuarial gain of $4 million and $9 million
for our other postretirement benefit plan as of December 31, 2019 and 2018,
respectively. There was no meaningful prior service cost recognized in AOCI.
Plan Assets and Fair Value Measurement
Plan assets are invested using a total return investment approach whereby a mix
of equity securities and debt securities are used to preserve asset values,
diversify risk and enhance our ability to achieve our benchmark for long-term
investment return. Investment strategies and asset allocations are based on
careful consideration of plan liabilities, the plan's funded status and our
financial condition. Investment performance and asset allocation are measured
and monitored on a quarterly basis.
As of December 31, 2019 and 2018, our plan assets totaled $260 million and $224
million, respectively. We invested substantially all our plan assets in common
collective trusts, which primarily consist of domestic and international equity
securities, government securities and corporate and municipal bonds. Our plan
assets were classified as Level 2 in the fair value hierarchy as of December 31,
2019. In 2018, investments in common collective trusts were measured at net
asset value per share, or its equivalent, as a practical expedient and therefore
were not classified in the fair value hierarchy as of December 31, 2018. For
information on fair value measurements, including descriptions of Level 1, 2 and
3 of the fair value hierarchy and the valuation methods we utilize, see
"Note 16-Fair Value Measurement."
Expected Future Benefit Payments
As of December 31, 2019, the benefits expected to be paid in the next ten years
totaled $100 million for our defined pension benefit plans and $18 million for
our other postretirement benefit plan, respectively.
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15-INCOME TAXES
We recognize the current and deferred tax consequences of all transactions that
have been recognized in the financial statements using the provisions of the
enacted tax laws. Current income tax expense represents our estimated taxes to
be paid or refunded for the current period and includes income tax expense
related to our uncertain tax positions, as well as tax-related interest and
penalties. Deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax basis of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. We record valuation
allowances to reduce deferred tax assets to the amount that is more likely than
not to be realized. We record the effect of remeasuring deferred tax assets and
liabilities due to a change in tax rates or laws as a component of income tax
expense related to continuing operations for the period in which the change is
enacted. We subsequently release income tax effects stranded in AOCI using a
portfolio approach. Income tax benefits are recognized when, based on their
technical merits, they are more likely than not to be sustained upon
examination. The amount recognized is the largest amount of benefit that is more
likely than not to be realized upon settlement.
In the fourth quarter of 2018, we recognized a tax benefit of $284 million as a
result of an approval from the IRS related to a tax methodology change on
rewards costs. In the fourth quarter of 2017, we recorded charges of $1.8
billion associated with the impacts of the Tax Act, and there were no material
adjustments made to this amount during the measurement period which ended in
December 2018.
The following table presents significant components of the provision for income
taxes attributable to continuing operations for the years ended December 31,
2019, 2018 and 2017.
Table 15.1: Significant Components of the Provision for Income Taxes
Attributable to Continuing Operations
Year Ended December 31,
(Dollars in millions) 2019 2018 2017
Current income tax provision:
Federal taxes $ 1,207 $ 210 $ 1,585
State taxes 301 234 223
International taxes 129 135 133
Total current provision $ 1,637 $ 579 $ 1,941
Deferred income tax provision (benefit):
Federal taxes $ (222 ) $ 620 $ 1,509
State taxes (45 ) 115 (69 )
International taxes (29 ) (21 ) (6 )
Total deferred provision (benefit) (296 ) 714 1,434
Total income tax provision $ 1,341 $ 1,293 $ 3,375
The international income tax provision is related to pre-tax earnings from
foreign operations of approximately $215 million, $382 million and $410 million
in 2019, 2018 and 2017, respectively.
Total income tax provision does not reflect the tax effects of items that are
included in accumulated other comprehensive income, which include tax provisions
of $727 million and $15 million in 2019 and 2018, respectively, and a tax
benefit of $134 million in 2017. See "Note 10-Stockholders' Equity" for
additional information.
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the reconciliation of the U.S. federal statutory income tax rate to the effective income tax rate applicable to income from continuing operations for the years ended December 31, 2019, 2018 and 2017. Table 15.2: Effective Income Tax Rate
Year Ended December 31,
2019 2018 2017
Income tax at U.S. federal statutory tax rate 21.0 % 21.0 % 35.0 % State taxes, net of federal benefit 3.1 3.2
2.2
Non-deductible expenses 1.6 2.2
0.7
Affordable housing, new markets and other tax credits (5.2 ) (4.0 )
(5.8 )
Tax-exempt interest and other nontaxable income (0.8 ) (0.7 ) (1.5 )
IRS method changes 0.0 (3.9 ) 0.0
Impacts of the Tax Act 0.0 (0.3 ) 32.2
Other, net (0.2 ) 0.2 (1.3 )
Effective income tax rate 19.5 % 17.7 % 61.5 %
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents significant components of our deferred tax assets
and liabilities as of December 31, 2019 and 2018. The valuation allowance below
represents the adjustment of certain state deferred tax assets and net operating
loss carryforwards to the amount we have determined is more likely than not to
be realized.
Table 15.3: Significant Components of Deferred Tax Assets and Liabilities
(Dollars in millions) December 31, 2019 December 31, 2018
Deferred tax assets:
Allowance for loan and lease losses $ 1,729 $ 1,700
Rewards programs 579 500
Lease liabilities 407 0
Compensation and employee benefits 301 167
Net operating loss and tax credit carryforwards 284 271
Partnership investments 202 162
Goodwill and intangibles 161 187
Unearned income 95 114
Net unrealized losses on derivatives 0 135
Security and loan valuations(1) 0 288
Other assets 142 152
Subtotal 3,900 3,676
Valuation allowance (223 ) (245 )
Total deferred tax assets 3,677 3,431
Deferred tax liabilities:
Original issue discount 600 720
Right-of-use assets 393 0
Security and loan valuations(1) 234 0
Fixed assets and leases 189 204
Partnership investments 147 102
Loan fees and expenses 100 75
Net unrealized gains on derivatives 93 0
Mortgage servicing rights 55 48
Other liabilities 146 137
Total deferred tax liabilities 1,957 1,286
Net deferred tax assets $ 1,720 $ 2,145
_________
(1) Amount includes the tax impact of our December 31, 2019 transfer of our
entire portfolio of held to maturity securities to available for sale.
Our federal net operating loss carryforwards were $31 million and less than $1 million as of December 31, 2019 and 2018, respectively. These operating loss carryforwards were attributable to acquisitions and will expire from 2027 to 2037, however $12 million of these carryforwards do not have an expiration. Under IRS rules, our ability to utilize these losses against future income is limited. The net tax value of our state net operating loss carryforwards were $237 million and $253 million as of December 31, 2019 and 2018, respectively, and they will expire from 2020 to 2038. Our foreign tax credit carryforward was $40 million and $19 million as of December 31, 2019 and 2018, respectively. This carryforward will begin expiring in 2028. We recognize accrued interest and penalties related to income taxes as a component of income tax expense. We recognized $4 million, $6 million and $5 million of expense in 2019, 2018 and 2017, respectively.
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the accrued balance of tax, interest and penalties
related to unrecognized tax benefits.
