COF 10-K diff: FY 2023-12-31 → FY 2024-12-31
Paragraph-level diff of Risk Factors (Item 1A) and Management's Discussion & Analysis (Item 7).
Item 1A · Risk Factors
+137 paragraphs −126 paragraphs ~126 changed
FY 2023-12-31 (earlier)
Item 1A. Risk Factors
The following discussion sets forth what management currently believes could be the material risks and uncertainties that could impact our businesses, results of operations and financial condition. The events and consequences discussed in these risk factors could, in circumstances we may not be able to accurately predict, recognize, or control, have a material adverse effect on our business, growth, reputation, prospects, financial condition, operating results, cash flows, liquidity, and stock price. These risk factors do not identify all risks that we face; our operations could also be affected by factors, events, or uncertainties that are not presently known to us or that we currently do not consider to present significant risks to our operations. In addition, the global economic and political climate may amplify many of these risks.
Summary of Risk Factors
The following is a summary of the Risk Factors disclosure in this Item 1A. This summary does not address all of the risks that we face. Additional discussion of the risks summarized in this risk factor summary, and other risks that we face, can be found below and should be carefully considered, together with other information in this Form 10-K and our other filings with the SEC, before making an investment decision regarding our securities.• The Transaction is contingent upon a number of conditions, including stockholder and regulatory approvals, which may fail to be satisfied or which may delay the consummation of the Transaction or result in the imposition of conditions that could reduce the anticipated benefits from the Transaction or cause the parties to abandon the Transaction.
• We are expected to incur substantial expenses related to the Transaction and to the integration of Discover.
• We may fail to realize all of the anticipated benefits of the Transaction or those benefits may take longer, or be more difficult, to realize than expected.• Our future results may suffer if we do not effectively manage our expanded operations following the Transaction.• We will be subject to business uncertainties and contractual restrictions while the Transaction is pending.• Changes and instability in the macroeconomic environment could disrupt capital markets, reduce consumer and business activity, and weaken the labor market, all of which could impact borrowers’ ability to service their debt obligations and adversely impact our financial results.• Fluctuations in interest rates or volatility in the capital markets could adversely affect our business, results of operations and financial condition.
• We may experience increases or fluctuations in delinquencies and credit losses, or we may incorrectly estimate expected losses, which could result in inadequate reserves.
• We may not be able to maintain adequate capital or liquidity levels or may become subject to revised capital or liquidity requirements, which could have a negative impact on our financial results and our ability to return capital to our stockholders.
• Limitations on our ability to receive dividends from our subsidiaries could affect our liquidity and ability to pay dividends and repurchase our common stock.
• A downgrade in our credit ratings could significantly impact our liquidity, funding costs and access to the capital markets.
• We face risks related to our operational, technological and organizational infrastructure.
• A cyber-attack or other security incident on us or third parties (including their supply chains) with which we conduct business, including an incident that results in the theft, loss, manipulation or misuse of information (including personal information), or the disabling of systems and access to information critical to business operations, may result in increased costs, reductions in revenue, reputational damage, legal exposure and business disruptions.
• We face risks resulting from the extensive use of models, AI, and data.22
Capital One Financial Corporation (COF)
Table of Contents• Compliance with new and existing domestic and foreign laws, regulations and regulatory expectations is costly and complex.• Our required compliance with applicable laws and regulations related to privacy, data protection and data security, in addition to compliance with our own privacy policies and contractual obligations to third parties, may increase our costs, reduce our revenue, increase our legal exposure and limit our ability to pursue business opportunities.
• Our businesses are subject to the risk of increased litigation, government investigations and regulatory enforcement.
• We face intense competition in all of our markets, which could have a material adverse effect on our business and results of operations.• Our business, financial condition and results of operations may be adversely affected by merchants’ efforts to reduce the fees charged by credit and debit card networks to facilitate card transactions, and by legislation and regulation impacting such fees.• If we are not able to invest successfully in and introduce digital and other technological developments across all our businesses, our financial performance may suffer.
• We may fail to realize the anticipated benefits of our mergers, acquisitions and strategic partnerships.
• Reputational risk and social factors may impact our results and damage our brand.• If we are not able to protect our intellectual property, our revenue and profitability could be negatively affected.• Our risk management strategies may not be fully effective in mitigating our risk exposures in all market environments or against all types of risk.
• Our business could be negatively affected if we are unable to attract, develop, retain and motivate key senior leaders and skilled employees.
• We face risks from catastrophic events.
• Climate change manifesting as physical or transition risks could adversely affect our businesses, operations and customers and result in increased costs.• We face risks from the use of or changes to assumptions or estimates in our financial statements.
• The soundness of other financial institutions and other third parties, actual or perceived, could adversely affect us.
Risks Relating to the Acquisition of Discover
We have identified certain additional risk factors in connection with the Merger Agreement and the proposed Transaction. These risks and the other risks associated with the proposed Transaction will be more fully discussed in the joint proxy statement/prospectus that will be included in the registration statement on Form S-4 that we intend to file with the SEC in connection with the Transaction.
The consummation of the Transaction is contingent upon the satisfaction of a number of conditions, including stockholder and regulatory approvals, that may be outside either party’s control and that either party may be unable to satisfy or obtain or which may delay the consummation of the Transaction or result in the imposition of conditions that could reduce the anticipated benefits from the Transaction or cause the parties to abandon the Transaction.
Consummation of the Transaction is contingent upon the satisfaction of a number of conditions, some of which are beyond either party's control, including, among others:
• adoption of the Merger Agreement by Discover’s stockholders;
• approval by our stockholders of the issuance of our common stock to be issued in the Transaction;
• authorization for listing on the NYSE of the shares of our common stock to be issued in the Transaction;23
Capital One Financial Corporation (COF)
Table of Contents• the receipt of required regulatory approvals;
• effectiveness of the registration statement on Form S-4 to be filed by us in connection with the Transaction; and
• the absence of any order, injunction, decree or other legal restraint preventing the completion of the Transaction.Each party’s obligation to complete the Transaction is also subject to certain additional customary conditions, including:
• subject to certain exceptions, the accuracy of the representations and warranties of the other party;
• performance in all material respects by the other party of its obligations under the Merger Agreement; and
• receipt by such party of an opinion from its counsel to the effect that the Merger and the Second Step Merger, taken together, will qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended.These conditions to the closing of the Transaction may not be fulfilled in a timely manner, or at all, and, accordingly, the Transaction may not be completed. In addition, the parties can mutually decide to terminate the Merger Agreement at any time, before or after receipt of the requisite approvals by our stockholders or Discover’s stockholders, or either party may elect to terminate the Merger Agreement in certain other circumstances.
As a condition to granting required regulatory approvals, governmental entities may impose conditions, limitations or costs, require divestitures or place restrictions on our conduct after the closing of the Transaction. Such conditions or changes and the process of obtaining regulatory approvals could, among other things, have the effect of delaying completion of the Transaction or of imposing additional costs or limitations on us following the Transaction, any of which may have an adverse effect on us.Either party may also be subject to lawsuits challenging the Transaction, and adverse rulings in these lawsuits may delay or prevent the Transaction from being completed or require either party to incur significant costs to defend or settle these lawsuits. Any delay in completing the Transaction could cause us not to realize, or to be delayed in realizing, some or all of the benefits that we expect to achieve if the Transaction is successfully completed within its expected time frame.We expect to incur substantial expenses related to the Transaction and to the integration of Discover.
We have incurred and expect to incur a number of costs associated with the Transaction and the integration of Discover. These costs include financial advisory, legal, accounting, consulting and other advisory fees, severance/employee benefit‐related costs, public company filing fees and other regulatory fees and financial printing and other related costs. There are also a large number of processes, policies, procedures, operations, technologies and systems that may need to be integrated.
While we have assumed that a certain level of costs will be incurred, there are many factors beyond our control that could affect the total amount or the timing of the integration expenses. Moreover, many of the expenses that we will incur are, by their nature, difficult to estimate accurately. These expenses could, particularly in the near term, exceed the savings that we expect to achieve from the elimination of duplicative expenses and the realization of economies of scale. These integration expenses may result in us taking charges against earnings as a result of the Transaction or the integration of Discover, and the amount and timing of such charges are uncertain at present.
We may fail to realize all of the anticipated benefits of the Transaction, or those benefits may take longer to realize than expected due to factors that may be outside our control or Discover’s control. We may also encounter significant difficulties in integrating Discover.
We may fail to realize the anticipated benefits of the proposed Transaction, including, among other things, anticipated revenue and cost synergies, due to factors that may be outside either party’s control, including, but not limited to, changes in laws or regulations or in the interpretation of existing laws or regulations, whether caused by a change in government or otherwise, or general economic, political, legislative or regulatory conditions, and the outcome of any legal or regulatory proceedings that may be currently pending or later instituted against us (before or after the Transaction) or against Discover.
Both parties have operated and, until the completion of the Transaction, will continue to operate, independently. The success of the Transaction, including anticipated benefits and cost savings, will depend, in part, on our ability to successfully integrate Discover’s operations in a manner that results in various benefits and that does not materially disrupt existing customer relationships or result in decreased revenues due to loss of customers, as well as our ability to successfully integrate Discover24
Capital One Financial Corporation (COF)
Table of Contentsinto our Framework, compliance systems and corporate culture. The process of integrating operations could result in a loss of key personnel or cause an interruption of, or loss of momentum in, the activities of one or more of our businesses following the completion of the Transaction. Inconsistencies in standards, controls, procedures and policies could adversely affect us following the completion of the Transaction. The diversion of management’s attention and any delays or difficulties encountered in connection with the Transaction and the integration of Discover’s operations could have an adverse effect on our business, financial condition, operating results and prospects.
If we experience difficulties in the integration process, including those listed above, we may fail to realize the anticipated benefits of the Transaction in a timely manner, or at all.Our future results may suffer if we do not effectively manage our expanded operations following the Transaction.
Following the Transaction, the size and scope of our business will increase significantly beyond our current size and scope. Our future success depends, in part, upon the ability to manage our expanded businesses, which will pose substantial challenges for management, including challenges related to the management and monitoring of new operations and associated increased costs and complexity. There can be no assurances we will be successful or that we will realize the expected operating efficiencies, cost savings and other benefits currently anticipated from the Transaction.
In addition, following the Transaction, we may be subject to increased scrutiny by, and/or additional regulatory requirements of, governmental authorities as a result of the Transaction or the size, scope and complexity of our business operations, which may have an adverse effect on our business, operations or stock price.
While the Transaction is pending, we will be subject to business uncertainties and contractual restrictions that could adversely affect our business and operations.Uncertainty about the effect of the Transaction on employees, customers, suppliers and other persons with whom we or Discover have a business relationship may have an adverse effect on our business, operations and stock price. Existing customers, suppliers and other business partners of ours and of Discover could decide to no longer do business with us or with Discover before the completion of the Transaction or with us after the Transaction is completed, reducing its anticipated benefits. Both parties are also subject to certain restrictions on the conduct of our respective businesses while the Transaction is pending. As a result, certain projects may be delayed or abandoned and business decisions could be deferred. Employee retention may be challenging for Discover before completion of the Transaction, as certain employees of Discover may experience uncertainty about their future roles with us following the Transaction, and these retention challenges will require us to incur additional expenses in order to retain key employees of Discover. If key employees of Discover depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with Discover or with us following the Transaction, the benefits of the Transaction could be materially diminished.
General Economic and Market Risks
Changes and instability in the macroeconomic environment could disrupt capital markets, reduce consumer and business activity, and weaken the labor market, all of which could impact borrowers’ ability to service their debt obligations and adversely impact our financial results.Changes and instability in the macroeconomic environment may lead to changes in payment patterns, increases or fluctuations in delinquencies and default rates and decrease consumer spending. Because we offer a broad array of financial products and services to consumers, small businesses and commercial clients, our financial results are impacted by the level of consumer and business activity and the demand for our products and services. A prolonged period of economic weakness, volatility, slow growth, or a significant deterioration in economic conditions, in the U.S., Canada or the U.K., could have a material adverse effect on our financial condition and results of operations as customers or commercial clients default on their loans, maintain lower deposit levels or, in the case of credit card accounts, carry lower balances and reduce credit card purchase activity.Some of the factors that could disrupt capital markets, reduce consumer and business activity, and weaken the labor market include the following:• Monetary policy actions, such as changes to interest rates, taken by the Federal Reserve and other central banks, such as the central banks in the United Kingdom and Canada;
• Geopolitical conflicts or instabilities, such as the war between Ukraine and Russia and the war between Israel and Hamas, and increased geopolitical tensions between the U.S. and China;
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Table of Contents• Trade wars, tariffs, labor shortages and disruptions of global supply chains;• The effects of divided government in the U.S., including government shutdowns whether recurring, prolonged or otherwise, and developments related to the U.S. federal debt ceiling;• Inflation and deflation, including the effects of related governmental responses;
• Concerns over a potential recession, which may lead to adjustments in spending patterns;• Lower demand for credit and shifts in consumer behavior, including shifts away from using credit cards, changes in deposit practices, and changes in and payment patterns; and
• Ongoing changes in usage of commercial real estate, which may have a sustained negative impact on utilization rates and values.
Decreases in overall business activity and changes in customer behavior may lead to increases in our charge-off rate caused by bankruptcies and may reduce our ability to recover debt that we have previously charged-off. Such changes may also decrease the reliability of our internal processes and models, including those we use to estimate our allowance for credit losses, particularly if unexpected variations in key inputs and assumptions cause actual losses to diverge from the projections of our models and our estimates become increasingly subject to management’s judgment. See “ We face risks resulting from the extensive use of models, AI, and data. ”
Fluctuations in interest rates or volatility in the capital markets could adversely affect our business, results of operations and financial condition.
Like other financial institutions, our business is sensitive to interest rate movements and the performance of the capital markets. We rely on access to the capital markets to fund our operations and to grow our business. Our ability to borrow from other financial institutions or to engage in funding transactions on favorable terms or at all could be adversely affected by disruptions, uncertainty or volatility in the capital markets. Additionally, increased charge-offs, rising interest rates, increased refinancing activity and other events may cause our securitization transactions to amortize earlier than scheduled or reduce the value of the securities that we hold for liquidity purposes, which could accelerate our need for additional funding from other sources. We could also experience impairments of other financial assets and other negative impacts on our financial position, including possible constraints on liquidity and capital, as well as higher costs of capital.
Additionally, changes in interest rates could adversely affect the results of our operations and financial condition. For example, if inflation were to remain elevated or begin to increase, interest rates could increase further. Higher interest rates increase our borrowing costs and may require us to increase the interest we pay on funds deposited with us and may reduce the market value of our securities holdings. If interest rates continue to increase or if higher interest rates persist for an extended period of time, our expenses may increase further. If the rate of economic growth decreased sharply, causing the Federal Reserve to lower interest rates, our net income could be adversely affected. Additionally, a shrinking yield premium between short-term and long-term market interest rates could adversely impact the rates that we pay on our liabilities and the rates that we earn on our assets and thus affect our profitability.
We assess our interest rate risk by estimating the effect on our earnings, economic value and capital under various scenarios that differ based on assumptions about the direction and the magnitude of interest rate changes. We take risk mitigation actions based on those assessments. We face the risk that changes in interest rates could materially reduce our net interest income and our earnings, especially if actual conditions turn out to be materially different than those we assumed.
Furthermore, interest rate fluctuations and competitor responses to those changes may have a material adverse effect on our financial condition and results of operations, as customers or commercial clients default on their loans, maintain lower deposit levels or, in the case of credit card accounts, reduce demand for credit or (for existing customers) the level of borrowing or purchase activity. For example, increases in interest rates increase debt service requirements for some of our borrowers, which may adversely affect those borrowers’ ability to pay as contractually obligated. This could result in additional or fluctuating delinquencies or charge-offs and negatively impact our results of operations. These changes could reduce the overall yield on our interest-earning asset portfolio. An inability to attract or maintain deposits could materially affect our ability to fund our business and our liquidity position. Many other financial institutions have increased their reliance on deposit funding and, as such, we expect continued competition in the deposit markets. We cannot predict how this competition will affect our costs. If we are required to offer higher interest rates to attract or maintain deposits, our funding costs will be adversely impacted.26
Capital One Financial Corporation (COF)
Table of ContentsChanges in valuations in the debt and equity markets could have a negative impact on the assets we hold in our investment portfolio. Such market changes could also have a negative impact on the valuation of assets for which we provide servicing. See “Part II—Item 7. MD&A—Market Risk Profile” and “ We face intense competition in all of our markets ” for additional information.Credit RiskWe may experience increases or fluctuations in delinquencies and credit losses, or we may incorrectly estimate expected losses, which could result in inadequate reserves.Like other lenders, we face the risk that our customers will not repay their loans. A customer’s ability and willingness to repay us can be adversely affected by decreases in the income of the borrower or increases in their payment obligations to other lenders, whether as a result of a job loss, higher debt levels or rising cost of servicing debt, inflation outpacing wage growth, or by restricted availability of credit generally. We may fail to quickly identify and reduce our exposure to customers that are likely to default on their payment obligations, whether by closing credit lines or restricting authorizations. Our ability to manage credit risk also is affected by legal or regulatory changes (such as restrictions on collections, bankruptcy laws, minimum payment regulations and re-age guidance), competitors’ actions and consumer behavior, and depends on the effectiveness of our collections staff, techniques and models.
Rising credit losses or leading indicators of rising credit losses (such as higher delinquencies, higher rates of nonperforming loans, higher bankruptcy rates, lower collateral values, elevated unemployment rates or changing market terms) may require us to increase our allowance for credit losses, which would decrease our profitability if we are unable to raise revenue or reduce costs to compensate for higher credit losses, whether actual or expected. In particular, we face the following risks in this area:• Missed Payments: Our customers may fail to make required payments on time and may default or become delinquent. Loan charge-offs (including from bankruptcies) are generally preceded by missed payments or other indications of worsening financial conditions for our customers. Historically, customers are more likely to miss payments during an economic downturn, recession, periods of high unemployment, or prolonged periods of slow economic growth. Customers might also be more likely to miss payments if the payment burdens on their existing debt grow due to rising interest rates, or if inflation outpaces wage growth. Additionally, the CFPB has, among other things, proposed changes to lower the safe harbor amount for past due fees that a credit card issuer can charge on consumer credit card accounts, which could result in changes in consumer repayment patterns.
• Incorrect Estimates of Expected Credit Losses: The credit quality of our loan portfolios can have a significant impact on our earnings. We allow for and reserve against credit risks based on our assessment of expected credit losses in our loan portfolios. This process, which is critical to our financial condition and results of operations, requires complex judgments, including forecasts of economic conditions. We may underestimate our expected credit losses and fail to hold an allowance for credit losses sufficient to account for these credit losses. Incorrect assumptions could lead to material underestimations of expected credit losses and an inadequate allowance for credit losses. See “ We face risks resulting from the extensive use of models, AI, and data. ”
• Inaccurate Underwriting: Our ability to accurately assess the creditworthiness of our customers may diminish, which could result in an increase in our credit losses and a deterioration of our returns. See “ Our risk management strategies may not be fully effective in mitigating our risk exposures in all market environments or against all types of risk .”
• Business Mix: We engage in a diverse mix of businesses with a broad range of potential credit exposure. Because we originate a relatively greater proportion of consumer loans in our loan portfolio compared to other large bank peers and originate both prime and subprime credit card accounts and auto loans, we may experience higher delinquencies and a greater number of accounts charging off, as well as greater fluctuations in those metrics, compared to other large bank peers, which could result in increased credit losses, operating costs and regulatory scrutiny. Additionally, a change in this business mix over time to include proportionally more consumer loans or subprime credit card accounts or auto loans could adversely affect the credit quality of our loan portfolios.
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Table of Contents• Increasing Charge-off Recognition/Allowance for Credit Losses: We account for the allowance for credit losses according to accounting and regulatory guidelines and rules, including Financial Accounting Standards Board (“FASB”) standards and the Federal Financial Institutions Examination Council (“FFIEC”) Account Management Guidance. We measure our allowance for credit losses under the CECL standard, which is based on management’s best estimate of expected lifetime credit losses. The impact of measuring our allowance for credit losses on our results will depend on the characteristics of our financial instruments, economic conditions, and our economic and loss forecasts. The application of the CECL standard may require us to increase reserves faster and to a higher level in an economic downturn, resulting in greater adverse impact to our results and our capital ratios than we would have experienced in similar circumstances prior to the adoption of CECL. Due to our business mix and the impact of credit losses on our income statement as compared to many of our large bank peers, we could be disproportionately affected by use of the CECL standard.
• Insufficient Asset Values: The collateral we have on secured loans could be insufficient to compensate us for credit losses. When customers default on their secured loans, we attempt to recover collateral where permissible and appropriate. However, the value of the collateral may not be sufficient to compensate us for the amount of the unpaid loan, and we may be unsuccessful in recovering the remaining balance from our customers. Decreases in real estate and other asset values adversely affect the collateral value for our commercial lending activities, while the auto business is similarly exposed to collateral risks arising from the auction markets that determine used car prices. Borrowers may be less likely to continue making payments on loans if the value of the property used as collateral for the loan is less than what the borrower owes, even if the borrower is still financially able to make the payments. In that circumstance, the recovery of such property could be insufficient to compensate us for the value of these loans upon a default. In our auto business, business and economic conditions that negatively affect household incomes and savings, housing prices and consumer behavior, as well as technological advances that make older cars obsolete faster, could decrease (i) the demand for new and/or used vehicles and (ii) the value of the collateral underlying our portfolio of auto loans, which could cause the number of consumers who become delinquent or default on their loans to increase.
• Geographic and Industry Concentration: Although our consumer lending is geographically diversified, approximately 40.5% of our commercial real estate loan portfolio is concentrated in the Northeast region. The regional economic conditions in the Northeast affect the demand for our commercial products and services as well as the ability of our customers to repay their commercial real estate loans and the value of the collateral securing these loans. An economic downturn or prolonged period of slow economic growth in, or a catastrophic event or natural disaster that disproportionately affects the Northeast region could have a material adverse effect on the performance of our commercial real estate loan portfolio and our results of operations. In addition, our Commercial Banking strategy includes an industry-specific focus. If any of the industries that we focus on experience changes, we may experience increased credit losses and our results of operations could be adversely impacted.Capital and Liquidity Risk
We may not be able to maintain adequate capital or liquidity levels or may become subject to revised capital or liquidity requirements, which could have a negative impact on our financial results and our ability to return capital to our stockholders.
Financial institutions are subject to extensive and complex capital and liquidity requirements, which are subject to change. These requirements affect our ability to lend, grow deposit balances, make acquisitions and distribute capital. Failure to maintain adequate capital or liquidity levels, whether due to adverse developments in our business or the economy or to changes in the applicable requirements, could subject us to a variety of restrictions and/or remedial actions imposed by our regulators. These include limitations on the ability to pay dividends or repurchase shares and the issuance of a capital directive to increase capital. Such limitations or capital directive could have a material adverse effect on our business and results of operations. For example, changes to applicable capital, liquidity, or other regulations, such as the changes proposed in the Basel III Finalization Proposal and the LTD Proposal, could result in increased regulatory capital requirements, operating expenses or cost of funding, which could negatively affect our financial results or our ability to distribute capital.We consider various factors in the management of capital, including the impact of both internal and supervisory stress scenarios on our capital levels as determined by our internal modeling and the Federal Reserve’s estimation of losses in supervisory stress scenarios that are used to annually set our stress capital buffer requirement. There can be significant differences between our modeling and the Federal Reserve’s projections for a given supervisory stress scenario and between the capital needs suggested by our internal stress scenarios and the supervisory scenarios. Therefore, although our estimated capital levels under stress disclosed as part of the stress testing processes may suggest that we have a particular capacity to return capital to stockholders
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Table of Contentsand remain well capitalized under stress, the Federal Reserve’s modeling, our internal modeling of another scenario or other factors related to our capital management process may reflect a lower capacity to return capital to stockholders than that indicated by the projections released in the stress testing processes. This in turn, could lead to restrictions on our ability to pay dividends and engage in repurchases of our common stock. See “Item 1. Business—Supervision and Regulation” for additional information.
We also consider various factors in the management of liquidity, including maintaining sufficient liquid assets to meet the requirements of several internal and regulatory stress tests. There can be significant differences in estimated liquidity needs between internal and regulatory stress testing, and liquidity resources required to meet regulatory requirements, such as applicable LCR and NSFR requirements, may exceed what would otherwise be required to satisfy internal liquidity metrics and stress testing. Regulatory liquidity stress testing and regulatory liquidity requirements may, therefore, require us to take actions to increase our liquid assets or alter our activities or funding sources, which could negatively affect our financial results or our ability to return capital to our stockholders. See “Item 1. Business—Supervision and Regulation” for additional information.Limitations on our ability to receive dividends from our subsidiaries could affect our liquidity and ability to pay dividends and repurchase our common stock.
We are a separate and distinct legal entity from our subsidiaries, including, without limitation, the Bank and our broker-dealer subsidiaries. Dividends to us from these direct and indirect subsidiaries have represented a major source of funds for us to pay dividends on our common and preferred stock, repurchase our common stock, make payments on corporate debt securities and meet other obligations. These capital distributions may be limited by law, regulation or supervisory policy. There are various federal law limitations on the extent to which the Bank can finance or otherwise supply funds to us through dividends and loans. These limitations include minimum regulatory capital and capital buffer requirements, federal banking law requirements concerning the payment of dividends out of net profits or surplus, and Sections 23A and 23B of the Federal Reserve Act and Regulation W governing transactions between an insured depository institution and its affiliates, as well as general federal regulatory oversight to prevent unsafe or unsound practices. Our broker-dealer subsidiaries are also subject to laws and regulations, including net capital requirements, that may limit their ability to pay dividends or make other distributions to us. If our subsidiaries’ earnings are not sufficient to make dividend payments to us while maintaining adequate capital levels, our liquidity may be affected and we may not be able to make dividend payments to our common or preferred stockholders, repurchase our common stock, make payments on outstanding corporate debt securities or meet other obligations, each and any of which could have a material adverse impact on our results of operations, our financial position or the perception of our financial health. The frequency and size of any future dividends to our stockholders and our stock repurchases will depend upon regulatory limitations imposed by our regulators and our results of operations, financial condition, capital levels, cash requirements, future prospects, regulatory review and other factors as further described in “Item 1. Business—Supervision and Regulation.”
A downgrade in our credit ratings could significantly impact our liquidity, funding costs and access to the capital markets.Our credit ratings are based on a number of factors, including financial strength, as well as factors not within our control, including conditions affecting the financial services industry generally, the macroeconomic environment and changes made by rating agencies to their methodologies or ratings criteria. Our ratings could be downgraded at any time and without any notice by any of the rating agencies, which could, among other things, adversely affect our ability to borrow funds, increase our funding cost, increase our cost of capital, limit the number of investors or counterparties willing to do business with or lend to us, adversely limit our ability to access the capital markets and have a negative impact on our results of operations.Operational Risk
We face risks related to our operational, technological and organizational infrastructure.
Our ability to retain and attract customers depends on our ability to develop, operate, and adapt our technology and organizational infrastructure in a rapidly changing environment. In addition, we must accurately process, record and monitor an increasingly large number of complex transactions. Digital technology, cloud-based services, data and software development are deeply embedded into our business model and how we work.Similar to other large corporations in our industry, we are exposed to operational risk that can manifest itself in many ways, such as errors in execution, inadequate processes, inaccurate models, faulty or disabled technological infrastructure, malicious disruption and fraud by employees or persons outside of our company, whether through attacks on Capital One directly, or on our third-party service providers or customers. In addition, the increasing use of near real-time money movement solutions,
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Table of Contentsamong other risks, increases the complexity of preventing, detecting and recovering fraudulent transactions. We are also heavily dependent on the security, capability, integrity and continuous availability of the technology systems that we use to manage our internal financial and other systems, monitor risk and compliance with regulatory requirements, provide services to our customers, develop and offer new products and communicate with stakeholders.
We also face risk of adverse customer impacts and business disruption arising from the execution of strategic initiatives and operational plans we may pursue across our operations. For example, when we launch a new product, service or platform for the delivery or distribution of products or services, acquire or invest in a business or make changes to an existing product, service or delivery platform, there is the risk of execution issues related to changes to operations or processes. These issues could be driven by insufficient mitigation of operational risks associated with the change implementation, inadequate training, failure to account for new or changed requirements, or failure to identify or address impacted downstream processes.
In addition, we may experience increased costs and/or disruptions due to our hybrid work model, which could also affect our ability to operate effectively and maintain our corporate culture.
If we do not maintain the necessary operational, technological and organizational infrastructure to operate our business, including to maintain the resiliency and security of that infrastructure, our business and reputation could be materially adversely affected. We also are subject to disruptions to our systems arising from events that are wholly or partially beyond our control, which may include computer viruses; computer, telecommunications, network, utility, electronic or physical infrastructure outages; bugs, errors, insider threats, design flaws in systems or platforms; availability and quality of vulnerability patches from key vendors, cyber-attacks and other security incidents, natural disasters, other damage to property or physical assets, or events arising from local or larger scale politics, including civil unrest, terrorist acts and military conflict. Any failure to maintain our infrastructure or prevent disruption of our systems and applications could diminish our ability to operate our businesses, service customer accounts and protect customers’ information, or result in potential liability to customers, reputational damage, regulatory intervention and customers’ loss of confidence in our businesses, any of which could result in a material adverse effect.
We also rely on the business infrastructure and systems of third parties (and their supply chains) with which we do business and/or to whom we outsource the operation, maintenance and development of our information technology and communications systems. We have substantially migrated primarily all aspects of our core information technology systems and customer-facing applications to third-party cloud infrastructure platforms, principally AWS. If we fail to architect, administer or oversee these environments in a well-managed, secure and effective manner, or if such platforms become unavailable, are disrupted, fail to scale, do not operate as designed, or do not meet their service level agreements for any reason, we may experience unplanned service disruption or unforeseen costs which could result in material harm to our business and operations. We must successfully develop and maintain information, financial reporting, disclosure, privacy, data protection, data security and other controls adapted to our reliance on outside platforms and providers. In addition, AWS, or other service providers (including, without limitation, those who also rely on AWS) could experience system or telecommunication breakdowns or failures, outages, degradation in service, downtime, failure to scale, software bugs, design flaws, cyber-attacks and other security incidents, insider threats, adverse changes to financial condition, bankruptcy, or other adverse conditions, (including conditions which interfere with our access to and use of AWS), which could have a material adverse effect on our business and reputation. We also face a risk that our third-party service providers might be unable or unwilling to continue to provide these or other services to meet our current or future needs in an efficient, cost-effective, or favorable manner or may terminate or seek to terminate their contractual relationship with us. Any transition to alternative third-party service providers or internal solutions may be difficult to implement, may cause us to incur significant time and expense and may disrupt or degrade our ability to deliver our products and services. Thus, the substantial amount of our infrastructure that we outsource to AWS or to other third-party service providers may increase our risk exposure.
Any disruptions, failures or inaccuracies of our operational processes, technology systems and models, including those associated with improvements or modifications to such technology systems and models, or failure to identify or effectively respond to operational risks in a timely manner and continue to deliver our services through an operational disruption, could cause us to be unable to market and manage our products and services, manage our risk, meet our regulatory obligations or report our financial results in a timely and accurate manner, all of which could have a negative impact on our results of operations. In addition, our ongoing investments in infrastructure, which are necessary to maintain a competitive business, integrate acquisitions and establish scalable operations, may increase our expenses. As our business develops, changes or expands, additional expenses can arise as a result of a reevaluation of business strategies or risks, management of outsourced services, asset purchases or other acquisitions, structural reorganization, compliance with new laws or regulations, the integration of newly acquired businesses, or the prevention or occurrence of cyber-attacks and other security incidents. If we are
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Table of Contentsunable to successfully manage our expenses, our financial results will be negatively affected. Changes to our business, including those resulting from our strategic imperatives, also require robust governance to ensure that our objectives are executed as intended without adversely impacting our customers, associates, operations or financial performance. Ineffective change management oversight and governance over the execution of our key projects and initiatives could expose us to operational, strategic and reputational risk and could negatively impact customers or our financial performance.A cyber-attack or other security incident on us or third parties (including their supply chains) with which we conduct business, including an incident that results in the theft, loss, manipulation or misuse of information (including personal information), or the disabling of systems and access to information critical to business operations, may result in increased costs, reductions in revenue, reputational damage, legal exposure and business disruptions.Our ability to provide our products and services and communicate with our customers, depends upon the management and safeguarding of information systems and infrastructure, networks, software, data, technology, methodologies and business secrets, including those of our service providers. Our products and services involve the collection, authentication, management, usage, storage, transmission and destruction of sensitive and confidential information, including personal information, regarding our customers and their accounts, our employees, our partners and other third parties with which we do business. We also have arrangements in place with third-party business partners through which we share and receive information about their customers who are or may become our customers. The financial services industry, including Capital One, is particularly at risk because of the increased use of and reliance on digital banking products and other digital services, including mobile banking products, such as mobile payments, and other internet- and cloud-based products and applications, and the development of additional remote connectivity solutions, which increase cybersecurity risks and exposure. In addition, global events and geopolitical instability (including, without limitation, the war between Israel and Hamas, the war between Ukraine and Russia and the related sanctions imposed by the U.S. and other countries, and increased geopolitical tensions between the U.S. and China) may lead to increased nation state targeting of financial institutions in the U.S. and abroad.
Technologies, systems, networks and other devices of Capital One, as well as those of our employees, service providers, partners and other third parties with whom we interact, have been and may continue to be the subject of cyber-attacks and other security incidents, including computer viruses, hacking, malware, ransomware, supply chain attacks, vulnerabilities, credential stuffing, account takeovers, insider threats, business email compromise scams or phishing or other forms of social engineering. Such cyber-attacks and other security incidents are designed to lead to various harmful outcomes, such as unauthorized transactions in Capital One accounts, unauthorized or unintended access to or release, gathering, monitoring, disclosure, loss, destruction, corruption, disablement, encryption, misuse, modification or other processing of confidential or sensitive information (including personal information), intellectual property, software, methodologies or business secrets, disruption, sabotage or degradation of service, systems or networks, an attempt to extort Capital One, its third-party service providers or its business partners or other damage. Cyber-attacks and other security incidents that occur in the supply chain of third parties with which we interact could also negatively impact Capital One.
These threats may derive from, among other things, error, fraud or malice on the part of our employees, insiders, or third parties or may result from accidental technological failure or design flaws. Any of these parties may also attempt to fraudulently induce employees, service providers, customers, partners or other third-party users of our systems or networks to disclose confidential or sensitive information (including personal information) in order to gain access to our systems, networks or data or that of our customers, partners, or third parties with whom we interact, or to unlawfully obtain monetary benefit through misdirected or otherwise improper payment. For instance, any party that obtains our confidential or sensitive information (including personal information) through a cyber-attack or other security incident may use this information for ransom, to be paid by us or a third party, as part of a fraudulent activity that is part of a broader criminal activity, or for other illicit purposes. Additionally, the failure of our employees, third-party service providers or business partners, or their respective supply chains, to exercise sound judgment and vigilance when targeted with social engineering or other cyber-attacks may increase our vulnerability.
For example, on July 29, 2019, we announced that on March 22 and 23, 2019 an outside individual gained unauthorized access to our systems (the “2019 Cybersecurity Incident”). This individual obtained certain types of personal information relating to people who had applied for our credit card products and to our credit card customers. While the 2019 Cybersecurity Incident has been remediated, it resulted in fines, litigation, consent orders, settlements, government investigations and other regulatory enforcement inquiries. Cyber and information security risks for large financial institutions like us continue to increase due to the proliferation of new technologies, the industry-wide shift to reliance upon the internet to conduct financial transactions, the increased sophistication and activities of malicious actors, organized crime, perpetrators of fraud, hackers, terrorists, activists, extremist parties, formal and informal instrumentalities of foreign governments, state-sponsored or nation-state actors and other external parties and the growing use of AI by threat actors. In addition, our customers access our products and services using personal devices that are necessarily external to our security control systems. There has also been a significant proliferation of
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Table of Contentsconsumer information available on the internet resulting from breaches of third-party entities, including personal information, log-in credentials and authentication data. These third-party breach events could create a threat for our customers if their Capital One log-in credentials are the same as or similar to the credentials that have been compromised on other internet sites. This threat could include the risk of unauthorized account access, data loss and fraud. The use of AI, “bots” or other automation software can increase the velocity and efficacy of these types of attacks. As our employees are operating under our hybrid work model, our remote interaction with employees, service providers, partners and other third parties on systems, networks and environments over which we have less control (such as through employees’ personal devices) increases our cybersecurity risk exposure. We will likely face an increasing number of attempted cyber-attacks as we expand our mobile and other internet-based products and services, as well as our usage of mobile and cloud technologies and as we provide more of these services to a greater number of retail banking customers.
The methods and techniques employed by malicious actors develop and evolve rapidly, including from emerging technologies, such as advanced forms of AI and quantum computing, are increasingly sophisticated and often are not fully recognized or understood until after they have occurred, and some techniques could occur and persist for an extended period of time before being detected and remediated. For example, although we immediately fixed the configuration vulnerability that was exploited in the 2019 Cybersecurity Incident once we discovered the unauthorized access, a period of time elapsed between the occurrence of the unauthorized access and the time when we discovered it. In other circumstances, we and our service providers and other third parties with which we interact may be unable to anticipate or identify certain attack methods or techniques in order to implement effective preventative or detective measures or mitigate or remediate the damages caused in a timely manner. We may also be unable to hire, develop and retain talent that keeps pace with the rapidly changing cyber threat landscape, and which are capable of preventing, detecting, mitigating or remediating these risks. Although we seek to maintain a robust suite of authentication and layered information security controls, any one or combination of these controls could fail to prevent, detect, mitigate, remediate or recover from these risks in a timely manner.