Table 15.4: Reconciliation of the Change in Unrecognized Tax Benefits
Gross Accrued Gross Tax,
Unrecognized Interest and Interest and
(Dollars in millions) Tax Benefits Penalties Penalties
Balance as of January 1, 2017 $ 85 $ 24 $ 109
Additions for tax positions related to prior years 5 7 12
Reductions for tax positions related to prior (4 ) (2 ) (6 )
years due to IRS and other settlements
Balance as of December 31, 2017 86 29 115
Additions for tax positions related to the current 28 0 28
year
Additions for tax positions related to prior years 402 25 427 Reductions for tax positions related to prior (76 ) (19 ) (95 ) years due to IRS and other settlements Balance as of December 31, 2018 440 35 475 Additions for tax positions related to the current 23 17 40
year
Additions for tax positions related to prior years 12 4 16
Reductions for tax positions related to prior (44 ) (25 ) (69 )
years due to IRS and other settlements
Balance as of December 31, 2019 $ 431 $ 31 $ 462
Portion of balance at December 31, 2019 that, if
recognized, would impact the effective income tax $ 164 $ 24 $ 188
rate
We are subject to examination by the IRS and other tax authorities in certain
countries and states in which we operate. The tax years subject to examination
vary by jurisdiction. During 2019, we entered into settlement agreements with
states that resolved our outstanding state disputes on the economic nexus issue
for prior tax years. We also continued to participate in the IRS Compliance
Assurance Process ("CAP") for our 2017, 2018 and 2019 federal income tax return
years, and have been accepted into CAP for 2020. The IRS review of our 2017
federal income tax return is substantially completed, with one issue remaining
open. We have proposed a resolution of this issue to the IRS and expect that the
issue and the tax year will be closed on an agreed basis during the first
quarter of 2020. The IRS review of our 2018 federal income tax return was
substantially completed prior to its filing in the fourth quarter of 2019, with
the IRS reserving a limited number of issues for further post-filing review that
is expected to be completed in 2020. As in prior years, we expect that the IRS
review of our 2019 federal income tax return will be substantially completed
prior to its filing in 2020.
It is reasonably possible that further adjustments to the Company's unrecognized
tax benefits may be made within 12 months of the reporting date as a result of
future judicial or regulatory interpretations of existing tax laws. At this
time, an estimate of the potential changes to the amount of unrecognized tax
benefits cannot be made.
The Tax Act required that all unremitted earnings of our subsidiaries operating
outside the U.S. were deemed to be repatriated as of December 31, 2017. As such,
a liability of $111 million was paid with our 2017 federal tax return for the
deemed repatriation of $1.5 billion of undistributed foreign earnings. Upon
repatriation of these earnings, there would be no additional U.S. federal income
taxes. In accordance with the guidance for income taxes in special areas, these
earnings are considered by management to be invested indefinitely, except for
the earnings of our Philippines subsidiary as we made distributions in 2019 and
expect to make distributions in the future.
As of December 31, 2019, U.S. income taxes of $69 million have not been provided
for approximately $287 million of previously acquired thrift bad debt reserves
created for tax purposes as of December 31, 1987. These amounts, acquired as a
result of previous mergers and acquisitions, are subject to recapture in the
unlikely event that CONA, as the successor to the merged and acquired entities,
makes distributions in excess of earnings and profits, redeems its stock or
liquidates.
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16-FAIR VALUE MEASUREMENT
Fair value, also referred to as an exit price, is defined as the price that
would be received for an asset or paid to transfer a liability in an orderly
transaction between market participants on the measurement date. The fair value
accounting guidance provides a three-level fair value hierarchy for classifying
financial instruments. This hierarchy is based on the markets in which the
assets or liabilities trade and whether the inputs to the valuation techniques
used to measure fair value are observable or unobservable. The fair value
measurement of a financial asset or liability is assigned a level based on the
lowest level of any input that is significant to the fair value measurement in
its entirety. The three levels of the fair value hierarchy are described below:
Valuation is based on quoted prices (unadjusted) in active markets for
Level 1: identical assets or liabilities.
Level 2: Valuation is based on observable market-based inputs other than Level 1
prices, such as quoted prices for similar assets or liabilities, quoted
prices in markets that are not active, or other inputs that are
observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.Level 3: Valuation is generated from techniques that use significant assumptions
not observable in the market. Valuation techniques includepricing
models, discounted cash flow methodologies or similar techniques.
The accounting guidance for fair value measurements requires that we maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value. The accounting guidance provides for the irrevocable option to elect, on a contract-by-contract basis, to measure certain financial assets and liabilities at fair value at inception of the contract and record any subsequent changes in fair value in earnings. Assets and Liabilities Measured at Fair Value on a Recurring Basis The following describes the valuation techniques used in estimating the fair value of our financial assets and liabilities recorded at fair value on a recurring basis. Investment Securities Quoted prices in active markets are used to measure the fair value of U.S. Treasury securities. For the majority of securities in other investment categories, we utilize multiple vendor pricing services to obtain fair value measurements. A waterfall of pricing vendors is determined in order of preference. The determination of the top-ranked pricing vendor is made on an annual basis as part of an assessment of the performance of pricing services provided by the vendors. A pricing service may be considered as the preferred or primary pricing provider depending on how closely aligned its prices are to other vendor prices, and how consistent the prices are with other available market information. The price of each security is confirmed by comparing with other vendor prices before it is finalized. RMBS and CMBS securities are generally classified as Level 2 or 3. When significant assumptions are not consistently observable, fair values are derived using the best available data. Such data may include quotes provided by dealers, valuation from external pricing services, independent pricing models, or other model-based valuation techniques, for example, calculation of the present values of future cash flows incorporating assumptions such as benchmark yields, spreads, prepayment speeds, credit ratings and losses. Generally, the pricing services utilize observable market data to the extent available. Pricing models may be used, which can vary by asset class and may also incorporate available trade, bid and other market information. Across asset classes, information such as trader/dealer inputs, credit spreads, forward curves and prepayment speeds are used to help determine appropriate valuations. Because many fixed income securities do not trade on a daily basis, the pricing models may apply available information through processes such as benchmarking curves, grouping securities based on their characteristics and using matrix pricing to prepare valuations. In addition, model processes are used by the pricing services to develop prepayment assumptions. We validate the pricing obtained from the primary pricing providers through comparison of pricing to additional sources, including other pricing services, dealer pricing indications in transaction results and other internal sources. Pricing variances among different pricing sources are analyzed. Additionally, on an on-going basis, we request more detailed information from the valuation vendors to understand the pricing methodology and assumptions used to value the securities.
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Derivative Assets and Liabilities
We use both exchange-traded and OTC derivatives to manage our interest rate and
foreign currency risk exposures. When quoted market prices are available and
used to value our exchange-traded derivatives, we classify them as Level 1.
However, predominantly all of our derivatives do not have readily available
quoted market prices. Therefore, we value most of our derivatives using
vendor-based valuation techniques. We primarily rely on market observable inputs
for our models, such as interest rate yield curves, credit curves, option
volatility and currency rates. These inputs can vary depending on the type of
derivatives and nature of the underlying rate, price or index upon which the
value of the derivative is based. We typically classify derivatives as Level 2
when significant inputs can be observed in a liquid market and the model itself
does not require significant judgment. When instruments are traded in less
liquid markets and significant inputs are unobservable, such as interest rate
swaps whose remaining terms do not correlate with market observable interest
rate yield curves, such derivatives are classified as Level 3. The impact of
credit risk valuation adjustments are considered when measuring the fair value
of derivative contracts in order to reflect the credit quality of the
counterparty and our own credit quality. Official internal pricing is compared
against additional pricing sources such as external valuation agents and other
internal sources. Pricing variances among different pricing sources are analyzed
and validated. These derivatives are included in other assets or other
liabilities on the consolidated balance sheets.
Loans Held for Sale
In our commercial business, we originate multifamily commercial real estate
loans with the intent to sell them to GSEs. Beginning in the fourth quarter of
2019, we elected the fair value option for such loans as part of our management
of interest rate risk in our multifamily agency business. These held for sale
loans are valued based on market observable inputs and are therefore classified
as Level 2. Unrealized gains and losses on these loans are recorded in other
non-interest income in our consolidated statements of income.
Retained Interests in Securitizations
We have retained interests in various mortgage securitizations from previous
acquisitions. Our retained interests primarily include interest-only bonds and
negative amortization bonds. We record these retained interests at fair value
using market indications and valuation models to calculate the present value of
future cash flows. The models incorporate various assumptions that market
participants use in estimating future cash flows including voluntary prepayment
rate, discount rate, default rate and loss severity. Due to the use of
significant unobservable inputs, retained interests in securitizations are
classified as Level 3 under the fair value hierarchy.