An actual, suspected, threatened or alleged disruption or breach, including as a result of a cyber-attack such as the 2019 Cybersecurity Incident, or media (including social media) reports of alleged or perceived security vulnerabilities or incidents at Capital One or at our service providers, could result in significant legal and financial exposure, regulatory intervention, litigation, enforcement actions, remediation costs, card reissuance, supervisory liability, damage to our reputation or loss of confidence in the security of our systems, products and services that could adversely affect our business. Moreover, new regulations may require us to publicly disclose certain information about certain cybersecurity incidents before they have been resolved or fully investigated. There can be no assurance that unauthorized access or cyber incidents similar to the 2019 Cybersecurity Incident will not occur or that we will not suffer material losses in the future. If future attacks are successful or if customers are unable to access their accounts online for other reasons, it could adversely impact our ability to service customer accounts or loans, complete financial transactions for our customers or otherwise operate any of our businesses or services. In addition, a breach or attack affecting one of our service providers or other third parties with which we interact could harm our business even if we do not control the service that is attacked.Further, our ability to monitor our service providers’ and other business partners’ cybersecurity practices is inherently limited. Although the agreements that we have in place with our service providers (and other business partners) generally include requirements relating to privacy, data protection and data security, we cannot guarantee that such agreements will prevent a cyber incident impacting our systems or information or enable us to obtain adequate or any reimbursement from our service providers or other business partners in the event we should suffer any such incidents. However, due to applicable laws and regulations or contractual obligations, we may be held responsible for cyber incidents attributed to our service providers and other business partners as they relate to the information we share with them.In addition, we continue to incur increased costs with respect to preventing, detecting, investigating, mitigating, remediating, and recovering from cybersecurity risks, as well as any related attempted fraud. In order to address ongoing and future risks, we must expend significant resources to support protective security measures, investigate and remediate any vulnerabilities of our information systems and infrastructure and invest in new technology designed to mitigate security risks. Further, high profile cyber incidents at Capital One or other large financial institutions could undermine our competitive advantage and divert management attention and resources, lead to a general loss of customer confidence in financial institutions that could negatively affect us, including harming the market perception of the effectiveness of our security measures or the global financial system in general, which could result in reduced use of our financial products. We have insurance against some cyber risks and attacks; nonetheless, our insurance coverage may not be sufficient to offset the impact of a material loss event (including if our insurer denies coverage as to any particular claim in the future), and such insurance may increase in cost or cease to be available on commercially reasonable terms, or at all, in the future.
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Table of ContentsWe face risks resulting from the extensive use of models, AI, and data.
We rely on quantitative models and the use of AI, as well as our ability to manage and aggregate data in an accurate and timely manner, to assess and manage our various risk exposures, create estimates and forecasts, and manage compliance with regulatory capital requirements. We continue to invest in building new capabilities that employ new AI technologies such as generative AI, and we expect our use of these technologies to increase over time. However, there are significant risks involved in utilizing models and AI and no assurance can be provided that our use will produce only intended or beneficial results. AI may subject us to new or heightened legal, regulatory, ethical, or other challenges; and negative public opinion of AI could impair the acceptance of AI solutions. If the models or AI solutions that we create or use are deficient, inaccurate or controversial, we could incur operational inefficiencies, competitive harm, legal liability, brand or reputational harm, or other adverse impacts on our business and financial results. We also may incur liability through the violation of applicable laws and regulations, third-party intellectual property, privacy or other rights, or contracts to which we are a party.
We may use models and AI in processes such as determining the pricing of various products, identifying potentially fraudulent transactions, grading loans and extending credit, measuring interest rate and other market risks, predicting deposit levels or loan losses, assessing capital adequacy, calculating managerial and regulatory capital levels, estimating the value of financial instruments and balance sheet items, and other operational functions. Development and implementation of some of these models , such as the models for credit loss accounting under CECL, require us to make difficult, subjective and complex judgments. Our risk reporting and management, including business decisions based on information incorporating models and the use of AI, depend on the effectiveness of our models and AI and our policies, programs, processes and practices governing how data, models and AI, as applicable, are acquired, validated, stored, protected, processed and analyzed. Any issues with the quality or effectiveness of our data aggregation and validation procedures, as well as the quality and integrity of data inputs, formulas or algorithms, could result in inaccurate forecasts, ineffective risk management practices or inaccurate risk reporting. In addition, models and AI based on historical data sets might not be accurate predictors of future outcomes and their ability to appropriately predict future outcomes may degrade over time due to limited historical patterns, extreme or unanticipated market movements or customer behavior and liquidity, especially during severe market downturns or stress events (e.g., geopolitical or pandemic events).
While we continuously update our policies, programs, processes and practices, many of our data management, modeling, AI, aggregation and implementation processes are manual and may be subject to human error, data limitations, process delays or system failure. Failure to manage data effectively and to aggregate data in an accurate and timely manner may limit our ability to manage current and emerging risk, to produce accurate financial, regulatory and operational reporting as well as to manage changing business needs. If our Framework is ineffective, we could suffer unexpected losses which could materially adversely affect our results of operation or financial condition. Also, any information we provide to the public or to our regulators based on incorrectly designed or implemented models or AI could be inaccurate or misleading. Some of the decisions that our regulators make, including those related to capital distribution to our stockholders, could be affected adversely due to the perception that the quality of the data, models and AI used to generate the relevant information is insufficient. In addition, regulation of AI is rapidly evolving worldwide as legislators and regulators are increasingly focused on these powerful emerging technologies. The technologies underlying AI and its uses are subject to a variety of laws and regulations, including intellectual property, privacy, data protection and information security, consumer protection, competition, and equal opportunity laws, and are expected to be subject to increased regulation and new laws or new applications of existing laws and regulations. AI is the subject of ongoing review by various U.S. governmental and regulatory agencies, and various U.S. states and other foreign jurisdictions are applying, or are considering applying, their platform moderation, privacy, data protection and data security laws and regulations to AI or are considering general legal frameworks for AI. We may not be able to anticipate how to respond to these rapidly evolving frameworks, and we may need to expend resources to adjust our offerings in certain jurisdictions if the legal frameworks are inconsistent across jurisdictions. Furthermore, because AI technology itself is highly complex and rapidly developing, it is not possible to predict all of the legal, operational or technological risks that may arise relating to the use of AI.Legal and Regulatory RiskCompliance with new and existing domestic and foreign laws, regulations and regulatory expectations is costly and complex.
A wide array of laws and regulations, including banking and consumer lending laws and regulations, apply to every aspect of our business and these laws can be uncertain and evolving. We and our subsidiaries are also subject to supervision and examination by multiple regulators both in the U.S. and abroad, and the manner in which our regulators interpret applicable laws and regulations may affect how we comply with them. Failure to comply with these laws and regulations, even if the failure was inadvertent or reflects a difference in interpretation or conflicting legal requirements, could subject us to restrictions
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Table of Contentson our business activities, fines, criminal sanctions and other penalties, and/or damage to our reputation with regulators, our customers or the public. Hiring, training and retaining qualified compliance and legal personnel, and establishing and maintaining risk management and compliance-related systems, infrastructure and processes, is difficult and may lead to increased expenses. These efforts and the associated costs could limit our ability to invest in other business opportunities. In addition, actions, behaviors or practices by us, our employees or representatives that are illegal, unethical or contrary to our core values could harm us, our stockholders or customers or damage the integrity of the financial markets and are subject to regulatory scrutiny across jurisdictions. Violations of law by other financial institutions may also result in increased regulatory scrutiny of our business.
Applicable rules and regulations may affect us disproportionately compared to our competitors or in an unforeseen manner. For example, we have a large number of customer accounts in our credit card and auto lending businesses and we have made the strategic choice to originate and service subprime credit card and auto loans, which typically have higher delinquencies and charge-offs than prime customer accounts. As a result, we have significant involvement with credit bureau reporting and the collection and recovery of delinquent and charged-off debt, primarily through customer communications, the filing of litigation against customers in default, the periodic sale of charged-off debt and vehicle repossession. These and other consumer lending activities are subject to enhanced legal and regulatory scrutiny from regulators, courts and legislators. Any future changes to or legal liabilities resulting from our business practices in these areas, including our debt collection practices and the fees we charge, whether mandated by regulators, courts, legislators or otherwise, could have a material adverse impact on our financial condition.
The legislative and regulatory environment is beyond our control, may change rapidly and unpredictably, and may negatively influence our revenue, costs, earnings, growth, liquidity and capital levels. For example, the CFPB has announced several initiatives related to the amounts and types of fees financial institutions may charge, including by issuing a proposed rule that would, among other things, significantly lower the safe harbor amount for past due fees that a credit card issuer can charge on consumer credit card accounts. Such changes could affect our ability or willingness to provide certain products or services, necessitate changes to the our business practices, or reduce our revenues. There may also be future rulemaking in emerging regulatory areas such as climate-related risks and new technologies. Adoption of new technologies, such as distributed ledger technologies, tokenization, cloud computing, AI and machine learning technologies, can present unforeseen challenges in applying and relying on existing compliance systems. In addition, some laws and regulations may be subject to litigation or other challenges that delay or modify their implementation and impact on us.Certain laws and regulations, and any interpretations and applications with respect thereto, are generally intended to protect consumers, borrowers, depositors, the DIF, the U.S. banking and financial system, and financial markets as a whole, but not stockholders. Our success depends on our ability to maintain compliance with both existing and new laws and regulations. For a description of the material laws and regulations, including those related to the consumer lending business, to which we are subject, see “Item 1. Business—Supervision and Regulation.”
Our required compliance with applicable laws and regulations related to privacy, data protection and data security, in addition to compliance with our own privacy policies and contractual obligations to third parties, may increase our costs, reduce our revenue, increase our legal exposure and limit our ability to pursue business opportunities.We are subject to a variety of continuously evolving and developing laws and regulations in the United States at the federal, state and local level regarding privacy, data protection and data security, including those related to the collection, storage, handling, use, disclosure, transfer, security and other processing of personal information. For example, at the federal level, we are subject to the GLBA and the FCRA, among other laws and regulations. Moreover, legislative changes have been proposed in the U.S. Congress for more comprehensive privacy, data protection and data security legislation, to which we may be subject if passed. The enactment of CIRCIA, once rulemaking is complete, will require, among other things, certain companies to report significant cyber incidents to the CISA within 72 hours from the time the company reasonably believes the incident occurred. At the state level, California has enacted the CPRA, and various other states also have enacted or are in the process of enacting state-level privacy, data protection and/or data security laws and regulations, with which we may be required to comply. Additionally, the Federal Banking Agencies, as well as the SEC and related self‐regulatory organizations, regularly issue guidance regarding cybersecurity that is intended to enhance cyber risk management among financial institutions.
We also are, or may become, subject to continuously evolving and developing laws and regulations in other jurisdictions regarding privacy, data protection and data security. For example, in Canada we are subject to the Personal Information Protection and Electronic Documents Act (“PIPEDA”) and may become subject to additional privacy, data protection and data security laws and regulations in Canada, including those which may differ from PIPEDA, if passed. In addition, subject to
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Table of Contentslimited exceptions, the EU General Data Protection Regulation (“EU GDPR”) applies EU data protection laws to certain companies processing personal data of individuals in the EU, regardless of the company’s location. We also are subject to the U.K. General Data Protection Regulation (“U.K. GDPR”), which is how the EU GDPR has been implemented into U.K. law. These laws and regulations, and similar laws and regulations in other jurisdictions, impose strict requirements regarding the collection, storage, handling, use, disclosure, transfer, security and other processing of personal information, which may have adverse consequences, including significant compliance costs and severe monetary penalties for non-compliance. Significant uncertainty exists as privacy, data protection, and data security laws may be interpreted and applied differently from country to country and may create inconsistent or conflicting requirements.
Further, we make public statements about our use, collection, disclosure and other processing of personal information through our privacy policies, information provided on our website and press statements. Although we endeavor to comply with our public statements and documentation, we may at times fail to do so or be alleged to have failed to do so. The publication of our privacy policies and other statements that provide promises and assurances about privacy, data protection and data security can subject us to potential government or legal action if they are found to be deceptive, unfair or misrepresentative of our actual practices. Additional risks could arise in connection with any failure or perceived failure by us, our service providers or other third parties with which we do business to provide adequate disclosure or transparency to individuals, including our customers, about the personal information collected from them and its use, to receive, document or honor the privacy preferences expressed by individuals, to protect personal information from unauthorized disclosure, or to maintain proper training on privacy practices for all employees or third parties who have access to personal information in our possession or control.
Our efforts to comply with GLBA, FCRA, CPRA, PIPEDA, EU GDPR, U.K. GDPR and other privacy, data protection and data security laws and regulations, as well as our posted privacy policies, and related contractual obligations to third parties, entail substantial expenses, may divert resources from other initiatives and projects, and could limit the services we are able to offer. Furthermore, enforcement actions and investigations by regulatory authorities related to data security incidents and privacy, data protection and data security violations continue to increase. The enactment of more restrictive laws or regulations, or future enforcement actions, litigation or investigations, could impact us through increased costs or restrictions on our business, and any noncompliance or perceived noncompliance could result in monetary or other penalties, harm to our reputation, distraction to our management and technical personnel and significant legal liability.Our businesses are subject to the risk of increased litigation, government investigations and regulatory enforcement.
Our businesses are subject to increased litigation, government investigations and other regulatory enforcement risks as a result of a number of factors and from various sources, including the highly regulated nature of the financial services industry, the focus of state and federal prosecutors on banks and the financial services industry and the structure of the credit card industry.
Given the inherent uncertainties involved in litigation, government investigations and regulatory enforcement decisions, and the very large or indeterminate damages sought in some matters asserted against us, there can be significant uncertainty as to the ultimate liability we may incur from these kinds of matters. The finding, or even the assertion, of substantial legal liability against us could have a material adverse effect on our business and financial condition and could cause significant reputational harm to us, which could seriously harm our business. For example, the 2019 Cybersecurity Incident has resulted in litigation, consent orders, settlements, government investigations and other regulatory enforcement inquiries.In addition, financial institutions, such as ourselves, face significant regulatory scrutiny, which can lead to public enforcement actions or nonpublic supervisory actions. We and our subsidiaries are subject to comprehensive regulation and periodic examination by, among other regulatory bodies, the Federal Banking Agencies, SEC, CFTC and CFPB. We have been subject to enforcement actions by many of these and other regulators and may continue to be involved in such actions, including governmental inquiries, investigations and enforcement proceedings, including by the OCC, Department of Justice, the FinCEN and state Attorneys General.
Over the last several years, federal and state regulators have focused on risk management, compliance with anti-money laundering (“AML”) and sanctions laws, privacy, data protection and data security, use of service providers, fair lending and other consumer protection issues and innovative activities, such as those that utilize new technology. In August 2020, we entered into consent orders with the Federal Reserve and the OCC resulting from regulatory reviews of the 2019 Cybersecurity Incident and relating to ongoing enhancements of our cybersecurity and operational risk management processes, and we paid a civil monetary penalty as part of the OCC agreement. The OCC and the Federal Reserve have since terminated their consent orders. In January 2021, we also paid a civil monetary penalty assessed by FinCEN against the Bank in connection with AML
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Table of Contentsviolations alleged to have occurred between 2008 and 2014. Regulatory scrutiny is expected to continue in these areas, including as a result of implementation of the AML Act of 2020.
We expect that regulators and governmental enforcement bodies will continue taking public enforcement actions against financial institutions in addition to addressing supervisory concerns through nonpublic supervisory actions or findings, which could involve restrictions on our activities, or our ability to make acquisitions or otherwise expand our business, among other limitations that could adversely affect our business. In addition, a violation of law or regulation by another financial institution is likely to give rise to an investigation by regulators and other governmental agencies of the same or similar practices by us. Furthermore, a single event may give rise to numerous and overlapping investigations and proceedings. These and other initiatives from governmental authorities and officials may subject us to further judgments, settlements, fines or penalties, or cause us to restructure our operations and activities or to cease offering certain products or services, all of which could harm our reputation or lead to higher operational costs. Litigation, government investigations and other regulatory actions could generally subject us to significant fines, increased expenses, restrictions on our activities and damage to our reputation and our brand, and could adversely affect our business, financial condition and results of operations. For additional information regarding legal and regulatory proceedings to which we are subject, see “Part II—Item 8. Financial Statements and Supplementary Data—Note 18—Commitments, Contingencies, Guarantees and Others.”Other Business Risks
We face intense competition in all of our markets, which could have a material adverse effect on our business and results of operations.
We operate in a highly competitive environment across all of our lines of business, whether in making loans, attracting deposits or in the global payments industry, and we expect competitive conditions to continue to intensify with respect to most of our products particularly in our credit card and consumer banking businesses. We compete on the basis of the rates we pay on deposits and the rates and other terms we charge on the loans we originate or purchase, as well as the quality and range of our customer service, products, innovation and experience. This competitive environment is primarily a result of changes in technology, product delivery systems and regulation, as well as the emergence of new or significantly larger financial services providers, all of which may affect our customers’ expectations and demands. In addition to offering competitive products and services, we invest in and conduct marketing campaigns to attract and inform customers. If our marketing campaigns are unsuccessful, it may adversely impact our ability to attract new customers and grow market share.Some of our competitors, including new and emerging competitors in the digital and mobile payments space and other financial technology providers, are not subject to the same regulatory requirements or scrutiny to which we are subject, which also could place us at a competitive disadvantage, in particular in the development of new technology platforms or the ability to rapidly innovate. We compete with many forms of payments offered by both bank and non-bank providers, including a variety of new and evolving alternative payment mechanisms, systems and products, such as aggregators and web-based and wireless payment platforms or technologies, digital or cryptocurrencies, prepaid systems and payment services targeting users of social networks, communications platforms and online gaming. If we are unable to continue to keep pace with innovation, do not effectively market our products and services or are prohibited from or unwilling to enter emerging areas of competition, our business and results of operations could be adversely affected. In addition, government actions or initiatives may also provide competitors with increased opportunities to derive competitive advantages and may create new competitors. For example, the CFPB has proposed a rule that would require certain financial institutions, including the Company, to share certain financial information with third parties upon a customer’s request, which could enable those third parties to offer competing financial services to consumers.Some of our competitors are substantially larger than we are, which may give those competitors advantages, including a more diversified product and customer base, the ability to reach more customers and potential customers, operational efficiencies, broad-based local distribution capabilities, lower-cost funding and larger existing branch networks. Many of our competitors are also focusing on cross-selling their products and developing new products or technologies, which could affect our ability to maintain or grow existing customer relationships or require us to offer lower interest rates or fees on our lending products or higher interest rates on deposits. Competition for loans could result in origination of fewer loans, earning less on our loans or an increase in loans that perform below expectations.We operate as an online direct bank in the United States. While direct banking provides a significant opportunity to attract new customers that value greater and more flexible access to banking services at reduced costs, we face strong and increasing competition in the direct banking market. Aggressive pricing throughout the industry may adversely affect the retention of existing balances and the cost-efficient acquisition of new deposit funds and may affect our growth and profitability. Customers
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Table of Contentscould also close their online accounts or reduce balances or deposits in favor of products and services offered by competitors for other reasons. These shifts, which could be rapid, could result from general dissatisfaction with our products or services, including concerns over pricing, online security or our reputation. The potential consequences of this competitive environment are exacerbated by the flexibility of direct banking and the financial and technological sophistication of our online customer base.
In our credit card business, competition for rewards customers may result in higher rewards expenses, or we may fail to attract new customers or retain existing rewards customers due to increasing competition for these consumers. As of December 31, 2023, we have a number of large partnerships in our credit card loan portfolio. The market for key business partners, especially in the credit card business, is very competitive, and we may not be able to grow or maintain these partner relationships or assure that these relationships will be profitable or valued by our customers. Additionally, partners themselves may face changes in their business, including market factors and ownership changes, that could impact the partnership. We face the risk that we could lose partner relationships, even after we have invested significant resources into acquiring and developing the relationships. The loss of any key business partner could have a negative impact on our results of operations, including lower returns, excess operating expense and excess funding capacity.
We depend on our partners to effectively promote our co-brand and private label products and integrate the use of our credit cards into their retail operations. The failure by our partners to effectively promote and support our products as well as changes they may make in their business models could adversely affect card usage and our ability to achieve the growth and profitability objectives of our partnerships. In addition, if our partners do not adhere to the terms of our program agreements and standards, or otherwise diminish the value of our brand, we may suffer reputational damage and customers may be less likely to use our products.Some of our competitors have developed, or may develop, substantially greater financial and other resources than we have, may offer richer value propositions or a wider range of programs and services than we offer, or may use more effective advertising, marketing or cross-selling strategies to acquire and retain more customers, capture a greater share of spending and borrowings, attain and develop more attractive co-brand card programs and maintain greater merchant acceptance than we have. We may not be able to compete effectively against these threats or respond or adapt to changes in consumer spending habits as effectively as our competitors.
In such a competitive environment, we may lose entire accounts or may lose account balances to competing firms, or we may find it more costly to maintain our existing customer base. Customer attrition from any or all of our lending products, together with any lowering of interest rates or fees that we might implement to retain customers, could reduce our revenues and therefore our earnings. Similarly, unexpected customer attrition from our deposit products, in addition to an increase in rates or services that we may offer to retain deposits, may increase our expenses and therefore reduce our earnings.Our business, financial condition and results of operations may be adversely affected by merchants’ efforts to reduce the fees charged by credit and debit card networks to facilitate card transactions, and by legislation and regulation impacting such fees.
Interchange fees are the amounts established by credit and debit card networks for the purpose of compensating debit and credit card issuers for their role in facilitating card transactions and are a meaningful source of revenue for our credit and debit card businesses. Interchange fees are a revenue source that, for example, covers the issuer’s costs associated with credit and debit card payments, fund rewards programs, offset fraud, management and dispute costs and fund competition and innovation. Interchange fees continue to be the subject of significant and intense global legal, legislative and regulatory focus, and the resulting decisions, legislation and regulation may have a material adverse impact on our overall business, financial condition and results of operations.
Legislative and regulatory bodies in a number of countries have sought, or are currently seeking, to reduce interchange fees through legislation, competition-related regulatory proceedings, voluntary agreements, central bank regulation and/or litigation. For credit transactions, interchange reimbursement rates in the United States are set by credit card networks such as MasterCard and Visa.
In some jurisdictions, such as Canada and certain countries in Europe, including the U.K., interchange fees and related practices are subject to regulatory activity, including in some cases, imposing caps on permissible interchange fees. Our international card businesses have been impacted by these restrictions. For example, in the U.K., interchange fees are capped for both credit and debit card transactions. In addition, in Canada, Visa and MasterCard payment networks have entered into voluntary
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Table of Contentsagreements with the Department of Finance Canada to maintain an agreed upon average interchange rate. Lowering interchange fees remains an area of domestic and international governmental attention by certain parties.
In addition to this regulatory activity, merchants are also seeking avenues to reduce interchange fees. Merchants and their trade groups have filed numerous lawsuits against payment card networks and banks that issue cards on those networks, claiming that their practices toward merchants, including interchange fees, violate federal antitrust laws. In 2005, a number of entities filed antitrust lawsuits against MasterCard and Visa and several member banks, including our subsidiaries and us, alleging among other things, that the defendants conspired to fix the level of interchange fees. For additional information about the lawsuits, see “Part II—Item 8. Financial Statements and Supplementary Data—Note 18—Commitments, Contingencies, Guarantees and Others” for further details.Some major retailers or industry sectors could independently negotiate lower interchange fees with MasterCard and Visa, which could, in turn, result in lower interchange fees for us when our cardholders undertake purchase transactions with these retailers. Merchants continue to lobby Congress aggressively for legislation that would require additional routing requirements for credit cards that are issued on four-party networks, like Visa or MasterCard, which could create a downward pressure on interchange fees should their efforts be successful. Retailers may continue to bring legal proceedings against us or other credit card and debit card issuers and networks in the future.For debit transactions, Regulation II (Debit Card Interchange Fees and Routing) which was issued by the Federal Reserve in 2011, place limits on the interchange fees we may charge and requires additional routing requirements for debit cards issued on four-party networks, like Visa or Mastercard. On October 25, 2023, the Federal Reserve released a notice of proposed rulemaking to revise Regulation II to further reduce the interchange fee cap that debit card issuers covered by Regulation II can receive for debit card transactions. For more information on these rules, please see “Item 1. Business—Supervision and Regulation.”
Beyond pursuing litigation, legislation and regulation, merchants may also promote forms of payment with lower fees or seek to impose surcharges or discounts at the point of sale for use of credit or debit cards. New payment systems, particularly mobile-based payment technologies, could also gain widespread adoption and lead to issuer transaction fees or the displacement of credit or debit cards as a payment method.
The heightened focus by merchants and legislative and regulatory bodies on the fees charged by credit and debit card networks, and the ability of certain merchants to successfully negotiate discounts to interchange fees with MasterCard and Visa or develop alternative payment systems, could result in a loss of income. Any resulting loss in income to us could have a material adverse effect on our business, financial condition and results of operations.If we are not able to invest successfully in and introduce digital and other technological developments across all our businesses, our financial performance may suffer.Our industry is subject to rapid and significant technological changes and our ability to meet our customers’ needs and expectations is key to our ability to grow revenue and earnings. We expect digital technologies to continue to have a significant impact on banking over time. Consumers expect robust digital experiences from their financial services providers. The ability for customers to access their accounts and conduct financial transactions using digital technology, including mobile applications, is an important aspect of the financial services industry and financial institutions are rapidly introducing new digital and other technology-driven products and services that aim to offer a better customer experience and to reduce costs. We continue to invest in digital technology designed to attract new customers, facilitate the ability of existing customers to conduct financial transactions and enhance the customer experience related to our products and services.
Our continued success depends, in part, upon our ability to assess and address the needs of our customers by using digital technology to provide products and services that meet their expectations. The development and launch of new digital products and services depends in large part on our ability to invest in and build the technology platforms that can enable them, in a cost effective and timely manner. We expect that new technologies in the payments industry will continue to emerge, and these new technologies may be superior to our existing technology. See “ We face intense competition in all of our markets ” and “ We face risks related to our operational, technological and organizational infrastructure. ”
Some of our competitors are substantially larger than we are, which may allow those competitors to invest more money into their technology infrastructure and digital innovation than we do. In addition, smaller competitors may experience lower cost structures and different regulatory requirements and scrutiny than we do, which may allow them to innovate more rapidly than we can. See “ We face intense competition in all of our markets. ” Further, our success depends on our ability to attract and retain
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Table of Contentsstrong digital and technology leaders, engineers and other specialized personnel. The competition is intense and the compensation costs continue to increase for such talent. If we are unable to attract and retain digital and technology talent, our ability to offer digital products and services and build the necessary technology infrastructure could be negatively affected, which could negatively impact our business and financial results. A failure to maintain or enhance our competitive position with respect to digital products and services, whether because we fail to anticipate customer expectations or because our technological developments fail to perform as desired or are not implemented in a timely or successful manner, could negatively impact our business and financial results.We may fail to realize the anticipated benefits of our mergers, acquisitions and strategic partnerships.We engage in merger and acquisition activity and enter into strategic partnerships from time to time. We continue to evaluate and anticipate engaging in, among other merger and acquisition activity, additional strategic partnerships and selected acquisitions of financial institutions and other businesses or assets, including credit card and other loan portfolios. We may not be able to identify and secure future acquisition targets on terms and conditions that are acceptable to us, or successfully complete and integrate the businesses within the anticipated time frame and achieve the anticipated benefits of proposed mergers, acquisitions and strategic partnerships, which could impair our growth.
Any merger, acquisition or strategic partnership we undertake entails certain risks, which may materially and adversely affect our results of operations. If we experience greater than anticipated costs to integrate acquired businesses into our existing operations, or are not able to achieve the anticipated benefits of any merger, acquisition or strategic partnership, including cost savings and other synergies, our business could be negatively affected. In addition, it is possible that the ongoing integration processes could result in the loss of key employees, errors or delays in systems implementation, exposure to cybersecurity risks associated with acquired businesses, exposure to additional regulatory oversight, the disruption of our ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect our ability to maintain relationships with partners, clients, customers, depositors and employees or to achieve the anticipated benefits of any merger, acquisition or strategic partnership. Integration efforts also may divert management attention and resources. These integration matters may have an adverse effect on us during any transition period.
See additional risk factors under the heading “Risks Relating to the Acquisition of Discover.”In addition, we may face the following risks in connection with any merger, acquisition or strategic partnership:
• New Businesses and Geographic or Other Markets: Our merger, acquisition or strategic partnership activity may involve our entry into new businesses or new geographic areas or markets in the U.S. or internationally, that present risks resulting from our relative inexperience in these new businesses, localities or markets. These new businesses, localities or markets may change the overall character of our consolidated portfolio of businesses and alter our exposure to economic and other external factors. We also face the risk that we will not be successful in these new businesses, localities or markets.
• Identification and Assessment of Merger and Acquisition Targets and Deployment of Acquired Assets: We may not be able to identify, acquire or partner with suitable targets. Further, our ability to achieve the anticipated benefits of any merger, acquisition or strategic partnership will depend on our ability to assess the asset quality, risks and value of the particular assets or institutions we partner with, merge with or acquire. We may be unable to profitably deploy any assets we acquire.
• Accuracy of Assumptions: In connection with any merger, acquisition or strategic partnership, we may make certain assumptions relating to the proposed merger, acquisition or strategic partnership that may be, or may prove to be, inaccurate, including as a result of the failure to anticipate the costs, timeline or ability to realize the expected benefits of any merger, acquisition or strategic partnership. The inaccuracy of any assumptions we may make could result in unanticipated consequences that could have a material adverse effect on our results of operations or financial condition.• Target-specific Risk: Assets and companies that we acquire, or companies that we enter into strategic partnerships with, will have their own risks that are specific to a particular asset or company. These risks include, but are not limited to, particular or specific regulatory, accounting, operational, reputational and industry risks, any of which could have a material adverse effect on our results of operations or financial condition. For example, we may face challenges associated with integrating other companies due to differences in corporate culture, compliance systems or standards of
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Table of Contentsconduct. Indemnification rights, if any, may be insufficient to compensate us for any losses or damages resulting from such risks. In addition to regulatory approvals discussed below, certain of our merger, acquisition or partnership activity may require third-party consents in order for us to fully realize the anticipated benefits of any such transaction.
• Conditions to Regulatory Approval: We may be required to obtain various governmental and regulatory approvals to consummate certain acquisitions. We cannot be certain whether, when or on what terms and conditions, such approvals may be granted. Consequently, we may not obtain governmental or regulatory approval for a proposed acquisition on acceptable terms or at all, in which case we would not be able to complete the acquisition despite investing resources in pursuing it.Reputational risk and social factors may impact our results and damage our brand.Our ability to attract and retain customers is highly dependent upon the perceptions of consumer and commercial borrowers and deposit holders and other external perceptions of our products, services, trustworthiness, business practices, workplace culture, compliance practices or our financial health. Capital One’s brand is one of our most important assets. Maintaining and enhancing our brand depends largely on our ability to continue to provide high-quality products and services. Adverse perceptions regarding our reputation in the consumer, commercial, and funding markets could lead to difficulties in generating, maintaining and financing accounts. In particular, negative public perceptions regarding our reputation, including negative perceptions regarding our ability to maintain the security of our technology systems and protect customer data, could lead to decreases in the levels of deposits that current and potential consumer and commercial customers choose to maintain with us. Negative perceptions may also significantly increase the costs of attracting and retaining customers. In addition, negative perceptions regarding certain industries, partners or clients could also prompt us to cease business activities associated with those entities in order to manage reputational risk.Negative public opinion or damage to our brand could also result from actual or alleged conduct in any number of activities or circumstances, including lending practices, regulatory compliance, cyber-attacks or other security incidents, corporate governance and sales and marketing, and from actions taken by regulators or other persons in response to such conduct. Such conduct could fall short of our customers’ and the public’s heightened expectations of companies of our size with rigorous privacy, data protection, data security and compliance practices, and could further harm our reputation. In addition, our co-brand and private label credit card partners or other third parties with whom we have important relationships may take actions over which we have limited control that could negatively impact perceptions about us or the financial services industry. The proliferation of social media may increase the likelihood that negative public opinion from any of the actual or alleged events discussed above could impact our reputation and business.
In addition, a variety of economic or social factors may cause changes in borrowing activity, including credit card use, payment patterns and the rate of defaults by account holders and borrowers domestically and internationally. These economic and social factors include changes in consumer confidence levels, the public’s perception regarding the banking industry and consumer debt, including credit card use, and changing attitudes about the stigma of bankruptcy. If consumers develop or maintain negative attitudes about incurring debt, or consumption trends decline or if we fail to maintain and enhance our brand, or we incur significant expenses to do so, our reputation and business and financial results could be materially and negatively affected.There has also been an increased focus by investor advocacy groups, investment funds and shareholder activists, among others, on topics related to environmental, social and corporate governance policies, and our policies, practices and disclosure in these areas, including those related to climate change. Reputation risk related to corporate policies and practices on environmental, social and corporate governance topics is increasingly complex. Divergent ideological and social views may create competing stakeholder, legislative, and regulatory scrutiny that may impact our reputation. Furthermore, responding to environmental, social and corporate governance considerations and implementing our related goals and initiatives involve risk and uncertainties, require investments and depend in part on third-party performance or data that is outside of our control. There can be no assurance that we will achieve these goals and initiatives or that any such achievements will have the desired results. Our failure to achieve progress in these areas on a timely basis, if at all, could impact our reputation and public perceptions of our business.
If we are not able to protect our intellectual property, our revenue and profitability could be negatively affected.
We rely on a variety of measures to protect and enhance our intellectual property, including copyrights, trademarks, trade secrets, patents and certain restrictions on disclosure, solicitation and competition. We also undertake other measures to control access to and distribution of our other proprietary and confidential information. These measures may not prevent
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Table of Contentsmisappropriation of our proprietary or confidential information or infringement, misappropriation or other violations of our intellectual property rights and a resulting loss of competitive advantage. In addition, our competitors or other third parties may obtain patents for innovations that are used in our industry or allege that our systems, processes or technologies infringe, misappropriate or violate their intellectual property rights. Given the complex, rapidly changing and competitive technological and business environments in which we operate, if our competitors or other third parties are successful in obtaining such patents or prevail in intellectual property-related litigation against us, we could lose significant revenues, incur significant license, royalty, technology development or other expenses, or pay significant damages.Our risk management strategies may not be fully effective in mitigating our risk exposures in all market environments or against all types of risk.Management of market, credit, liquidity, strategic, reputational, operational and compliance risk requires, among other things, policies and procedures to properly record and verify a large number of transactions and events. See “Part II—Item 7. MD&A—Risk Management” for further details. Our Framework is designed to identify, measure, assess, monitor, test, control, report, escalate, and mitigate the risks that we face. Even though we continue to devote significant resources to developing and operating our Framework, our risk management strategies may not be fully effective in identifying and mitigating our risk exposure in all market environments or against all types of risk, including risks that are unidentified or unanticipated.Some of our methods of managing these risks are based upon our use of observed historical market behavior, the use of analytical and/or forecasting models and management’s judgment. These methods may not accurately predict future exposures, which could be significantly greater than the historical measures or models indicate and market conditions, particularly during a period of financial market stress, can involve unprecedented dislocations. For example, credit risk is inherent in the financial services business and results from, among other things, extending credit to customers. Our ability to assess the creditworthiness of our customers may be impaired if the models and approaches we use to select, manage and underwrite our consumer and commercial customers become less predictive of future charge-offs due, for example, to rapid changes in the economy, or degradation in the predictive nature of credit bureau and other data used in underwriting.
While we employ a broad and diversified set of risk monitoring and risk mitigation techniques, those techniques and the judgments that accompany their application cannot anticipate every economic and financial outcome or the timing of such outcomes. For example, our ability to implement our risk management strategies may be hindered by adverse changes in the volatility or liquidity conditions in certain markets and as a result, may limit our ability to distribute such risks (for instance, when we seek to syndicate exposure in bridge financing transactions we have underwritten). We may, therefore, incur losses in the course of our risk management or investing activities.
Our business could be negatively affected if we are unable to attract, develop, retain and motivate key senior leaders and skilled employees.Our success depends, in large part, on our ability to retain key senior leaders and to attract, develop and retain skilled employees, particularly employees with advanced expertise in credit, risk, digital and technology skills. We depend on our senior leaders and skilled employees to oversee simultaneous, transformative initiatives across the enterprise and execute on our business plans in an efficient and effective manner. Competition for such senior leaders and employees, and the costs associated with attracting, developing and retaining them, is high and competitive. While we engage in robust succession planning, our key senior leaders have deep and broad industry experience and could be difficult to replace without some degree of disruption.
Our ability to attract, develop and retain qualified employees also is affected by perceptions of our culture and management, including our position on remote and hybrid work arrangements, our profile in the regions where we have offices and the professional opportunities we offer. In addition, an increase in remote working arrangements by other companies may create more job opportunities for employees and make it more difficult for us to attract and retain key talent.