Deferred Compensation Plan Assets
We offer a voluntary non-qualified deferred compensation plan to eligible
associates. In addition to participant deferrals, we make contributions to the
plan. Participants invest these contributions in a variety of publicly traded
mutual funds. The plan assets, which consist of publicly traded mutual funds,
are classified as Level 1.
The determination of the leveling of financial instruments in the fair value
hierarchy is performed at the end of each reporting period. We consider all
available information, including observable market data, indications of market
liquidity and orderliness, and our understanding of the valuation techniques and
significant inputs. Based upon the specific facts and circumstances of each
instrument or instrument category, judgments are made regarding the significance
of the observable or unobservable inputs to the instruments' fair value
measurement in its entirety. If unobservable inputs are considered significant,
the instrument is classified as Level 3. The process for determining fair value
using unobservable inputs is generally more subjective and involves a high
degree of management judgment and assumptions.
The following table displays our assets and liabilities measured on our
consolidated balance sheets at fair value on a recurring basis as of
December 31, 2019 and 2018.
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Table 16.1: Assets and Liabilities Measured at Fair Value on a Recurring Basis
December 31, 2019
Fair Value Measurements Using
(Dollars in millions) Level 1 Level 2 Level 3 Netting Adjustments(1) Total
Assets:
Securities available for sale:
U.S. Treasury securities $ 4,124 $ 0 $ 0 - $ 4,124
RMBS 0 63,909 429 - 64,338
CMBS 0 9,413 13 - 9,426
Other securities 231 1,094 0 - 1,325
Total securities available for sale 4,355 74,416 442 - 79,213
Loans held for sale 0 251 0 - 251
Other assets:
Derivative assets(2) 84 1,568 77 $ (633 ) 1,096
Other(3) 344 0 66 - 410
Total assets $ 4,783 $ 76,235 $ 585 $ (633 ) $ 80,970
Liabilities:
Other liabilities:
Derivative liabilities(2) $ 17 $ 1,129 $ 51 $ (523 ) $ 674
Total liabilities $ 17 $ 1,129 $ 51 $ (523 ) $ 674
December 31, 2018
Fair Value Measurements Using Netting
(Dollars in millions) Level 1 Level 2 Level 3 Adjustments(1) Total
Assets:
Securities available for sale:
U.S. Treasury securities $ 6,144 $ 0 $ 0 - $ 6,144
RMBS 0 33,212 433 - 33,645
CMBS 0 4,729 10 - 4,739
Other securities 219 1,403 0 - 1,622
Total securities available for sale 6,363 39,344 443 - 46,150
Other assets:
Derivative assets(2) 0 1,501 38 $ (1,079 ) 460
Other(3) 265 0 158 - 423
Total assets $ 6,628 $ 40,845 $ 639 $ (1,079 ) $ 47,033
Liabilities:
Other liabilities:
Derivative liabilities(2) $ 0 $ 1,153 $ 48 $ (287 ) $ 914
Total liabilities $ 0 $ 1,153 $ 48 $ (287 ) $ 914
__________(1) Represents balance sheet netting of derivative assets and liabilities, and
related payables and receivables for cash collateral held or placed with the
same counterparty. See "Note 9-Derivative Instruments and Hedging
Activities" for additional information.
(2) Does not reflect $12 million and $2 million recognized as a net valuation
allowance on derivative assets and liabilities for non-performance risk as
of December 31, 2019 and 2018, respectively. Non-performance risk is
included in derivative assets and liabilities, which are part of other
assets and liabilities on the consolidated balance sheets, and is offset
through non-interest income in the consolidated statements of income.
(3) As of December 31, 2019 and 2018, other includes retained interests in
securitizations of $66 million and $158 million, deferred compensation plan
assets of $343 million and $264 million, and equity securities of $1 million
and $1 million, respectively.
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Level 3 Recurring Fair Value Rollforward
The table below presents a reconciliation for all assets and liabilities
measured and recognized at fair value on a recurring basis using significant
unobservable inputs (Level 3) for the years ended December 31, 2019, 2018 and
2017. Generally, transfers into Level 3 were primarily driven by the usage of
unobservable assumptions in the pricing of these financial instruments as
evidenced by wider pricing variations among pricing vendors and transfers out of
Level 3 were primarily driven by the usage of assumptions corroborated by market
observable information as evidenced by tighter pricing among multiple pricing
sources.
Table 16.2: Level 3 Recurring Fair Value Rollforward
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Year Ended December 31, 2019
Total Gains (Losses) (Realized/Unrealized) Net Unrealized Gains
(Losses) Included in
Net Income Related to
Included Transfers Transfers Assets and Liabilities
Balance, January 1, in Net Into Out of Balance, December Still Held as of
(Dollars in millions) 2019 Income(1) Included in OCI Purchases Sales Issuances Settlements Level 3 Level 3 31, 2019 December 31, 2019(1)
Securities available for sale:(2)
RMBS $ 433 $ 35 $ 5 $ 0 $ 0 $ 0 $ (63 ) $ 177 $ (158 ) $ 429 $ 34
CMBS 10 0 0 0 0 0 (2 ) 5 0 13 0
Total securities
available for sale 443 35 5 0 0 0 (65 ) 182 (158 ) 442 34
Other assets:
Retained interests in
securitizations 158 18 0 0 0 0 (110 ) 0 0 66 (19 )
Net derivative assets
(liabilities)(3) (10 ) 6 0 0 0 (16 ) 52 0 (6 ) 26 1
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Year Ended December 31, 2018
Total Gains (Losses) (Realized/Unrealized) Net Unrealized Gains
(Losses) Included in
Net Income Related to
Assets and
Balance, Included Transfers Transfers Liabilities
(Dollars in January 1, in Net Into Out of Balance, December 31, Still Held as of
millions) 2018 Income(1) Included in OCI Purchases Sales Issuances Settlements Level 3 Level 3 2018 December 31, 2018(1)
Securities available for sale:
RMBS $ 614 $ 32 $ (8 ) $ 0 $ 0 $ 0 $ (74 ) $ 203 $ (334 ) $ 433 $ 28
CMBS 14 0 0 0 0 0 (4 ) 0 0 10 0
Other securities 5 0 0 0 0 0 (5 ) 0 0 0 0
Total securities
available for sale 633 32 (8 ) 0 0 0 (83 ) 203 (334 ) 443 28
Other assets:
Consumer MSRs 92 3 0 0 (97 ) 2 0 0 0 0 0
Retained interests
in securitizations 172 (14 ) 0 0 0 0 0 0 0 158 (14 )
Net derivative
assets
(liabilities)(3) 13 (20 ) 0 0 0 13 (17 ) 0 1 (10 ) (20 )
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Year Ended December 31, 2017
Total Gains (Losses) Net Unrealized Gains
(Realized/Unrealized) (Losses) Included in
Net Income Related to
Assets and
Balance, Included Transfers Transfers Liabilities
(Dollars in January 1, in Net Included in Into Out of Balance, December Still Held as of
millions) 2017 Income(1) OCI Purchases Sales Issuances Settlements Level 3 Level 3 31, 2017 December 31, 2017(1)
Securities available for sale:
RMBS $ 518 $ 90 $ (24 ) $ 0 $ (116 ) $ 0 $ (92 ) $ 572 $ (334 ) $ 614 $ 19
CMBS 51 0 0 110 (50 ) 0 (4 ) 0 (93 ) 14 0
Other securities 9 0 0 0 0 0 (4 ) 0 0 5 0
Total securities
available for sale 578 90 (24 ) 110 (166 ) 0 (100 ) 572 (427 ) 633 19
Other assets:
Consumer MSRs 80 (5 ) 0 0 (3 ) 27 (7 ) 0 0 92 (5 )
Retained interests
in securitizations 201 (29 ) 0 0 0 0 0 0 0 172 (29 )
Net derivative
assets
(liabilities)(3) 18 0 0 0 0 46 (44 ) 0 (7 ) 13 0
__________(1) Realized gains (losses) on securities available for sale are included in net
securities gains (losses), and retained interests in securitizations are
reported as a component of non-interest income in our consolidated
statements of income. Gains (losses) on derivatives are included as acomponent of net interest income or non-interest income in our consolidated
statements of income.