Regulation or regulatory guidance restricting executive compensation, as well as evolving investor expectations, may limit the types of compensation arrangements that we may enter into with our most senior leaders and could have a negative impact on our ability to attract, retain and motivate such leaders in support of our long-term strategy. These laws and regulations may not apply in the same manner to all financial institutions and technology companies, which therefore may subject us to more restrictions than other institutions and companies with which we compete for talent and may also hinder our ability to compete for talent with other industries. We rely upon our senior leaders not only for business success, but also to lead with integrity. To the extent our senior leaders behave in a manner that does not comport with our values, the consequences to our brand and reputation could be severe and could adversely affect our financial condition and results of operations. If we are unable to attract, develop and retain talented senior leadership and employees, or to implement appropriate succession plans for our senior leadership, our business could be negatively affected.
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Table of ContentsWe face risks from catastrophic events.
Natural disasters, geopolitical events and other catastrophic events could harm our employees, business and infrastructure, including our information technology systems and third-party platforms. Our ability to conduct business may be adversely affected by a disruption in the infrastructure that supports our business and the communities where we are located, which are concentrated in the Northern Virginia and New York metropolitan areas, Richmond, Virginia and Plano, Texas. This may include a disruption involving damage or loss of access to a physical site, cyber-attacks and other security incidents, terrorist activities, the occurrence or worsening of disease outbreaks or pandemics, natural disasters, extreme weather events, electrical outage, environmental hazards, disruption to technological infrastructure, communications or other services we use, our employees or third parties with whom we conduct business. Our business, financial condition and results of operations may be impacted by any such disruption and our ability to implement corresponding response measures quickly. In addition, if a natural disaster or other catastrophic event occurs in certain regions where our business, customers or assets securing our loans are concentrated, such as the mid-Atlantic, New York, California or Texas metropolitan areas, or in regions where our third-party platforms are located, we could be disproportionately impacted as compared to our competitors. The impact of such events and other catastrophes on the overall economy and our physical and transition risks may also adversely affect our financial condition and results of operations.
Climate change manifesting as physical or transition risks could adversely affect our businesses, operations and customers and result in increased costs.
Climate change risks can manifest as physical or transition risks.
Physical risks are the risks from the effects of climate change arising from acute, climate-related events, such as, hurricanes, flooding and wildfires, and chronic shifts in climate, such as sea level rise and higher average temperatures. Such events could lead to financial losses or disrupt our operations or those of our customers or third parties on which we rely, including through direct damage to assets and indirect impacts from supply chain disruption and market volatility.
Transition risks are the risks resulting from the shift toward a lower-carbon economy arising from the changes in policy, consumer and business sentiment or technologies in regards to limiting climate change. Transition risks, including changes in consumer preferences and additional regulatory requirements or taxes, could increase our expenses, affect credit performance, and impact our strategies or those of our customers. For example, on October 24, 2023, the Federal Banking Agencies jointly issued guidance on climate-related financial risk management for large institutions, which applies to us. For more information on climate-related regulatory developments, see “Item 1. Business—Supervision and Regulation.”Physical and transition risks could also affect the financial health of certain customers in impacted industries or geographies. In addition, we face reputational risk as a result of our policies, practices, disclosures and decisions related to climate change and the environment, or the practices or involvement of our clients or vendors and suppliers, in certain industries or projects associated with causing or exacerbating climate change. Further, there is increased scrutiny of climate change-related policies, goals and disclosures, which could result in litigation and regulatory investigations and actions. We may incur additional costs and require additional resources as we evolve our strategy, practices and related disclosures with respect to these matters.
As climate risk is interconnected with many risk types, we continue to enhance processes to embed evolving climate risk considerations into our existing risk management strategies; however, because the timing and severity of climate change may not be predictable, our risk management strategies may not be effective in mitigating climate risk exposure.
We face risks from the use of or changes to assumptions or estimates in our financial statements.
Pursuant to generally accepted accounting principles in the U.S. (“U.S. GAAP”), we are required to use certain assumptions and estimates in preparing our financial statements, including determining our allowance for credit losses, the fair value of certain assets and liabilities, and goodwill impairment, among other items. In addition, the FASB, the SEC and other regulatory bodies may change the financial accounting and reporting standards, including those related to assumptions and estimates we use to prepare our financial statements, in ways that we cannot predict and that could impact our financial statements. If actual results differ from the assumptions or estimates underlying our financial statements or if financial accounting and reporting standards are changed, we may experience unexpected material losses. For a discussion of our use of estimates in the preparation of our consolidated financial statements, see “Part II—Item 7. MD&A—Critical Accounting Policies and Estimates” and “Part II—Item 8. Financial Statements and Supplementary Data—Note 1—Summary of Significant Accounting Policies.”
The soundness of other financial institutions and other third parties, actual or perceived, could adversely affect us.
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Table of ContentsOur ability to engage in routine funding and other transactions could be adversely affected by the stability and actions of other financial services institutions. Financial services institutions are interrelated as a result of trading, clearing, servicing, counterparty and other relationships. We have exposure to financial institutions, intermediaries and counterparties that are exposed to risks over which we have little or no control.Recently, several financial services institutions have failed or required outside liquidity support, in many cases, as a result of the inability of the institutions to obtain needed liquidity. For example, during 2023, Silicon Valley Bank, Signature Bank and First Republic Bank were closed and placed under FDIC receivership. This has led to additional risk for other financial services institutions and the financial services industry generally as a result of increased lack of confidence in the financial sector. The failure of other banks and financial institutions and the measures taken by governments, businesses and other organizations in response to these events could adversely impact our business, financial condition and results of operations. For information on the FDIC’s special assessment following the closures of Silicon Valley Bank and Signature Bank, see “Item 1. Business—Supervision and Regulation.”In addition, we routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds and other institutional clients, resulting in a significant credit concentration with respect to the financial services industry overall. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions.Likewise, adverse developments affecting the overall strength and soundness of our competitors, the financial services industry as a whole and the general economic climate and the U.S. Treasury market could have a negative impact on perceptions about the strength and soundness of our business even if we are not subject to the same adverse developments. In addition, adverse developments with respect to third parties with whom we have important relationships also could negatively impact perceptions about us. These perceptions about us could cause our business to be negatively affected and exacerbate the other risks that we face. Moreover, the speed with which information spreads through social media, enhanced technology and other news sources on the Internet and the ease with which customers transact may amplify the onset and negative effects from such perceptions.
FY 2024-12-31 (later)
Item 1A. Risk Factors
The following discussion sets forth what management currently believes could be the material risks and uncertainties that could impact our businesses, results of operations and financial condition. The events and consequences discussed in these risk factors could, in circumstances we may not be able to accurately predict, recognize, or control, have a material adverse effect on our business, growth, reputation, prospects, financial condition, operating results, cash flows, liquidity, and stock price. These risk factors do not identify all risks that we face; our operations could also be affected by factors, events, or uncertainties that are not presently known to us or that we currently do not consider to present significant risks to our operations. In addition, the global economic and political climate may amplify many of these risks.
Summary of Risk Factors
The following is a summary of the Risk Factors disclosure in this Item 1A. This summary does not address all of the risks that we face. Additional discussion of the risks summarized in this risk factor summary, and other risks that we face, can be found below and should be carefully considered, together with other information in this Form 10-K and our other filings with the SEC, before making an investment decision regarding our securities.• The consummation of the Transaction is contingent upon the satisfaction of a number of conditions, including regulatory approvals, that may be outside either party’s control and that either party may be unable to satisfy or obtain or which may delay the consummation of the Transaction or result in the imposition of conditions that could reduce the anticipated benefits from the Transaction or cause the parties to abandon the Transaction.
• We expect to incur substantial expenses related to the Transaction and to the integration of Discover, and the expenses may be greater than anticipated due to unexpected events.
• We may fail to realize all of the anticipated benefits of the Transaction, or those benefits may take longer to realize than expected due to factors that may be outside our control or Discover’s control. We may also encounter significant difficulties in integrating Discover.• Our future results may suffer if we do not effectively manage our expanded operations following the Transaction.• While the Transaction is pending, we will be subject to business uncertainties and contractual restrictions that could adversely affect our business and operations.• Changes and instability in the macroeconomic environment could disrupt capital markets, reduce consumer and business activity, and weaken the labor market, all of which could impact borrowers’ ability to service their debt obligations and adversely impact our financial results.• Fluctuations in interest rates could adversely affect our business, results of operations and financial condition.
• We may not be able to maintain adequate sources of funding and liquidity to operate our business.22
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Table of Contents• We may experience increases in delinquencies and credit losses, or we may incorrectly estimate expected losses, which could result in inadequate reserves.
• We may not be able to maintain adequate capital or liquidity levels or may become subject to revised capital or liquidity requirements, which could have a negative impact on our financial results and our ability to return capital to our stockholders.
• Limitations on our ability to receive dividends from our subsidiaries could affect our liquidity and ability to pay dividends and repurchase our common stock.
• A downgrade in our credit ratings could significantly impact our liquidity, funding costs and access to the capital markets.
• We face risks related to our operational, technological and organizational infrastructure .
• A cyber-attack or other security incident on us or third parties (including their supply chains) with which we conduct business, including an incident that results in the theft, loss, manipulation or misuse of information (including personal information), or the disabling of systems and access to information critical to business operations, may result in increased costs, reductions in revenue, reputational damage, legal exposure and business disruptions .
• We face risks resulting from the extensive use of models and data, as well as from our evolving use of AI .
• Fraudulent activity associated with our products could cause our fraud losses to increase, the use of our products to decrease and our brands to suffer reputational damage, all of which could have a material adverse effect on our business.
• Compliance with new and existing domestic and foreign laws, regulations and regulatory expectations is costly and complex, and any significant changes may adversely affect our business.• Our required compliance with applicable laws and regulations related to privacy, data protection and data security, in addition to compliance with our own privacy policies and contractual obligations to third parties, may increase our costs, reduce our revenue, increase our legal exposure and limit our ability to pursue business opportunities.
• Our businesses are subject to the risk of increased litigation, government investigations and regulatory enforcement.
• We face intense competition in all of our markets, which could have a material adverse effect on our business and results of operations.• Our business, financial condition and results of operations may be adversely affected by legislation, regulation and merchants’ efforts to reduce the interchange fees charged by credit and debit card networks to facilitate card transactions.• If we are not able to invest successfully in and introduce digital and other technological developments across all our businesses, our financial performance may suffer.
• We may fail to realize the anticipated benefits of our mergers, acquisitions and strategic partnerships.
• Reputational risk and social factors may impact our results and damage our brand.• If we are not able to protect our intellectual property rights, or we violate third-party intellectual property rights, our revenue and profitability could be negatively affected.• Our risk management strategies may not be fully effective in mitigating our risk exposures in all market environments or against all types of risk.
• Our business could be negatively affected if we are unable to attract, develop, retain and motivate key senior leaders and skilled employees.
• We face risks from catastrophic events.
• Climate change manifesting as physical or transition risks could adversely affect our businesses, operations and customers and result in increased costs.23
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Table of Contents• We face risks from the use of or changes to assumptions or estimates in our financial statements.
• The soundness of other financial institutions and other third parties, actual or perceived, could adversely affect us.
Risks Relating to the Acquisition of Discover
We have identified certain additional risk factors in connection with the Merger Agreement and the proposed Transaction. For additional information concerning these risks, uncertainties and assumptions, please refer to the section entitled “Risk Factors” included in our joint proxy statement/prospectus included in the registration statement declared effective by the SEC on January 6, 2025.
The consummation of the Transaction is contingent upon the satisfaction of a number of conditions, including regulatory approvals, that may be outside either party’s control and that either party may be unable to satisfy or obtain or which may delay the consummation of the Transaction or result in the imposition of conditions that could reduce the anticipated benefits from the Transaction or cause the parties to abandon the Transaction.
Consummation of the Transaction is contingent upon the satisfaction of a number of conditions, some of which are beyond either party's control, including, the receipt of the requisite regulatory approvals and the absence of any order, injunction, decree or other legal restraint preventing the completion of the Transaction.Each party’s obligation to complete the Transaction is also subject to certain additional customary conditions, including:
• subject to certain exceptions, the accuracy of the representations and warranties of the other party;
• performance in all material respects by the other party of its obligations under the Merger Agreement; and
• receipt by such party of an opinion from its counsel to the effect that the Merger and the Second Step Merger, taken together, will qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended.These conditions to the closing of the Transaction may not be fulfilled in a timely manner, or at all, and, accordingly, the Transaction may not be completed. In addition, the parties can mutually decide to terminate the Merger Agreement at any time, or either party may elect to terminate the Merger Agreement in certain other circumstances.
As a condition to granting required regulatory approvals, governmental entities may impose conditions, limitations, obligations or costs or place restrictions on our conduct after the closing of the Transaction. Such conditions or changes and the process of obtaining regulatory approvals could, among other things, have the effect of delaying completion of the Transaction or of imposing additional costs or limitations on us following the Transaction, any of which may have an adverse effect on us.Either party may also be subject to lawsuits challenging the Transaction, and adverse rulings in these lawsuits may delay or prevent the Transaction from being completed or require either party to incur significant costs to defend or settle these lawsuits. Any delay in completing the Transaction could cause us not to realize, or to be delayed in realizing, some or all of the benefits that we expect to achieve if the Transaction is successfully completed within its expected time frame.We expect to incur substantial expenses related to the Transaction and to the integration of Discover, and the expenses may be greater than anticipated due to unexpected events.
We have incurred and expect to incur a number of significant non-recurring costs associated with the Transaction and the integration of Discover. These costs include legal, financial advisory, accounting, consulting and other advisory fees, severance/employee benefit‐related costs, public company filing fees and other regulatory fees, financial printing and other printing costs and other related costs. In addition, we will incur integration costs following the completion of the Transaction as we integrate Discover’s business with ours, including facilities and systems consolidation costs and employment-related costs. There are a large number of processes, policies, procedures, operations, technologies and systems that may need to be integrated, including purchasing, accounting and finance, payroll, compliance, treasury management, branch operations, vendor management, risk management, lines of business, pricing and benefits.
While we have assumed that a certain level of costs will be incurred, there are many factors beyond our control that could affect the total amount or the timing of these expenses. Moreover, many of the expenses that we will incur are, by their nature, difficult to estimate accurately. These expenses could, particularly in the near term, exceed the savings that we expect to24
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Table of Contentsachieve from the elimination of duplicative expenses and the realization of economies of scale. These expenses may result in us recording increased expenses as a result of the Transaction or the integration of Discover, and the amount and timing of such charges are uncertain at the present and could exceed initial estimates.
We may fail to realize all of the anticipated benefits of the Transaction, or those benefits may take longer to realize than expected due to factors that may be outside our control or Discover’s control. We may also encounter significant difficulties in integrating Discover.
We may fail to realize the anticipated benefits of the proposed Transaction, including, among other things, anticipated revenue and cost synergies, due to factors that may be outside either party’s control. These factors include, but are not limited to, changes in laws or regulations or the implementation or interpretation of laws or regulation due to changes in government or general economic, political, legislative or regulatory conditions. For example, debit card transactions on three-party networks—comprising the cardholder, merchant and network provider—could become subject to the Federal Reserve’s Regulation II limitation on interchange fees or its prohibition on network exclusivity, and other changes in laws or regulation could impose additional limitations on the fees issuers or networks can charge on debit or credit card transactions or require merchants to be provided an alternative network for transaction routing, any of which may have an adverse effect on our business. Other factors that may impact our ability to achieve the anticipated benefits of the proposed Transaction include the outcome of any legal or regulatory proceedings that may be currently pending or later instituted against us (before or after completion of the Transaction) or against Discover, including those related to Discover’s card product misclassification issue. As a result of the Transaction, we will be the legal successor to Discover and as a result we will assume the risks relating to actions that may be currently pending or later instituted against Discover, as well as any ongoing expense in defending and resolving these actions, and may be subject to reputational and other risks associated with Discover’s actions.
Both parties have operated and, until the completion of the Transaction, will continue to operate, independently. The success of the Transaction, including anticipated benefits and cost savings, will depend, in part, on our ability to successfully integrate Discover’s operations in a manner that results in various benefits and that does not materially disrupt existing customer relationships or materially decrease revenues due to loss of customers, as well as our ability to successfully integrate Discover into our Framework, compliance systems and corporate culture, which we believe will require extensive investment, including to enhance the risk management function at Discover consistent with our risk management standards and those of regulators, as well as to address remediation obligations under existing and possible future regulatory orders. The costs of these investments may be greater than anticipated and the benefits thereof may take longer than expected to realize. The process of integrating operations could result in a loss of key personnel or cause an interruption of, or loss of momentum in, the activities of one or more of our businesses following the completion of the Transaction. Inconsistencies in standards, controls, procedures and policies between us and Discover could adversely affect us following the completion of the Transaction. The diversion of management’s attention and any delays or difficulties encountered in connection with the Transaction and the integration of Discover’s operations could have an adverse effect on our business, financial condition, operating results and prospects.
An inability to realize the full extent of the anticipated benefits of Transaction, as well as any delays encountered in the integration process, could have an adverse effect on our revenues, levels of expenses and operating results following the completion of the Transaction.Our future results may suffer if we do not effectively manage our expanded operations following the Transaction.
Following the Transaction, the size and scope of our business will increase significantly beyond our current size and scope. Our future success depends, in part, upon the ability to manage our expanded businesses, which will pose substantial challenges for management, including challenges related to the management and monitoring of new operations and associated increased costs and complexity. There can be no assurances we will be successful or that we will realize the expected operating efficiencies, cost savings and other benefits currently anticipated from the Transaction.
In addition, following the Transaction, we may be subject to increased scrutiny by, and/or additional regulatory requirements of, governmental authorities as a result of the Transaction or the size, scope and complexity of our business operations, which may have an adverse effect on our business, operations or stock price.
While the Transaction is pending, we will be subject to business uncertainties and contractual restrictions that could adversely affect our business and operations.25
Capital One Financial Corporation (COF)
Table of ContentsUncertainty about the effect of the Transaction on employees, customers, suppliers and other persons with whom we or Discover have a business relationship may have an adverse effect on our business, operations and stock price. Existing customers, suppliers and other business partners of ours and of Discover could decide to no longer do business with us or with Discover before the completion of the Transaction or with us after the Transaction is completed, reducing its anticipated benefits. Both parties are also subject to certain restrictions on the conduct of our respective businesses while the Transaction is pending. As a result, certain projects may be delayed or abandoned and business decisions could be deferred. Employee retention may be challenging for Discover before completion of the Transaction, as certain employees of Discover may experience uncertainty about their future roles with us following the Transaction, and these retention challenges will require us to incur additional expenses in order to retain key employees of Discover. If key employees of Discover depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with Discover or with us following the Transaction, the benefits of the Transaction could be materially diminished.
General Economic and Market Risks
Changes and instability in the macroeconomic environment could disrupt capital markets, reduce consumer and business activity, and weaken the labor market, all of which could impact borrowers’ ability to service their debt obligations and adversely impact our financial results.Changes or instability in the macroeconomic environment may impact payment patterns, consumer spending, and credit losses. Because we offer a broad array of financial products and services to consumers, small businesses and commercial clients, our financial results are impacted by the level of consumer and business activity and the demand for our products and services. A prolonged period of economic weakness, volatility, slow growth, or a significant deterioration in economic conditions, in the countries in which we operate, could have a material adverse effect on our financial condition and results of operations as customers or commercial clients default on their loans, maintain lower deposit levels or, in the case of credit card accounts, carry lower balances and reduce credit card purchase activity.Some of the factors that could disrupt capital markets, reduce consumer and business activity, and weaken the labor market include the following:• Monetary policy actions, such as changes to interest rates, taken by the Federal Reserve and other central banks, such as the central banks in the United Kingdom and Canada, and a growing fiscal deficit and increase in the U.S. debt to gross domestic product ratio;
• Fiscal policy actions, such as changes to applicable tax codes;
• Geopolitical conflicts or instabilities, such as the war between Ukraine and Russia and the conflict in the Middle East, and increased geopolitical tensions between the U.S. and China;• Trade wars, tariffs, labor shortages and disruptions of global supply chains;• The effects of stalemates in the U.S. government, including government shutdowns whether recurring, prolonged or otherwise, developments related to the U.S. federal debt ceiling, default by the U.S. government on its debt obligations, or related credit-rating downgrades;• Inflation and deflation, including the effects of related governmental responses;
• Concerns over a potential recession, which may lead to adjustments in spending patterns;• Technology-driven disruption of certain industries, such as those due to advances in AI, robotics and cryptocurrency;
• Lower demand for credit and shifts in consumer behavior, including shifts away from using credit cards, changes in deposit practices, and changes in payment patterns; and
• Changes in usage of commercial real estate, which may have a sustained negative impact on utilization rates and values.
Decreases in overall business activity and changes in customer behavior may lead to increases in our charge-off rate caused by bankruptcies and may reduce our ability to recover debt that we have previously charged-off. Such changes may also decrease the reliability of our internal processes and models, including those we use to estimate our allowance for credit losses,26
Capital One Financial Corporation (COF)
Table of Contentsparticularly if unexpected variations in key inputs and assumptions cause actual losses to diverge from the projections of our models and our estimates become increasingly subject to management’s judgment. See “ We face risks resulting from the extensive use of models and data, as well as our evolving use of AI. ”
Fluctuations in interest rates could adversely affect our business, results of operations and financial condition.
Like other financial institutions, our business is sensitive to interest rate movements. Changes in interest rates could adversely affect the results of our operations and financial condition. For example, higher interest rates may increase our borrowing costs and may require us to increase the interest we pay on funds deposited with us and may reduce the market value of our securities holdings. If interest rates increase or if higher interest rates persist for an extended period of time, our expenses may increase further. On the other hand, lower interest rates could also adversely affect our business, results of operations and financial condition. If the rate of economic growth decreased sharply, causing the Federal Reserve to lower interest rates, our net income could be adversely affected. While higher interest rates generally enhance our ability to grow our net interest income, there are potential risks associated with operating in a higher interest rate environment. For example, some customers have been and may continue to be less willing or able overall to borrow at higher interest rates. Higher interest rates also have hindered and may continue to hinder the ability of some borrowers to support required loan payments.
Additionally, interest rate fluctuations and competitor responses to those changes may have a material adverse effect on our financial condition and results of operations, as customers or commercial clients default on their loans, maintain lower deposit levels or, in the case of credit card accounts, reduce demand for credit or (for existing customers) the level of borrowing or purchase activity. For example, increases in interest rates increase debt service requirements for some of our borrowers, which may adversely affect those borrowers’ ability to pay as contractually obligated. This could result in additional or fluctuating delinquencies or charge-offs and negatively impact our results of operations. These changes could reduce the overall yield on our interest-earning asset portfolio.
We assess our interest rate risk by estimating the effect on our net interest income and earnings, economic value and capital under various interest rate scenarios of different direction and magnitude. We take risk mitigation actions based on those assessments. For example, the Company employs various hedging strategies to mitigate the interest rate, foreign exchange, and market risks inherent in many of our assets and liabilities. The Company’s hedging strategies rely considerably on assumptions and projections regarding our assets and liabilities as well as general market factors. If any of these assumptions or projections prove to be incorrect or our hedges do not adequately mitigate the impact of changes in interest rates, foreign exchange rates, and other market factors, the Company may experience volatility in our earnings that could adversely affect our profitability and financial condition. We face the risk that changes in interest rates could materially reduce our net interest income and our earnings, especially if actual conditions turn out to be materially different than those we assumed.
Changes in valuations in the debt and equity markets could have a negative impact on the assets we hold in our investment portfolio. Such market changes could also have a negative impact on the valuation of assets for which we provide servicing. See “Part II—Item 7. MD&A—Market Risk Profile” and “ We face intense competition in all of our markets, which could have a material adverse effect on our business and results of operation ” for additional information.
We may not be able to maintain adequate sources of funding and liquidity to operate our business.
We may not be able to maintain adequate sources of funding and liquidity to fund our operations, grow our business, pay our outstanding liabilities and meet regulatory expectations. Our ability to borrow from other financial institutions or to engage in funding transactions on favorable terms or at all could be adversely affected by factors outside of our control, including disruptions, uncertainty or volatility in the capital markets. Additionally, increased charge-offs, rising interest rates, increased refinancing activity and other events may cause our securitization transactions to amortize earlier than scheduled or reduce the value of the securities that we hold for liquidity purposes, which could accelerate our need for additional funding from other sources. We could also experience impairments of other financial assets and other negative impacts on our financial position, including possible constraints on liquidity and capital, as well as higher costs of capital.
In addition, our access to funding sources in amounts adequate to finance our activities on terms that are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy generally. Factors that could detrimentally impact our access to liquidity sources include increases in funding costs, downturns in the geographic markets in which our loans and operations are concentrated, difficulties in credit markets or unforeseen outflows of cash or collateral, including as a result of unusual effects in the market.
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Our ability to fund our business and our liquidity position also depend on our ability to attract or maintain deposits. Many other financial institutions have increased their reliance on deposit funding and, as such, we expect continued competition in the deposit markets. We cannot predict how this competition will affect our costs. If we are required to offer higher interest rates to attract or maintain deposits, our funding costs will be adversely impacted. Although we have historically been able to meet the liquidity needs of customers as necessary, the ability to do so is not assured, especially if a large number of our depositors seek to withdraw their accounts or if our customers seek significant draws on their credit lines, regardless of the reason. A failure to maintain adequate liquidity could materially and adversely affect our business, results of operations and financial condition.Credit RiskWe may experience increases in delinquencies and credit losses, or we may incorrectly estimate expected losses, which could result in inadequate reserves.Like other lenders, we face the risk that our customers will not repay their loans. A customer’s ability and willingness to repay us can be adversely affected by decreases in the income of the borrower or increases in their payment obligations to other lenders, whether as a result of a job loss, higher debt levels or rising cost of servicing debt, inflation outpacing wage growth, or by restricted availability of credit generally. We may fail to quickly identify and reduce our exposure to customers that are likely to default on their payment obligations, whether by closing credit lines or restricting authorizations. Our ability to manage credit risk also is affected by legal or regulatory changes (such as restrictions on collections, bankruptcy laws, minimum payment regulations and re-age guidance), competitors’ actions and consumer behavior, and depends on the effectiveness of our collections staff, techniques and models.
Rising credit losses or leading indicators of rising credit losses (such as higher delinquencies, higher rates of nonperforming loans, higher bankruptcy rates, lower collateral values, elevated unemployment rates or changing market terms) may require us to increase our allowance for credit losses, which would decrease our profitability if we are unable to raise revenue or reduce costs to compensate for higher credit losses, whether actual or expected. In particular, we face the following risks in this area:• Missed Payments : Our customers may fail to make required payments on time and may default or become delinquent. Loan charge-offs (including from bankruptcies) are generally preceded by missed payments or other indications of worsening financial conditions for our customers. Historically, customers are more likely to miss payments during an economic downturn, recession, periods of high unemployment, or prolonged periods of slow economic growth. Customers might also be more likely to miss payments if the payment burdens on their existing debt grow due to higher interest rates, or if inflation outpaces wage growth. Additionally, the CFPB has, among other things, issued a final rule amending Regulation Z that, if it goes into effect as currently issued, would significantly lower the safe harbor amount for past due fees that a large credit card issuer, such as the Bank, can charge on consumer credit card accounts, which could result in changes in consumer repayment patterns.
• Incorrect Estimates of Expected Credit Losses : The credit quality of our loan portfolios can have a significant impact on our earnings. We allow for and reserve against credit risks based on our assessment of expected credit losses in our loan portfolios. This process, which is critical to our financial condition and results of operations, requires complex judgments, including forecasts of economic conditions. We may underestimate our expected credit losses and fail to hold an allowance for credit losses sufficient to account for these credit losses. Incorrect assumptions could lead to material underestimations of expected credit losses and an inadequate allowance for credit losses. See “ We face risks resulting from the extensive use of models and data, as well as our evolving use of AI. ”
• Inaccurate Underwriting : Our ability to accurately assess the creditworthiness of our customers may diminish, which could result in an increase in our credit losses and a deterioration of our returns. See “ Our risk management strategies may not be fully effective in mitigating our risk exposures in all market environments or against all types of risk. ”
• Business Mix : We engage in a diverse mix of businesses with a broad range of potential credit exposure. Because we originate a relatively greater proportion of consumer loans in our loan portfolio compared to other large bank peers and originate both prime and subprime credit card accounts and auto loans, we may experience higher delinquencies and a greater number of accounts charging off, as well as greater fluctuations in those metrics, compared to other large bank peers, which could result in increased credit losses, operating costs and regulatory scrutiny. Additionally, a change in this business mix over time to include proportionally more consumer loans or subprime credit card accounts or auto loans could adversely affect the credit quality of our loan portfolios.
28Capital One Financial Corporation (COF)
Table of Contents• Increasing Charge-off Recognition/Allowance for Credit Losses : We account for the allowance for credit losses according to accounting and regulatory guidelines and rules, including Financial Accounting Standards Board (“FASB”) standards and the Federal Financial Institutions Examination Council (“FFIEC”) Account Management Guidance. We measure our allowance for credit losses under the CECL standard, which is based on management’s best estimate of expected lifetime credit losses. The impact of measuring our allowance for credit losses on our results will depend on the characteristics of our financial instruments, economic conditions, and our economic and loss forecasts. The application of the CECL standard may require us to increase reserves faster and to a higher level in an economic downturn, resulting in greater adverse impact to our results and our capital ratios than we would have experienced in similar circumstances prior to the adoption of CECL. Due to our business mix and the impact of credit losses on our income statement as compared to many of our large bank peers, we could be disproportionately affected by use of the CECL standard.
• Insufficient Asset Values : The collateral we have on secured loans could be insufficient to compensate us for credit losses. When customers default on their secured loans, we attempt to recover collateral where permissible and appropriate. However, the value of the collateral may not be sufficient to compensate us for the amount of the unpaid loan, and we may be unsuccessful in recovering the remaining balance from our customers. Decreases in real estate and other asset values adversely affect the collateral value for our commercial lending activities, while the auto business is similarly exposed to collateral risks arising from the auction markets that determine used car prices. Borrowers may be less likely to continue making payments on loans if the value of the property used as collateral for the loan is less than what the borrower owes, even if the borrower is still financially able to make the payments. In that circumstance, the recovery of such property could be insufficient to compensate us for the value of these loans upon a default. For example, high vacancy rates in commercial properties may affect the value of commercial real estate, including by causing the value of properties securing commercial real estate loans to be less than the amounts owed on such loans. In our auto business, business and economic conditions that negatively affect household incomes and savings, housing prices and consumer behavior, as well as technological advances that make older cars obsolete faster, could decrease (i) the demand for new and/or used vehicles and (ii) the value of the collateral underlying our portfolio of auto loans, which could cause the number of consumers who become delinquent or default on their loans to increase.
• Geographic and Industry Concentration : Although our consumer lending is geographically diversified, approximately 38.1% of our commercial real estate loan portfolio is concentrated in the Northeast region. The regional economic conditions in the Northeast affect the demand for our commercial products and services as well as the ability of our customers to repay their commercial real estate loans and the value of the collateral securing these loans. An economic downturn or prolonged period of slow economic growth in, or a catastrophic event or natural disaster that disproportionately affects the Northeast region could have a material adverse effect on the performance of our commercial real estate loan portfolio and our results of operations. In addition, our Commercial Banking strategy includes an industry-specific focus. If any of the industries that we focus on experience changes, we may experience increased credit losses and our results of operations could be adversely impacted.Capital and Liquidity Risk
We may not be able to maintain adequate capital or liquidity levels or may become subject to revised capital or liquidity requirements, which could have a negative impact on our financial results and our ability to return capital to our stockholders.
Financial institutions are subject to extensive and complex capital and liquidity requirements, which are subject to change. These requirements affect our ability to lend, grow deposit balances, make acquisitions and distribute capital. Failure to maintain adequate capital or liquidity levels, whether due to adverse developments in our business or the economy or to changes in the applicable requirements, could subject us to a variety of restrictions and/or remedial actions imposed by our regulators. These include limitations on the ability to pay dividends or repurchase shares and the issuance of a capital directive to increase capital. Such limitations or capital directive could have a material adverse effect on our business and results of operations. For example, changes to applicable capital, liquidity, or other regulations, such as the changes proposed in the Basel III Finalization Proposal and the LTD Proposal, could result in increased regulatory capital requirements, operating expenses or cost of funding, which could negatively affect our financial results or our ability to distribute capital.We consider various factors in the management of capital, including the impact of both internal and supervisory stress scenarios on our capital levels as determined by our internal modeling and the Federal Reserve’s estimation of losses in supervisory stress
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Table of Contentsscenarios that are used to annually set our stress capital buffer requirement. There can be significant differences between our modeling and the Federal Reserve’s projections for a given supervisory stress scenario and between the capital needs suggested by our internal stress scenarios and the supervisory stress scenarios. Therefore, although our estimated capital levels under stress disclosed as part of the stress testing processes may suggest that we have a particular capacity to return capital to stockholders and remain well capitalized under stress, the Federal Reserve’s modeling, our internal modeling of another scenario or other factors related to our capital management process may reflect a lower capacity to return capital to stockholders than that indicated by the projections released in the stress testing processes. This, in turn, could lead to restrictions on our ability to pay dividends and engage in repurchases of our common stock. See “Item 1. Business—Supervision and Regulation” for additional information.
We also consider various factors in the management of liquidity, including maintaining sufficient liquid assets to meet the requirements of several internal and regulatory stress tests. Regulatory liquidity stress testing, regulatory liquidity requirements, and internal stress tests may, therefore, require us to take actions to increase our liquid assets or alter our activities or funding sources, which could negatively affect our financial results or our ability to return capital to our stockholders. See “Item 1. Business—Supervision and Regulation” for additional information.Limitations on our ability to receive dividends from our subsidiaries could affect our liquidity and ability to pay dividends and repurchase our common stock.
We are a separate and distinct legal entity from our subsidiaries, including, without limitation, the Bank and our broker-dealer subsidiaries. Dividends to us from these direct and indirect subsidiaries have represented a major source of funds for us to pay dividends on our common and preferred stock, repurchase our common stock, make payments on corporate debt securities and meet other obligations. These capital distributions may be limited by law, regulation or supervisory policy. There are various federal law limitations on the extent to which the Bank can finance or otherwise supply funds to us through dividends and loans. These limitations include minimum regulatory capital and capital buffer requirements, federal banking law requirements concerning the payment of dividends out of net profits or surplus, and Sections 23A and 23B of the Federal Reserve Act and Regulation W governing transactions between an insured depository institution and its affiliates, as well as general federal regulatory oversight to prevent unsafe or unsound practices. Our broker-dealer subsidiaries are also subject to laws and regulations, including net capital requirements, that may limit their ability to pay dividends or make other distributions to us. If our subsidiaries’ earnings are not sufficient to make dividend payments to us while maintaining adequate capital levels, our liquidity may be affected and we may not be able to make dividend payments to our common or preferred stockholders, repurchase our common stock, make payments on outstanding corporate debt securities or meet other obligations, each and any of which could have a material adverse impact on our results of operations, our financial position or the perception of our financial health. The frequency and size of any future dividends to our stockholders and our stock repurchases will depend upon regulatory limitations imposed by our regulators and our results of operations, financial condition, capital levels, cash requirements, future prospects, regulatory review and other factors as further described in “Item 1. Business—Supervision and Regulation.”
A downgrade in our credit ratings could significantly impact our liquidity, funding costs and access to the capital markets.Our credit ratings are based on a number of factors, including financial strength, as well as factors not within our control, including conditions affecting the financial services industry generally, the macroeconomic environment and changes made by rating agencies to their methodologies or ratings criteria. Our ratings could be downgraded at any time and without any notice by any of the rating agencies, which could, among other things, adversely affect our ability to borrow funds, increase our funding cost, increase our cost of capital, limit the number of investors or counterparties willing to do business with or lend to us, adversely limit our ability to access the capital markets and result in additional collateral requirements under certain of our existing agreements, all of which could have a negative impact on our results of operations.Operational Risk
We face risks related to our operational, technological and organizational infrastructure.
Our ability to retain and attract customers depends on our ability to develop, operate, and adapt our technology and organizational infrastructure in a rapidly changing environment. In addition, we must accurately process, record and monitor an increasingly large number of complex transactions. Digital technology, cloud-based services, data and software development are deeply embedded into our business model and how we work.30Capital One Financial Corporation (COF)
Table of ContentsSimilar to other large corporations in our industry, we are exposed to operational risk that can manifest itself in many ways, such as errors in execution, inadequate processes, inaccurate models, faulty or disabled technological infrastructure, malicious disruption and fraud by employees or persons outside of our company, whether through attacks on Capital One directly, or on our third-party service providers or customers. In addition, the increasing use of near real-time money movement solutions, among other risks, increases the complexity of preventing, detecting and recovering fraudulent transactions. We are also heavily dependent on the security, capability, integrity and continuous availability of the technology systems and networks that we use to manage our internal financial and other systems, monitor risk and compliance with regulatory requirements, provide services to our customers, develop and offer new products and communicate with stakeholders. Despite our implementation of various internal and external procedures and security measures, our employees, service providers, partners and other third parties with whom we interact may expose us to certain risks as a result of human error. For example, errors in processing wire transfers may result in the inadvertent release of funds in incorrect amounts or to incorrect recipients, and we may be unable to recover such funds.
We also face the risk of adverse customer impacts and business disruption arising from the execution of strategic initiatives and operational plans we may pursue across our operations. For example, when we launch a new product, service or platform for the delivery or distribution of products or services, acquire or invest in a business or make changes to an existing product, service or delivery platform, there is the risk of execution issues related to changes to operations or processes. These issues could be driven by insufficient mitigation of operational risks associated with the change implementation, inadequate training, failure to account for new or changed requirements, or failure to identify or address impacted downstream processes. Furthermore, ineffective change management oversight and governance over the execution of our key projects and initiatives could expose us to operational, strategic and reputational risk and could negatively impact customers or our financial performance. In addition, we may experience increased costs and/or disruptions due to our hybrid work model, which could also affect our ability to operate effectively and maintain our corporate culture.
If we do not maintain the necessary operational, technological and organizational infrastructure to operate our business, including to maintain the resiliency and security of that infrastructure, our business and reputation could be materially adversely affected. We also are subject to disruptions to our systems or networks arising from events that are wholly or partially beyond our control, which may include computer viruses; computer, telecommunications, network, utility, electronic or physical infrastructure outages; bugs, errors, insider threats, design flaws in systems, networks or platforms; availability and quality of vulnerability patches from key vendors, cyber-attacks and other security incidents, natural disasters, other damage to property or physical assets, or events arising from local or larger scale politics, including civil unrest, terrorist acts and military conflict. Any failure to maintain our infrastructure or prevent disruption of our systems, networks and applications could diminish our ability to operate our businesses, service customer accounts and protect customers’ information, or result in potential liability to customers, reputational damage, regulatory intervention and customers’ loss of confidence in our businesses, any of which could result in a material adverse effect.
We also rely on the business infrastructure and systems of third-party service providers (and their supply chains) with which we do business and/or to whom we outsource the operation, maintenance and development of our information technology and communications systems. We have substantially migrated primarily all aspects of our core information technology systems and customer-facing applications to third-party cloud infrastructure platforms, principally AWS. If we fail to architect, administer or oversee these environments in a well-managed, secure and effective manner, or if such platforms become unavailable, are disrupted, fail to scale, do not operate as designed, or do not meet their service level agreements for any reason, we may experience unplanned service disruption or unforeseen costs which could result in material harm to our business and operations. We must successfully develop and maintain information, financial reporting, disclosure, privacy, data protection, data security and other controls adapted to our reliance on outside platforms and providers. Weakness in our third-party service providers’ processes or controls could impact our ability to deliver products or services to our customers and expose us to compliance and operational risks. In addition, AWS, or other service providers (including, without limitation, those who also rely on AWS) have experienced, and may continue to experience system or telecommunication breakdowns or failures, outages, degradation in service, downtime, failure to scale, software bugs, design flaws, cyber-attacks and other security incidents, insider threats, adverse changes to financial condition, bankruptcy, or other adverse conditions, (including conditions which interfere with our access to and use of AWS) that are outside of our control, any of which could have a material adverse effect on our business and reputation. For example, in January 2025, we experienced a multi-day system outage due to a technical issue experienced by FIS, a third-party service provider, which temporarily impacted certain services for some of our customers. Although we were able to reconnect our systems following restoration of the vendor’s capabilities, there can be no assurance that we will not experience additional system outages in the future as a result of technical issues experienced by our third-party vendors. Any such service outage, particularly where the vendor is the single source from which we obtain such services, could significantly
31Capital One Financial Corporation (COF)
Table of Contentsdisrupt our business or negatively impact the relationship we have with customers that rely on such services.. We also face a risk that our third-party service providers might be unable or unwilling to continue to provide services to meet our current or future needs in an efficient, cost-effective, or favorable manner or may terminate or seek to terminate their contractual relationship with us. Any transition to alternative third-party service providers or internal solutions may be difficult to implement, may cause us to incur significant time and expense and may disrupt or degrade our ability to deliver our products and services. Thus, the substantial amount of our infrastructure that we outsource to AWS or to other third-party service providers may increase our risk exposure.
Any disruptions, failures or inaccuracies of our operational processes, technology systems, networks and models, including those associated with improvements or modifications to such technology systems, networks and models, or failure to identify or effectively respond to operational risks in a timely manner and continue to deliver our services through an operational disruption, could cause us to be unable to market and manage our products and services, manage our risk, meet our regulatory obligations or report our financial results in a timely and accurate manner, all of which could have a negative impact on our results of operations. In addition, our ongoing investments in infrastructure, which are necessary to maintain a competitive business, integrate acquisitions and establish scalable operations, may increase our expenses. As our business develops, changes or expands, additional expenses can arise as a result of a reevaluation of business strategies or risks, management of outsourced services, asset purchases or other acquisitions, structural reorganization, compliance with new laws or regulations, the integration of newly acquired businesses, or the prevention or occurrence of cyber-attacks and other security incidents. If we are unable to successfully manage our expenses, our financial results will be negatively affected. Changes to our business, including those resulting from our strategic imperatives, also require robust governance to ensure that our objectives are executed as intended without adversely impacting our customers, associates, operations or financial performance.A cyber-attack or other security incident on us or third parties (including their supply chains) with which we conduct business, including an incident that results in the theft, loss, manipulation or misuse of information (including personal information), or the disabling of systems and access to information critical to business operations, may result in increased costs, reductions in revenue, reputational damage, legal exposure and business disruptions.Our ability to provide our products and services and communicate with our customers, depends upon the management and safeguarding of information systems and infrastructure, networks, software, data, technology, methodologies and business secrets, including those of our service providers. Our products and services involve the collection, authentication, management, usage, storage, transmission and destruction of sensitive and confidential information, including personal information, regarding our customers and their accounts, our employees, our partners and other third parties with which we do business. We also have arrangements in place with third-party business partners through which we share and receive information about their customers who are or may become our customers. The financial services industry, including Capital One, is particularly at risk because of the increased use of and reliance on digital banking products and other digital services, including mobile banking products, such as mobile payments, and other internet- and cloud-based products and applications, and the development of additional remote connectivity solutions, which increase cybersecurity risks and exposure. In addition, global events and geopolitical instability (including, without limitation, the conflict in the Middle East, the war between Ukraine and Russia and the related sanctions imposed by the U.S. and other countries, and increased geopolitical tensions between the U.S. and China) may lead to increased nation state targeting of financial institutions in the U.S. and abroad.
Technologies, systems, networks and other devices of Capital One, as well as those of our employees, service providers, partners and other third parties with whom we interact, have been and may continue to be the subject of cyber-attacks and other security incidents, including computer viruses, hacking, malware, ransomware, denial of service attacks, supply chain attacks, exploitation of vulnerabilities, credential stuffing, account takeovers, insider threats, business email compromise scams or the use of phishing, vishing (through voice messages), smishing (through SMS text), “deep fakes”, or other forms of social engineering. Such cyber-attacks and other security incidents are designed to lead to various harmful outcomes, such as unauthorized transactions in Capital One accounts, unauthorized or unintended access to or release, gathering, monitoring, disclosure, loss, destruction, corruption, disablement, encryption, misuse, modification or other processing of confidential or sensitive information (including personal information), intellectual property, software, methodologies or business secrets, disruption, sabotage or degradation of service, systems or networks, an attempt to extort Capital One, its third-party service providers or its business partners or other damage. Cyber-attacks and other security incidents that occur in the supply chain of third parties with which we interact could also negatively impact Capital One.
These threats may derive from, among other things, error, fraud or malice on the part of our employees, insiders, or third parties or may result from accidental technological failure or design flaws. Any of these parties may attempt to fraudulently induce employees, service providers, customers, partners or other third-party users of our systems or networks to disclose confidential
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Table of Contentsor sensitive information (including personal information) in order to gain access to our systems, networks or data or that of our customers, partners, or third parties with whom we interact, or to unlawfully obtain monetary benefit through misdirected or otherwise improper payment. For instance, any party that obtains our confidential or sensitive information (including personal information) through a cyber-attack or other security incident may use this information for ransom, to be paid by us or a third party, as part of a fraudulent activity that is part of a broader criminal activity, or for other illicit purposes. Additionally, the failure of our employees, third-party service providers or business partners, or their respective supply chains, to exercise sound judgment and vigilance when targeted with social engineering or other cyber-attacks may increase our vulnerability.
For example, on July 29, 2019, we announced that on March 22 and 23, 2019 an outside individual gained unauthorized access to our systems (the “2019 Cybersecurity Incident”). This individual obtained certain types of personal information relating to people who had applied for our credit card products and to our credit card customers. While the 2019 Cybersecurity Incident has been remediated, it resulted in fines, litigation, consent orders, settlements, government investigations and other regulatory enforcement inquiries. Cyber and information security risks for large financial institutions like us continue to increase due to the proliferation of new technologies, the industry-wide shift to reliance upon the internet to conduct financial transactions, the increased sophistication and activities of malicious actors, organized crime, perpetrators of fraud, hackers, terrorists, activists, extremist parties, formal and informal instrumentalities of foreign governments, state-sponsored or nation-state actors and other external parties and the growing use of AI by threat actors.
In addition, our customers access our products and services using personal devices that are necessarily external to our security control systems. There has also been a significant proliferation of consumer information available on the internet resulting from breaches of third-party entities, including personal information, log-in credentials and authentication data. These third-party breach events could create a threat for our customers if their Capital One log-in credentials are the same as or similar to the credentials that have been compromised on other internet sites. This threat could include the risk of unauthorized account access, data loss and fraud. The use of AI, “bots” or other automation software can increase the velocity and efficacy of these types of attacks. As our employees are operating under our hybrid work model, our remote interaction with employees, service providers, partners and other third parties on systems, networks and environments over which we have less control (such as through employees’ personal devices) increases our cybersecurity risk exposure. We will likely face an increasing number of attempted cyber-attacks as we expand our mobile and other internet-based products and services, expand our usage of mobile, cloud and other internet-based technologies and provide more of such products and these services to a greater number of retail banking customers.
The methods and techniques employed by malicious actors continue to develop and evolve rapidly, including from emerging technologies, such as advanced forms of AI and quantum computing, are increasingly sophisticated and often are not fully recognized or understood until after they have occurred, and some techniques could occur and enable persistent access for an extended period of time before being detected and remediated, if at all. We and our service providers and other third parties with which we interact may be unable to anticipate or identify certain attack methods or techniques in order to implement effective preventative or detective measures or mitigate or remediate the damages caused in a timely manner. Similarly, any cyber-attack or other security incident, information or security breach or technology failure that significantly exposes, degrades, destroys or compromises our information systems or networks could adversely impact third parties and the critical infrastructure of the financial services industry, thereby creating additional risk for us.
We may also be unable to hire, develop and retain talent that keeps pace with the rapidly changing cyber threat landscape, and which are capable of preventing, detecting, mitigating or remediating these risks. Although we seek to maintain a robust suite of authentication and layered information security controls, any one or combination of these controls could fail to prevent, detect, mitigate, remediate or recover from these risks in a timely manner.
An actual, suspected, threatened or alleged disruption or breach, including as a result of a cyber-attack such as the 2019 Cybersecurity Incident, or media (including social media) reports of alleged or perceived security vulnerabilities or incidents at Capital One or at our service providers, could result in significant legal and financial exposure, regulatory intervention, litigation, enforcement actions, remediation costs, card reissuance, supervisory liability, damage to our reputation or loss of confidence in the security of our systems, products and services that could adversely affect our business. Moreover, new regulations may require us to publicly disclose certain information about certain cybersecurity incidents before they have been resolved or fully investigated, and any delays in receiving timely information from impacted service providers and business partners can affect our ability to fully meet applicable disclosure requirements for a given incident. There can be no assurance that unauthorized access or cyber incidents similar to the 2019 Cybersecurity Incident will not occur or that we will not suffer material losses in the future. If future attacks are successful or if customers are unable to access their accounts online for other
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reasons, it could adversely impact our ability to service customer accounts or loans, complete financial transactions for our customers or otherwise operate any of our businesses or services. In addition, a breach or attack affecting one of our service providers or other third parties with which we interact could harm our business even if we do not control the service that is attacked.Further, our ability to monitor our service providers’ and other business partners’ cybersecurity practices is inherently limited. Although the agreements that we have in place with our service providers (and other business partners) generally include requirements relating to privacy, data protection and data security, we cannot guarantee that such agreements will prevent a cyber incident impacting our systems or information or enable us to obtain adequate or any reimbursement from our service providers or other business partners in the event we should suffer any such incidents. However, due to applicable laws and regulations or contractual obligations, we may be held responsible for cyber incidents attributed to our service providers and other business partners as they relate to the information we share with them.In addition, we continue to incur increased costs with respect to preventing, detecting, investigating, mitigating, remediating, and recovering from cybersecurity risks, as well as any related attempted fraud. In order to address ongoing and future risks, we must expend significant resources to support protective security measures, investigate and remediate any vulnerabilities of our information systems and infrastructure and invest in new technology designed to mitigate security risks. Further, high profile cyber incidents at Capital One or other large financial institutions could undermine our competitive advantage and divert management attention and resources, lead to a general loss of customer confidence in financial institutions that could negatively affect us, including harming the market perception of the effectiveness of our security measures or the global financial system in general, which could result in reduced use of our financial products. We have insurance against some cyber risks and attacks; nonetheless, our insurance coverage may not be sufficient to offset the impact of a material loss event (including if our insurer denies coverage as to any particular claim in the future), and such insurance may increase in cost or cease to be available on commercially reasonable terms, or at all, in the future. In addition, in the case of any cyber-attack or other security incident, information or security breach or technology failure arising from third-party systems impacting us, any third-party indemnification may not be applicable or sufficient to address the impact of such incidents.
We face risks resulting from the extensive use of models and data, as well as from our evolving use of AI.
We rely on quantitative models and in some cases the use of AI, as well as our ability to manage and aggregate data in an accurate and timely manner, to assess and manage our various risk exposures, create estimates and forecasts, and manage compliance with regulatory capital requirements. We continue to invest in building new capabilities that employ new AI technologies such as generative AI, and we expect our use of these technologies to increase over time. However, there are significant risks involved in utilizing models and AI and no assurance can be provided that our use will enhance our business or produce only intended or beneficial results. For example, generative AI has been known to produce false or “hallucinatory” inferences or output, and certain generative AI uses machine learning and predictive analytics, which can create inaccurate, incomplete or misleading output, unexpected results, errors or inadequacies, any of which may not be easily detectable. AI may subject us to new or heightened legal, regulatory, ethical, or other challenges; and negative public opinion of AI could impair the acceptance of AI solutions. Accordingly, if the models or AI solutions that we create or use, or if the content, analyses or recommendations that models or AI solutions assist in producing in our products and services, are, or are perceived to be deficient, inaccurate, biased, unethical or controversial, we could incur operational inefficiencies, competitive harm, legal liability, brand or reputational harm, or other adverse impacts on our business and financial results. We also may incur liability through the violation of applicable laws and regulations, third-party intellectual property, privacy or other rights, or contracts to which we are a party.
We may use models and AI in processes such as determining the pricing of various products, identifying potentially fraudulent transactions, grading loans and extending credit, measuring interest rate and other market risks, predicting deposit levels or loan losses, assessing capital adequacy, calculating managerial and regulatory capital levels, estimating the value of financial instruments and balance sheet items, and other operational functions. Development and implementation of some of these models, such as the models for credit loss accounting under CECL, require us to make difficult, subjective and complex judgments. Our risk reporting and management, including business decisions based on information incorporating models and the use of AI, depend on the effectiveness of our models and AI and our policies, programs, processes and practices governing how data, models and AI, as applicable, are acquired, validated, stored, protected, processed and analyzed. Any issues with the quality or effectiveness of our data aggregation and validation procedures, as well as the quality and integrity of data inputs, formulas or algorithms, could result in inaccurate forecasts, ineffective risk management practices or inaccurate risk reporting. In addition, models and AI based on historical data sets might not be accurate predictors of future outcomes and their ability to appropriately predict future outcomes may degrade over time due to limited historical patterns, extreme or unanticipated market
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Table of Contentsmovements or customer behavior and liquidity, especially during severe market downturns or stress events (e.g., geopolitical or pandemic events).
While we continuously update our policies, programs, processes and practices, many of our data management, modeling, AI, aggregation and implementation processes are manual and may be subject to human error, data limitations, process delays or system failure. Failure to manage data effectively and to aggregate data in an accurate and timely manner may limit our ability to manage current and emerging risk, to produce accurate financial, regulatory and operational reporting as well as to manage changing business needs. If our Framework is ineffective, we could suffer unexpected losses which could materially adversely affect our results of operation or financial condition. Also, any information we provide to the public or to our regulators based on incorrectly designed or implemented models or AI could be inaccurate or misleading. Some of the decisions that our regulators make could be affected adversely due to the perception that the quality of the data, models and AI used to generate the relevant information is insufficient. In addition, regulation of AI is rapidly evolving worldwide as legislators and regulators are increasingly focused on these powerful emerging technologies. The technologies underlying AI and its uses are subject to a variety of laws and regulations, including intellectual property, privacy, data protection and data security, consumer protection, competition, and equal opportunity laws, and are expected to be subject to increased regulation and new laws or new applications of existing laws and regulations. AI is the subject of ongoing review by various U.S. governmental and regulatory agencies, and various U.S. states and other foreign jurisdictions are applying, or are considering applying, their platform moderation, privacy, data protection and data security laws and regulations to AI or are considering general legal frameworks for AI. We may not be able to anticipate how to respond to these rapidly evolving frameworks, and we may need to expend resources to adjust our offerings in certain jurisdictions if the legal frameworks are inconsistent across jurisdictions. Furthermore, because AI technology itself is highly complex and rapidly developing, it is not possible to predict all of the legal, operational, competitive or technological risks that may arise relating to the use of AI.
Fraudulent activity associated with our products could cause our fraud losses to increase, the use of our products to decrease and our brands to suffer reputational damage, all of which could have a material adverse effect on our business.
We are subject to the risk of fraudulent activity associated with merchants, customers and other third parties handling customer information. The risk of fraud continues to be a persistent inherent risk for the financial services industry. Credit and debit card fraud, identity theft and electronic-transaction related crimes are prevalent and perpetrators are growing ever more sophisticated. Emerging generative AI capabilities, such as synthetic voice and conversation generation, introduced an increase in fraud risks, especially in the form of identity fraud. While we have policies and procedures designed to address such risk, there can be no assurance that losses will not occur. Our resources, customer authentication methods and fraud prevention tools may be insufficient to accurately predict, prevent or detect fraud. Consumer activists and regulators have sought to expand financial institutions’ responsibility to hold customers harmless for fraudulent transactions that they authorized on their accounts.
Our risk of fraud continues to increase as third parties that handle confidential consumer information suffer security breaches and we expand our digital banking business and introduce new products and features. Our financial condition, the level of our fraud charge-offs and other results of operations could be materially adversely affected if fraudulent activity were to significantly increase. Furthermore, high-profile fraudulent activity could negatively impact our brand and reputation. In addition, significant increases in fraudulent activity could lead to regulatory intervention or other actions (such as mandatory card reissuance) and reputational and financial damage to our brands, which could negatively impact the use of our deposit accounts and cards and which could have a material adverse effect on our business.Legal and Regulatory RiskCompliance with new and existing domestic and foreign laws, regulations and regulatory expectations is costly and complex, and any significant changes may adversely affect our business.
A wide array of laws and regulations, including banking, tax and consumer lending laws and regulations, apply to every aspect of our business and these laws can be uncertain and evolving. We and our subsidiaries are also subject to supervision and examination by multiple regulators both in the U.S. and abroad, and the manner in which our regulators interpret applicable laws and regulations may affect how we comply with them.
Failure to comply with these laws and regulations and effectively navigate this complex regulatory landscape, even if the failure is inadvertent, results from human error or reflects a difference in interpretation or conflicting legal requirements, could subject
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Table of Contentsus to restrictions on our business activities, fines, criminal sanctions and other penalties, and/or damage to our reputation with regulators, our customers or the public. Hiring, training and retaining qualified compliance and legal personnel, and establishing and maintaining risk management and compliance-related systems, infrastructure and processes, is difficult and may lead to increased expenses. These efforts and the associated costs could limit our ability to invest in other business opportunities. In addition, actions, behaviors or practices by us, our employees or representatives that are illegal, unethical or contrary to our core values could harm us, our stockholders or customers or damage the integrity of the financial markets and are subject to regulatory scrutiny across jurisdictions. Violations of law by other financial institutions may also result in increased regulatory scrutiny of our business.
Applicable rules and regulations may affect us disproportionately compared to our competitors or in an unforeseen manner. For example, we have a large number of customer accounts in our credit card and auto lending businesses and we have made the strategic choice to originate and service subprime credit card and auto loans, which typically have higher delinquencies and charge-offs than prime customer accounts. As a result, we have significant involvement with credit bureau reporting and the collection and recovery of delinquent and charged-off debt, primarily through customer communications, the filing of litigation against customers in default, the periodic sale of charged-off debt and vehicle repossession. These and other consumer lending activities are subject to customer complaints and enhanced legal and regulatory scrutiny from regulators, courts and legislators. Any future changes to or legal liabilities resulting from our business practices in these areas, including our debt collection practices and the fees we charge, whether mandated by regulators, courts, legislators or otherwise, could have a material adverse impact on our financial condition.
The legislative, regulatory and supervisory environment is beyond our control, may change rapidly and unpredictably, and may negatively influence our revenue, costs, earnings, growth, liquidity and capital levels. For example, the CFPB has announced several initiatives related to the amounts and types of fees financial institutions may charge, including a final rule amending Regulation Z that, if it goes into effect as currently issued, would significantly lower the safe harbor amount for past due fees that a large credit card issuer, such as the Bank, can charge on consumer credit card accounts. Such changes could affect our ability or willingness to provide certain products or services, necessitate changes to our business practices, or reduce our revenues. There may also be future rulemaking in emerging regulatory areas, such as climate-related risks and new technologies. Adoption of new technologies, such as distributed ledger technologies, tokenization, cloud computing, AI and machine learning technologies, can present unforeseen challenges in applying and relying on existing compliance systems. In addition, some laws and regulations may be subject to litigation or other challenges that delay or modify their implementation and impact on us. Furthermore, political and policy goals of elected officials may change over time, which could impact the rulemaking, supervision, examination and enforcement priorities of the Federal Banking Agencies.Certain laws and regulations, and any interpretations and applications with respect thereto, are generally intended to protect consumers, borrowers, depositors, the DIF, the U.S. banking and financial system, and financial markets as a whole, but not stockholders. Our success depends on our ability to maintain compliance with both existing and new laws and regulations. For a description of the material laws and regulations, including those related to the consumer lending business, to which we are subject, see “Item 1. Business—Supervision and Regulation.”
Our required compliance with applicable laws and regulations related to privacy, data protection and data security, in addition to compliance with our own privacy policies and contractual obligations to third parties, may increase our costs, reduce our revenue, increase our legal exposure and limit our ability to pursue business opportunities.We are subject to a variety of continuously evolving and developing laws and regulations in the United States at the federal, state and local level regarding privacy, data protection and data security, including those related to the collection, storage, handling, use, disclosure, transfer, security and other processing of personal information. For further discussion of applicable privacy, data protection and data security laws and regulations, see “Item 1. Business—Supervision and Regulation” under the headings “Privacy, Data Protection and Data Security” and “Regulation by Authorities Outside the United States.” These laws and regulations, and similar laws and regulations in other jurisdictions, impose strict requirements regarding the collection, storage, handling, use, disclosure, transfer, security and other processing of personal information, which may have adverse consequences, including significant compliance costs and severe monetary penalties for non-compliance. Significant uncertainty exists as privacy, data protection, and data security laws may be interpreted and applied differently from country to country and may create inconsistent or conflicting requirements.
Further, we make public statements about our use, collection, disclosure and other processing of personal information through our privacy policies, information provided on our website and press statements. Although we endeavor to comply with our public statements and documentation, we may at times fail to do so or be alleged to have failed to do so. The publication of our
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Table of Contentsprivacy policies and other statements that provide promises and assurances about privacy, data protection and data security can subject us to potential government or legal action if they are found to be deceptive, unfair or misrepresentative of our actual practices. We have been subject to these types of claims in the past, and there can be no assurance that we will not be subject to these types of claims in the future. Additional risks could arise in connection with any failure or perceived failure by us, our service providers or other third parties with which we do business to provide adequate disclosure or transparency to individuals, including our customers, about the personal information collected from them and its use, to receive, document or honor the privacy preferences expressed by individuals, to protect personal information from unauthorized disclosure, or to maintain proper training on privacy practices for all employees or third parties who have access to personal information in our possession or control.
Our efforts to comply with GLBA, FCRA, CCPA, PIPEDA and provincial privacy laws, EU GDPR, U.K. GDPR and other privacy, data protection and data security laws and regulations, as well as our posted privacy policies, and related contractual obligations to third parties, entail substantial expenses, may divert resources from other initiatives and projects, and could limit the services we are able to offer. Furthermore, enforcement actions and investigations by regulatory authorities related to data security incidents and privacy, data protection and data security violations continue to increase. The enactment of more restrictive laws or regulations, or future enforcement actions, litigation or investigations, could impact us through increased costs or restrictions on our business, and any noncompliance or perceived noncompliance could result in monetary or other penalties, harm to our reputation, distraction to our management and technical personnel and significant legal liability.Our businesses are subject to the risk of increased litigation, government investigations and regulatory enforcement.
Our businesses are subject to increased litigation, government investigations and other regulatory enforcement risks as a result of a number of factors and from various sources, including the highly regulated nature of the financial services industry, the focus of state and federal prosecutors on banks and the financial services industry and the structure of the credit card industry.
Given the inherent uncertainties involved in litigation, government investigations and regulatory enforcement decisions, and the very large or indeterminate damages sought in some matters asserted against us, there can be significant uncertainty as to the ultimate liability we may incur from these kinds of matters. The finding, or even the assertion, of substantial legal liability against us could have a material adverse effect on our business and financial condition and could cause significant reputational harm to us, which could seriously harm our business. For example, the 2019 Cybersecurity Incident has resulted in litigation, consent orders, settlements, government investigations and other regulatory enforcement inquiries.In addition, financial institutions, such as ourselves, face significant regulatory scrutiny, which can lead to public enforcement actions or nonpublic supervisory actions. We and our subsidiaries are subject to comprehensive regulation and periodic examination by, among other regulatory bodies, the Federal Banking Agencies, SEC, CFTC and CFPB. We have been subject to enforcement actions by many of these and other regulators and may continue to be involved in such actions, including governmental inquiries, investigations and enforcement proceedings, including by the OCC, CFPB, Department of Justice, FinCEN and state Attorneys General. For example, on January 14, 2025, the CFPB brought an action in the United States District Court for the Eastern District of Virginia making claims similar to the ongoing previously disclosed savings account litigation.
Over the last several years, federal and state regulators have focused on risk management, compliance with anti-money laundering (“AML”) and sanctions laws, privacy, data protection and data security, use of service providers, fair lending, unfair or deceptive practices, and other consumer protection issues and innovative activities, such as those that utilize AI and other new technology. Regulators have indicated the potential for escalating consequences for banks that do not timely resolve open issues or have repeat issues. Regulatory scrutiny is expected to continue in these areas, including as a result of implementation of the AML Act of 2020.
We expect that regulators and governmental enforcement bodies will continue taking public enforcement actions against financial institutions in addition to addressing supervisory concerns through nonpublic supervisory actions or findings, which could involve restrictions on our activities, or our ability to make acquisitions or otherwise expand our business, among other limitations that could adversely affect our business. In addition, a violation of law or regulation by another financial institution is likely to give rise to supervisory review or an investigation by regulators and other governmental agencies of the same or similar practices by us. Furthermore, a single event may give rise to numerous and overlapping investigations and proceedings. These and other initiatives from governmental authorities and officials may subject us to further customer remuneration, judgments, settlements, fines or penalties, or cause us to restructure our operations and activities or to cease offering certain products or services, all of which could harm our reputation or lead to higher operational costs. Litigation, government
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Table of Contentsinvestigations and other regulatory actions could generally subject us to significant fines, increased expenses, restrictions on our activities and damage to our reputation and our brand, and could adversely affect our business, financial condition and results of operations. For additional information regarding legal and regulatory proceedings to which we are subject, see “Part II—Item 8. Financial Statements and Supplementary Data—Note 19—Commitments, Contingencies, Guarantees and Others.”Other Business Risks
We face intense competition in all of our markets, which could have a material adverse effect on our business and results of operations.
We operate in a highly competitive environment across all of our lines of business, whether in making loans, attracting deposits or in the global payments industry, and we expect competitive conditions to continue to intensify with respect to most of our products particularly in our credit card and consumer banking businesses. We compete on the basis of the rates we pay on deposits and the rates and other terms we charge on the loans we originate or purchase, as well as the quality and range of our customer service, products, innovation and experience. This competitive environment is primarily a result of changes in technology, product delivery systems and regulation, as well as the emergence of new or significantly larger financial services providers, all of which may affect our customers’ expectations and demands. In addition to offering competitive products and services, we invest in and conduct marketing campaigns to attract and inform customers. If our marketing campaigns are unsuccessful, it may adversely impact our ability to attract new customers and grow market share.Some of our competitors, including new and emerging competitors in the digital and mobile payments space and other financial technology providers, are not subject to the same regulatory requirements or scrutiny to which we are subject, which also could place us at a competitive disadvantage, in particular in the development of new technology platforms or the ability to rapidly innovate. We compete with many forms of payments offered by both bank and non-bank providers, including a variety of new and evolving alternative payment mechanisms, systems and products, such as aggregators and web-based and wireless payment platforms or technologies, digital or cryptocurrencies, prepaid systems and payment services targeting users of social networks, communications platforms and online gaming. If we are unable to continue to keep pace with innovation, do not effectively market our products and services or are prohibited from or unwilling to enter emerging areas of competition, our business and results of operations could be adversely affected. Also, our competitors or other third parties may incorporate AI into their products or services more quickly or more successfully than we do, which could impair our ability to compete effectively. In addition, government actions or initiatives may also provide competitors with increased opportunities to derive competitive advantages and may create new competitors. For example, the CFPB has released a final rule that will require certain financial institutions, including the Company, to share certain financial information with third parties upon a customer’s request, which could enable those third parties to offer competing financial services to consumers.Some of our competitors are substantially larger than we are, which may give those competitors advantages, including a more diversified product and customer base, the ability to reach more customers and potential customers, operational efficiencies, broad-based local distribution capabilities, lower-cost funding and larger existing branch networks. Many of our competitors are also focusing on cross-selling their products and developing new products or technologies, which could affect our ability to maintain or grow existing customer relationships or require us to offer lower interest rates or fees on our lending products or higher interest rates on deposits. Competition for loans could result in origination of fewer loans, earning less on our loans or an increase in loans that perform below expectations.We operate as an online direct bank in the United States. While direct banking provides a significant opportunity to attract new customers that value greater and more flexible access to banking services at reduced costs, we face strong and increasing competition in the direct banking market. Aggressive pricing throughout the industry may adversely affect the retention of existing balances and the cost-efficient acquisition of new deposit funds and may affect our growth and profitability. Customers could also close their online accounts or reduce balances or deposits in favor of products and services offered by competitors for other reasons. These shifts, which could be rapid, could result from general dissatisfaction with our products or services, including concerns over pricing, online security or our reputation. The potential consequences of this competitive environment are exacerbated by the flexibility of direct banking and the financial and technological sophistication of our online customer base.
In our credit card business, competition for rewards customers may result in higher rewards expenses, or we may fail to attract new customers or retain existing rewards customers due to increasing competition for these consumers. As of December 31, 2024, we have a number of large partnerships in our credit card loan portfolio. The market for key business partners, especially in the credit card business, is very competitive, and we may not be able to grow or maintain these partner relationships or assure
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Table of Contentsthat these relationships will be profitable or valued by our customers. Additionally, partners themselves may face changes in their business, including market factors and ownership changes, that could impact the partnership or they may make changes to the products and services they offer, which may lower the value of our products, such as the cobranded cards we issue to our customers. We face the risk that we could lose partner relationships, even after we have invested significant resources into acquiring and developing the relationships. The loss of any key business partner could have a negative impact on our results of operations, including lower returns, excess operating expense and excess funding capacity.
We depend on our partners to effectively promote our co-brand and private label credit card products and integrate the use of our credit cards into their retail operations. The failure by our partners to effectively promote and support our products as well as changes they may make in their business models could adversely affect card usage and our ability to achieve the growth and profitability objectives of our partnerships. In addition, if our partners do not adhere to the terms of our program agreements and standards, or otherwise diminish the value of our brand, we may suffer reputational damage and customers may be less likely to use our products.Some of our competitors have developed, or may develop, substantially greater financial and other resources than we have, may offer richer value propositions or a wider range of programs and services than we offer, or may use more effective advertising, marketing or cross-selling strategies to acquire and retain more customers, capture a greater share of spending and borrowings, attain and develop more attractive co-brand card programs and maintain greater merchant acceptance than we have. We may not be able to compete effectively against these threats or respond or adapt to changes in consumer spending habits as effectively as our competitors.
In such a competitive environment, we may lose entire accounts or may lose account balances to competing firms, or we may find it more costly to maintain our existing customer base. Customer attrition from any or all of our lending products, together with any lowering of interest rates or fees that we might implement to retain customers, could reduce our revenues and therefore our earnings. Similarly, unexpected customer attrition from our deposit products, in addition to an increase in rates or services that we may offer to retain deposits, may increase our expenses and therefore reduce our earnings.Our business, financial condition and results of operations may be adversely affected by legislation, regulation and merchants’ efforts to reduce the interchange fees charged by credit and debit card networks to facilitate card transactions.
As an issuer of credit and debit cards, we earn interchange fees, which are paid by merchants, when customers use our cards. Interchange fees are the amounts established by credit and debit card networks for the purpose of compensating debit and credit card issuers for their role in facilitating card transactions and are a meaningful source of revenue for our credit and debit card businesses. Interchange fees are a revenue source that, for example, covers the issuer’s costs associated with credit and debit card payments, fund rewards programs, help fund anti-fraud measures, management and dispute costs and fund competition and innovation. Interchange fees continue to be the subject of significant and intense global legislative, regulatory and legal focus, and the resulting legislation, regulation and decisions may have a material adverse impact on our overall business, financial condition and results of operations.
Legislative and regulatory bodies in a number of countries have sought, or are currently seeking, to reduce interchange fees through legislation, competition-related regulatory proceedings, voluntary agreements, central bank regulation and/or litigation. In the United States, interchange reimbursement rates for credit card transactions are set by credit card networks such as MasterCard and Visa. In the United States, the Federal Reserve’s Regulation II (Debit Card Interchange Fees and Routing) places limits on the interchange fees that issuers may charge, and requires additional routing requirements for, debit cards issued on networks operated by third parties. On October 25, 2023, the Federal Reserve released a notice of proposed rulemaking to revise Regulation II to further reduce the cap on interchange fees that debit card issuers covered by Regulation II can receive for covered debit card transactions. For more information on these rules, please see “Item 1. Business—Supervision and Regulation.” At the state level, Illinois passed a law prohibiting interchange fees on state taxes and gratuities, which would go into effect July 2025, though it is being challenged in the courts.
Lowering interchange fees also remains an area of international governmental attention by certain parties. In some jurisdictions, such as Canada and certain countries in Europe, including the U.K., interchange fees and related practices are subject to regulatory activity, including in some cases, imposing caps on permissible interchange fees. Our international card businesses have been impacted by these restrictions. For example, in the U.K., interchange fees are capped for both credit and debit card transactions. In addition, in Canada, Visa and MasterCard payment networks have entered into voluntary agreements with the Department of Finance Canada to maintain an agreed upon average interchange rate.
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Table of ContentsIn addition to this legislative and regulatory activity, merchants are also seeking avenues to reduce interchange fees. Merchants and their trade groups have filed numerous lawsuits against payment card networks and banks that issue cards on those networks, claiming that their practices toward merchants, including interchange fees, violate federal antitrust laws. In 2005, a number of entities filed antitrust lawsuits against MasterCard and Visa and several member banks, including our subsidiaries and us, alleging among other things, that the defendants conspired to fix the level of interchange fees. For additional information about the lawsuits, see “Part II—Item 8. Financial Statements and Supplementary Data—Note 19—Commitments, Contingencies, Guarantees and Others” for further details.Some major retailers or industry sectors could independently negotiate lower interchange fees with MasterCard and Visa, which could, in turn, result in lower interchange fees for us when our cardholders undertake purchase transactions with these retailers. Merchants continue to lobby Congress aggressively for legislation that would require additional routing requirements for credit cards that are issued on four-party networks, like Visa or MasterCard, which could create a downward pressure on interchange fees should their efforts be successful. Retailers may continue to bring legal proceedings against us or other credit card and debit card issuers and networks in the future.Beyond pursuing legislation, regulation and litigation, merchants may also promote forms of payment with lower fees or seek to impose surcharges or discounts at the point of sale for use of credit or debit cards. New payment systems, particularly mobile-based payment technologies, could also gain widespread adoption and lead to issuer transaction fees or the displacement of credit or debit cards as a payment method.
The heightened focus by legislative and regulatory bodies on the fees charged by credit and debit card networks, and the ability of certain merchants to successfully pursue litigation, negotiate discounts to interchange fees with payment networks or develop alternative payment systems could result in a loss of income from interchange fees. Any resulting loss in income to us could have a material adverse effect on our business, financial condition and results of operations.If we are not able to invest successfully in and introduce digital and other technological developments across all our businesses, our financial performance may suffer.Our industry is subject to rapid and significant technological changes, including due to the increasing development and use of AI, and our ability to meet our customers’ needs and expectations is key to our ability to grow revenue and earnings. We expect digital technologies to continue to have a significant impact on banking over time. Consumers expect robust digital experiences from their financial services providers. The ability for customers to access their accounts and conduct financial transactions using digital technology, including mobile applications, is an important aspect of the financial services industry and financial institutions are rapidly introducing new digital and other technology-driven products and services that aim to offer a better customer experience and to reduce costs. We continue to invest in digital technology designed to attract new customers, facilitate the ability of existing customers to conduct financial transactions and enhance the customer experience related to our products and services.