(2) Net unrealized losses included in other comprehensive income related to
Level 3 securities available for sale still held as of December 31, 2019
were $4 million.
(3) Includes derivative assets and liabilities of $77 million and $51 million,
respectively, as of December 31, 2019, $38 million and $48 million,
respectively, as of December 31, 2018, and $37 million and $24 million,
respectively as of December 31, 2017.
Significant Level 3 Fair Value Asset and Liability Inputs Generally, uncertainties in fair value measurements of financial instruments, such as changes in unobservable inputs, may have a significant impact on fair value. Certain of these unobservable inputs will, in isolation, have a directionally consistent impact on the fair value of the instrument for a given change in that input. Alternatively, the fair value of the instrument may move in an opposite direction for a given change in another input. In general, an increase in the discount rate, default rates, loss severity and credit spreads, in isolation, would result in a decrease in the fair value measurement. In addition, an increase in default rates would generally be accompanied by a decrease in recovery rates, slower prepayment rates and an increase in liquidity spreads. Techniques and Inputs for Level 3 Fair Value Measurements The following table presents the significant unobservable inputs used to determine the fair values of our Level 3 financial instruments on a recurring basis. We utilize multiple vendor pricing services to obtain fair value for our securities. Several of our vendor pricing services are only able to provide unobservable input information for a limited number of securities due to software licensing restrictions. Other vendor pricing services are able to provide unobservable input information for all securities for which they provide a valuation. As a result, the unobservable input information for the securities available for sale presented below represents a composite summary of all information we are able to obtain. The unobservable input information for all other Level 3 financial instruments is based on the assumptions used in our internal valuation models.
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Table 16.3: Quantitative Information about Level 3 Fair Value Measurements
Quantitative Information about Level 3 Fair Value Measurements
Fair Value at Significant Significant
(Dollars in December 31, Valuation Unobservable Weighted
millions) 2019 Techniques Inputs Range Average(1)
Securities
available for
sale:
RMBS $ 429 Discounted cash Yield 2-18% 5%
flows (vendor Voluntary prepayment rate 0-18% 10%
pricing) Default rate 1-6% 2%
Loss severity 30-95% 67%
CMBS 13 Discounted cash Yield 2-3% 2%
flows (vendor
pricing)
Other assets:
Retained interests 66 Discounted cash Life of receivables (months) 35-51
in flows Voluntary prepayment rate 4-14%
securitizations(2) Discount rate 3-10% N/A
Default rate 2-3%
Loss severity 74-88%
Net derivative 26 Discounted cash Swap rates 2% 2%
assets flows
(liabilities)
Quantitative Information about Level 3 Fair Value Measurements
Fair Value at Significant Significant
(Dollars in December 31, Valuation Unobservable Weighted
millions) 2018 Techniques Inputs Range Average(1)
Securities
available for sale:
RMBS $ 433 Discounted cash Yield 3-11% 5%
flows (vendor Voluntary prepayment rate 0-17% 5%
pricing) Default rate 0-7% 3%
Loss severity 0-75% 65%
CMBS 10 Discounted cash Yield 3% 3%
flows (vendor
pricing)
Other assets:
Retained interests 158 Discounted cash Life of receivables (months) 3-56
in flows Voluntary prepayment rate 3-14%
securitizations(2) Discount rate 4-6% N/A
Default rate 2-4%
Loss severity 50-104%
Net derivative (10 ) Discounted cash Swap rates 3% 3%
assets flows
(liabilities)
__________
(1) Weighted averages are calculated by using the product of the input
multiplied by the relative fair value of the instruments.
(2) Due to the nature of the various mortgage securitization structures in which
we have retained interests, it is not meaningful to present a consolidated
weighted average for the significant unobservable inputs.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis We are required to measure and recognize certain assets at fair value on a nonrecurring basis on the consolidated balance sheets. These assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, from the application of lower of cost or fair value accounting or when we evaluate for impairment). The following describes the valuation techniques used in estimating the fair value of our financial assets and liabilities recorded at fair value on a nonrecurring basis. Net Loans Held for Investment For loans held for investment that are recorded at fair value on our consolidated balance sheets and measured on a nonrecurring basis, the fair value is determined using appraisal values that are obtained from independent appraisers, broker pricing opinions or other available market information, adjusted for the estimated cost to sell. Due to the use of significant unobservable inputs, these loans are classified as Level 3 under the fair value hierarchy. Fair value adjustments for individually impaired collateralized loans held for investment are recorded in provision for credit losses in the consolidated statements of income.
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loans Held for Sale
Loans held for sale for which we have not elected the fair value option are
carried at the lower of aggregate cost, net of deferred fees and deferred
origination costs, or fair value. These loans held for sale are valued based on
market observable inputs and are therefore classified as Level 2. Fair value
adjustments to these loans are recorded in other non-interest income in our
consolidated statements of income.
Other Assets
Other assets subject to nonrecurring fair value measurements include equity
investments accounted for under measurement alternative, other repossessed
assets and long-lived assets held for sale. These assets held for sale are
carried at the lower of the carrying amount or fair value less costs to sell.
The fair value is determined based on the appraisal value, listing price of the
property or collateral provided by independent appraisers, and is adjusted for
the estimated costs to sell. Due to the use of significant unobservable inputs,
these assets are classified as Level 3 under the fair value hierarchy. Fair
value adjustments for these assets are recorded in other non-interest expense in
the consolidated statements of income.
The following table presents the carrying value of the assets measured at fair
value on a nonrecurring basis and still held as of December 31, 2019 and 2018,
and for which a nonrecurring fair value measurement was recorded during the year
then ended.
Table 16.4: Nonrecurring Fair Value Measurements
December 31, 2019
Estimated Fair Value Hierarchy
(Dollars in millions) Level 2 Level 3 Total
Loans held for investment $ 0 $ 294 $ 294
Other assets(1) 0 103 103
Total $ 0 $ 397 $ 397
December 31, 2018
Estimated Fair Value Hierarchy
(Dollars in millions) Level 2 Level 3 Total
Loans held for investment $ 0 $ 129 $ 129
Loans held for sale 38 0 38
Other assets(1) 0 100 100
Total $ 38 $ 229 $ 267
__________(1) As of December 31, 2019, other assets included equity investments accounted
for under the measurement alternative of $5 million, repossessed assets of
$61 million and long-lived assets held for sale of $37 million. As of
December 31, 2018, other assets included equity investments accounted for
under the measurement alternative of $24 million, foreclosed property andrepossessed assets of $57 million and long-lived assets held for sale of $19
million.
In the above table, loans held for investment are generally valued based in part on the estimated fair value of the underlying collateral and the non-recoverable rate, which is considered to be a significant unobservable input. The non-recoverable rate ranged from 0% to 50%, with a weighted average of 6%, and from 0% to 84%, with a weighted average of 33%, as of December 31, 2019 and 2018, respectively. The weighted average non-recoverable rate is calculated based on the estimated market value of the underlying collateral. The significant unobservable inputs and related quantitative information related to fair value of the other assets are not meaningful to disclose as they vary significantly across properties and collateral.
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents total nonrecurring fair value measurements for the
period, included in earnings, attributable to the change in fair value relating
to assets that are still held at December 31, 2019 and 2018.
Table 16.5: Nonrecurring Fair Value Measurements Included in Earnings
Total Gains (Losses)
Year Ended December 31,
(Dollars in millions) 2019 2018
Loans held for investment $ (268 ) $ (85 )
Other assets(1) (76 ) (74 )
Total $ (344 ) $ (159 )
__________(1) Other assets include fair value adjustments related to repossessed assets,
long-lived assets held for sale and equity investments accounted for under
the measurement alternative. Other assets also included foreclosed property
as of December 31, 2018.