Our continued success depends, in part, upon our ability to assess and address the needs of our customers by using digital technology to provide products and services that meet their expectations. The development and launch of new digital products and services depends in large part on our ability to invest in and build the technology platforms that can enable them, in a cost effective and timely manner. We expect that new technologies in the payments industry will continue to emerge, and these new technologies may be superior to our existing technology. See “ We face intense competition in all of our markets, which could have a material adverse effect on our business and results of operation ” and “ We face risks related to our operational, technological and organizational infrastructure. ”
Some of our competitors are substantially larger than we are, which may allow those competitors to invest more money into their technology infrastructure and digital innovation than we do. In addition, smaller competitors may experience lower cost structures and different regulatory requirements and scrutiny than we do, which may allow them to innovate more rapidly than we can. See “ We face intense competition in all of our markets, which could have a material adverse effect on our business and results of operation. ” Further, our success depends on our ability to attract and retain strong digital and technology leaders, engineers and other specialized personnel. The competition is intense and the compensation costs continue to increase for such talent. If we are unable to attract and retain digital and technology talent, our ability to offer digital products and services and build the necessary technology infrastructure could be negatively affected, which could negatively impact our business and financial results. A failure to maintain or enhance our competitive position with respect to digital products and services, whether because we fail to anticipate customer expectations or because our technological developments fail to perform as desired or are not implemented in a timely or successful manner, could negatively impact our business and financial results.
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Table of ContentsWe may fail to realize the anticipated benefits of our mergers, acquisitions and strategic partnerships.We engage in merger and acquisition activity and enter into strategic partnerships from time to time. We continue to evaluate and anticipate engaging in, among other merger and acquisition activity, additional strategic partnerships, selected acquisitions of financial institutions, and acquisitions or divestitures of other businesses or assets, including credit card and other loan portfolios. We may not be able to identify and secure future acquisition targets or dispositions on terms and conditions that are acceptable to us, or successfully complete and integrate the businesses within the anticipated time frame and achieve the anticipated benefits of proposed mergers, acquisitions, dispositions and strategic partnerships, which could impair our growth.
Any merger, acquisition, disposition or strategic partnership we undertake entails certain risks, which may materially and adversely affect our results of operations. If we experience greater than anticipated costs to integrate acquired businesses into our existing operations, or are not able to achieve the anticipated benefits of any merger, acquisition or strategic partnership, including cost savings and other synergies, our business could be negatively affected. In addition, it is possible that the ongoing integration processes could result in the loss of key employees, errors or delays in systems implementation, exposure to cybersecurity risks associated with acquired businesses, exposure to additional regulatory oversight, the disruption of our ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect our ability to maintain relationships with partners, clients, customers, depositors and employees or to achieve the anticipated benefits of any merger, acquisition or strategic partnership. Integration efforts also may divert management attention and resources. These integration matters may have an adverse effect on us during any transition period. Moreover, it is possible that we may not realize the anticipated benefits of a given merger, acquisition or strategic partnership (either strategically or financially), even after spending substantial time and money on such a transaction, and we may ultimately decide to divest our interest or otherwise terminate the transaction.In addition, we may face the following risks in connection with any merger, acquisition or strategic partnership:
• New Businesses and Geographic or Other Markets: Our merger, acquisition or strategic partnership activity may involve our entry into new businesses or new geographic areas or markets in the U.S. or internationally, that present risks resulting from our relative inexperience in these new businesses, localities or markets. These new businesses, localities or markets may change the overall character of our consolidated portfolio of businesses and alter our exposure to economic and other external factors. We also face the risk that we will not be successful in these new businesses, localities or markets.
• Identification and Assessment of Merger and Acquisition Targets and Deployment of Acquired Assets: We may not be able to identify, acquire or partner with suitable targets. Further, our ability to achieve the anticipated benefits of any merger, acquisition or strategic partnership will depend on our ability to assess the asset quality, risks and value of the particular assets or institutions we partner with, merge with or acquire. We may be unable to profitably deploy any assets we acquire.
• Accuracy of Assumptions: In connection with any merger, acquisition or strategic partnership, we may make certain assumptions relating to the proposed merger, acquisition or strategic partnership that may be, or may prove to be, inaccurate, including as a result of the failure to anticipate the costs, timeline or ability to realize the expected benefits of any merger, acquisition or strategic partnership. The inaccuracy of any assumptions we may make could result in unanticipated consequences that could have a material adverse effect on our results of operations or financial condition.• Target-specific Risk: Assets and companies that we acquire, or companies that we enter into strategic partnerships with, will have their own risks that are specific to a particular asset or company. These risks include, but are not limited to, particular or specific regulatory, accounting, operational, reputational and industry risks, any of which could have a material adverse effect on our results of operations or financial condition. For example, we may face challenges associated with integrating other companies due to differences in corporate culture, compliance systems or standards of conduct. Indemnification rights, if any, may be insufficient to compensate us for any losses or damages resulting from such risks. In addition to regulatory approvals discussed below, certain of our merger, acquisition or partnership activity may require third-party consents in order for us to fully realize the anticipated benefits of any such transaction.
• Conditions to Regulatory Approval: We may be required to obtain various governmental and regulatory approvals to consummate certain acquisitions. We cannot be certain whether, when or on what terms and conditions, such approvals
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Table of Contentsmay be granted. Consequently, we may not obtain governmental or regulatory approval for a proposed acquisition on acceptable terms or at all, in which case we would not be able to complete the acquisition despite investing resources in pursuing it.
For additional risks related to the Transaction, see “Risks Relating to the Acquisition of Discover” and the section entitled “Risk Factors” included in our joint proxy statement/prospectus included in the registration statement declared effective by the SEC on January 6, 2025.Reputational risk and social factors may impact our results and damage our brand.Our ability to attract and retain customers is highly dependent upon the perceptions of consumer and commercial borrowers and deposit holders and other external perceptions of our products, services, trustworthiness, business practices, workplace culture, compliance practices or our financial health. All of Capital One’s brands are one of our most important assets. Maintaining and enhancing our brand depends largely on our ability to continue to provide high-quality products and services. Adverse perceptions regarding our reputation in the consumer, commercial, and funding markets could lead to difficulties in generating, maintaining and financing accounts. In particular, negative public perceptions regarding our reputation, including negative perceptions regarding our ability to maintain the security of our technology systems and protect customer data, could lead to decreases in the levels of deposits that current and potential consumer and commercial customers choose to maintain with us. Negative perceptions may also significantly increase the costs of attracting and retaining customers. In addition, negative perceptions regarding certain industries, partners or clients could also prompt us to cease business activities associated with those entities in order to manage reputational risk.Negative public opinion or damage to our brand could also result from actual or alleged conduct in any number of activities or circumstances, including lending practices, regulatory compliance, cyber-attacks or other security incidents, corporate governance and sales and marketing, and from actions taken by regulators or other persons in response to such conduct. Such conduct could fall short of our customers’ and the public’s heightened expectations of companies of our size with rigorous privacy, data protection, data security and compliance practices, and could further harm our reputation. In addition, our co-brand and private label credit card partners or other third parties with whom we have important relationships may take actions over which we have limited control that could negatively impact perceptions about us or the financial services industry. The proliferation of social media may increase the likelihood that negative public opinion from any of the actual or alleged events discussed above could impact our reputation and business.
In addition, a variety of economic or social factors may cause changes in borrowing activity, including credit card use, payment patterns and the rate of defaults by account holders and borrowers domestically and internationally. These economic and social factors include changes in consumer confidence levels, the public’s perception regarding the banking industry and consumer debt, including credit card use, and changing attitudes about the stigma of bankruptcy. If consumers develop or maintain negative attitudes about incurring debt, or consumption trends decline or if we fail to maintain and enhance our brand, or we incur significant expenses to do so, our reputation and business and financial results could be materially and negatively affected.There has also been an increased focus by investor advocacy groups, investment funds and shareholder activists, among others, on topics related to environmental, social and corporate governance policies, and our policies, practices and disclosure in these areas, including those related to climate change. Reputation risk related to corporate policies and practices on environmental, social and corporate governance topics is increasingly complex. Divergent ideological and social views may create competing stakeholder, legislative, and regulatory scrutiny that may impact our reputation or operations. Furthermore, responding to environmental, social and corporate governance considerations and implementing our related goals and initiatives involve risk and uncertainties, require investments and depend in part on third-party performance or data that is outside of our control. There can be no assurance that we will achieve these goals and initiatives or that any such achievements will have the desired results. Our failure or perceived failure to achieve progress in these areas on a timely basis, if at all, or incorrect perception or distortions of our goals and initiatives could impact our reputation and public perceptions of our business.
If we are not able to protect our intellectual property rights, or we violate third-party intellectual property rights, our revenue and profitability could be negatively affected.
We rely on a variety of measures to protect and enhance our intellectual property rights, including copyrights, trademarks, trade secrets, patents, licenses and certain restrictions on disclosure, solicitation and competition. We also undertake other measures to control access to and distribution of our other proprietary and confidential information. These measures may not be successful in protecting or enforcing our rights in every jurisdiction or preventing misappropriation of our proprietary or
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Table of Contentsconfidential information or infringement, a misappropriation or other violations of our intellectual property rights and a resulting loss of competitive advantage. In certain situations, we may be compelled to engage in intellectual property-related litigation to enforce our intellectual property rights, which may incur significant expense and may be perceived negatively by customers or industry partners, thus potentially resulting in reputational harm and may adversely impact our business, financial position and results of operations. In addition, our competitors or other third parties may obtain patents for innovations that are used in our industry or allege that our operations, marketing, trademarks, systems, processes, or technologies infringe, misappropriate or violate their intellectual property rights. Given the complex, rapidly changing and competitive technological and business environments in which we operate, if our competitors or other third parties are successful in obtaining such patents or prevail in intellectual property-related litigation or demands against us, we could lose significant revenues, incur significant license, royalty, technology development or other expenses, or pay significant damages.
We license certain intellectual property and technology that are important to our business, and in the future, we may enter into additional agreements that provide us with licenses to valuable intellectual property or technology. If we fail to comply with any of these obligations under our license agreements, we may be required to pay damages and the licensor may have the right to terminate the license. Termination by the licensor (or other applicable counterparty) may cause us to lose valuable rights, and could disrupt our operations and harm our reputation. In the future, we may identify additional third-party intellectual property and technology we need, including to develop and offer new products and services. However, such licenses may not be available on acceptable terms or at all.
While we believe that we have all the necessary licenses from third parties for any intellectual property, including technology and software, that we use in the operations of our business but do not own, a third party could nonetheless allege that we are infringing its rights, which may deter our ability to obtain licenses on commercially reasonable terms from the third party, if at all, or cause the third party to commence litigation against us. Our failure to obtain necessary licenses or other rights, or litigation or claims arising out of intellectual property matters, may adversely impact our business, financial position and results of operations.Our risk management strategies may not be fully effective in mitigating our risk exposures in all market environments or against all types of risk.Management of market, credit, liquidity, strategic, reputational, operational and compliance risk requires, among other things, policies and procedures to properly record and verify a large number of transactions and events. See “Part II—Item 7. MD&A—Risk Management” for further details. Our Framework is designed to identify, measure, assess, monitor, test, control, report, escalate, and mitigate the risks that we face. Even though we continue to devote significant resources to operating and governing our Framework, our risk management strategies may not be fully effective in identifying and mitigating our risk exposure in all market environments or against all types of risk, including risks that are unidentified or unanticipated.Some of our methods of managing these risks are based upon our use of observed historical market behavior, the use of analytical and/or forecasting models and management’s judgment. These methods may not accurately predict future exposures, which could be significantly greater than the historical measures or models indicate and market conditions, particularly during a period of financial market stress, can involve unprecedented dislocations. For example, credit risk is inherent in the financial services business and results from, among other things, extending credit to customers. Our ability to assess the creditworthiness of our customers may be impaired if the models and approaches we use to select, manage and underwrite our consumer and commercial customers become less predictive of future charge-offs due, for example, to rapid changes in the economy, or degradation in the predictive nature of credit bureau and other data used in underwriting.
While we employ a broad and diversified set of risk monitoring and risk mitigation techniques, those techniques and the judgments that accompany their application cannot anticipate every economic and financial outcome or the timing of such outcomes. For example, our ability to implement our risk management strategies may be hindered by adverse changes in the volatility or liquidity conditions in certain markets and as a result, may limit our ability to distribute such risks (for instance, when we seek to syndicate exposure in bridge financing transactions we have underwritten). We may, therefore, incur losses in the course of our risk management or investing activities.
Our business could be negatively affected if we are unable to attract, develop, retain and motivate key senior leaders and skilled employees.Our success depends, in large part, on our ability to retain key senior leaders and to attract, develop and retain skilled employees, particularly employees with advanced expertise in credit, risk, digital and technology skills. We depend on our senior leaders and skilled employees to oversee simultaneous, transformative initiatives across the enterprise and execute on our
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Table of Contentsbusiness plans in an efficient and effective manner. The market for such senior leaders and skilled employees can be competitive and hard to predict, and attracting, developing and retaining them may require significant investment generally and in any given year. While we engage in robust succession planning, our key senior leaders have deep and broad industry experience and could be difficult to replace without some degree of disruption.
Our ability to attract, develop and retain qualified employees is also affected by perceptions of our culture and management, including our position on remote and hybrid work arrangements, our profile in the regions where we have offices and the professional opportunities we offer.
Regulation or regulatory guidance restricting executive compensation, as well as evolving investor expectations, may limit the types of compensation arrangements that we may enter into with our most senior leaders and could have a negative impact on our ability to attract, retain and motivate such leaders in support of our long-term strategy. These laws and regulations may not apply in the same manner to all financial institutions and technology companies, which therefore may subject us to more restrictions than other institutions and companies with which we compete for talent and may also hinder our ability to compete for talent with other industries. We rely upon our senior leaders not only for business success, but also to lead with integrity. To the extent our senior leaders behave in a manner that does not comport with our values, the consequences to our brand and reputation could be severe and could adversely affect our financial condition and results of operations. If we are unable to attract, develop and retain talented senior leadership and employees, or to implement appropriate succession plans for our senior leadership, our business could be negatively affected.We face risks from catastrophic events.
Natural disasters, geopolitical events and other catastrophic events could harm our employees, business and infrastructure, including our information technology systems and third-party platforms. Our ability to conduct business may be adversely affected by a disruption in the infrastructure that supports our business and the communities where we are located, which are concentrated in the Northern Virginia and New York metropolitan areas, Richmond, Virginia and Plano, Texas. This may include a disruption involving damage or loss of access to a physical site, cyber-attacks and other security incidents, terrorist activities, the occurrence or worsening of disease outbreaks or pandemics, natural disasters, extreme weather events, electrical outage, environmental hazards, disruption to technological infrastructure, communications or other services we use, our employees or third parties with whom we conduct business. Our business, financial condition and results of operations may be impacted by any such disruption and our ability to implement corresponding response measures quickly. In addition, if a natural disaster or other catastrophic event occurs in certain regions where our business, customers or assets securing our loans are concentrated, such as the mid-Atlantic, New York, California or Texas metropolitan areas, or in regions where our third-party platforms are located, we could be disproportionately impacted as compared to our competitors. The impact of such events and other catastrophes on the overall economy and our physical and transition risks may also adversely affect our financial condition and results of operations.
Climate change manifesting as physical or transition risks could adversely affect our businesses, operations and customers and result in increased costs.
Climate change risks can manifest as physical or transition risks.
Physical risks are the risks from the effects of climate change arising from acute, climate-related events, such as, hurricanes, flooding and wildfires, and chronic shifts in climate, such as sea level rise and higher average temperatures. Such events could lead to financial losses or disrupt our operations or those of our customers or third parties on which we rely, including through direct damage to assets and indirect impacts from supply chain disruption and market volatility.
Transition risks are the risks resulting from the shift toward a lower-carbon economy arising from the changes in policy, consumer and business sentiment or technologies in regards to limiting climate change. Transition risks, including changes in consumer preferences and additional regulatory requirements or taxes, could increase our expenses, affect credit performance, and impact our strategies or those of our customers. For example, on October 24, 2023, the Federal Banking Agencies jointly issued guidance on climate-related financial risk management for large institutions, which applies to us. For more information on climate-related regulatory developments, see “Item 1. Business—Supervision and Regulation.”Physical and transition risks could also affect the financial health of certain customers in impacted industries or geographies. In addition, we face reputational risk as a result of our policies, practices, disclosures and decisions related to climate change and the environment, or the practices or involvement of our clients or vendors and suppliers, in certain industries or projects associated with causing or exacerbating climate change. In addition, due to divergent views of stakeholders, we are at increased
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Table of Contentsrisk that any action, or lack thereof, by us concerning our response to climate change could be perceived negatively by some stakeholders, which could adversely impact our reputation and businesses. Further, there is increased scrutiny of climate change-related policies, goals and disclosures, which could result in litigation and regulatory investigations and actions. We may incur additional costs and require additional resources as we evolve our strategy, practices and related disclosures with respect to these matters.
As climate risk is interconnected with many risk types, we continue to enhance processes to embed evolving climate risk considerations into our existing risk management strategies; however, because the timing and severity of climate change may not be predictable, our risk management strategies may not be effective in mitigating climate risk exposure. Additionally, estimations used in climate risk assessments have an increased level of uncertainty due to limited historical trend information and the absence of standardized, reliable and comprehensive greenhouse gas emissions data across the industry, which could cause these risk assessments to vary significantly over time or actual risks to vary from our assessments.
We face risks from the use of or changes to assumptions or estimates in our financial statements.
Pursuant to generally accepted accounting principles in the U.S. (“U.S. GAAP”), we are required to use certain assumptions, judgments, and estimates in preparing our financial statements, including determining our allowance for credit losses, the liability for legal actions, the fair value of certain assets and liabilities, and goodwill impairment, among other items. In addition, the FASB, the SEC and other regulatory bodies may issue new or amend existing accounting and reporting standards or change existing interpretations of those standards, including those related to assumptions and estimates we use to prepare our financial statements, in ways that we cannot predict and that could materially impact our financial statements. If actual results differ from the assumptions, judgments or estimates underlying our financial statements or if financial accounting and reporting standards are changed, we may experience unexpected material losses. For a discussion of our use of estimates in the preparation of our consolidated financial statements, see “Part II—Item 7. MD&A—Critical Accounting Policies and Estimates” and “Part II—Item 8. Financial Statements and Supplementary Data—Note 1—Summary of Significant Accounting Policies.”
The soundness of other financial institutions and other third parties, actual or perceived, could adversely affect us.Our ability to engage in routine funding and other transactions could be adversely affected by the stability and actions of other financial services institutions. Financial services institutions are interrelated as a result of trading, clearing, servicing, counterparty and other relationships. We have exposure to financial institutions, intermediaries and counterparties that are exposed to risks over which we have little or no control.Since 2023, several financial services institutions failed or required outside liquidity support, in many cases, as a result of the inability of the institutions to obtain needed liquidity. For example, Silicon Valley Bank, Signature Bank and First Republic Bank were closed in 2023 and placed under FDIC receivership. This has led to additional risk for other financial services institutions and the financial services industry generally as a result of increased lack of confidence in the financial sector. The failure of other banks and financial institutions and the measures taken by governments, businesses and other organizations in response to these events could adversely impact our business, financial condition and results of operations. For information on the FDIC’s special assessment following the closures of Silicon Valley Bank and Signature Bank, see “Item 1. Business—Supervision and Regulation.”In addition, we routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds and other institutional clients, resulting in a significant credit concentration with respect to the financial services industry overall. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions.Likewise, adverse developments affecting the overall strength and soundness of our competitors, the financial services industry as a whole and the general economic climate and the U.S. Treasury market could have a negative impact on perceptions about the strength and soundness of our business even if we are not subject to the same adverse developments. In addition, adverse developments with respect to third parties with whom we have important relationships also could negatively impact perceptions about us. These perceptions about us could cause our business to be negatively affected and exacerbate the other risks that we face. Moreover, the speed with which information spreads through news, social media and other sources on the Internet and the ease with which customers transact may amplify the onset and negative effects from such perceptions, such as rapid deposit withdrawals or other outflows.
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Item 7 · Management's Discussion & Analysis
+790 paragraphs −783 paragraphs ~783 changed
FY 2023-12-31 (earlier)
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)This discussion contains forward-looking statements that are based upon management’s current expectations and are subject to significant uncertainties and changes in circumstances. Please review “Part I—Item 1. Business—Forward-Looking Statements” for more information on the forward-looking statements in this Report. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future 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, 2023 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 and financial condition, including capital and liquidity management, 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, 2023 and accompanying notes. MD&A is organized in the following sections:• Selected Financial Data
• Capital Management
• Executive Summary • Risk Management
• Consolidated Results of Operations • Credit Risk Profile
• Consolidated Balance Sheets Analysis • Liquidity Risk Profile
• Off-Balance Sheet Arrangements • Market Risk Profile
• Business Segment Financial Performance • Supplemental Tables
• Critical Accounting Policies and Estimates • Glossary and Acronyms
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SELECTED FINANCIAL DATAThe following table presents selected consolidated financial data and performance metrics for the three-year period ended December 31, 2023, 2022 and 2021. We also provide selected key metrics we use in evaluating our performance, including certain metrics that are computed using non-GAAP measures. We consider these metrics to be key financial measures that management uses in assessing our operating performance, capital adequacy and the level of returns generated. We believe these non-GAAP metrics provide useful insight to investors and users of our financial information as they provide an alternate measurement of our performance and assist in assessing our capital adequacy and the level of return generated. These non-GAAP measures should not be viewed as a substitute for reported results determined in accordance with U.S. GAAP, nor are they necessarily comparable to non-GAAP measures that may be presented by other companies.Three-Year Summary of Selected Financial Data(Dollars in millions, except per share data and as noted) 2023 2022 2021 2023 vs. 2022 2022 vs. 2021Income statementInterest income $ 41,938 $ 31,237 $ 25,769 34% 21%
Interest expense 12,697 4,123 1,598 ** 158
Net interest income $ 29,241 $ 27,114 $ 24,171 8 12
Non-interest income 7,546 7,136 6,264 6 14
Total net revenue 36,787 34,250 30,435 7 13
Provision (benefit) for credit losses 10,426 5,847 (1,944) 78 **Non-interest expense:Marketing 4,009 4,017 2,871 — 40
Operating expense 16,307 15,146 13,699 8 11
Total non-interest expense 20,316 19,163 16,570 6 16
Income from continuing operations before income taxes 6,045 9,240 15,809 (35) (42)
Income tax provision 1,158 1,880 3,415 (38) (45)
Income from continuing operations, net of tax 4,887 7,360 12,394 (34) (41)
Income (loss) from discontinued operations, net of tax — — (4) — **
Net income 4,887 7,360 12,390 (34) (41)
Dividends and undistributed earnings allocated to participating securities (77) (88) (105) (13) (16)
Preferred stock dividends (228) (228) (274) — (17)
Issuance cost for redeemed preferred stock — — (46) — **
Net income available to common stockholders $ 4,582 $ 7,044 $ 11,965 (35) (41)Common share statistics
Basic earnings per common share:Net income from continuing operations $ 11.98 $ 17.98 $ 27.05 (33)% (34)%
Income (loss) from discontinued operations — — (0.01) — **
Net income per basic common share $ 11.98 $ 17.98 $ 27.04 (33) (34)Diluted earnings per common share:Net income from continuing operations $ 11.95 $ 17.91 $ 26.95 (33)% (34)%
Income (loss) from discontinued operations — — (0.01) — **
Net income per diluted common share $ 11.95 $ 17.91 $ 26.94 (33) (34)
Common shares outstanding (period-end, in millions) 380.4 381.3 413.9 — (8)
Dividends declared and paid per common share $ 2.40 $ 2.40 $ 2.60 — (8)
Book value per common share (period-end) 152.71 137.90 147.46 11 (6)Tangible book value per common share (period-end) (1)99.78 86.11 99.74 16 (14)
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Table of Contents(Dollars in millions, except per share data and as noted) 2023 2022 2021 2023 vs. 2022 2022 vs. 2021Common dividend payout ratio (2)20.03% 13.35% 9.62 % 7 4
Stock price per common share (period-end) $ 131.12 $ 92.96 $ 145.09 41 (36)
Total market capitalization (period-end) 49,877 35,447 60,047 41 (41)Balance sheet (average balances)Loans held for investment $ 311,541 $ 292,238 $ 252,730 7% 16%
Interest-earning assets 441,238 406,646 389,336 9 4
Total assets 467,807 440,538 424,521 6 4
Interest-bearing deposits 313,737 277,208 271,500 13 2
Total deposits 343,554 313,551 306,397 10 2
Borrowings 49,332 51,006 38,590 (3) 32
Common equity 50,349 50,279 56,966 — (12)
Total stockholders’ equity 55,195 55,125 62,556 — (12)Selected performance metricsPurchase volume $ 620,290 $ 587,283 $ 527,605 6% 11%Total net revenue margin (3)8.34% 8.42 % 7.82% (8) bps 60 bps
Net interest margin 6.63 6.67 6.21 (4) 46Return on average assets (4)1.04 1.67 2.92 (63) (125)Return on average tangible assets (5)1.08 1.73 3.03 (65) (130)Return on average common equity (6)9.10 14.01 21.01 (491) (700)Return on average tangible common equity (7)13.04 19.91 28.39 (687) (848)Equity-to-assets ratio (8)11.80 12.51 14.74 (71) (223)Efficiency ratio (9)55.23 55.95 54.44 (72) 151Operating efficiency ratio (10)44.33 44.22 45.01 11 (79)Adjusted operating efficiency ratio (11)43.54 44.53 44.68 (99) (15)
Effective income tax rate from continuing operations 19.2 20.3 21.6 (110) (130)
Net charge-offs $ 8,414 $ 3,973 $ 2,234 112% 78%
Net charge-off rate 2.70 % 1.36 % 0.88% 134 bps 48 bpsDecember 31, Change(Dollars in millions, except as noted) 2023 2022 2021 2023 vs. 2022 2022 vs. 2021Balance sheet (period-end)Loans held for investment $ 320,472 $ 312,331 $ 277,340 3% 13%
Interest-earning assets 449,701 427,248 397,341 5 8
Total assets 478,464 455,249 432,381 5 5
Interest-bearing deposits 320,389 300,789 272,937 7 10
Total deposits 348,413 332,992 310,980 5 7
Borrowings 49,856 48,715 43,086 2 13
Common equity 53,244 47,737 56,184 12 (15)
Total stockholders’ equity 58,089 52,582 61,029 10 (14)Credit quality metricsAllowance for credit losses $ 15,296 $ 13,240 $ 11,430 16% 16%Allowance coverage ratio4.77 % 4.24% 4.12% 53 bps 12 bps
30+ day performing delinquency rate 3.71 2.96 2.25 75 71
30+ day delinquency rate 3.99 3.21 2.41 78 80
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December 31, Change(Dollars in millions, except as noted) 2023 2022 2021 2023 vs. 2022 2022 vs. 2021Capital ratios
Common equity Tier 1 capital (12)12.9 % 12.5% 13.1% 40 bps (60) bpsTier 1 capital (12)14.2 13.9 14.5 30 (60)Total capital (12)16.0 15.8 16.9 20 (110)Tier 1 leverage (12)11.2 11.1 11.6 10 (50)Tangible common equity (13)8.2 7.5 9.9 70 (240)Supplementary leverage (12)9.6 9.5 9.9 10 (40)OtherEmployees (period end, in thousands) 52.0 56.0 50.8 (7)% 10%__________(1) Tangible book value per common share is a non-GAAP measure calculated based on tangible common equity (“TCE”) divided by common shares outstanding. See “Supplemental Tables—Table B—Reconciliation of Non-GAAP Measures” for additional information on non-GAAP measures.(2) Common dividend payout ratio is calculated based on dividends per common share for the period divided by basic earnings per common share for the period.
(3) Total net revenue margin is calculated based on total net revenue for the period divided by average interest-earning assets for the period.
(4) Return on average assets is calculated based on income from continuing operations, net of tax, for the period divided by average total assets for the period.(5) Return on average tangible assets is a non-GAAP measure calculated based on income from continuing operations, net of tax, for the period divided by average tangible assets for the period. See “Supplemental Tables—Table B—Reconciliation of Non-GAAP Measures” for additional information on non-GAAP measures.(6) Return on average common equity is calculated based on net income (loss) available to common stockholders less income (loss) from discontinued operations, net of tax, for the period, divided by average common equity. Our calculation of return on average common equity may not be comparable to similarly-titled measures reported by other companies.(7) Return on average tangible common equity is a non-GAAP measure calculated based on net income (loss) available to common stockholders less income (loss) from discontinued operations, net of tax, for the period, divided by average TCE. Our calculation of return on average TCE may not be comparable to similarly-titled measures reported by other companies. See “Supplemental Tables—Table B—Reconciliation of Non-GAAP Measures” for additional information on non-GAAP measures.(8) Equity-to-assets ratio is calculated based on average stockholders’ equity for the period divided by average total assets for the period.
(9) Efficiency ratio is calculated based on total non-interest expense for the period divided by total net revenue for the period.
(10) Operating efficiency ratio is calculated based on operating expense for the period divided by total net revenue for the period.(11) Adjusted operating efficiency ratio is a non-GAAP measure. See “Supplemental Tables—Table B—Reconciliation of Non-GAAP Measures” for a reconciliation of our adjusted operating efficiency ratio (non-GAAP) to our operating efficiency ratio (GAAP).
(12) Capital ratios are calculated based on the Basel III standardized approach framework, see “Capital Management” for additional information.
(13) Tangible common equity ratio is a non-GAAP measure calculated based on TCE divided by tangible assets. See “Supplemental Tables—Table B—Reconciliation of Non-GAAP Measures” for the calculation of this measure and reconciliation to the comparative U.S. GAAP measure.** Not meaningful.52Capital One Financial Corporation (COF)
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EXECUTIVE SUMMARY
Financial HighlightsOn February 19, 2024, we entered into an agreement to acquire Discover in an all-stock transaction. Upon closing, each share of Discover common stock will be exchanged for 1.0192 shares of our common stock. The closing of the Transaction is subject to the satisfaction of customary closing conditions, including receipt of required regulatory approvals and approval by our stockholders and the stockholders of Discover. See the “Agreement to Acquire Discover” section in “ Part I—Item 1. Business—Overview” for additional information.
We reported net income of $4.9 billion ($11.95 per diluted common share) on total net revenue of $36.8 billion for 2023. In comparison, we reported net income of $7.4 billion ($17.91 per diluted common share) on total net revenue of $34.3 billion for 2022 and net income of $12.4 billion ($26.94 per diluted common share) on total net revenue of $30.4 billion for 2021.
Our CET1 capital ratio as calculated under the Basel III standardized approach was 12.9% and 12.5% as of December 31, 2023 and 2022, respectively. See “Capital Management” for additional information.
For the year ended December 31, 2023, we declared and paid common stock dividends of $935 million and repurchased $600 million of shares of our common stock. See “Capital Management—Dividend Policy and Stock Purchases” for additional information .
Below are additional highlights of our performance in 2023. These highlights are based on a comparison between the results of 2023 and 2022, except as otherwise noted. We provide a more detailed discussion of our financial performance in the sections following this “Executive Summary.”
Discussions of our performance for 2022 compared to 2021 can be found in “Part II—Item 7. MD&A” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.Total Company Performance
• Earnings:Our net income decreased by $2.5 billion to $4.9 billion in 2023 compared to 2022 primarily driven by:
◦ Higher provision for credit losses primarily driven by growth and continued credit normalization in our domestic credit card loan portfolio.
◦ Higher non-interest expense primarily driven by increased salaries and associate benefits, the $289 million FDIC special assessment related to certain regional bank failures and the absence of $177 million insurance recoveries net of legal reserve activity received in 2022, partially offset by lower professional services.These drivers were partially offset by:◦ Higher net interest income primarily driven by higher average loan balances in our credit card loan portfolio and higher asset yields, partially offset by higher funding costs.• Loans Held for Investment:◦ Period-end loans held for investment increased by $8.1 billion to $320.5 billion as of December 31, 2023 from December 31, 2022 primarily driven by growth in our credit card loan portfolio.
◦ Average loans held for investment increased by $19.3 billion to $311.5 billion in 2023 compared to 2022 primarily driven by growth in our credit card loan portfolio.• Net Charge-Off and Delinquency Metrics:◦ Our net charge-off rate increased by 134 bps to 2.70% in 2023 compared to 2022 primarily driven by higher net charge-offs in our credit card loan portfolio.
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Table of Contents◦ Our 30+ day delinquency rate increased by 78 bps to 3.99% as of December 31, 2023 from December 31, 2022 primarily driven by higher delinquency inventories in our credit card loan portfolio.
• Allowance for Credit Losses: Our allowance for credit losses increased by $2.1 billion to $15.3 billion and our allowance coverage ratio increased by 53 bps to 4.77% as of December 31, 2023 compared to December 31, 2022.CONSOLIDATED RESULTS OF OPERATIONSThe section below provides a comparative discussion of our consolidated financial performance for 2023 and 2022. We provide a discussion of our business segment results in the following section, “Business Segment Financial Performance.” This section should be read together with our “Executive Summary,” where we discuss trends and other factors that we expect will affect our future results of operations.Net Interest IncomeNet interest income represents the difference between interest income, including certain fees, earned on our interest-earning assets and the interest expense incurred on our interest-bearing liabilities. Our 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, net of reversals, 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 of ContentsTable 1 below presents the average outstanding balance, interest income earned, interest expense incurred and average yield for 2023, 2022 and 2021 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 31,2023 2022 2021(Dollars in millions) Average Balance Interest Income/ Expense Average Yield/
Rate (1)
Average Balance Interest Income/ Expense Average Yield/
Rate (1)
Average Balance Interest Income/ Expense Average Yield/
Rate (1)
Assets:
Interest-earning assets:
Loans: (2)Credit card $ 141,675 $ 26,267 18.54 % $ 121,055 $ 19,626 16.21 % $ 106,016 $ 15,474 14.60 %
Consumer banking 77,514 6,041 7.79 80,511 5,782 7.18 73,874 5,804 7.86Commercial banking (3)92,984 6,363 6.84 92,273 3,702 4.01 77,438 2,119 2.74Other (4)— (1,261) ** — (200) ** — 866 **
Total loans, including loans held for sale 312,173 37,410 11.98 293,839 28,910 9.84 257,328 24,263 9.43
Investment securities 89,105 2,550 2.86 90,608 1,884 2.08 98,394 1,446 1.47
Cash equivalents and other interest-earning assets 39,960 1,978 4.95 22,199 443 2.00 33,614 60 0.18
Total interest-earning assets 441,238 41,938 9.50 406,646 31,237 7.68 389,336 25,769 6.62
Cash and due from banks 3,869 5,054 5,281
Allowance for credit losses (14,290) (11,620) (13,354)
Premises and equipment, net 4,373 4,265 4,257
Other assets 32,617 36,193 39,001
Total assets $ 467,807 $ 440,538 $ 424,521Liabilities and stockholders’ equity:
Interest-bearing liabilities:Interest-bearing deposits $ 313,737 $ 9,489 3.02 % $ 277,208 $ 2,535 0.91 % $ 271,500 $ 956 0.35 %
Securitized debt obligations 17,675 959 5.42 15,603 384 2.46 12,336 119 0.96
Senior and subordinated notes 31,109 2,204 7.08 29,286 1,074 3.67 25,530 488 1.91
Other borrowings and liabilities 2,394 45 1.89 7,800 130 1.67 2,261 35 1.57
Total interest-bearing liabilities 364,915 12,697 3.48 329,897 4,123 1.25 311,627 1,598 0.51
Non-interest-bearing deposits 29,817 36,343 34,897
Other liabilities 17,880 19,173 15,441
Total liabilities 412,612 385,413 361,965
Stockholders’ equity 55,195 55,125 62,556
Total liabilities and stockholders’ equity $ 467,807 $ 440,538 $ 424,521
Net interest income/spread $ 29,241 6.03 $ 27,114 6.43 $ 24,171 6.11
Impact of non-interest-bearing funding 0.60 0.24 0.10
Net interest margin 6.63 % 6.67% 6.21 %__________
(1) Average yield is calculated based on interest income for the period divided by average loans during the period. Interest income does not include any allocations, such as funds transfer pricing. Average yield is calculated using whole dollar values for average balances and interest income/expense.(2) Past due fees, net of reversals, included in interest income totaled approximately $2.2 billion in 2023, $1.9 billion in 2022 and $1.4 billion in 2021.
(3) Some of our commercial investments generate tax-exempt income, tax credits or other tax benefits. Accordingly, we present our Commercial Banking revenue and yields on a taxable-equivalent basis, calculated using the federal statutory tax rate of 21% and state taxes where applicable, with offsetting reductions to the Other category. Taxable-equivalent adjustments included in the interest income and yield computations for our commercial loans totaled
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Table of Contentsapproximately $74 million in 2023, 2022 and 2021, with corresponding reductions to the Other category.