Fair Value of Financial Instruments The following table presents the carrying value and estimated fair value, including the level within the fair value hierarchy, of our financial instruments that are not measured at fair value on a recurring basis on our consolidated balance sheets as of December 31, 2019 and 2018. Table 16.6: Fair Value of Financial Instruments
December 31, 2019
Carrying Estimated Estimated Fair Value Hierarchy
(Dollars in millions) Value Fair Value Level 1 Level 2 Level 3
Financial assets:
Cash and cash equivalents $ 13,407 $ 13,407 $ 4,129 $ 9,278 $ 0
Restricted cash for securitization investors 342 342 342 0 0
Net loans held for investment 258,601 258,696 0 0 258,696
Loans held for sale 149 149 0 149 0
Interest receivable 1,758 1,758 0 1,758 0
Other investments(1) 1,638 1,638 0 1,638 0
Financial liabilities:
Deposits with defined maturities 44,958 45,225 0 45,225 0
Securitized debt obligations 17,808 17,941 0 17,941 0
Senior and subordinated notes 30,472 31,233 0 31,233 0
Federal funds purchased and securities loaned
or sold under agreements to repurchase 314 314 0 314 0
Other borrowings(2) 7,000 7,001 0 7,001 0
Interest payable 439 439 0 439 0
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
Carrying Estimated Estimated Fair Value Hierarchy
(Dollars in millions) Value Fair Value Level 1 Level 2 Level 3
Financial assets:
Cash and cash equivalents $ 13,186 $ 13,186 $ 4,768 $ 8,418 $ 0
Restricted cash for securitization investors 303 303 303 0 0
Securities held to maturity 36,771 36,619 0 36,513 106
Net loans held for investment 238,679 241,556 0 0 241,556
Loans held for sale 1,192 1,218 0 1,218 0
Interest receivable 1,614 1,614 0 1,614 0
Other investments(1) 1,725 1,725 0 1,725 0
Financial liabilities:
Deposits with defined maturities 38,471 38,279 0 38,279 0
Securitized debt obligations 18,307 18,359 0 18,359 0
Senior and subordinated notes 30,826 30,635 0 30,635 0
Federal funds purchased and securities loaned
or sold under agreements to repurchase 352 352 0 352 0
Other borrowings(2) 9,354 9,354 0 9,354 0
Interest payable 458 458 0 458 0
__________(1) Other investments include FHLB and Federal Reserve stock. These investments
are included in other assets on our consolidated balance sheets.
(2) Other borrowings excludes finance lease liabilities.
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17-BUSINESS SEGMENTS AND REVENUE FROM CONTRACTS WITH CUSTOMERS
Our principal operations are organized into three major business segments, which are defined primarily based on the products and services provided or the types of customers served: Credit Card, Consumer Banking and Commercial Banking. The operations of acquired businesses have been integrated into our existing business segments. Certain activities that are not part of a segment, such as management of our corporate investment portfolio, asset/liability management by our centralized Corporate Treasury group and residual tax expense or benefit to arrive at the consolidated effective tax rate that is not assessed to our primary business segments, are included in the Other category. • Credit Card: Consists of our domestic consumer and small business card
lending, and international card businesses in Canada and the United Kingdom.
• Consumer Banking: Consists of our deposit gathering and lending activities
for consumers and small businesses, and national auto lending.
• Commercial Banking: Consists of our lending, deposit gathering, capital
markets and treasury management services to commercial real estate and
commercial and industrial customers. Our commercial and industrial customers
typically include companies with annual revenues between $20 million and $2
billion.
• Other category: Includes the residual impact of the allocation of our
centralized Corporate Treasury group activities, such as management of our
corporate investment portfolio and asset/liability management, to our
business segments. Accordingly, net gains and losses on our investment
securities portfolio and certain trading activities are included in the
Other category. Other category also includes foreign exchange-rate
fluctuations on foreign currency-denominated transactions; unallocated
corporate 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; certain material items that are non-recurring in
nature; offsets related to certain line-item reclassifications; and residual
tax expense or benefit to arrive at the consolidated effective tax rate that
is not assessed to our primary business segments.
Basis of Presentation
We report the results of each of our business segments on a continuing
operations basis. The results of our individual businesses reflect the manner in
which management evaluates performance and makes decisions about funding our
operations and allocating resources.
Business Segment Reporting Methodology
The results of our business segments are intended to present each segment as if
it were a stand-alone business. Our internal management and reporting process
used to derive our segment results employs various allocation methodologies,
including funds transfer pricing, to assign certain balance sheet assets,
deposits and other liabilities and their related revenue and expenses directly
or indirectly attributable to each business segment. Our funds transfer pricing
process provides a funds credit for sources of funds, such as deposits generated
by our Consumer Banking and Commercial Banking businesses, and a funds charge
for the use of funds by each segment. Due to the integrated nature of our
business segments, estimates and judgments have been made in allocating certain
revenue and expense items. Transactions between segments are based on specific
criteria or approximate third-party rates. We regularly assess the assumptions,
methodologies and reporting classifications used for segment reporting, which
may result in the implementation of refinements or changes in future periods.
The following is additional information on the principles and methodologies used
in preparing our business segment results.
• Net interest income: Interest income from loans held for investment and
interest expense from deposits and other interest-bearing liabilities are
reflected within each applicable business segment. Because funding andasset/liability management are managed centrally by our Corporate Treasury
group, net interest income for our business segments also includes the
results of a funds transfer pricing process that is intended to allocate a
cost of funds used or credit for funds provided to all business segment
assets and liabilities, respectively, using a matched funding concept. The
taxable-equivalent benefit of tax-exempt products is also allocated to each
business unit with a corresponding increase in income tax expense.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
• Non-interest income: Non-interest fees and other revenue associated withloans or customers managed by each business segment and other direct
revenues are accounted for within each business segment.
• Provision for credit losses: The provision for credit losses is directly
attributable to the business segment in accordance with the loans each
business segment manages.
• Non-interest expense: Non-interest expenses directly managed and incurred by
a business segment are accounted for within each business segment. We
allocate certain non-interest expenses indirectly incurred by business
segments, such as corporate support functions, to each business segment
based on various factors, including the actual cost of the services from the
service providers, the utilization of the services, the number of employees
or other relevant factors.
• Goodwill and intangible assets: Goodwill and intangible assets that are not
directly attributable to business segments are assigned to business segments
based on the relative fair value of each segment. Intangible amortization is
included in the results of the applicable segment.
• Income taxes: Income taxes are assessed for each business segment based on a
standard tax rate with the residual tax expense or benefit to arrive at the
consolidated effective tax rate included in the Other category.
• Loans held for investment: Loans are reported within each business segment
based on product or customer type served by that business segment.
• Deposits: Deposits are reported within each business segment based on
product or customer type served by that business segment.
Segment Results and Reconciliation
We may periodically change our business segments or reclassify business segment
results based on modifications to our management reporting methodologies or
changes in organizational alignment. In the first quarter of 2019, we made a
change in how revenue is measured in our Commercial Banking business by revising
the allocation of tax benefits on certain tax-advantaged investments. As such,
2018 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 $108 million for the year ended
December 31, 2018, with an offsetting increase in the Other category. This
change in measurement of our Commercial Banking revenue did not have any impact
to the consolidated financial statements.
The following table presents our business segment results for the years ended
December 31, 2019, 2018 and 2017, selected balance sheet data as of December 31,
2019, 2018 and 2017, and a reconciliation of our total business segment results
to our reported consolidated income from continuing operations, loans held for
investment and deposits.