(4) Interest income/expense in the Other category represents the impact of hedge accounting on our loan portfolios and the offsetting reduction of the taxable-equivalent adjustments of our commercial loans as described above.** Not meaningful.Net interest income increased by $2.1 billion to $29.2 billion in 2023 compared to 2022 primarily driven by higher average loan balances in our credit card loan portfolio and higher asset yields, partially offset by higher funding costs.
Net interest margin decreased by 4 bps to 6.63% in 2023 compared to 2022 primarily driven by higher rates paid on interest-bearing deposits, partially offset by higher asset yields and growth in our credit card loan portfolio.
Our cumulative deposit beta increased to 60% as of December 31, 2023, from 35% as of December 31, 2022 primarily driven by product mix shifts toward higher rate products, deposit pricing lags catching up to earlier increases in market interest rates and competition. We define cumulative deposit beta as the ratio of changes in the rate paid on our interest-bearing deposits to the increases in the upper limit of the federal funds rate during the current rising interest rate cycle.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)2023 vs. 2022 2022 vs. 2021(Dollars in millions) Total Variance Volume Rate Total Variance Volume Rate
Interest income:
Loans:Credit card $ 6,641 $ 3,584 $ 3,057 $ 4,152 $ 2,324 $ 1,828
Consumer banking 259 (215) 474 (22) 477 (499)Commercial banking (2)2,661 29 2,632 1,583 454 1,129Other (3)(1,061) — (1,061) (1,066) — (1,066)
Total loans, including loans held for sale 8,500 3,398 5,102 4,647 3,255 1,392
Investment securities 666 (31) 697 438 (115) 553
Cash equivalents and other interest-earning assets 1,535 476 1,059 383 (20) 403
Total interest income 10,701 3,843 6,858 5,468 3,120 2,348Interest expense:Interest-bearing deposits 6,954 371 6,583 1,579 20 1,559
Securitized debt obligations 575 56 519 265 37 228
Senior and subordinated notes 1,130 71 1,059 586 80 506
Other borrowings and liabilities (85) (90) 5 95 92 3
Total interest expense 8,574 408 8,166 2,525 229 2,296
Net interest income $ 2,127 $ 3,435 $ (1,308) $ 2,943 $ 2,891 $ 52__________
(1) We calculate the change in interest income and interest expense separately for each item. The portion of interest income or interest expense attributable to both volume and rate is allocated proportionately when the calculation results in a positive value. When the portion of interest income or interest expense attributable to both volume and rate results in a negative value, the total amount is allocated to volume or rate, depending on which amount is positive.
(2) Some of our commercial investments generate tax-exempt income, tax credits or other tax benefits. Accordingly, we present our Commercial Banking revenue and yields on a taxable-equivalent basis, calculated using the federal statutory tax rate of 21% and state taxes where applicable, with offsetting reductions to the Other category.
(3) Interest income/expense in the Other category represents the impact of hedge accounting on our loan portfolios and the offsetting reduction of the taxable-equivalent adjustments of our commercial loans as described above.56Capital One Financial Corporation (COF)
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Non-Interest IncomeTable 3 displays the components of non-interest income for 2023, 2022 and 2021.Table 3: Non-Interest Income
Year Ended December 31,(Dollars in millions) 2023 2022 2021
Interchange fees, net $ 4,793 $ 4,606 $ 3,860
Service charges and other customer-related fees 1,667 1,625 1,578
Net securities gains (losses)
(34) (9) 2Other (1)(2)1,120 914 824
Total non-interest income $ 7,546 $ 7,136 $ 6,264________(1) Primarily consists of revenue from treasury and other investment income, Capital One Shopping, our credit card partnership agreements and commercial mortgage banking revenue.
(2) Includes gains of $86 million, losses of $78 million and gains of $69 million on deferred compensation plan investments for 2023, 2022 and 2021, respectively. These amounts have corresponding offsets in non-interest expense.
Non-interest income increased by $410 million to $7.5 billion in 2023 compared to 2022, primarily driven by higher treasury income due to higher interest rates and higher net interchange fees due to an increase in purchase volume.Provision for Credit LossesOur provision for credit losses in each period is driven by net charge-offs, changes to the allowance for credit losses and changes to the reserve for unfunded lending commitments. We recorded a provision for credit losses of $10.4 billion in 2023, $5.8 billion in 2022 and $(1.9) billion in 2021 .
Our provision for credit losses increased by $4.6 billion to $10.4 billion in 2023 compared to 2022 primarily driven by growth and continued credit normalization in our domestic credit card loan portfolio.
We provide additional information on the provision for credit losses and changes in the allowance for credit losses within “Credit Risk Profile” and “Item 8. Financial Statements and Supplementary Data—Note 4—Allowance for Credit Losses and Reserve for Unfunded Lending Commitments.” For information on the allowance methodology for each of our loan categories, see “Item 8. Financial Statements and Supplementary Data—Note 1—Summary of Significant Accounting Policies.”
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Non-Interest ExpenseTable 4 displays the components of non-interest expense for 2023, 2022 and 2021.Table 4: Non-Interest Expense
Year Ended December 31,(Dollars in millions) 2023 2022 2021Operating Expense:
Salaries and associate benefits (1)$ 9,302 $ 8,425 $ 7,421
Occupancy and equipment 2,160 2,050 2,003
Professional services 1,268 1,807 1,440
Communications and data processing 1,383 1,379 1,262
Amortization of intangibles 82 70 29Other non-interest expense:Bankcard, regulatory and other fee assessments 548 264 199
Collections 353 331 360
Other 1,211 820 985
Total other non-interest expense 2,112 1,415 1,544
Total operating expense $ 16,307 $ 15,146 $ 13,699
Marketing 4,009 4,017 2,871
Total non-interest expense $ 20,316 $ 19,163 $ 16,570_________(1) Includes expenses of $86 million, a benefit of $78 million and expenses of $69 million related to our deferred compensation plan for 2023, 2022 and 2021, respectively. These amounts have corresponding offsets from investments in other non-interest income.
Non-interest expense increased by $1.2 billion to $20.3 billion in the year ended 2023 compared to 2022, primarily driven by increased salaries and associate benefits, the $289 million FDIC special assessment related to certain regional bank failures and the absence of $177 million insurance recoveries net of legal reserve activity received in 2022, partially offset by lower professional services.
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Income TaxesWe recorded an income tax provision of $1.2 billion (19.2% effective income tax rate), $1.9 billion (20.3% effective income tax rate) and $3.4 billion (21.6% effective income tax rate) in 2023, 2022 and 2021, respectively. Our effective tax rate on income from continuing operations varies between periods due, in part, to the impact of changes in pre-tax income and changes in tax credits, tax-exempt income and non-deductible expenses relative to our pre-tax earnings.
Our effective income tax rate in 2023 decreased by 1.1% compared to 2022. We recorded discrete tax expense of $6 million in 2023 and discrete tax benefits of $71 million and $66 million in 2022 and 2021, respectively.
We provide additional information on items affecting our income taxes and effective tax rate in “Item 8. Financial Statements and Supplementary Data—Note 15—Income Taxes.”CONSOLIDATED BALANCE SHEETS ANALYSISTotal assets increased by $23.2 billion to $478.5 billion as of December 31, 2023 from December 31, 2022 primarily driven by increases in our cash balances as we continue to hold elevated levels of liquidity given the market volatility and growth in our credit card loan portfolio.
Total liabilities increased by $17.7 billion to $420.4 billion as of December 31, 2023 from December 31, 2022 primarily driven by deposit growth due to our national consumer banking strategy, which includes our national brand and marketing strategy, cafés, and tech / digital investments, which have enabled us to both deepen and grow our overall customer base.
Stockholders’ equity increased by $5.5 billion to $58.1 billion as of December 31, 2023 from December 31, 2022 primarily driven by net income of $4.9 billion.
The following is a discussion of material changes in the major components of our assets and liabilities during 2023. Period-end balance sheet amounts may vary from average balance sheet amounts due to the timing of normal balance sheet management activities that are intended to support our capital and liquidity positions, our market risk profile and the needs of our customers.Investment SecuritiesOur investment securities portfolio consists of the following: U.S. government-sponsored enterprise or agency (“Agency”) and non-agency residential mortgage-backed securities (“RMBS”), agency commercial mortgage-backed securities (“CMBS”), U.S. Treasury securities and other securities. Agency securities include Government National Mortgage Association (“Ginnie Mae”) guaranteed securities, Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”) issued securities. The carrying value of our investments in Agency and U.S. Treasury securities represented 97% of our total investment securities portfolio as of both December 31, 2023 and 2022.
The fair value of our available for sale securities portfolio increased by $2.2 billion to $79.1 billion as of December 31, 2023 from 2022 primarily driven by increases in fair value due to decreases in interest rates and net purchases. See “Item 8. Financial Statements and Supplementary Data—Note 2—Investment Securities” for more information.
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Loans Held for InvestmentTotal loans held for investment consists of both unsecuritized loans and loans held in our consolidated trusts. Table 5 summarizes, by portfolio segment, the carrying value of our loans held for investment, the allowance for credit losses and net loan balance as of December 31, 2023 and 2022.Table 5: Loans Held for InvestmentDecember 31, 2023 December 31, 2022(Dollars in millions) Loans Allowance Net Loans Loans Allowance Net LoansCredit Card $ 154,547 $ (11,709) $ 142,838 $ 137,730 $ (9,545) $ 128,185
Consumer Banking 75,437 (2,042) 73,395 79,925 (2,237) 77,688
Commercial Banking 90,488 (1,545) 88,943 94,676 (1,458) 93,218
Total $ 320,472 $ (15,296) $ 305,176 $ 312,331 $ (13,240) $ 299,091
Loans held for investment increased by $8.1 billion to $320.5 billion as of December 31, 2023 compared to December 31, 2022 primarily driven by growth in our credit card loan portfolio.
We provide additional information on the composition of our loan portfolio and credit quality in “Credit Risk Profile,” “Consolidated Results of Operations” and “Item 8. Financial Statements and Supplementary Data—Note 3—Loans.”Funding SourcesOur primary source of funding comes from insured retail deposits, as they are a relatively stable and lower cost source of funding. In addition to deposits, we raise funding through the issuance of senior and subordinated notes, securitized debt obligations, federal funds purchased, securities loaned or sold under agreements to repurchase, and Federal Home Loan Banks (“FHLB”) advances secured by certain portions of our loan and securities portfolios.
Table 6 provides the composition of our primary sources of funding as of December 31, 2023 and 2022.Table 6: Funding Sources CompositionDecember 31, 2023 December 31, 2022(Dollars in millions) Amount % of Total Amount % of Total
Deposits:Consumer Banking $ 296,171 74 % $ 270,592 71 %
Commercial Banking 32,712 8 40,808 11Other (1)19,530 5 21,592 6Total deposits348,413 87 332,992 88
Securitized debt obligations 18,043 5 16,973 4
Other debt 31,813 8 31,742 8
Total funding sources $ 398,269 100 % $ 381,707 100 %__________(1) Includes brokered deposits of $18.5 billion and $20.6 billion as of December 31, 2023 and 2022, respectively.
Total deposits increased by $15.4 billion to $348.4 billion as of December 31, 2023 from December 31, 2022 primarily driven by our national banking strategy, which includes our national brand and marketing strategy, cafés, and tech / digital investments, which have enabled us to both deepen and grow our overall customer base.
As of December 31, 2023 and 2022, we held $64.2 billion and $80.7 billion, respectively, of estimated uninsured deposits excluding any intercompany balances. These amounts were primarily comprised of checking and savings deposits. These estimated uninsured deposits comprised approximately 18% and 24% of our total deposits as of December 31, 2023 and 2022, respectively. We estimate our uninsured amounts based on methodologies and assumptions used for our “Consolidated Reports of Condition and Income” (FFIEC 031) filed with the Federal Banking Agencies.
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Table of ContentsSecuritized debt obligations increased by $1.1 billion to $18.0 billion as of December 31, 2023 from December 31, 2022 primarily driven by net issuances in our credit card and auto securitization programs.
Other debt remained substantially flat at $31.8 billion as of December 31, 2023 compared to December 31, 2022.
We provide additional information on our funding sources in “Liquidity Risk Profile” and “Item 8. Financial Statements and Supplementary Data—Note 8—Deposits and Borrowings.”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 make these estimates.Deferred tax assets, net of deferred tax liabilities and valuation allowances, were approximately $7.9 billion as of December 31, 2023, an increase of $280 million from December 31, 2022. The increase in our net deferred tax assets was primarily driven by an increase in our allowance for credit losses, partially offset by an increase in fair value of our available for sale securities and derivatives in 2023.
Our recorded valuation allowance balances were $496 million and $446 million as of December 31, 2023 and 2022, respectively. 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 “Consolidated Results of Operations” and “Item 8. Financial Statements and Supplementary Data—Note 15—Income Taxes.”OFF-BALANCE SHEET ARRANGEMENTSIn 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 “Item 8. Financial Statements and Supplementary Data—Note 5—Variable Interest Entities and Securitizations” and “Item 8. Financial Statements and Supplementary Data—Note 18—Commitments, Contingencies, Guarantees and Others.”
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BUSINESS SEGMENT FINANCIAL PERFORMANCEOur 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 or managed as a part of our existing business segments. Certain activities that are not part of a business segment are included in the Other category, such as the management of our corporate investment portfolio and asset/liability positions performed by our centralized Corporate Treasury group and any residual tax expense or benefit beyond what is assessed to our business segments in order to arrive at the consolidated effective tax rate.
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 revenues 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 is managed by our centralized Corporate Treasury group and 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 is unique to each business segment and acquired business and is based on the composition of assets and liabilities. The funds transfer pricing process considers the interest rate and liquidity risk characteristics of assets and liabilities and off-balance sheet products. Periodically, the methodology and assumptions utilized in the funds transfer pricing process are adjusted to reflect economic conditions and other factors, which may impact the allocation of net interest income to the business segments. 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 on U.S. GAAP. There is no comprehensive authoritative body of guidance for management accounting equivalent to U.S. GAAP; therefore, the managed presentation of our business segment results may not be comparable to similar information provided by other financial services companies. In addition, our individual business segment results should not be used as a substitute for comparable results determined in accordance with U.S. GAAP.We summarize our business segment results for the years ended December 31, 2023, 2022 and 2021 and provide a comparative discussion of these results for 2023 and 2022, as well as changes in our financial condition and credit performance metrics as of December 31, 2023 compared to December 31, 2022. We provide a reconciliation of our total business segment results to our reported consolidated results in “Item 8. Financial Statements and Supplementary Data—Note 17—Business Segments and Revenue from Contracts with Customers.”
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Business Segment Financial PerformanceTable 7 summarizes our business segment results, which we report based on total net revenue (loss) and net income (loss) from continuing operations, for the years ended December 31, 2023, 2022 and 2021. We provide information on the allocation methodologies used to derive our business segment results in “Item 8. Financial Statements and Supplementary Data—Note 17—Business Segments and Revenue from Contracts with Customers.”Table 7 : Business Segment Results
Year Ended December 31,2023 2022 2021Total Net Revenue (Loss) (1)
Net Income
(Loss) (2)
Total Net Revenue (Loss) (1)
Net Income
(Loss) (2)
Total Net Revenue (Loss) (1)
Net Income
(Loss) (2)
(Dollars in millions) Amount % of Total Amount % of Total Amount % of Total Amount % of Total Amount % of Total Amount % of TotalCredit Card $ 25,669 70% $ 3,457 71% $ 22,355 65% $ 4,927 67% $ 18,880 62% $ 7,758 63%
Consumer Banking 9,302 25 2,258 46 9,434 28 2,250 31 9,002 29 3,676 30Commercial Banking (3)3,520 10 691 14 3,590 10 843 11 3,301 11 1,532 12Other (3)(1,704) (5) (1,519) (31) (1,129) (3) (660) (9) (748) (2) (572) (5)
Total $ 36,787 100% $ 4,887 100% $ 34,250 100% $ 7,360 100% $ 30,435 100% $ 12,394 100%__________
(1) Total net revenue (loss) consists of net interest income and non-interest income.
(2) Net income (loss) for our business segments and the Other category is based on income (loss) from continuing operations, net of tax.
(3) Some of our commercial investments generate tax-exempt income, tax credits or other tax benefits. Accordingly, we present our Commercial Banking revenue and yields on a taxable-equivalent basis, calculated using the federal statutory tax rate of 21% and state taxes where applicable, with offsetting reductions to the Other category.63Capital One Financial Corporation (COF)
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Credit Card BusinessThe 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 $3.5 billion, $4.9 billion and $7.8 billion in 2023, 2022 and 2021, respectively.Table 8 summarizes the financial results of our Credit Card business and displays selected key metrics for the periods indicated.
Table 8: Credit Card Business Results
Year Ended December 31, Change(Dollars in millions, except as noted) 2023 2022 2021 2023 vs. 2022 2022 vs. 2021Selected income statement data:Net interest income $ 19,729 $ 16,584 $ 14,074 19% 18%
Non-interest income 5,940 5,771 4,806 3 20Total net revenue (1)25,669 22,355 18,880 15 18
Provision (benefit) for credit losses 8,651 4,265 (902) 103 **
Non-interest expense 12,490 11,627 9,621 7 21
Income from continuing operations before income taxes 4,528 6,463 10,161 (30) (36)
Income tax provision 1,071 1,536 2,403 (30) (36)
Income from continuing operations, net of tax $ 3,457 $ 4,927 $ 7,758 (30) (36)Selected performance metrics:Average loans held for investment $ 141,572 $ 120,392 $ 102,731 18 17Average yield on loans (2)18.54 % 16.21 % 14.60 % 233bps 161bpsTotal net revenue margin (3)18.12 18.47 17.81 (35) 66
Net charge-offs $ 6,472 $ 3,048 $ 1,956 112% 56%
Net charge-off rate 4.57 % 2.53 % 1.90 % 204bps 63bps
Purchase volume $ 620,290 $ 587,283 $ 527,605 6% 11%
(Dollars in millions, except as noted) December 31, 2023 December 31, 2022 ChangeSelected period-end data:Loans held for investment $ 154,547 $ 137,730 12%
30+ day performing delinquency rate 4.61 % 3.46 % 115bps
30+ day delinquency rate 4.62 3.46 116Nonperforming loan rate (4)
0.01 0.01 —Allowance for credit losses $ 11,709 $ 9,545 23%
Allowance coverage ratio 7.58 % 6.93 % 65bps__________(1) We recognize finance charges and fee income on open-ended loans in accordance with the contractual provisions of the credit arrangements and charge off any uncollectible amounts. Total net revenue was reduced by $1.9 billion, $946 million and $629 million in 2023, 2022 and 2021, respectively, for finance charges and fees charged-off as uncollectible.(2) Average yield is calculated based on interest income for the period divided by average loans during the period and does not include any allocations, such as funds transfer pricing.
(3) Total net revenue margin is calculated based on total net revenue for the period divided by average loans during the period.(4) Within our credit card loan portfolio, only certain loans in our international card businesses are classified as nonperforming. See “Nonperforming Loans and Other Nonperforming Assets” for additional information.
** Not meaningful.
64Capital One Financial Corporation (COF)
Table of ContentsKey factors affecting the results of our Credit Card business for 2023 compared to 2022, and changes in financial condition and credit performance between December 31, 2023 and 2022 include the following:
• Net Interest Income: Net interest income increased by $3.1 billion to $19.7 billion in 2023 primarily driven by higher average loan balances and margins.
• Non-Interest Income: Non-interest income increased by $169 million to $5.9 billion in 2023 due to higher net interchange fees due to an increase in purchase volume and gains on our deferred compensation plan investments, partially offset by the absence of a $192 million gain on the sale of partnership loan portfolios in 2022.
• Provision for Credit Losses: Provision for credit losses increased by $4.4 billion to $8.7 billion in 2023 primarily driven by loan growth and continued credit normalization.
• Non-Interest Expense: Non-interest expense increased by $863 million to $12.5 billion in 2023 primarily driven by increased operating expenses, including salaries and associate benefits.Loans Held for Investment:• Period-end loans held for investment increased by $16.8 billion to $154.5 billion as of December 31, 2023 from December 31, 2022 driven by growth across our portfolio.
• Average loans held for investment increased by $21.2 billion to $141.6 billion in 2023 compared to 2022 driven by growth across our portfolio.Net Charge-Off and Delinquency Metrics:• The net charge-off rate increased by 204 bps to 4.57% in 2023 compared to 2022 primarily driven by higher net charge-offs in our domestic credit card loan portfolio.
• The 30+ day delinquency rate increased by 116 bps to 4.62% as of December 31, 2023 from December 31, 2022 primarily driven by higher delinquency inventories.
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Domestic Card BusinessThe Domestic Card business generated net income from continuing operations of $3.3 billion, $4.7 billion and $7.3 billion in 2023, 2022 and 2021, respectively. In 2023, 2022 and 2021, the Domestic Card business accounted for greater than 90% of total net revenue of our Credit Card business.Table 8.1 summarizes the financial results for our Domestic Card business and displays selected key metrics for the periods indicated.
Table 8.1: Domestic Card Business Results
Year Ended December 31, Change(Dollars in millions, except as noted) 2023 2022 2021 2023 vs. 2022 2022 vs. 2021Selected income statement data:Net interest income $ 18,610 $ 15,616 $ 12,916 19% 21%
Non-interest income 5,672 5,363 4,532 6 18Total net revenue (1)24,282 20,979 17,448 16 20
Provision (benefit) for credit losses 8,268 4,020 (868) 106 **
Non-interest expense 11,648 10,827 8,712 8 24
Income from continuing operations before income taxes 4,366 6,132 9,604 (29) (36)
Income tax provision 1,030 1,453 2,266 (29) (36)
Income from continuing operations, net of tax $ 3,336 $ 4,679 $ 7,338 (29) (36)Selected performance metrics:Average loans held for investment $ 135,213 $ 114,506 $ 95,818 18 20Average yield on loans (2)18.46 % 16.07 % 14.49% 239bps 158 bps
Total net revenue margin (3)
17.94 18.28 17.85 (34) 43
Net charge-offs $ 6,164 $ 2,833 $ 1,820 118% 56%
Net charge-off rate 4.56 % 2.47 % 1.90% 209bps 57 bps
Purchase volume $ 605,664 $ 568,752 $ 487,297 6% 17%
(Dollars in millions, except as noted) December 31, 2023 December 31, 2022 ChangeSelected period-end data:Loans held for investment $ 147,666 $ 131,581 12%
30+ day performing delinquency rate 4.61 % 3.43 % 118bps
Allowance for credit losses $ 11,261 $ 9,165 23%
Allowance coverage ratio 7.63 % 6.97 % 66bps__________
(1) We recognize finance charges and fee income on open-ended loans in accordance with the contractual provisions of the credit arrangements and charge off any uncollectible amounts. Finance charges and fees charged off as uncollectible are reflected as a reduction in total net revenue.
(2) Average yield is calculated based on interest income for the period divided by average loans during the period and does not include any allocations, such as funds transfer pricing.
(3) Total net revenue margin is calculated based on total net revenue for the period divided by average loans during the period.** Not meaningful
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 decreased in 2023 compared to 2022 primarily driven by:
• Higher provision for credit losses primarily driven by loan growth and continued credit normalization.
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Table of Contents• Higher non-interest expense primarily driven by increased operating expenses, including salaries and associate benefits.These drivers were partially offset by:• Higher net interest income primarily driven by higher average loan balances and margins.
• Higher non-interest income primarily driven by higher net interchange fees due to an increase in purchase volume and gains on our deferred compensation plan investments.Consumer Banking BusinessThe primary sources of revenue for our Consumer Banking business are net interest income from loans and deposits as well as 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 $2.3 billion in both 2023 and 2022 and $3.7 billion in 2021.
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Table of ContentsTable 9 summarizes the financial results of our Consumer Banking business and displays selected key metrics for the periods indicated.
Table 9: Consumer Banking Business Results
Year Ended December 31, Change(Dollars in millions, except as noted) 2023 2022 2021 2023 vs. 2022 2022 vs. 2021Selected income statement data:Net interest income $ 8,713 $ 8,965 $ 8,448 (3)% 6%
Non-interest income 589 469 554 26 (15)
Total net revenue 9,302 9,434 9,002 (1) 5
Provision (benefit) for credit losses 1,169 1,173 (521) — **
Non-interest expense 5,178 5,312 4,711 (3) 13
Income from continuing operations before income taxes 2,955 2,949 4,812 — (39)
Income tax provision 697 699 1,136 — (38)
Income from continuing operations, net of tax $ 2,258 $ 2,250 $ 3,676 — (39)Selected performance metrics:
Average loans held for investment:Auto $ 76,067 $ 78,772 $ 71,108 (3) 11
Retail banking 1,446 1,663 2,765 (13) (40)
Total consumer banking $ 77,513 $ 80,435 $ 73,873 (4) 9Average yield on loans held for investment (1)7.79 % 7.19% 7.86% 60bps (67) bps
Average deposits $ 285,880 $ 257,089 $ 251,676 11% 2%
Average deposits interest rate 2.59 % 0.72 % 0.32 % 187bps 40 bps
Net charge-offs $ 1,364 $ 854 $ 276 60% **
Net charge-off rate 1.76 % 1.06 % 0.37 % 70bps 69 bps
Auto loan originations $ 26,980 $ 36,965 $ 43,083 (27)% (14)%
(Dollars in millions, except as noted) December 31, 2023 December 31, 2022 ChangeSelected period-end data:
Loans held for investment:Auto $ 74,075 $ 78,373 (5)%
Retail banking 1,362 1,552 (12)
Total consumer banking $ 75,437 $ 79,925 (6)
30+ day performing delinquency rate 6.25 % 5.53 % 72bps
30+ day delinquency rate 7.08 6.18 90
Nonperforming loan rate 1.00 0.79 21Nonperforming asset rate (2)1.09 0.87 22
Allowance for credit losses $ 2,042 $ 2,237 (9)%
Allowance coverage ratio 2.71 % 2.80 % (9)bps
Deposits $ 296,171 $ 270,592 9%_________
(1) Average yield is calculated based on interest income for the period divided by average loans during the period and does not include any allocations, such as funds transfer pricing.
(2) Nonperforming assets primarily consist of nonperforming loans and repossessed assets. The total nonperforming asset rate is calculated based on total nonperforming assets divided by the combined period-end total loans held for investment and repossessed assets.** Not meaningful.
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Key factors affecting the results of our Consumer Banking business for 2023 compared to 2022, and changes in financial condition and credit performance between December 31, 2023 and 2022 include the following:
• Net Interest Income: Net interest income decreased by $252 million to $8.7 billion in 2023 primarily driven by lower margins in our retail banking and auto businesses and lower average loan balances in our auto business, partially offset by higher deposits in our retail banking business.
• Non-Interest Income: Non-interest income increased by $120 million to $589 million in 2023 primarily driven by higher interchange fees from an increase in debit card purchase volume and gains on our deferred compensation plan investments.
• Provision for Credit Losses: Provision for credit losses remained substantially flat at $1.2 billion in 2023.
• Non-Interest Expense: Non-interest expense decreased by $134 million to $5.2 billion in 2023 primarily driven by a lower level of auto originations.Loans Held for Investment:• Period-end loans held for investment decreased by $4.5 billion to $75.4 billion as of December 31, 2023 from December 31, 2022 primarily driven by customer payments outpacing new originations in auto.
• Average loans held for investment decreased by $2.9 billion to $77.5 billion in 2023 compared to 2022 primarily driven by lower auto loan originations.Deposits:• Period-end deposits increased by $25.6 billion to $296.2 billion as of December 31, 2023 from December 31, 2022 primarily driven by our national banking strategy, which includes our national brand and marketing strategy, cafés, and tech / digital investments, which have enabled us to both deepen and grow our overall customer base.Net Charge-Off and Delinquency Metrics:• The net charge-off rate increased by 70 bps to 1.76% in 2023 compared to 2022 primarily driven by higher net charge-offs in our auto loan portfolio.
• The 30+ day delinquency rate increased by 90 bps to 7.08% as of December 31, 2023 compared to December 31, 2022 primarily driven 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 earned from products and services provided to our clients such as advisory services, capital markets and treasury management. Because our Commercial Banking business has loans and investments that generate tax-exempt income, tax credits or other tax benefits, we present the revenues on a taxable-equivalent basis. Expenses primarily consist of the provision for credit losses and operating costs.
Our Commercial Banking business generated net income from continuing operations of $691 million, $843 million and $1.5 billion in 2023, 2022 and 2021, respectively.
69Capital One Financial Corporation (COF)
Table of ContentsTable 10 summarizes the financial results of our Commercial Banking business and displays selected key metrics for the periods indicated.
Table 10: Commercial Banking Business Results
Year Ended December 31, Change(Dollars in millions, except as noted) 2023 2022 2021 2023 vs. 2022 2022 vs. 2021Selected income statement data:Net interest income $ 2,518 $ 2,461 $ 2,153 2% 14%
Non-interest income 1,002 1,129 1,148 (11) (2)Total net revenue (1)3,520 3,590 3,301 (2) 9
Provision (benefit) for credit losses (2)
605 415 (519) 46 **
Non-interest expense 2,011 2,070 1,815 (3) 14
Income from continuing operations before income taxes 904 1,105 2,005 (18) (45)
Income tax provision 213 262 473 (19) (45)
Income from continuing operations, net of tax $ 691 $ 843 $ 1,532 (18) (45)Selected performance metrics:
Average loans held for investment:Commercial and multifamily real estate $ 36,448 $ 36,639 $ 30,980 (1) 18
Commercial and industrial 56,008 54,772 45,146 2 21
Total commercial banking $ 92,456 $ 91,411 $ 76,126 1 20Average yield on loans held for investment (1)(3)6.86 % 4.02 % 2.74 % 284bps 128bps
Average deposits $ 37,411 $ 42,018 $ 42,350 (11)% (1)%
Average deposits interest rate 2.68 % 0.73 % 0.14 % 195bps 59bps
Net charge-offs $ 578 $ 71 $ 2 ** **
Net charge-off (recovery) rate 0.62 % 0.08 % — 54bps 8bps
(Dollars in millions, except as noted) December 31, 2023 December 31, 2022 ChangeSelected period-end data:
Loans held for investment:Commercial and multifamily real estate $ 34,446 $ 37,453 (8)%
Commercial and industrial 56,042 57,223 (2)
Total commercial banking $ 90,488 $ 94,676 (4)
Nonperforming loan rate 0.84 % 0.74 % 10bpsNonperforming asset rate (4)0.84 0.74 10Allowance for credit losses (2)$ 1,545 $ 1,458 6%
Allowance coverage ratio 1.71% 1.54% 17bps
Deposits $ 32,712 $ 40,808 (20)%
Loans serviced for others 52,341 51,918 1__________
(1) Some of our commercial investments generate tax-exempt income, tax credits or other tax benefits. Accordingly, we present our Commercial Banking revenue and yields on a taxable-equivalent basis, calculated using the federal statutory tax rate of 21% and state taxes where applicable, with offsetting reductions to the Other category.(2) The provision for losses on unfunded lending commitments is included in the provision for credit losses in our consolidated statements of income and the related reserve is included in other liabilities on our consolidated balance sheets. Our reserve for unfunded lending commitments totaled $158 million $218 million and $165 million as of December 31, 2023, 2022 and 2021, respectively.(3) Average yield is calculated based on interest income for the period divided by average loans during the period and does not include any allocations, such as funds transfer pricing.
(4) Nonperforming assets consist of nonperforming loans and other foreclosed assets. The total nonperforming asset rate is calculated based on total nonperforming assets divided by the combined period-end total loans held for investment and other foreclosed assets.
** Not meaningful.70
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Key factors affecting the results of our Commercial Banking business for 2023 compared to 2022, and changes in financial condition and credit performance between December 31, 2023 and 2022 include the following:
• Net Interest Income: Net interest income remained substantially flat at $2.5 billion in 2023 compared to 2022.
• Non-Interest Income: Non-interest income decreased by $127 million to $1.0 billion in 2023 primarily driven by lower activity in our multifamily agency lending business.
• Provision for Credit Losses: Provision for credit losses increased by $190 million to $605 million in 2023 primarily driven by our office real estate portfolio.
• Non-Interest Expense: Non-interest expense remained substantially flat at $2.0 billion in 2023 compared to 2022.Loans Held for Investment:• Period-end loans held for investment decreased by $4.2 billion to $90.5 billion as of December 31, 2023 from December 31, 2022 primarily driven by customer payments outpacing originations.
• Average loans held for investment increased by $1.0 billion to $92.5 billion in 2023 compared to 2022 primarily driven by growth across our loan portfolio.Deposits:• Period-end deposits decreased by $8.1 billion to $32.7 billion as of December 31, 2023 from December 31, 2022 primarily driven by intentional reduction in lower margin deposit balances.Net Charge-Off and Nonperforming Metrics:• The net charge-off rate increased by 54 bps to 0.62% in 2023 primarily driven by higher charge-offs in our office real estate portfolio.
• The nonperforming loan rate increased by 10 bps to 0.84% as of December 31, 2023 compared to December 31, 2022 primarily driven by credit deterioration in our office real estate portfolio.Other Category
Other includes unallocated amounts related to our centralized Corporate Treasury group activities, such as management of our corporate investment securities portfolio, asset/liability management and oversight of our funds transfer pricing process. 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 of ContentsTable 11 summarizes the financial results of our Other category for the periods indicated.
Table 11: Other Category Results
Year Ended December 31, Change(Dollars in millions) 2023 2022 2021 2023 vs. 2022 2022 vs. 2021Selected income statement data:Net interest loss $ (1,719) $ (896) $ (504) 92% 78%
Non-interest income (loss) 15 (233) (244) ** (5)Total net loss (1)(1,704) (1,129) (748) 51 51
Provision (benefit) for credit losses 1 (6) (2) ** **
Non-interest expense 637 154 423 ** (64)
Loss from continuing operations before income taxes (2,342) (1,277) (1,169) 83 9
Income tax benefit (823) (617) (597) 33 3
Loss from continuing operations, net of tax $ (1,519) $ (660) $ (572) 130 15__________
(1) Some of our commercial investments generate tax-exempt income, tax credits or other tax benefits. Accordingly, we present our Commercial Banking revenue and yields on a taxable-equivalent basis, calculated using the federal statutory tax rate of 21% and state taxes where applicable, with offsetting reductions to the Other category.
** Not meaningful.Loss from continuing operations increased by $859 million to a loss of $1.5 billion in 2023 compared to 2022 primarily driven by higher funding costs and increased non-interest expense largely driven by the $289 million FDIC special assessment charge recognized in the fourth quarter of 2023, partially offset by higher treasury income in non-interest income driven by higher market interest rates.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 “Item 8. Financial Statements and Supplementary Data—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
• Goodwill
• Fair value
• Customer rewards reserve
We evaluate our critical accounting estimates and judgments on an ongoing basis and update them as necessary, based on changing conditions.72
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Table of ContentsLoan Loss ReservesWe maintain an allowance for credit losses that represents management’s current estimate of expected credit losses inherent in our credit card, consumer banking and commercial banking loans held for investment portfolios as of each balance sheet date. We also reserve for the uncollectible portion of finance charges and fees related to credit card loan receivables in the allowance for credit losses consistent with the methodology we use to estimate the allowance for credit losses on the principal portion of our credit card loan receivables. We also separately reserve for unfunded lending commitments that are not unconditionally cancellable. We build our allowance for credit losses and reserve for unfunded lending commitments through the provision for credit losses, which is driven by charge-offs, changes in the allowance for credit losses and changes in the reserve for unfunded lending commitments. The allowance for credit losses was $15.3 billion as of December 31, 2023, compared to $13.2 billion as of December 31, 2022.Our allowance for credit losses and reserve for unfunded lending commitments utilize models to derive a quantitative estimate of credit losses that is supplemented with additional qualitative considerations to capture risks and uncertainties not included in the quantitative result. Our estimate of expected credit losses, for all loan and unfunded lending commitments, includes a reasonable and supportable forecast period of one year and then reverts over a one-year period to historical losses at each relevant loss component of the estimate. We use externally produced consensus estimates as inputs for our forward-looking macroeconomic forecast and consider other forecasts and sources of uncertainty to develop the quantitative component. This quantitative result is then supplemented qualitatively by management for economic uncertainty, including the consideration of alternative macroeconomic scenarios, changes and trends in loan portfolios that may not be captured in the quantitative component. These adjustments represent management’s judgment of the imprecision and risks inherent in the processes and assumptions used in establishing the allowance for credit losses.We have an established process, using analytical tools and management judgment, to determine our allowance for credit losses. Significant management judgment is required to determine the relevant information and estimation methods used to arrive at our best estimate of lifetime credit losses. Establishing the allowance on a quarterly basis involves evaluating and forecasting both credit and macroeconomic variables. The macroeconomic forecast used to inform both quantitative and qualitative components of our allowance for credit losses estimate is sensitive to certain variables, such as the U.S. Unemployment Rate, and the U.S. Real Gross Domestic Product (“U.S. Real GDP”) Growth Rate assumptions. Our December 31, 2023 allowance assumes that the quarterly average U.S. unemployment rate gradually increases to approximately 4.4% by the fourth quarter of 2024 and annual U.S. Real GDP increases 1.0% in 2024.