Table 17.1: Segment Results and Reconciliation
Year Ended December 31, 2019
Credit Consumer Commercial Consolidated
(Dollars in millions) Card Banking Banking(1) Other(1) Total
Net interest income $ 14,461 $ 6,732 $ 1,983 $ 164 $ 23,340
Non-interest income (loss) 3,888 643 831 (109 ) 5,253
Total net revenue 18,349 7,375 2,814 55 28,593
Provision for credit losses 4,992 938 306 0 6,236
Non-interest expense 9,271 4,091 1,699 422 15,483
Income (loss) from continuing
operations before income taxes 4,086 2,346 809 (367 ) 6,874
Income tax provision (benefit) 959 547 188 (353 ) 1,341
Income (loss) from continuing
operations, net of tax $ 3,127 $ 1,799 $ 621 $ (14 ) $ 5,533
Loans held for investment $ 128,236 $ 63,065 $ 74,508 $ 0 $ 265,809
Deposits 0 213,099 32,134 17,464 262,697
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended December 31, 2018
Credit Consumer Commercial Consolidated
(Dollars in millions) Card Banking Banking(1)(2) Other(1)(2) Total
Net interest income $ 14,167 $ 6,549 $ 2,044 $ 115 $ 22,875
Non-interest income 3,520 663 744 274 5,201
Total net revenue 17,687 7,212 2,788 389 28,076
Provision (benefit) for credit
losses 4,984 838 83 (49 ) 5,856
Non-interest expense 8,542 4,027 1,654 679 14,902
Income (loss) from continuing
operations before income taxes 4,161 2,347 1,051 (241 ) 7,318
Income tax provision (benefit) 970 547 245 (469 ) 1,293
Income from continuing operations,
net of tax $ 3,191 $ 1,800 $ 806 $ 228 $ 6,025
Loans held for investment $ 116,361 $ 59,205 $ 70,333 $ 0 $ 245,899
Deposits 0 198,607 29,480 21,677 249,764
Year Ended December 31, 2017
Credit Consumer Commercial Consolidated
(Dollars in millions) Card Banking Banking(1) Other(1) Total
Net interest income $ 13,648 $ 6,380 $ 2,261 $ 171 $ 22,460
Non-interest income (loss) 3,325 749 708 (5 ) 4,777
Total net revenue 16,973 7,129 2,969 166 27,237
Provision for credit losses 6,066 1,180 301 4 7,551
Non-interest expense 7,916 4,233 1,603 442 14,194
Income (loss) from continuing
operations before income taxes 2,991 1,716 1,065 (280 ) 5,492
Income tax provision 1,071 626 389 1,289 3,375
Income (loss) from continuing
operations, net of tax $ 1,920 $ 1,090 $ 676 $ (1,569 ) $ 2,117
Loans held for investment $ 114,762 $ 75,078 $ 64,575 $ 58 $ 254,473
Deposits 0 185,842 33,938 23,922 243,702
__________(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 (21% for 2019 and 2018 and 35% for 2017) 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, 2018 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 $108 million for the year ended December 31,
2018, with an offsetting increase in the Other category.
Revenue from Contracts with Customers The majority of our revenue from contracts with customers consists of interchange fees, service charges and other customer-related fees, and other contract revenue. Interchange fees are primarily from our Credit Card business and are recognized upon settlement with the interchange networks, net of rewards earned by customers. Service charges and other customer-related fees within our Consumer Banking business are primarily related to fees earned on consumer deposit accounts for account maintenance and various transaction-based services such as overdrafts and ATM usage. Service charges and other customer-related fees within our Commercial Banking business are mostly related to fees earned on treasury management and capital markets services. Other contract revenue in our Credit Card business consists primarily of revenue from our partnership arrangements. Other contract revenue in our Consumer Banking business consists primarily of revenue earned on certain marketing and promotional events from our auto dealers. Revenue from contracts with customers is included in non-interest income in our consolidated statements of income.
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents revenue from contracts with customers and a
reconciliation to non-interest income by business segment for the years ended
December 31, 2019 and 2018.
Table 17.2: Revenue from Contracts with Customers and Reconciliation to Segments
Result
Year Ended December 31, 2019
Credit Consumer Commercial Consolidated
(Dollars in millions) Card Banking Banking(1) Other(1) Total
Contract revenue:
Interchange fees, net(2) $ 2,925 $ 205 $ 55 $ (6 ) $ 3,179
Service charges and other
customer-related fees 0 298 120 (1 ) 417
Other 120 101 3 0 224
Total contract revenue 3,045 604 178 (7 ) 3,820
Revenue from other sources 843 39 653 (102 ) 1,433
Total non-interest income $ 3,888 $ 643 $ 831 $ (109 ) $ 5,253
Year Ended December 31, 2018
Credit Consumer Commercial Consolidated
(Dollars in millions) Card Banking Banking(1) Other(1) Total
Contract revenue:
Interchange fees, net(2) $ 2,609 $ 185 $ 33 $ (4 ) $ 2,823
Service charges and other
customer-related fees 0 367 123 (1 ) 489
Other 8 109 2 0 119
Total contract revenue 2,617 661 158 (5 ) 3,431
Revenue from other sources 903 2 586 279 1,770
Total non-interest income $ 3,520 $ 663 $ 744 $ 274 $ 5,201
__________
(1) Some of our commercial investments generate tax-exempt income, tax credits
or other tax benefits. Accordingly, we present our Commercial Banking
revenue and yields on a taxable-equivalent basis, calculated using the
federal statutory tax rate of 21% and state taxes where applicable, with
offsetting reclassifications to the Other category.
(2) Interchange fees are presented net of customer reward expenses of $4.9
billion and $4.4 billion for the years ended December 31, 2019 and 2018,
respectively.
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18-COMMITMENTS, CONTINGENCIES, GUARANTEES AND OTHERS
Commitments to Lend
Our unfunded lending commitments primarily consist of credit card lines, loan
commitments to customers of both our Commercial Banking and Consumer Banking
businesses, as well as standby and commercial letters of credit. These
commitments, other than credit card lines, are legally binding conditional
agreements that have fixed expirations or termination dates and specified
interest rates and purposes. The contractual amount of these commitments
represents the maximum possible credit risk to us should the counterparty draw
upon the commitment. We generally manage the potential risk of unfunded lending
commitments by limiting the total amount of arrangements, monitoring the size
and maturity structure of these portfolios, and applying the same credit
standards for all of our credit activities.
For unused credit card lines, we have not experienced and do not anticipate that
all of our customers will access their entire available line at any given point
in time. Commitments to extend credit other than credit card lines generally
require customers to maintain certain credit standards. Collateral requirements
and loan-to-value ("LTV") ratios are the same as those for funded transactions
and are established based on management's credit assessment of the customer.
These commitments may expire without being drawn upon; therefore, the total
commitment amount does not necessarily represent future funding requirements.
We also issue letters of credit, such as financial standby, performance standby
and commercial letters of credit, to meet the financing needs of our customers.
Standby letters of credit are conditional commitments issued by us to guarantee
the performance of a customer to a third party in a borrowing arrangement.
Commercial letters of credit are short-term commitments issued primarily to
facilitate trade finance activities for customers and are generally
collateralized by the goods being shipped to the customer. These collateral
requirements are similar to those for funded transactions and are established
based on management's credit assessment of the customer. Management conducts
regular reviews of all outstanding letters of credit and the results of these
reviews are considered in assessing the adequacy of reserves for unfunded
lending commitments.
The following table presents the contractual amount and carrying value of our
unfunded lending commitments as of December 31, 2019 and 2018. The carrying
value represents our reserve and deferred revenue on legally binding
commitments.
Table 18.1: Unfunded Lending Commitments
Contractual Amount Carrying Value
December 31, December 31, December 31, December 31,
(Dollars in millions) 2019 2018 2019 2018
Credit card lines $ 363,446 $ 346,186 N/A N/A
Other loan commitments(1) 36,454 34,449 $ 110 $ 95
Standby letters of credit and commercial
letters of credit(2) 1,574 1,792 27 29
Total unfunded lending commitments $ 401,474 $ 382,427 $ 137 $ 124
__________
(1) Includes $1.6 billion and $1.3 billion of advised lines of credit as of
December 31, 2019 and 2018, respectively.
(2) These financial guarantees have expiration dates ranging from 2020 to 2022
as of December 31, 2019.
Loss Sharing Agreements Within our Commercial Banking business, we originate multifamily commercial real estate loans with the intent to sell them to the GSEs. We enter into loss sharing agreements with the GSEs upon the sale of the loans. At inception, we record a liability representing the fair value of our obligation which is subsequently amortized as we are released from risk of payment under the loss sharing agreement. If payment under the loss sharing agreement becomes probable and estimable, an additional liability may be recorded on the consolidated balance sheets and a non-interest expense may be recognized in the consolidated statements of income. The liability recognized on our consolidated balance sheets for these loss sharing agreements was $75 million and $59 million as of December 31, 2019 and 2018, respectively. See "Note 4-Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments" for more information related to our credit card partnership loss sharing arrangements.
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.K. Payment Protection Insurance
In the U.K., we previously sold payment protection insurance ("PPI"). In
response to an elevated level of customer complaints across the industry,
heightened media coverage and pressure from consumer advocacy groups, the U.K.
Financial Conduct Authority ("FCA"), formerly the Financial Services Authority,
investigated and raised concerns about the way the industry has handled
complaints related to the sale of these insurance policies. For the past several
years, the U.K.'s Financial Ombudsman Service ("FOS") has been adjudicating
customer complaints relating to PPI, escalated to it by consumers who disagree
with the rejection of their complaint by firms, leading to customer remediation
payments by us and others within the industry. In August 2017, the FCA issued
final rules and guidance on the PPI complaints. This set the deadline for
complaints as August 29, 2019. It also provided clarity on how to handle PPI
complaints under s.140A of the Consumer Credit Act, including guidance on how
redress for such complaints should be calculated.
In determining our best estimate of incurred losses for future remediation
payments, management considers numerous factors, including (i) the number of
customer complaints or information requests still to be processed; (ii) our
expectation of upholding those complaints; (iii) the expected number of
complaints customers escalate to the FOS; (iv) our expectation of the FOS
upholding such escalated complaints; (v) the number of complaints that fall
under s.140A of the Consumer Credit Act; and (vi) the estimated remediation
payout to customers. We monitor these factors each quarter and adjust our
reserves to reflect the latest data.
Our U.K. PPI reserve totaled $188 million and $133 million as of December 31,
2019 and 2018, respectively. In 2019, we recorded an additional reserve build of
$212 million due to significantly elevated claims volume ahead of the August 29,
2019 claims submission deadline. Our best estimate of reasonably possible future
losses beyond our reserve as of December 31, 2019 is approximately $50 million.
Litigation
In accordance with the current accounting standards for loss contingencies, we
establish reserves for litigation-related matters that arise from the ordinary
course of our business activities when it is probable that a loss associated
with a claim or proceeding has been incurred and the amount of the loss can be
reasonably estimated. None of the amounts we currently have recorded
individually or in the aggregate are considered to be material to our financial
condition. Litigation claims and proceedings of all types are subject to many
uncertain factors that generally cannot be predicted with assurance. Below we
provide a description of potentially material legal proceedings and claims.
For some of the matters disclosed below, we are able to estimate reasonably
possible losses above existing reserves, and for other disclosed matters, such
an estimate is not possible at this time. For those matters below where an
estimate is possible, management currently estimates the reasonably possible
future losses beyond our reserves as of December 31, 2019 are approximately $1.1
billion. Our reserve and reasonably possible loss estimates involve considerable
judgment and reflect that there is still significant uncertainty regarding
numerous factors that may impact the ultimate loss levels. Notwithstanding our
attempt to estimate a reasonably possible range of loss beyond our current
accrual levels for some litigation matters based on current information, it is
possible that actual future losses will exceed both the current accrual level
and the range of reasonably possible losses disclosed here. Given the inherent
uncertainties involved in these matters, especially those involving governmental
agencies, and the very large or indeterminate damages sought in some of these
matters, there is significant uncertainty as to the ultimate liability we may
incur from these litigation matters and an adverse outcome in one or more of
these matters could be material to our results of operations or cash flows for
any particular reporting period.
Interchange
In 2005, a putative class of retail merchants filed antitrust lawsuits against
MasterCard and Visa and several issuing banks, including Capital One, seeking
both injunctive relief and monetary damages for an alleged conspiracy by
defendants to fix the level of interchange fees. Other merchants have asserted
similar claims in separate lawsuits, and while these separate cases did not name
any issuing banks, Visa, MasterCard and issuers, including Capital One, have
entered settlement and judgment sharing agreements allocating the liabilities of
any judgment or settlement arising from all interchange-related cases.
The lawsuits were consolidated before the U.S. District Court for the Eastern
District of New York for certain purposes and were settled in 2012. The class
settlement, however, was invalidated by the United States Court of Appeals for
the Second Circuit in June 2016, and the suit was bifurcated into separate class
actions seeking injunctive and monetary relief, respectively. In addition,
numerous merchant groups opted out of the 2012 settlement and have pursued their
own claims. The claims by the injunctive relief
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class have not been resolved, but the settlement of $5.5 billion for the
monetary damages class has received final approval from the trial court, and has
been appealed to the U.S. Court of Appeals for the Second Circuit. Visa and
MasterCard have also settled several of the opt-out cases, which required
non-material payments from issuing banks, including Capital One. Visa created a
litigation escrow account following its initial public offering of stock in 2008
that funds settlements for its member banks, and any settlements related to
MasterCard-allocated losses have either already been paid or are reflected in
our reserves.
Mortgage Representation and Warranty
We face residual exposure related to subsidiaries that originated residential
mortgage loans and sold these loans to various purchasers, including purchasers
who created securitization trusts. In connection with their sales of mortgage
loans, these subsidiaries entered into agreements containing varying
representations and warranties about, among other things, the ownership of the
loan, the validity of the lien securing the loan, the loan's compliance with any
applicable criteria established by the purchaser, including underwriting
guidelines and the existence of mortgage insurance, and the loan's compliance
with applicable federal, state and local laws. Each of these subsidiaries may be
required to repurchase mortgage loans or indemnify certain purchasers and others
against losses they incur in the event of certain breaches of these
representations and warranties.
The substantial majority of our representation and warranty exposure has been
resolved through litigation, and our remaining representation and warranty
exposure is almost entirely litigation-related. Accordingly, we establish
litigation reserves for representation and warranty losses that we consider to
be both probable and reasonably estimable. The reserve process relies heavily on
estimates, which are inherently uncertain, and requires the application of
judgment. Our reserves and estimates of reasonably possible losses could be
impacted by claims which may be brought by securitization trustees and sponsors,
bond-insurers, investors, and GSEs, as well as claims brought by governmental
agencies.
Anti-Money Laundering
In October 2018, we paid a civil monetary penalty of $100 million to resolve the
monetary component of a July 2015 Office of the Comptroller of the Currency
("OCC") consent order relating to our anti-money laundering ("AML") program. The
OCC lifted the AML consent order in November 2019.
The Department of Justice and the New York District Attorney's Office have
closed their investigations into certain former check casher clients of the
Commercial Banking business and our AML program. We are in discussions with the
Financial Crimes Enforcement Network ("FinCEN") of the U.S. Department of
Treasury to explore a potential regulatory resolution of its investigation into
our AML program, which could include a monetary penalty.
Cybersecurity Incident
As a result of the Cybersecurity Incident announced on July 29, 2019, we are
subject to numerous legal proceedings and other inquiries and could be the
subject of additional proceedings and inquiries in the future. Although it is
reasonably possible that we may incur losses associated with these legal
proceedings and other inquiries, it is not possible to estimate the amount or
range of possible losses, if any, at this time.