In addition to macroeconomic factors, many credit factors inform our allowance for credit losses, including, but not limited to, historical loss and recovery experience, recent trends in delinquencies and charge-offs, risk ratings, the impact of bankruptcy filings, the value of collateral underlying secured loans, account seasoning, changes in our credit evaluation, underwriting and collection management policies, seasonality, credit bureau scores, current general economic conditions, changes in the legal and regulatory environment and uncertainties in forecasting and modeling techniques used in estimating our allowance for credit losses.We have a governance framework supported by processes and controls intended to ensure that our estimate of the allowance for credit losses is appropriate. Our governance framework provides for oversight of methods, models, qualitative adjustments, process controls and results. At least quarterly, representatives from the Finance and Risk Management organizations review and assess our allowance methodologies, key assumptions and the appropriateness of the allowance for credit losses. Groups independent of our estimation functions participate in the review and validation process. Tasks performed by these groups include periodic review of the rationale for and quantification of inputs requiring judgment as well as adjustments to results.
We have model policies, established by an independent Model Risk Office, which govern the validation of models and related supporting documentation to ensure the appropriate use of models for estimating credit losses. The Model Risk Office validates all models and requires ongoing monitoring of their performance.
In addition to the allowance for credit losses, on a quarterly basis, we review and assess our estimate of expected losses related to unfunded lending commitments that are not unconditionally cancellable which are generally in our Commercial Banking business. The factors impacting our assessment generally align with those considered in our evaluation of the allowance for credit losses for the Commercial Banking business. The reserve for losses on unfunded lending commitments is included in other liabilities on our consolidated balance sheets and changes to it are recorded through the provision for credit losses in our consolidated statements of income.73
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Although we examine a variety of externally available data, as well as our internal loan performance data, to determine our allowance for credit losses and reserve for unfunded lending commitments, our estimation process is subject to risks and uncertainties, including a reliance on historical loss and trend information that may not be representative of current conditions and indicative of future performance as well as economic forecasts that may not align with actual future economic conditions. Accordingly, our actual credit loss experience may not be in line with our expectations. We provide additional information on the methodologies and key assumptions used in determining our allowance for credit losses for each of our loan portfolio segments in “Item 8. Financial Statements and Supplementary Data—Note 1—Summary of Significant Accounting Policies.” We provide information on the components of our allowance, disaggregated by operating segment, and changes in our allowance in “Item 8. Financial Statements and Supplementary Data—Note 4—Allowance for Credit Losses and Reserve for Unfunded Lending Commitments.”GoodwillGoodwill represents the excess of the fair value of the consideration transferred, 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 $15.1 billion and $14.8 billion as of December 31, 2023 and 2022, respectively. We did not recognize any goodwill impairment in 2023 or 2022. See “Item 8. Financial Statements and Supplementary Data—Note 6—Goodwill and Other Intangible Assets” for additional information.We perform our goodwill impairment test annually on October 1 at a reporting unit level. We are also required to test goodwill for impairment whenever events or circumstances indicate it is more-likely-than-not that an impairment may have occurred. An impairment of a reporting unit’s goodwill is determined based on the amount by which the reporting unit’s carrying amount exceeds its fair value, limited to the amount of goodwill allocated to the reporting unit. We have four reporting units: Credit Card, Auto Finance, Other Consumer Banking, and Commercial Banking.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 other intangibles balances. Consolidated stockholder’s equity in excess of the sum of all reporting units capital requirements that is not identified for future capital needs, such as dividends, share buybacks, or other strategic initiatives, is allocated to the reporting units and the Other category and assumed to be distributed to equity holders in future periods.
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 calculate the fair value of our reporting units using a discounted cash flow (“DCF”) calculation, a form of the income approach. This DCF calculation uses projected cash flows based on each reporting unit’s internal forecast and the perpetuity growth method to calculate terminal values. Our DCF calculation requires 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 are then discounted using discount rates based on our external cost of capital with adjustments for the risk inherent in each reporting unit. Discount rates used for our reporting units ranged from 8.3% to 12.4%, and we applied a terminal year long-term growth rate of 3.8% to all reporting units. The reasonableness of our DCF calculation is assessed by reference to a market-based approach using comparable market multiples and recent market transactions where available. The usefulness of market data is inherently limited due to the size and scope of our operations compared to most peer institutions and recent market transactions. The results of the 2023 annual impairment test indicated that the estimated fair values of the reporting units exceeded their carrying amounts by between 12% and 121%. We also compare the aggregate fair values of our reporting units to our market capitalization. Our assessment considers the level of premium expected to assume control of the Company in a market transaction including anticipated cost savings and other synergies that would be realized in a hypothetical transaction.
The results of the 2023 annual goodwill impairment test for our Commercial Banking reporting unit concluded that, while the estimated fair value of this reporting unit exceeded its carrying amount, the percentage by which the estimated fair value of this reporting unit exceeded its carrying amount had decreased to 12% from 17% in the 2022 annual impairment test. The assumptions leveraged in the valuation of each reporting unit, including the Commercial Banking reporting unit, and the related risk of changes in those assumptions are described further below.
Assumptions used in estimating the fair value of a reporting unit are judgmental and inherently uncertain. A change in the economic conditions of a reporting unit, such as declines in business performance as a result of industry or macroeconomic trends or changes in our strategy, adverse impacts to loan or deposit growth trends, decreases in revenue, increases in expenses,
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Table of Contentsdeterioration in a significant loan portfolio, increases in credit losses, increases in capital requirements, deterioration of market conditions, declines in long-term growth expectations, an increase in disposition activity, 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. We perform sensitivity analyses around certain assumptions in order to assess the reasonableness of the assumptions and the resulting estimated fair values.We have a governance framework supported by processes and controls intended to ensure that the accounting and disclosure for goodwill is appropriate. Our governance framework provides for oversight of assumptions, forecast inputs, methods, process controls and results.
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 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, DCF 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 “Item 8. Financial Statements and Supplementary Data—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.
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Table of ContentsGroups 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 model policies, established by an independent Model Risk Office, which govern 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 manageme nt. There were no disputes escalated to the VAC for the years ended December 31, 2023 and 2022.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 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 judgment regarding 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 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 the weighted-average redemption cost during the previous twelve months, adjusted as appropriate for recent changes in redemption costs, including changes related to 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. While the rewards liability is sensitive to changes in assumptions for redemption rates and costs and involves management judgment, we believe portfolio characteristics and historical performance are the best indication of future reward redemption behavior and are the primary basis for our estimate. We recognized customer rewards expense of $8.2 billion, $7.6 billion and $6.4 billion in 2023, 2022 and 2021, respectively. Our customer rewards reserve, which is included in other liabilities on our consolidated balance sheets, totaled $7.4 billion and $6.8 billion as of December 31, 2023 and 2022, respectively.
We have a governance framework supported by processes and controls that are intended to ensure that our rewards liability estimate is appropriate and reliable. Our governance framework provides for oversight of assumptions, inputs, methods, process controls and results. Additional controls are performed to ensure all underlying data used to derive the rewards liability is complete and accurate.
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Table of ContentsACCOUNTING CHANGES AND DEVELOPMENTSAccounting Standards Issued but Not Adopted as of December 31, 2023Standard Guidance Adoption Timing and Financial Statement Impacts
Income Tax Disclosures
Accounting Standards Update (“ASU”) No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures
Issued December 2023Requires entities to provide additional information in the income tax rate reconciliation and make additional disclosures about income taxes paid. Effective January 1, 2025, with early adoption permitted, using either the prospective or retrospective transition method.
We plan to adopt this standard on its effective date using a prospective transition method. We expect such adoption to result in additional information being included in our income tax footnote and consolidated statements of cash flows.
Segment Reporting Disclosures
ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures
Issued November 2023
Requires disclosure of incremental segment information on an annual and interim basis. Effective for annual periods ending December 31, 2024 and interim periods within fiscal years beginning January 1, 2025, with early adoption permitted, using a retrospective transition method.
We plan to adopt this standard on its effective date using a retrospective transition method. Such adoption may result in additional information being included in our business segment footnote.
Tax Credit Investments
ASU No. 2023-02, Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method
Issued March 2023
Permits entities to elect to account for their tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method, if certain criteria are met. Previously, only Low-Income Housing Tax Credit investments were eligible for application of the proportional amortization method.
This standard became effective on January 1, 2024.
We adopted this guidance in the first quarter of 2024 using a modified retrospective method. Adoption of this standard will not have a material impact on our consolidated financial statements.
See “Item 8. Financial Statements and Supplementary Data—Note 1—Summary of Significant Accounting Policies” for information on the accounting standards we adopted in 2023.
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CAPITAL MANAGEMENT
The level and composition of our capital are determined by multiple factors, including our consolidated regulatory capital requirements as described in more detail below and internal risk-based capital assessments such as internal stress testing. 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
The Company and the Bank are subject to the Basel III Capital Rules. The Basel III Capital Rules implement certain capital requirements published by the Basel Committee, along with certain provisions of the Dodd-Frank Act and other capital provisions.
As a BHC with total consolidated assets of at least $250 billion but less than $700 billion and not exceeding any of the applicable risk-based thresholds, the Company is a Category III institution under the Basel III Capital Rules.
The Bank, as a subsidiary of a Category III institution, is a Category III bank. Moreover, the Bank, as an insured depository institution, is subject to PCA capital regulations.
Basel III and U.S. Capital Rules
Under the Basel III Capital Rules, we must maintain a minimum CET1 capital ratio of 4.5%, a Tier 1 capital ratio of 6.0% and a total capital ratio of 8.0%, in each case in relation to risk-weighted assets. In addition, we must maintain a minimum leverage ratio of 4.0% and a minimum supplementary leverage ratio of 3.0%. We are also subject to the capital conservation buffer requirement and countercyclical capital buffer requirement, each as described below. Our capital and leverage ratios are calculated based on the Basel III standardized approach framework.
We have elected to exclude certain elements of AOCI from our regulatory capital as permitted for a Category III institution. For information on the recognition of AOCI in regulatory capital under the proposed changes to the Basel III Capital Rules, see “Part I—Item 1. Business—Supervision and Regulation—Prudential Regulation of Banking—Capital and Stress Testing Regulation—Basel III Finalization Proposal.”
G-SIBs that are based in the U.S. are subject to an additional CET1 capital requirement known as the “G-SIB Surcharge.” We are not a G-SIB based on the most recent available data and thus we are not subject to a G-SIB Surcharge.
Stress Capital Buffer RuleThe Basel III Capital Rules require banking institutions to maintain a capital conservation buffer, composed of CET1 capital, above the regulatory minimum ratios. Under the Stress Capital Buffer Rule, the Company’s “standardized approach capital conservation buffer” includes its stress capital buffer requirement (as described below), any G-SIB Surcharge (which is not applicable to us) and the countercyclical capital buffer requirement (which is currently set at 0%) . Any 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 Company’s stress capital buffer requirement is recalibrated every year based on the Company’s supervisory stress test results. In particular, the Company’s stress capital buffer requirement equals, subject to a floor of 2.5%, the sum of (i) the difference between the Company’s starting CET1 capital ratio and its lowest projected CET1 capital ratio under the severely adverse scenario of the Federal Reserve’s supervisory stress test plus (ii) the ratio of the Company’s projected four quarters of common stock dividends (for the fourth to seventh quarters of the planning horizon) to the projected risk-weighted assets for the quarter in which the Company’s projected CET1 capital ratio reaches its minimum under the supervisory stress test.Based on the Company’s 2022 supervisory stress test results, the Company’s stress capital buffer requirement for the period beginning on October 1, 2022 through September 30, 2023 was 3.1%. Therefore, the Company’s minimum capital requirements plus the standardized approach capital conservation buffer for CET1 capital, Tier 1 capital and total capital ratios under the stress capital buffer framework were 7.6%, 9.1% and 11.1%, respectively, for the period from October 1, 2022 through September 30, 2023.
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Table of ContentsBased on the Company’s 2023 supervisory stress test results, the Company’s stress capital buffer requirement for the period beginning on October 1, 2023 through September 30, 2024 is 4.8%. Therefore, the Company’s minimum capital requirements plus the standardized approach capital conservation buffer for CET1 capital, Tier 1 capital and total capital ratios under the stress capital buffer framework are 9.3%, 10.8% and 12.8%, respectively, for the period from October 1, 2023 through September 30, 2024.
The Stress Capital Buffer Rule does not apply to the Bank. Pursuant to the OCC’s capital regulations, which are only applicable to the Bank, the capital conservation buffer for the Bank continues to be fixed at 2.5%. Accordingly, the Bank’s minimum capital requirements plus its capital conservation buffer for CET1 capital, Tier 1 capital and total capital ratios are 7.0%, 8.5% and 10.5%, respectively.
If the Company or the Bank fails to maintain its capital ratios above the minimum capital requirements plus the applicable capital conservation buffer requirements, it will face increasingly strict automatic limitations on capital distributions and discretionary bonus payments to certain executive officers.
As of December 31, 2023 and 2022, respectively, the Company and the Bank eac h exceeded the minimum capital requirements and the capital conservation buffer requirements applicable to them, and the Company and the Bank were each “ well-capitalized. ” The “well-capitalized” standards applicable to the Company are established in the Federal Reserve’s regulations, and the “well-capitalized” standards applicable to the Bank are established in the OCC’s PCA capital requirements.CECL Transition Rule
The Federal Banking Agencies adopted the CECL Transition Rule that provides banking institutions an optional five-year transition period to phase in the impact of the CECL standard on their regulatory capital, the CECL Transition Election. We adopted the CECL standard (for accounting purposes) as of January 1, 2020, and made the CECL Transition Election (for regulatory capital purposes) in the first quarter of 2020. Therefore, the applicable amounts presented in this Report reflect such election.Pursuant to the CECL Transition Rule, a banking institution could elect to delay the estimated impact of adopting CECL on its regulatory capital through December 31, 2021 and then phase in the estimated cumulative impact from January 1, 2022 through December 31, 2024. For the “day 2” ongoing impact of CECL during the initial two years, the Federal Banking Agencies used a uniform “scaling factor” of 25% as an approximation of the increase in the allowance under the CECL standard compared to the prior incurred loss methodology. Accordingly, from January 1, 2020 through December 31, 2021, electing banking institutions were permitted to add back to their regulatory capital an amount equal to the sum of the after-tax “day 1” CECL adoption impact and 25% of the increase in the allowance since the adoption of the CECL standard. From January 1, 2022 through December 31, 2024, the after-tax “day 1” CECL adoption impact and the cumulative “day 2” ongoing impact are being phased in to regulatory capital at 25% per year. The following table summarizes the capital impact delay and phase in period on our regulatory capital from years 2020 to 2025.Capital Impact Delayed Phase In Period
2020 2021 2022 2023 2024 2025
“Day 1” CECL adoption impact Capital impact delayed to 2022 25% Phased In 50% Phased In 75% Phased In Fully Phased In
Cumulative “day 2” ongoing impact 25% scaling factor as an approximation of the increase in allowance under CECLAs of December 31, 2021, we added back an aggregate amount of $2.4 billion to our regulatory capital pursuant to the CECL Transition Rule. Consistent with the rule, we have phased in 50% of this amount as of December 31, 2023. The remaining $1.2 billion will be phased in on January 1, 2024 and 2025 at $600 million per year. As of December 31, 2023, the Company’s CET1 capital ratio, reflecting the CECL Transition Rule, was 12.9% and would have been 12.6% excluding the impact of the CECL Transition Rule (or “on a fully phased-in basis”).
Market Risk Rule
The “Market Risk Rule” supplements the Basel III Capital Rules by requiring institutions subject to the rule to adjust their risk-based capital ratios to reflect the market risk in their trading book. The Market Risk Rule generally applies to institutions with
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Table of Contentsaggregate trading assets and liabilities equal to 10% or more of total assets or $1 billion or more. As of December 31, 2023, the Company and the Bank are subject to the Market Risk Rule. See “Market Risk Profile” below for additional information.For the description of the regulatory capital rules to which we are subject, including recent proposed amendments to these rules under the Basel III Finalization Proposal, see “Part I—Item 1. Business—Supervision and Regulation.”Table 12 provides a comparison of our regulatory capital ratios under the Basel III standardized approach, the regulatory minimum capital adequacy ratios and the applicable well-capitalized standards as of December 31, 2023 and 2022.Table 12: Capital Ratios Under Basel III (1)December 31, 2023 December 31, 2022Ratio Minimum Capital Adequacy Well- Capitalized Ratio Minimum Capital Adequacy Well- Capitalized
Capital One Financial Corp:
Common equity Tier 1 capital (2)12.9 % 4.5 % N/A 12.5 % 4.5 % N/ATier 1 capital (3)14.2 6.0 6.0 % 13.9 6.0 6.0 %Total capital (4)16.0 8.0 10.0 15.8 8.0 10.0Tier 1 leverage (5)11.2 4.0 N/A 11.1 4.0 N/ASupplementary leverage (6)9.6 3.0 N/A 9.5 3.0 N/ACONA:
Common equity Tier 1 capital (2)13.1 4.5 6.5 13.1 4.5 6.5Tier 1 capital (3)13.1 6.0 8.0 13.1 6.0 8.0Total capital (4)14.3 8.0 10.0 14.4 8.0 10.0Tier 1 leverage (5)10.3 4.0 5.0 10.5 4.0 5.0Supplementary leverage (6)8.8 3.0 N/A 9.0 3.0 N/A__________
(1) Capital requirements that are not applicable are denoted by “N/A.”(2) CET1 capital ratio is a regulatory capital measure calculated based on CET1 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 of ContentsTable 13 presents regulatory capital under the Basel III standardized approach and regulatory capital metrics as of December 31, 2023 and 2022.Table 13: Regulatory Risk-Based Capital Components and Regulatory Capital Metrics(Dollars in millions) December 31, 2023 December 31, 2022Regulatory capital under Basel III standardized approachCommon equity excluding AOCI $ 62,710 $ 59,450Adjustments and deductions:
AOCI, net of tax (1)27 (17)
Goodwill, net of related deferred tax liabilities (14,811) (14,540)
Other intangible and deferred tax assets, net of deferred tax liabilities (311) (162)
Common equity Tier 1 capital 47,615 44,731Tier 1 capital instruments 4,845 4,845Tier 1 capital 52,460 49,576
Tier 2 capital instruments 1,936 2,585
Qualifying allowance for credit losses 4,728 4,553
Tier 2 capital 6,664 7,138
Total capital $ 59,124 $ 56,714Regulatory capital metricsRisk-weighted assets $ 369,206 $ 357,920Adjusted average assets (2)467,553 444,704Total leverage exposure (3)546,909 522,136__________(1) Excludes certain components of AOCI in accordance with rules applicable to Category III institutions. See “ Capital Management—Basel III and United States Capital Rules” in this Report.(2) Includes on-balance sheet asset adjustments subject to deduction from Tier 1 capital under the Basel III Capital Rules.
(3) Reflects on- and off-balance sheet amounts for the denominator of the supplementary leverage ratio as set forth by the Basel III Capital Rules.
Capital Planning and Regulatory Stress TestingWe repurchased $150 million of shares of our common stock during the fourth quarter of 2023 and $600 million of shares of our common stock during the year ended 2023.
On July 27, 2023, the Federal Reserve announced individual stress capital buffer requirements for all large banking institutions, including the Company. The Company’s final stress capital buffer requirement for the period beginning on October 1, 2023 through September 30, 2024 is 4.8%. Therefore, the Company’s minimum capital requirements plus the standardized approach capital conservation buffer for CET1 capital, Tier 1 capital and total capital ratios under the stress capital buffer framework are 9.3%, 10.8% and 12.8%, respectively, for the period from October 1, 2023 through September 30, 2024.For the description of the regulatory capital planning rules and stress testing requirements to which we are subject, see “Part I—Item 1. Business—Supervision and Regulation.”81Capital One Financial Corporation (COF)
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Dividend Policy and Stock PurchasesFor the year ended December 31, 2023, we declared and paid common stock dividends of $935 million, or $2.40 per share, and preferred stock dividends of $228 million. Pursuant to the terms of the Merger Agreement, we are restricted from paying quarterly cash dividends on our common stock in excess of $0.60 per share per quarter until the Transaction is closed.
The following table summarizes the dividends paid per share on our various preferred stock series in each quarter of 2023.Table 14: Preferred Stock Dividends Paid Per ShareSeries Description Issuance Date Per Annum Dividend Rate Dividend Frequency 2023Q4 Q3 Q2 Q1
Series I 5.000% Non-Cumulative September 11, 2019 5.000% Quarterly $12.50 $12.50 $12.50 $12.50
Series J 4.800% Non-Cumulative January 31, 2020 4.800 Quarterly 12.00 12.00 12.00 12.00
Series K 4.625% Non-Cumulative September 17, 2020 4.625 Quarterly 11.56 11.56 11.56 11.56
Series L 4.375% Non-Cumulative May 4, 2021 4.375 Quarterly 10.94 10.94 10.94 10.94
Series M 3.950% Fixed Rate Reset Non-Cumulative June 10, 2021 3.950% through 8/31/2026; resets 9/1/2026 and every subsequent 5 year anniversary at 5-Year Treasury Rate +3.157% Quarterly 9.88 9.88 9.88 9.88
Series N 4.250% Non-Cumulative July 29, 2021 4.250 Quarterly 10.63 10.63 10.63 10.63The declaration and payment of dividends to our stockholders, as well as the amount thereof, are subject to the discretion of our Board of Directors and depend upon our results of operations, financial condition, capital levels, cash requirements, future prospects, regulatory requirements and other factors deemed relevant by the Board of Directors. As a BHC, our ability to pay dividends is largely dependent upon the receipt of dividends or other payments from our subsidiaries. The Bank is subject to regulatory restrictions that limit its ability to transfer funds to our BHC. As of December 31, 2023, funds available for dividend payments from the Bank were $5.2 billion. There can be no assurance that we will declare and pay any dividends to stockholders.
We repurchased $150 million of shares of our common stock during the fourth quarter of 2023 and $600 million of shares of our common stock during the year ended 2023. 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. The Board authorized stock repurchase program does not include specific price targets, may be executed through open market purchases, tender offers, or privately negotiated transactions, including utilizing Rule 10b5-1 programs, does not have a set expiration date and may be suspended at any time. For additional information on dividends and stock repurchases, see “Capital Management—Capital Planning and Regulatory Stress Testing,” “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities—Unregistered Sales of Equity Securities and Use of Proceeds” and “Part I—Item 1. Business—Supervision and Regulation—Funding and Dividends from Subsidiaries.”
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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.
First Line
Identifies and Owns Risk
Second Line
Advises & Challenges First Line
Third Line
Provides Independent AssuranceDefinition Business areas that are accountable for risk and responsible for: i) generating revenue or reducing expenses; ii) supporting the business to provide products or services to customers; or iii) providing technology services for the first line. Independent Risk Management (“IRM”) and Support Functions (e.g., Human Resources, Accounting, Legal) that provide support services to the Company. Internal Audit and Credit ReviewKey Responsibilities Identify, assess, measure, monitor, control, and report the risks associated with their business. IRM: Independently oversees and assesses risk taking activities for the first line of defense.
Support Functions: Centers of specialized expertise that provide support services to the enterprise. Provides independent and objective assurance to the Board of Directors and senior management that the systems and governance processes are designed and working as intended.83Capital One Financial Corporation (COF)
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Our Framework sets consistent expectations for risk management across the Company and consists of the following nine elements:
Governance and Accountability
Strategy and Risk Alignment
Risk Identification
Assessment, Measurement and Response
Monitoring and Testing
Aggregation, Reporting and Escalation
Capital and Liquidity Management (including Stress Testing)
Risk Data and Enabling Technology
Culture and Talent Management
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.
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 considers 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 identify new and emerging risks, including concentration of risk, 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.84Capital One Financial Corporation (COF)
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Assessment, Measurement and Response
Management assesses risks associated with our activities. Risks identified are assessed to understand the severity of each risk and likelihood of occurrence under both normal and stressful conditions. 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 determines the appropriate risk response. Risks may be mitigated or accepted. Actions taken to respond to the risk 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, including established concentration risk limits. 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 required to evaluate 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.
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. Our risk aggregation processes are designed to aggregate risk information from lower levels of the business hierarchy to high levels and to aggregate risk information to determine material risk themes.
Material risks, new or 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 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.
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.
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 are core Governance, Risk Management and Compliance systems which are 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.85Capital One Financial Corporation (COF)
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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 execute appropriate risk management across the enterprise.
Risk Categories
We apply our Framework to protect the Company from the major categories of risk that we are exposed to through our business activities. We have seven major categories of risk as noted below.
Major Categories of Risk
Compliance The risk to current or anticipated earnings or capital arising from violations of laws, rules or regulations. Compliance risk can also arise from nonconformance with prescribed practices, internal policies and procedures, contractual obligations or ethical standards that reinforce those laws, rules or regulations
Credit The risk to current or projected financial condition and resilience arising from an obligor’s failure to meet the terms of any contract with the Company or otherwise perform as agreed
Liquidity 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
Market 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
Operational The risk of loss, capital impairment, adverse customer experience or reputational impact resulting from failure to comply with policies and procedures, failed internal processes or systems, or from external events
Reputation The risk to market value, recruitment and retention of talented associates and maintenance of a loyal customer base due to the negative perceptions of our internal and external constituents regarding our business strategies and activities
Strategic 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 that can affect that position; lack of responsiveness to these conditions; strategic decisions to change the Company’s scale, market position or operating model; or, failure to appropriately consider implementation risks inherent in the Company’s strategy
We provide an overview of how we manage our seven 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.86Capital One Financial Corporation (COF)
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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 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 Credit and Financial Risk Officer, in conjunction with the 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 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 Credit and Financial 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.Liquidity Risk Management
We recognize that liquidity risk is embedded within our day-to-day and strategic decisions. Liquidity is essential for banks to meet customer withdrawals, account for balance sheet changes, and provide funding for growth. We have acquired and built deposit gathering businesses and actively monitor our funding concentration. We manage our liquidity risk, which is driven by both internal and external factors, centrally and establish quantitative risk limits to continually assess our liquidity adequacy.The Chief Credit and Financial Risk Officer, in conjunction with the Head of Liquidity, Market and Capital Risk Oversight, 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. Results are reported to the Asset Liability Committee monthly and to the Risk Committee no less than quarterly. We also continuously monitor market and economic conditions to evaluate emerging stress conditions and to develop appropriate action plans in accordance with our Contingency Funding Plan (“CFP”) and our Recovery Plan.We use internal and regulatory stress testing and the evaluation of other balance sheet metrics within our Liquidity Framework to confirm we maintain a fortified balance sheet. We rely on a combination of stable and diversified funding sources, along with a stockpile of liquidity reserves, to effectively manage our liquidity risk. We maintain a sizable liquidity reserve of cash and cash equivalents, high-quality unencumbered securities and investment securities and certain loans that are either readily-marketable or pledgeable. We also continue to maintain access to secured and unsecured debt markets through regular issuance.Market Risk Management
We recognize that interest rate and foreign exchange risk are present in our business due to the nature of our assets and liabilities. 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
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Table of Contentsprincipally driven by balance sheet interest rate risk, centrally and establish quantitative risk limits to monitor and control our exposure.The Chief Credit and Financial Risk Officer, in conjunction with the Head of Liquidity, Market, and Capital Risk Oversight, is responsible for the establishment of market risk management policies and standards for the governance and monitoring of market risk at a corporate level. The market risk position is calculated and analyzed against pre-established limits. We use industry accepted techniques to analyze and measure interest rate and foreign exchange risk and we perform sensitivity analysis to identify our risk exposures under a broad range of scenarios. Results are reported to the Asset Liability Committee monthly and to the Risk Committee no less than quarterly.
Management is authorized to utilize financial instruments as outlined in our policy to actively manage market risk exposure. 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.
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, in collaboration with the CTRO, is responsible for establishing and overseeing our Operational Risk Management Program. 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 and Technology Risk Management enforce these practices and delivers reporting of operational risk results to senior business leaders, the executive committee and the Board of Directors. For additional information on how we manage cybersecurity and technology risk, see “Part I—Item 1C. Cybersecurity” of this Report.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 recognize that strategic risk is present within our business and the Company’s strategy. We monitor risks for the impact on current or future earnings, capital growth or enterprise value arising from changes to the Company’s competitive and market positions, including as a result of evolving forces in the industry. Additionally, we monitor timely and effective responsiveness to these conditions, strategic decisions that impact the Company’s scale, market position or operating model and failure to appropriately consider implementation risks in the Company’s strategy. Potential areas of opportunity or risk inform the Company’s strategy, which is led by the Chief Executive Officer and other senior executives. The Chief Enterprise Risk Officer, in consultation with the Chief Credit and Financial Risk Officer, oversees the identification and assessment of risks associated with the Company’s strategy and the monitoring of these risks throughout the year.Our Strategic Risk Management Policy, processes and controls encompass an ongoing assessment of risks associated with corporate or line of business specific strategies. These risks are managed through periodic reviews, along with regular updates to senior management and the Board.
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Table of ContentsCREDIT RISK PROFILE
Our loan portfolio accounts for the substantial majority of our credit risk exposure. Our lending activities are governed under our credit policies and are subject to independent review and approval. Below we provide information about the composition of our loan portfolio, key concentrations and credit performance metrics.We also engage in certain non-lending activities that may give rise to ongoing credit and counterparty settlement risk, including purchasing securities for our investment securities portfolio, entering into derivative transactions to manage our market risk exposure and to accommodate customers, extending short-term advances on syndication activity including bridge financing transactions we have underwritten, depositing certain operational cash balances in other financial institutions, executing certain foreign exchange transactions and extending customer overdrafts. We provide additional information related to our investment securities portfolio under “Consolidated Balance Sheets Analysis—Investment Securities” and “Item 8. Financial Statements and Supplementary Data—Note 2—Investment Securities” as well as credit risk related to derivative transactions in “Item 8. Financial Statements and Supplementary Data—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.
• 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 and marketing 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 Fair Isaac Corporation (“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 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 $75,000. Similar to credit card accounts, the underwriting criteria are customized for individual products and marketing programs and based on analysis of net present value of expected revenues, expenses and losses, and are 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.• 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 where we retain certain levels of residual risk after the loans are sold.89Capital One Financial Corporation (COF)
Table of ContentsPortfolio and Geographic Composition 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. The information presented in this section excludes loans held for sale, which totaled $854 million and $203 million as of December 31, 2023 and 2022, respectively.
Table 15 presents the composition of our portfolio of loans held for investment by portfolio segment as of December 31, 2023 and 2022.
Table 15: Portfolio Composition of Loans Held for Investment
December 31, 2023 December 31, 2022
(Dollars in millions) Loans % of Total Loans % of Total
Credit Card:
Domestic credit card $ 147,666 46.1 % $ 131,581 42.1 %
International card businesses 6,881 2.1 6,149 2.0
Total credit card 154,547 48.2 137,730 44.1
Consumer Banking:
Auto 74,075 23.1 78,373 25.1
Retail banking 1,362 0.5 1,552 0.5
Total consumer banking 75,437 23.6 79,925 25.6
Commercial Banking:
Commercial and multifamily real estate 34,446 10.7 37,453 12.0
Commercial and industrial 56,042 17.5 57,223 18.3
Total commercial banking 90,488 28.2 94,676 30.3
Total loans held for investment $ 320,472 100.0 % $ 312,331 100.0 %
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Table 16 presents the maturities of our loans held for investment portfolio as of December 31, 2023. Determinations of maturities are based on scheduled repayments. Due to the revolving nature of credit card loans, we report the majority of our credit card loans as due in one year or less.
Table 16: Loan Maturity Schedule
December 31, 2023(Dollars in millions) Due Up to 1 Year > 1 Year to 5 Years > 5 Years to 15 Years > 15 Years Total
Fixed rate:
Credit card$ 16,260 $ 290 — — $ 16,550
Consumer banking 17,594 53,485 $ 3,965 $ 55 75,099
Commercial banking 1,012 4,277 6,488 1,005 12,782
Total fixed-rate loans 34,866 58,052 10,453 1,060 104,431Variable rate:
Credit card137,997 — — — 137,997
Consumer banking 322 9 7 — 338
Commercial banking 12,181 55,724 9,782 19 77,706
Total variable-rate loans 150,500 55,733 9,789 19 216,041
Total loans $ 185,366 $ 113,785 $ 20,242 $ 1,079 $ 320,472Geographic CompositionWe market our credit card products throughout the United States, the United Kingdom and Canada. 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, 2023 and 2022.
Table 17: Credit Card Portfolio by Geographic Region
December 31, 2023 December 31, 2022(Dollars in millions) Amount % of Total Amount % of Total
Domestic credit card:California $ 15,167 9.8 % $ 13,707 10.0%
Texas 12,318 8.0 11,202 8.1
Florida 11,148 7.2 9,549 6.9
New York 9,578 6.2 8,366 6.1
Pennsylvania 5,824 3.8 5,425 3.9
Illinois 5,581 3.6 5,260 3.8
Ohio 4,845 3.1 4,662 3.4
New Jersey 4,702 3.0 4,243 3.1
Georgia 4,606 3.0 4,172 3.0
Michigan 4,144 2.7 3,920 2.8
Other 69,753 45.1 61,075 44.4
Total domestic credit card 147,666 95.5 131,581 95.5 %International card businesses:United Kingdom 3,639 2.4 3,129 2.3
Canada 3,242 2.1 3,020 2.2
Total international card businesses 6,881 4.5 6,149 4.5
Total credit card $ 154,547 100.0 % $ 137,730 100.0%
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Table of ContentsOur auto loan portfolio is geographically diversified in the United States due to our product and marketing approach. Retail banking includes small business loans and other consumer lending products originated through our branch and café network. The table below presents the geographic profile of our auto loan and retail banking portfolios as of December 31, 2023 and 2022.
Table 18: Consumer Banking Portfolio by Geographic Region
December 31, 2023 December 31, 2022(Dollars in millions) Amount % of Total Amount % of Total
Auto:Texas $ 9,020 11.9 % $ 9,586 12.0 %
California 8,747 11.6 9,570 12.0
Florida 6,488 8.6 6,755 8.5
Pennsylvania 3,215 4.3 3,303 4.1
Ohio 3,130 4.1 3,143 3.9
Illinois 2,988 4.0 3,119 3.9
Georgia 2,971 3.9 3,243 4.1
New Jersey 2,626 3.5 2,742 3.4
Other 34,890 46.3 36,912 46.2
Total auto 74,075 98.2 78,373 98.1Retail banking:New York 417 0.6 477 0.6
Texas 297 0.4 333 0.4
Louisiana 234 0.3 283 0.3
New Jersey 94 0.1 122 0.2
Maryland 81 0.1 97 0.1
Virginia 54 0.1 67 0.1
Other 185 0.2 173 0.2
Total retail banking 1,362 1.8 1,552 1.9
Total consumer banking $ 75,437 100.0 % $ 79,925 100.0 %
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Table of ContentsWe originate commercial and multifamily real estate loans in most regions of the United States. The table below presents the geographic profile of our commercial real estate portfolio as of December 31, 2023 and 2022.
Table 19: Commercial Real Estate Portfolio by Region
December 31, 2023 December 31, 2022(Dollars in millions) Amount % of Total Amount % of Total
Geographic concentration: (1)Northeast $ 13,931 40.5 % $ 15,055 40.2 %
South 7,073 20.5 8,706 23.2
Pacific West 5,342 15.5 5,902 15.7
Mid-Atlantic 4,138 12.0 3,129 8.4
Midwest
2,052 6.0 2,394 6.4Mountain1,910 5.5 2,267 6.1
Total $ 34,446 100.0 % $ 37,453 100.0 %__________
(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, RI and VT. South consists of AL, AR, FL, GA, KY, LA, MS, NC, OK, SC, TN and TX. Pacific West consists of: AK, CA, HI, OR and WA. Mid-Atlantic consists of DC, DE, MD, VA and WV. Midwest consists of: IA, IL, IN, KS, MI, MN, MO, ND, NE, OH, SD and WI. Mountain consists of: AZ, CO, ID, MT, NM, NV, UT and WY.Commercial Loans by IndustryTable 20 summarizes our commercial loans held for investment portfolio by industry classification as of December 31, 2023 and 2022. Industry classifications below are based on our interpretation of the Federal Loan Classification codes as they pertain to each individual loan.
Table 20: Commercial Loans by Industry
(Percentage of portfolio) December 31, 2023 December 31, 2022
Industry Classification: (1)
Finance 31% 31 %Real Estate & Construction (2)30 31Government & Education 8 8Health Care & Pharmaceuticals 6 5Commercial Services 4 4
Technology, Telecommunications & Media2 3Oil, Gas & Pipelines
3 3Other 16 15Total 100 % 100 %
__________(1) Beginning in the third quarter of 2023, we made reporting presentation changes to classify loans based on regulatory loan classifications rather than the North American Industry Classification System codes previously utilized. Prior period amounts presented have been reclassified to conform to the current period presentation.
(2) The funded balance for commercial office real estate held for investment totaled $2.3 billion, or 3% and $4.0 billion, or 4%, as of December 31, 2023 and 2022, respectively. Commercial office real estate exposure does not include loans in our healthcare real estate business secured by medical office properties and loans to office real estate investment trusts or real estate investment funds.
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Credit Risk Measurement
We closely monitor economic conditions and loan performance trends to assess and manage our exposure to credit risk. Trends in delinquency rates are the key credit quality indicator for our credit card and retail banking loan portfolios as changes in delinquency rates can provide an early warning of changes in potential future credit losses. The key indicator we monitor when assessing the credit quality and risk of our auto loan portfolio is borrower credit scores as they provide insight into borrower risk profiles, which give indications of potential future credit losses. The key credit quality indicator for our commercial loan portfolios is our internal risk ratings as we generally classify loans that have been delinquent for an extended period of time and other loans with significant risk of loss as nonperforming. In addition to these credit quality indicators, we also manage and monitor other credit quality metrics such as level of nonperforming loans and net charge-off rates.