Consumer class actions. To date, we have been named as a defendant in
approximately 72 putative consumer class action cases (61 in U.S. federal courts
and 11 in Canadian courts) alleging harm from the Cybersecurity Incident and
seeking various remedies, including monetary and injunctive relief. The lawsuits
allege breach of contract, negligence, violations of various privacy laws and a
variety of other legal causes of action. On October 2, 2019, the U.S. consumer
class actions were consolidated for pretrial proceedings before a multi-district
litigation ("MDL") panel in the U.S. District Court for the Eastern District of
Virginia, Alexandria Division.
Securities class action. The Company and certain officers have also been named
as defendants in a putative class action pending in the MDL alleging violations
of certain federal securities laws in connection with statements and alleged
omissions in securities filings relating to our information security standards
and practices. The complaint seeks certification of a class of all persons who
purchased or otherwise acquired Capital One securities from July 23, 2015 to
July 29, 2019, as well as unspecified monetary damages, costs and other relief.
Governmental inquiries. We have received inquiries and requests for information
relating to the Cybersecurity Incident from Congress, federal banking
regulators, Canadian banking regulators, the Department of Justice and the
offices of approximately fourteen state Attorneys General. We are cooperating
with these offices and responding to their inquiries.
200 Capital One Financial Corporation (COF)
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Taxi Medallion Finance Investigations
We received a subpoena from the New York Attorney General's office in August
2019 and a subpoena from the U.S. Attorney's Office for the Southern District of
New York, Civil Division, in October 2019 relating to investigations of the taxi
medallion finance industry we exited beginning in 2015. The subpoenas seek,
among other things, information regarding our lending counterparties and
practices. We are cooperating with these investigations.
U.K. PPI Litigation
Some of the claimants in the U.K. PPI regulatory claims process described above
have initiated legal proceedings. The significant increase in PPI regulatory
claim volumes shortly before the August 29, 2019 claims submission deadline
increases the potential exposure for PPI-related litigation, which is not
subject to the August 29, 2019 deadline.
Other Pending and Threatened Litigation
In addition, we are commonly subject to various pending and threatened legal
actions relating to the conduct of our normal business activities. In the
opinion of management, the ultimate aggregate liability, if any, arising out of
all such other pending or threatened legal actions, is not expected to be
material to our consolidated financial position or our results of operations.
201 Capital One Financial Corporation (COF)
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19-CAPITAL ONE FINANCIAL CORPORATION (PARENT COMPANY ONLY)
Financial Information
The following parent company only financial statements are prepared in
accordance with Regulation S-X of the U.S. Securities and Exchange Commission
("SEC").
Table 19.1: Parent Company Statements of Income
Year Ended December 31,
(Dollars in millions) 2019 2018 2017
Interest income $ 442 $ 313 $ 178
Interest expense 798 720 381
Dividends from subsidiaries 3,276 2,750 300
Non-interest income (loss) (21 ) 19 19
Non-interest expense 60 29 34
Income before income taxes and equity in undistributed 2,839 2,333 82
earnings of subsidiaries
Income tax benefit (138 ) (128 ) (103 )
Equity in undistributed earnings of subsidiaries 2,569 3,554 1,797
Net income 5,546 6,015 1,982
Other comprehensive income (loss), net of tax 1,531 (136 ) 23
Comprehensive income $ 7,077 $ 5,879 $ 2,005
Table 19.2: Parent Company Balance Sheets
December 31, December 31,
(Dollars in millions) 2019 2018
Assets:
Cash and cash equivalents $ 13,050 $ 10,286
Investments in subsidiaries 61,626 58,154
Loans to subsidiaries 3,905 2,603
Securities available for sale 738 795
Other assets 1,017 1,250
Total assets $ 80,336 $ 73,088
Liabilities:
Senior and subordinated notes $ 22,080 $ 19,518
Borrowings from subsidiaries 0 1,671
Accrued expenses and other liabilities 245 231
Total liabilities 22,325 21,420
Total stockholders' equity 58,011 51,668
Total liabilities and stockholders' equity $ 80,336 $ 73,088
202 Capital One Financial Corporation (COF)
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Table 19.3: Parent Company Statements of Cash Flows
Year Ended December 31,
(Dollars in millions) 2019 2018 2017
Operating activities:
Net income $ 5,546 $ 6,015 $ 1,982
Adjustments to reconcile net income to net cash from
operating activities:
Equity in undistributed earnings of subsidiaries (2,569 ) (3,554 ) (1,797 )
Other operating activities 216 (35 ) 327
Net cash from operating activities 3,193 2,426 512
Investing activities:
Changes in investments in subsidiaries 704 (577 ) (4,956 ) Proceeds from paydowns and maturities of securities available for sale
111 140 130
Changes in loans to subsidiaries (1,302 ) (2,055 ) 44
Net cash from investing activities (487 ) (2,492 ) (4,782 )
Financing activities:
Borrowings:
Changes in borrowings from subsidiaries 0 38 23
Issuance of senior and subordinated notes 2,646 5,227 6,948
Maturities and paydowns of senior and subordinated notes (750 ) 0 (804 )
Common stock:
Net proceeds from issuances 199 175 164
Dividends paid (753 ) (773 ) (780 )
Preferred stock:
Net proceeds from issuances 1,462 0 0
Dividends paid (282 ) (265 ) (265 )
Redemptions (1,000 ) 0 0
Purchases of treasury stock (1,481 ) (2,284 ) (240 )
Proceeds from share-based payment activities 17 38 124
Net cash from financing activities 58 2,156 5,170
Changes in cash and cash equivalents 2,764 2,090 900
Cash and cash equivalents, beginning of the period 10,286 8,196 7,296
Cash and cash equivalents, end of the period $ 13,050 $ 10,286 $ 8,196
Supplemental information:
Non-cash impact from the dissolution of wholly-owned
subsidiary
Decrease in investment in subsidiaries $ 1,508 $ 0 $ 0
Decrease in borrowings from subsidiaries 1,671 0 0
203 Capital One Financial Corporation (COF)
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20-RELATED PARTY TRANSACTIONS
In the ordinary course of business, we may have loans issued to our executive officers, directors and principal stockholders. Pursuant to our policy, such loans are issued on the same terms as those prevailing at the time for comparable loans to unrelated persons and do not involve more than the normal risk of collectability. 204 Capital One Financial Corporation (COF)
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21-BUSINESS DEVELOPMENTS
Business Developments
We regularly explore and evaluate opportunities to acquire financial services
and products as well as financial assets, including credit card and other loan
portfolios, and enter into strategic partnerships as part of our growth
strategy. In addition, we regularly consider the potential disposition of
certain of our assets, branches, partnership agreements or lines of business.
On September 24, 2019, we launched a new credit card issuance program with
Walmart Inc. ("Walmart") and are now the exclusive issuer of Walmart's cobrand
and private label credit card program in the U.S. On October 11, 2019, we
completed the acquisition of the existing portfolio of Walmart's cobrand and
private label credit card receivables. The acquisition was accounted for as an
asset acquisition and total cash consideration for the acquisition was $8.2
billion. On the date of acquisition, we recognized approximately $8.2 billion in
assets, primarily consisting of $8.1 billion in credit card receivables and $81
million of accrued interest. We recorded an initial allowance build of $84
million on the acquired loans. During 2019, we also recognized approximately
$211 million of launch and integration expense related to the Walmart
partnership. Results of the acquisition and partnership program are included
within our Credit Card segment.
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.
We also periodically initiate restructuring activities to support business
strategies and enhance our overall operational efficiency. These restructuring
activities have primarily consisted of exiting certain business locations and
activities as well as the realignment of resources supporting various
businesses. The charges incurred as a result of these restructuring activities
have primarily consisted of severance and related benefits pursuant to our
ongoing benefit programs, which are included in salaries and associate benefits
within non-interest expense in our consolidated statements of income, as well as
impairment of certain assets related to business locations and activities being
exited, which are generally included in occupancy and equipment within
non-interest expense. For the year ended December 31, 2019 and 2018, we
recognized restructuring charges of $28 million and $34 million, respectively,
which are reflected in the Other category of our business segment results.
205 Capital One Financial Corporation (COF)
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