We underwrite most consumer loans using proprietary models, which typically include credit bureau data, such as borrower credit scores, application information and, where applicable, collateral and deal structure data. We continuously adjust our management of credit lines and collection strategies based on customer behavior and risk profile changes. We also use borrower credit scores for subprime classification, for competitive benchmarking and, in some cases, to drive product segmentation decisions.Table 21 provides details on the credit scores of our domestic credit card and auto loan portfolios as of December 31, 2023 and 2022.
Table 21: Credit Score Distribution
(Percentage of portfolio) December 31, 2023 December 31, 2022Domestic credit card—Refreshed FICO scores: (1)Greater than 660 68 % 69 %
660 or below 32 31Total 100 % 100 %
Auto — At origination FICO scores: (2)Greater than 660 53 % 53 %
621 - 660 20 20620 or below 27 27
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.
In our commercial loan portfolio, 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.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 “Item 8. Financial Statements and Supplementary Data—Note 3—Loans” for additional credit quality information and see “Item 8. Financial Statements and Supplementary Data—Note 1—Summary of Significant Accounting Policies” for information on our accounting policies for delinquent and nonperforming loans, charge-offs and loan modifications and restructurings 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 all loans held for investment that are 30 or more days past due but are currently classified as performing and accruing interest. The 30+ day
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Table of Contentsdelinquency 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 “Item 8. Financial Statements and Supplementary Data—Note 1—Summary of Significant Accounting Policies” for information on our policies for classifying loans as nonperforming for each of our loan categories. We provide additional information on our credit quality metrics in “Business Segment Financial Performance.”
Table 22 presents our 30+ day performing delinquency rates and 30+ day delinquency rates of our portfolio of loans held for investment, by portfolio segment, as of December 31, 2023 and 2022.
Table 22: 30+ Day Delinquencies
December 31, 2023 December 31, 202230+ Day Performing Delinquencies 30+ Day Delinquencies 30+ Day Performing Delinquencies 30+ Day Delinquencies
(Dollars in millions) Amount Rate (1)
Amount Rate (1)
Amount Rate (1)
Amount Rate (1)
Credit Card:Domestic credit card $ 6,806 4.61 % $ 6,806 4.61 % $ 4,515 3.43 % $ 4,515 3.43 %
International card businesses 321 4.67 329 4.77 248 4.03 254 4.13
Total credit card 7,127 4.61 7,135 4.62 4,763 3.46 4,769 3.46Consumer Banking:Auto 4,696 6.34 5,307 7.16 4,402 5.62 4,906 6.26
Retail banking 17 1.19 33 2.40 16 1.02 34 2.22
Total consumer banking 4,713 6.25 5,340 7.08 4,418 5.53 4,940 6.18Commercial Banking:Commercial and multifamily real estate — — 121 0.35 1 — 36 0.10
Commercial and industrial 55 0.10 181 0.32 78 0.14 281 0.49
Total commercial banking 55 0.06 302 0.33 79 0.08 317 0.33
Total $ 11,895 3.71 $ 12,777 3.99 $ 9,260 2.96 $ 10,026 3.21__________
(1) Delinquency rates are calculated by dividing delinquency amounts by period-end loans held for investment for each specified loan category.Table 23 presents our 30+ day delinquent loans held for investment, by aging and geography, as of December 31, 2023 and 2022
Table 23: Aging and Geography of 30+ Day Delinquent Loans
December 31, 2023 December 31, 2022(Dollars in millions) Amount Rate (1)
Amount Rate (1)
Delinquency status:30 – 59 days $ 5,367 1.68 % $ 4,666 1.50 %
60 – 89 days 3,119 0.97 2,511 0.80> 90 days4,291 1.34 2,849 0.91
Total $ 12,777 3.99 % $ 10,026 3.21 %Geographic region:Domestic $ 12,448 3.89 % $ 9,772 3.13 %
International 329 0.10 254 0.08
Total $ 12,777 3.99 % $ 10,026 3.21 %__________
(1) Delinquency rates are calculated by dividing delinquency amounts by total period-end loans held for investment.95Capital One Financial Corporation (COF)
Table of ContentsTable 24 summarizes loans that were 90+ days delinquent, in regards to interest or principal payments, and still accruing interest as of December 31, 2023 and 2022. These loans consist primarily of credit card accounts between 90 days and 179 days past due. As permitted by regulatory guidance issued by the FFIEC, we continue to accrue interest and fees on domestic credit card loans through the date of charge off, which is typically in the period the account becomes 180 days past due.
Table 24: 90+ Day Delinquent Loans Accruing Interest
December 31, 2023 December 31, 2022(Dollars in millions) Amount Rate (1)
Amount Rate (1)
Loan category:Credit card $ 3,499 2.26 % $ 2,240 1.63 %
Commercial banking 55 0.06 — —
Total $ 3,554 1.11 $ 2,240 0.72Geographic region:Domestic $ 3,422 1.09 $ 2,135 0.70
International 132 1.91 105 1.71
Total $ 3,554 1.11 $ 2,240 0.72__________
(1) Delinquency rates are calculated by dividing delinquency amounts by period-end loans held for investment for each specified loan category.Nonperforming Loans and Nonperforming Assets
Nonperforming loans include loans that have been placed on nonaccrual status. Nonperforming assets consist of nonperforming loans, repossessed assets and other foreclosed assets. See “Item 8. Financial Statements and Supplementary Data—Note 1—Summary of Significant Accounting Policies” for information on our policies for classifying loans as nonperforming for each of our loan categories.Table 25 presents our nonperforming loans, by portfolio segment, and other nonperforming assets as of December 31, 2023 and 2022. We do not classify loans held for sale as nonperforming. We provide additional information on our credit quality metrics in “Business Segment Financial Performance.”
Table 25: Nonperforming Loans and Other Nonperforming Assets (1)
December 31, 2023 December 31, 2022(Dollars in millions) Amount Rate Amount Rate
Nonperforming loans held for investment: (2)
Credit Card:International card businesses $ 9 0.13 % $ 9 0.14 %
Total credit card 9 0.01 9 0.01Consumer Banking:Auto 712 0.96 595 0.76
Retail banking 46 3.36 39 2.49
Total consumer banking 758 1.00 634 0.79Commercial Banking:Commercial and multifamily real estate 425 1.23 271 0.72
Commercial and industrial 336 0.60 430 0.75
Total commercial banking 761 0.84 701 0.74Total nonperforming loans held for investment (3)1,528 0.48 1,344 0.43Other nonperforming assets (4)62 0.02 61 0.02
Total nonperforming assets $ 1,590 0.50 $ 1,405 0.45__________(1) We recognized interest income for loans classified as nonperforming of $91 million and $66 million in 2023 and 2022, respectively.
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Table of Contents(2) Nonperforming loan rates are calculated based on nonperforming loans for each category divided by period-end total loans held for investment for each respective category.(3) Excluding the impact of domestic credit card loans, nonperforming loans as a percentage of total loans held for investment was 0.88% and 0.74% as of December 31, 2023 and 2022, respectively.(4) The denominators used in calculating nonperforming asset rates consist of total loans held for investment and other nonperforming assets.Net Charge-Offs
Net charge-offs consist of the amortized cost basis, excluding accrued interest, of loans held for investment that we determine to be uncollectible, net of recovered amounts. We charge off loans as a reduction to the allowance for credit losses when we determine the loan is uncollectible and record subsequent recoveries of previously charged off amounts as increases to the allowance for credit losses. Uncollectible finance charges and fees are reversed through revenue and certain fraud losses are recorded in other non-interest expense. Generally, costs to recover charged off loans are recorded as collection expenses as incurred and are 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 “Item 8. Financial Statements and Supplementary Data—Note 1—Summary of Significant Accounting Policies” for information on our charge-off policy for each of our loan categories.Table 26 presents our net charge-off amounts and rates, by portfolio segment, in 2023, 2022 and 2021.
Table 26: Net Charge-Offs (Recoveries)Year Ended December 31,2023 2022 2021(Dollars in millions) Amount Rate (1)
Amount Rate (1)
Amount Rate (1)
Credit Card:Domestic credit card
$ 6,164 4.56 % $ 2,833 2.47 % $ 1,820 1.90 %
International card businesses 308 4.84 215 3.65 136 1.96
Total credit card 6,472 4.57 3,048 2.53 1,956 1.90Consumer Banking:Auto 1,308 1.72 784 1.00 200 0.28
Retail banking 56 3.89 70 4.24 76 2.77
Total consumer banking 1,364 1.76 854 1.06 276 0.37Commercial Banking:Commercial and multifamily real estate 489 1.34 — — 8 0.03
Commercial and industrial 89 0.16 71 0.13 (6) (0.01)
Total commercial banking 578 0.62 71 0.08 2 —
Total net charge-offs $ 8,414 2.70 $ 3,973 1.36 $ 2,234 0.88
Average loans held for investment $ 311,541 $ 292,238 $ 252,730__________
(1) Net charge-off rates are calculated by dividing net charge-offs by average loans held for investment for the period for each loan category.97Capital One Financial Corporation (COF)
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Financial Difficulty Modifications to BorrowersWe adopted ASU No. 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures on January 1, 2023. The ASU eliminates the accounting guidance for troubled debt restructurings (“TDR”) and establishes disclosure requirements for certain loan refinancing and restructurings for borrowers experiencing financial difficulty, which results in a more than insignificant impact to the timing or amount of contractual cash flows.
Prior to the adoption of ASU 2022-02, a modification was deemed a TDR when the contractual terms of a loan agreement were modified by granting a concession to a borrower experiencing financial difficulty. ASU 2022-02 eliminated the concession requirement for modifications. After the adoption of ASU 2022-02, a financial difficulty modification (“FDM”) occurs when a modification in the form of principal forgiveness, interest rate reduction, an other-than-insignificant payment delay, a term extension or a combination of these modifications is granted to a borrower experiencing financial difficulty.
The types of modifications we offer to borrowers experiencing financial difficulty have not changed as a result of the adoption of ASU 2022-02. As part of our loss mitigation efforts, we may provide short-term (one 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.We consider the impact of all loan modifications, including FDMs, when estimating the credit quality of our loan portfolio and establishing allowance levels. For our Commercial Banking customers, loan modifications are also considered in the assignment of an internal risk rating.
In our Credit Card business, the majority of our FDMs receive an interest rate reduction and are placed on a fixed payment plan not exceeding 60 months. 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 being 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 FDMs receive an extension, an interest rate reduction, principal reduction, or a combination of these modifications.
In our Commercial Banking business, the majority of our FDMs receive an extension. A portion of FDMs receive an interest rate reduction, principal reduction, or a combination of modifications.For additional information on accounting standards adopted during the year ended December 31, 2023, see Item 8. Financial Statements and Supplementary Data—Note 1—Summary of Significant Accounting Policies.” For more information on FDMs in 2023 and TDRs in 2022, see Item 8. Financial Statements and Supplementary Data—Note 3—Loans.”Allowance for Credit Losses and Reserve for Unfunded Lending Commitments
Our allowance for credit losses represents management’s current estimate of expected credit losses over the contractual terms of our loans held for investment as of each balance sheet date. Expected recoveries of amounts previously charged off or expected to be charged off are recognized within the allowance. We also estimate expected credit losses related to unfunded lending commitments that are not unconditionally cancellable. The provision for losses on unfunded lending commitments is included in the provision for credit losses in our consolidated statements of income and the related reserve for unfunded lending commitments is included in other liabilities on our consolidated balance sheets. We provide additional information on the methodologies and key assumptions used in determining our allowance for credit losses in “Item 8. Financial Statements and Supplementary Data—Note 1—Summary of Significant Accounting Policies.”98Capital One Financial Corporation (COF)
Table of ContentsTable 27 presents changes in our allowance for credit losses and reserve for unfunded lending commitments for 2023 and 2022, and details by portfolio segment for the provision for credit losses, charge-offs and recoveries.
Table 27: Allowance for Credit Losses and Reserve for Unfunded Lending Commitments ActivityCredit Card Consumer Banking
(Dollars in millions) Domestic Card International Card Businesses Total Credit Card Auto Retail Banking Total Consumer Banking Commercial Banking Total
Allowance for credit losses:Balance as of December 31, 2021 $ 7,968 $ 377 $ 8,345 $ 1,852 $ 66 $ 1,918 $ 1,167 $ 11,430
Charge-offs (4,004) (358) (4,362) (1,525) (89) (1,614) (88) (6,064)
Recoveries (1)
1,171 143 1,314 741 19 760 17 2,091
Net charge-offs (2,833) (215) (3,048) (784) (70) (854) (71) (3,973)
Provision for credit losses
4,020 245 4,265 1,119 54 1,173 362 5,800
Allowance build (release) for credit losses 1,187 30 1,217 335 (16) 319 291 1,827
Other changes (2)
10 (27) (17) — — — — (17)
Balance as of December 31, 2022 9,165 380 9,545 2,187 50 2,237 1,458 13,240
Reserve for unfunded lending commitments:
Balance as of December 31, 2021 — — — — — — 165 165
Provision for losses on unfunded lending commitments — — — — — — 53 53
Balance as of December 31, 2022 — — — — — — 218 218
Combined allowance and reserve as of December 31, 2022 $ 9,165 $ 380 $ 9,545 $ 2,187 $ 50 $ 2,237 $ 1,676 $ 13,458
Allowance for credit losses:Balance as of December 31, 2022 $ 9,165 $ 380 $ 9,545 $ 2,187 $ 50 $ 2,237 $ 1,458 $ 13,240Cumulative effects of accounting standards adoption (3)(40) (23) (63) — — — — (63)
Balance as of January 1, 2023 9,125 357 9,482 2,187 50 2,237 1,458 13,177Charge-offs
(7,348) (439) (7,787) (2,252) (75) (2,327) (588) (10,702)
Recoveries (1)1,184 131 1,315 944 19 963 10 2,288
Net charge-offs (6,164) (308) (6,472) (1,308) (56) (1,364) (578) (8,414)
Provision for credit losses 8,268 383 8,651 1,123 46 1,169 665 10,485
Allowance build (release) for credit losses 2,104 75 2,179 (185) (10) (195) 87 2,071Other changes (2)32 16 48 — — — — 48
Balance as of December 31, 2023 11,261 448 11,709 2,002 40 2,042 1,545 15,296
Reserve for unfunded lending commitments:
Balance as of December 31, 2022 — — — — — — 218 218Provision for losses on unfunded lending commitments — — — — — — (60) (60)Balance as of December 31, 2023 — — — — — — 158 158
Combined allowance and reserve as of December 31, 2023 $ 11,261 $ 448 $ 11,709 $ 2,002 $ 40 $ 2,042 $ 1,703 $ 15,454________
(1) The amount and timing of recoveries are impacted by our collection strategies, which are based on customer behavior and risk profile and include direct customer communications, repossession of collateral, the periodic sale of charged off loans as well as additional strategies, such as litigation.
(2) Primarily represents the initial allowance for purchased credit-deteriorated (“PCD”) loans and foreign currency translation adjustments. The initial allowance of PCD loans was $32 million and $10 million for the years ended December 31, 2023 and 2022, respectively.
(3) Impact from the adoption of ASU No. 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures as of January 1, 2023.
Allowance Coverage Ratios for Specified Loan Category
O ur allowance for credit losses increased by $2.1 billion to $15.3 billion as of December 31, 2023 compared to 2022 and our allowance coverage ratio increased by 53 bps to 4.77% as of December 31, 2023 compared to 2022.
The ratio of the allowance for credit losses divided by total nonperforming loans held for investment of $1.5 billion and $1.3 billion as of December 31, 2023 and 2022, respectively, increased by 16% to 1,001% as of December 31, 2023 from 985% as of December 31, 2022. Excluding the impact of the allowance for credit losses related to Domestic Card of $11.3 billion and $9.2 billion as of December 31, 2023 and 2022, respectively, this ratio decreased by 39% to 264% as of December 31, 2023 from 303% as of December 31, 2022. The increase in the ratio for the allowance for credit losses divided by total
99Capital One Financial Corporation (COF)
Table of Contentsnonperforming loans was driven by an increase in our allowance for credit losses partially offset by an increase in nonperforming loans. The decrease in the ratio of allowance for credit losses divided by nonperforming loans excluding the impact of Domestic Card was driven by an increase in nonperforming loans.LIQUIDITY RISK PROFILEWe manage our funding and liquidity risk in an integrated manner in support of the current and future cash flow needs of our business. We maintained liquidity reserves of $120.7 billion and $106.6 billion as of December 31, 2023 and 2022, respectively, as shown in Table 28 below . Included in liquidity reserves are cash and cash equivalents, investment securities and FHLB borrowing capacity secured by loans.
As of December 31, 2023, we had available issuance capacity of $42.0 billion under shelf registrations associated with our credit card and auto loan securitization programs. We also maintain a shelf registration that enables us to issue an indeterminate amount of senior or subordinated debt securities, preferred stock, depositary shares, common stock, purchase contracts, warrants and units. Our ability to issue under each shelf registration is subject to market conditions.
Finally, as of December 31, 2023, we had access to available contingent liquidity sources totaling $99.1 billion through pledged collateral, including a portion of the investment securities included in the liquidity reserve amount above, at the Federal Reserve Discount Window, the Fixed Income Clearing Corporation—Government Securities Division (“FICC—GSD”), FHLB and the Bank Term Funding Program (“BTFP”).
As of December 31, 2023 and 2022, our funding sources totaled $398.3 billion and $381.7 billion, respectively, primarily comprised of consumer deposits, as shown in “Consolidated Balance Sheets Analysis—Funding Sources Composition . ”Our liquidity reserves, borrowing capacity, contingent liquidity sources and total funding sources are all discussed in more detail in the following sections.Table 28 below presents the composition of our liquidity reserves as of December 31, 2023 and 2022.
Table 28: Liquidity Reserves
(Dollars in millions) December 31, 2023 December 31, 2022
Cash and cash equivalents $ 43,297 $ 30,856
Securities available for sale 79,117 76,919
FHLB borrowing capacity secured by loans 5,205 6,436
Outstanding FHLB advances and letters of credit secured by loans and investment securities (50) (51)
Other encumbrances of investment securities (6,917) (7,583)
Total liquidity reserves $ 120,652 $ 106,577
Our liquidity reserves increased by $14.1 billion to $120.7 billion as of December 31, 2023 from December 31, 2022, primarily due to increases in cash and cash equivalents. In addition to these liquidity reserves, we maintain access to a diversified mix of funding sources as discussed in the “Borrowing Capacity” and “Funding” sections below. See “Risk Management” for additional information on our management of liquidity risk.
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Liquidity Coverage RatioWe are subject to the LCR Rule as implemented by the Federal Reserve and the OCC. The LCR Rule requires each of the Company and the Bank to calculate its respective 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 2023 was 167%, which exceeded the LCR Rule requirement of 100%. The calculation and the underlying components are based on our interpretations, expectations and assumptions of relevant regulations, as well as interpretations provided by our regulators, and are subject to change based on changes to future regulations and interpretations. See “Part I—Item 1. Business—Supervision and Regulation” for additional information.Net Stable Funding RatioWe are subject to the NSFR Rule as implemented by the Federal Reserve and the OCC. The NSFR Rule requires each of the Company and the Bank to maintain an NSFR of 100% on an ongoing basis. It also requires the Company to publicly disclose, on a semi-annual basis each second and fourth quarter, its NSFR, certain related quantitative liquidity metrics and qualitative discussion of its NSFR. Our average NSFR for each of the third and fourth quarters of 2023 was 135%, which exceeded the NSFR Rule requirement of 100%. The calculation and the underlying components are based on our interpretations, expectations and assumptions of the relevant regulations, as well as interpretations provided by our regulators, and are subject to change based on changes to future regulations and interpretations. See “Part I—Item 1. Business—Supervision and Regulation” for additional information.Borrowing CapacityWe maintain a shelf registration with the SEC so that we may periodically offer and sell an indeterminate aggregate amount of senior or subordinated debt securities, preferred stock, depositary shares, common stock, purchase contracts, warrants and units. There is no limit under this shelf registration to the amount or number of such securities that we may offer and sell, subject to market conditions. In addition, we also maintain a shelf registration associated with our credit card securitization trust that allows us to periodically offer and sell up to $30 billion of securitized debt obligations and a shelf registration associated with our auto loan securitization trusts that allows us to periodically offer and sell up to $25 billion of securitized debt obligations. The registered amounts under these shelf registration statements are subject to continuing review and change in the future, including as part of the routine renewal process. As of December 31, 2023, we had $22.6 billion and $19.4 billion of available issuance capacity in our credit card and auto loan securitization programs, respectively.
In addition to our issuance capacity under the shelf registration statements, we also have pledged collateral to support our access to FHLB advances, the Federal Reserve Discount Window, BTFP and FICC—GSD general collateral financing repurchase agreement service. For each of these programs, the ability to borrow utilizing these sources is dependent on meeting the respective membership requirements. Our borrowing capacity in each program is a function of the collateral the Bank has posted with each counterparty, including any respective haircuts applied to that collateral.
As of December 31, 2023, we pledged both loans and securities to the FHLB to secure a maximum borrowing capacity of $32.1 billion, of which $50 million was used. Our FHLB membership is supported by our investment in FHLB stock of $18 million and $15 million as of December 31, 2023 and 2022, respectively.
As a member of FICC—GSD, we have $16.1 billion of readily available borrowing capacity secured by securities from our investment portfolio as of December 31, 2023. Our FICC—GSD membership is supported by our investment in Depository Trust and Clearing Corporation (“DTCC”) common stock of $375 thousand as of both December 31, 2023 and 2022.
As of December 31, 2023, we pledged loans to secure a borrowing capacity of $41.4 billion under the Federal Reserve Discount Window. Additionally, we pledged securities to secure a borrowing capacity of $9.5 billion under the BTFP. Our membership with the Federal Reserve is supported by our investment in Federal Reserve stock, which totaled $1.3 billion as of both December 31, 2023 and 2022.
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DepositsTable 29 provides a comparison of average balances, interest expense and average deposits interest rates for December 31, 2023, 2022 and 2021.
Table 29: Deposits Composition and Average Deposits Interest RatesYear Ended December 31,2023 2022 2021(Dollars in millions) Average Balance Interest Expense Average Deposits Interest Rate Average Balance Interest Expense Average Deposits Interest Rate Average Balance Interest Expense Average Deposit Interest Rate
Interest-bearing checking accounts (1)$ 41,555 $ 797 1.92 % $ 48,291 $ 312 0.65 % $ 45,055 $ 76 0.17 %Saving deposits (2)197,896 5,353 2.71 202,454 1,628 0.80 203,293 628 0.31
Time deposits 74,286 3,339 4.49 26,463 595 2.25 23,152 252 1.09
Total interest-bearing deposits $ 313,737 $ 9,489 3.02 $ 277,208 $ 2,535 0.91 $ 271,500 $ 956 0.35__________
(1) Includes negotiable order of withdrawal accounts.
(2) Includes money market deposit accounts.The FDIC limits the acceptance of brokered deposits to well-capitalized insured depository institutions and, with a waiver from the FDIC, to adequately-capitalized institutions. The Bank was well-capitalized , as defined under the federal banking regulatory guidelines, as of December 31, 2023 and 2022. See “Part I—Item 1. Business—Supervision and Regulation” for additional information. We provide additional information on the composition of deposits in “Consolidated Balance Sheets Analysis—Funding Sources Composition” and in “Item 8. Financial Statements and Supplementary Data—Note 8—Deposits and Borrowings.”FundingOur primary source of funding comes from insured retail deposits, as they are a relatively stable and lower cost source of funding. In addition to deposits, we raise funding through the issuance of senior and subordinated notes and securitized debt obligations, federal funds purchased, securities loaned or sold under agreements to repurchase and FHLB advances secured by certain portions of our loan and securities portfolios. A key objective in our use of these markets is to maintain access to a diversified mix of wholesale funding sources. See “Consolidated Balance Sheets Analysis—Funding Sources Composition” for additional information on our primary sources of funding.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. The actual timing and amounts of future cash payments may vary over time due to a number of factors, such as early debt redemptions and changes in deposit balances.102Capital One Financial Corporation (COF)
Table of ContentsAs of December 31, 2023 and 2022, we held approximately $64.2 billion and $80.7 billion, respectively, of estimated uninsured deposits excluding any intercompany balances. These amounts are primarily comprised of checking and savings deposits. These estimated uninsured deposits comprised approximately 18% and 24% of our total deposits as of December 31, 2023 and 2022, respectively. We estimate our uninsured amounts based on methodologies and assumptions used for our “Consolidated Reports of Condition and Income” (FFIEC 031) filed with the Federal Banking Agencies.
Table 30 presents, by contractual maturity, the estimated uninsured portion of total time deposits as of December 31, 2023 and 2022. Our funding and liquidity management activities factor in the expected maturities of these deposits.
Table 30: Amount of Uninsured Time Deposits by Contractual Maturity 1
December 31, 2023 December 31, 2022(Dollars in millions) Amount % of Total Amount % of TotalUp to three months $ 4,784 53.2 % $ 87 4.3 %
> 3 months to 6 months 537 6.0 139 6.8
> 6 months to 12 months 2,095 23.3 1,098 54.0
> 12 months 1,577 17.5 708 34.9
Total $ 8,993 100.0 % $ 2,032 100.0 %__________(1) Some customers have time deposits in excess of the federal deposit insurance limit, making a portion of the deposit uninsured. As of December 31, 2023 and 2022, the total time deposit amount with some portion in excess of the insured amount was $15.8 billion and $6.1 billion, respectively.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 have access to short-term and long-term FHLB advances secured by certain investment securities, multifamily real estate loans and commercial real estate loans.Our short-term borrowings, which include those borrowings with an original contractual maturity of one year or less, typically consist of federal funds purchased, securities loaned or sold under agreements to repurchase or short-term FHLB advances, and do not include the current portion of long-term debt. Our short-term borrowings decreased by $345 million to $538 million as of December 31, 2023 from December 31, 2022 driven by a decrease in repurchase agreements.
Our long-term funding, which primarily consists of securitized debt obligations and senior and subordinated notes, increased by $1.5 billion to $49.3 billion as of December 31, 2023 from December 31, 2022 primarily driven by net issuances of senior unsecured debt and securitized debt obligations, partially offset by maturities of subordinated debt. We provide more information on our securitization activity in “Item 8. Financial Statements and Supplementary Data—Note 5—Variable Interest Entities and Securitizations” and on our borrowings in “Item 8. Financial Statements and Supplementary Data—Note 8—Deposits and Borrowings.”
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The following table summarizes issuances of securitized debt obligations, senior and subordinated notes, long term FHLB advanc es and their respective maturities or redemptions for the years ended December 31, 2023, 2022 and 2021.
Table 31: Long-Term Debt Funding ActivitiesIssuances Maturities/Redemptions
Year Ended December 31, Year Ended December 31,(Dollars in millions) 2023 2022 2021 2023 2022 2021
Securitized debt obligations $ 3,300 $ 9,750 $ 6,250 $ 2,483 $ 7,060 $ 3,442
Senior and subordinated notes 8,250 9,300 4,500 8,436 3,561 3,851
FHLB advances — 12,000 — — 12,000 —
Total $ 11,550 $ 31,050 $ 10,750 $ 10,919 $ 22,621 $ 7,293Credit RatingsOur credit ratings impact our ability to access capital markets and our borrowing costs. For more information, see “Part I—Item 1A. Risk Factors under the heading “A downgrade in our credit ratings could significantly impact our liquidity, funding costs and access to the capital markets.”
Table 32 provides a summary of the credit ratings for the senior unsecured long-term debt of Capital One Financial Corporation and CONA as of December 31, 2023 and 2022.
Table 32: Senior Unsecured Long-Term Debt Credit Ratings
December 31, 2023 December 31, 2022Capital One Financial Corporation CONA Capital One Financial Corporation CONA
Moody’s Baa1 A3 Baa1 A3
S&P BBB BBB+ BBB BBB+
Fitch A- A A- AIn connection with the agreement to acquire Discover , Standard & Poor’s (“S&P”) and Fitch Ratings (“Fitch”) have reaffirmed our credit ratings and Moody’s Investors Service (“Moody’s”) placed our credit rating on review for a downgrade. Moody’s said its review for downgrade may continue until the transaction has been completed.
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Table of ContentsOther Commitments
In the normal course of business, we enter into other contractual obligations that may require future cash payments that affect our short-term and long-term liquidity and capital resource needs. Our other contractual obligations include lending commitments, leases, purchase obligations and other contractual arrangements.As of December 31, 2023 and 2022, our total unfunded lending commitments were $441.3 billion and $409.3 billion, respectively, primarily consisting of credit card lines and loan commitments to customers of both our Commercial Banking and Consumer Banking businesses, as well as standby and commercial letters of credit. 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 additional information, refer to “Item 8. Financial Statements and Supplementary Data—Note 18—Commitments, Contingencies, Guarantees and Others” in this Report.
Our primary involvement with leases is in the capacity as a lessee where we lease premises to support our business. The majority of our leases are operating leases of office space, retail bank branches and cafés. Our operating leases expire at various dates through 2071, although some have extension or termination options. As of December 31, 2023 and 2022, we had $1.5 billion and $1.7 billion, respectively, in aggregate operating lease obligations, of which $241 million will be due in the following 12 months. We provide more information on our lease activity in “Item 8. Financial Statements and Supplementary Data—Note 7—Premises, Equipment and Leases.”
We have purchase obligations that represent substantial agreements to purchase goods or receive services such as data management, media and other software and third-party services that are enforceable and legally binding and specify significant terms. As of December 31, 2023 and 2022, we had $789 million and $1.1 billion, respectively, in aggregate purchase obligation liabilities.
We also enter into various contractual arrangements that may require future cash payments, including 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. These arrangements are discussed in more detail in “Item 8. Financial Statements and Supplementary Data—Note 5—Variable Interest Entities and Securitizations,” “Item 8. Financial Statements and Supplementary Data—Note 14—Employee Benefit Plans” and “Item 8. Financial Statements and Supplementary Data—Note 18—Commitments, Contingencies, Guarantees and Others.”MARKET RISK PROFILE
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 U.K. and Canada within our Credit Card business; and
• Customer accommodation activities within our Commercial Banking business.
We have enterprise-wide risk management policies and limits, approved by our Board of Directors, which govern our market risk management activities. Our objective is to manage our exposure to market risk in accordance with these policies and limits based on prevailing market conditions and long-term expectations. We provide additional information below about our primary sources of market risk, our market risk management strategies and the measures that we use to evaluate these exposures.
Interest Rate Risk
Interest rate risk represents exposure to financial instruments whose values vary with the level or volatility of interest rates. We are exposed to interest rate risk primarily from the differences in the timing between the maturities or repricing of assets and liabilities. We manage our interest rate risk primarily by entering into interest rate swaps and other derivative instruments which could include caps, floors, options, futures and forward contracts.105
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Table of ContentsWe use various industry standard market risk measurement techniques and analyses to measure, assess and manage the impact of changes in interest rates on our net interest income and our economic value of equity and changes in foreign exchange rates on our non-dollar-denominated funding and non-dollar equity investments in foreign operations.
Net Interest Income Sensitivity
Our net interest income sensitivity measure estimates the impact of hypothetical instantaneous movements in interest rates relative to our baseline interest rate forecast on our projected 12-month net interest income. Net interest income sensitivity metrics are derived using the following key assumptions:• In addition to our existing assets, liabilities and derivative positions, we incorporate expected future business growth assumptions. These assumptions include loan and deposit growth, pricing, plans for projected changes in our funding mix and our securities and cash position from our internal corporate outlook that is used in our financial planning process.
• The analysis assumes this forecast of expected future business growth remains unchanged between the baseline rate forecast and rate shock scenarios, including no changes to our interest rate risk management activities like securities and hedging actions.• We incorporate the dynamic nature of deposit re-pricing, which includes pricing lags and changes in deposit beta and mix as interest rates change, and the prepayment sensitivity of our mortgage securities to the level of interest rates. In our models, deposit betas and mortgage security prepayments vary dynamically based on the level of interest rates and by product type.
• In instances where an interest rate scenario would result in a rate less than 0.00%, we assume a rate of 0% for that scenario. This assumption applies only to jurisdictions that do not have a practice of employing negative policy rates. In jurisdictions that have negative policy rates, we do not floor interest rates at 0.00%.
At the current level of interest rates, our net interest income is expected to increase in higher rate scenarios and decrease in lower rate scenarios. Our current sensitivity to both upward and downward shocks is largely unchanged as compared to December 31, 2022, as our asset mix shift toward credit card and interest-bearing cash balances, which reprice rapidly, was offset by an increase in deposit beta, which was driven by higher interest rates and mix shift toward higher rate deposit products. In the contexts used in this section, “beta” refers to the change in deposit rate paid relative to the federal funds rate.
As part of our ongoing evaluation of our interest rate risk modeling capabilities, we enhanced our mortgage prepayment model in the fourth quarter of 2023 to improve how we estimate the expected prepayment behavior across various interest rate scenarios. This enhancement had the effect of slowing down the forecasted prepayment speed when the underlying mortgage coupons on our existing mortgage securities are well below prevailing (market) mortgage rates, which resulted in slightly lower net interest income sensitivity as of December 31, 2023.
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Table of ContentsEconomic Value of Equity Sensitivity
Our economic value of equity sensitivity measure estimates the impact of hypothetical instantaneous movements in interest rates on the net present value of our assets and liabilities, including derivative exposures. Economic value of equity sensitivity metrics are derived using the following key assumptions:• The analysis includes only existing assets, liabilities and derivative positions and does not incorporate business growth assumptions or projected balance sheet changes.
• Similar to our net interest income sensitivity measure, we incorporate the dynamic nature of deposit repricing and attrition, which includes pricing lags and changes in deposit beta as interest rates change and the prepayment sensitivity of our mortgage securities to the level of interest rates. In our models, deposit betas and mortgage security prepayments vary dynamically based on the level of interest rates and by product type.
• Balance attrition assumptions for loans, including credit card, auto and commercial loans, remain unchanged between the baseline interest rate forecast and interest rate shock scenarios as those loans are mainly floating rate or shorter duration fixed rate loans and hence paydowns have a low sensitivity to the level of interest rates.• For assets and liabilities with embedded optionality, such as mortgage securities and deposit balances, we utilize monte carlo simulations to assess economic value with industry-standard term structure modeling of interest rates.• Our calculations of net present value apply appropriate spreads over the benchmark yield curve for select assets and liabilities to capture the inherent risks (including credit risk) to discount expected interest and principal cash flows.• In instances where an interest rate scenario would result in a rate less than 0.00%, we assume a rate of 0% for that scenario. This assumption applies only to jurisdictions that do not have a practice of employing negative policy rates. In jurisdictions that have negative policy rates, we do not floor interest rates at 0.00%.
Our current economic value of equity sensitivity profile demonstrates that our economic value of equity decreases in higher interest rate scenarios and increases in lower interest rate scenarios. The decrease in higher rate scenarios is due to the declines in the projected value of our fixed rate assets being only partially offset by corresponding movements in the projected value of our deposits and other liabilities. The pace of economic value of equity decrease is larger for the +200 bps scenario as our deposits are assumed to reprice more rapidly in higher interest rate environments. Our current economic value of equity sensitivity became more negative in higher interest rate scenarios and more positive in lower interest rate scenarios as compared to December 31, 2022, primarily due to an increase in deposit beta driven by higher interest rates and mix shift towards higher rate deposit products, and a modeling change for our mortgage security prepayments forecast. As described above for net interest income sensitivity, the mortgage prepayment modeling change slowed down the prepayment speed forecast and increased the duration of the mortgage securities on our balance sheet, which resulted in a modestly more negative economic value of equity sensitivity in higher rate scenarios as of December 31, 2023.
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Table of ContentsTable 33 shows the estimated percentage impact on our projected baseline net interest income and our current economic value of equity calculated under the methodology described above as of December 31, 2023 and 2022.
Table 33: Interest Rate Sensitivity Analysis
December 31, 2023 December 31, 2022Estimated impact on projected baseline net interest income:+200 basis points 0.7 % 0.4 %+100 basis points 0.8 0.8
+50 basis points 0.4 0.4–50 basis points (0.5) (0.7)
–100 basis points (0.9) (1.3)
–200 basis points (2.0) (2.6)Estimated impact on economic value of equity:+200 basis points (8.4) (4.3)
+100 basis points (3.7) (1.5)
+50 basis points (1.8) (0.7)
–50 basis points 1.6 0.4
–100 basis points 2.9 0.6
–200 basis points 4.0 (0.2)In addition to these industry standard measures, we also consider the potential impact of alternative interest rate scenarios, such as larger rate shocks, higher than +/- 200 bps, as well as steepening and flattening yield curve scenarios in our internal interest rate risk management decisions. We also regularly review the sensitivity of our interest rate risk metrics to changes in our key modeling assumptions, such as our loan and deposit balance forecasts, mortgage prepayments and deposit repricing.
Limitations of Market Risk Measures
The interest rate risk models that we use in deriving these measures incorporate contractual information, internally-developed assumptions and proprietary modeling methodologies, which project borrower and depositor behavior patterns in certain interest rate environments. Other market inputs, such as interest rates, market prices and interest rate volatility, are also critical components of our interest rate risk measures. We regularly evaluate, update and enhance these assumptions, models and analytical tools as we believe appropriate to reflect our best assessment of the market environment and the expected behavior patterns of our existing assets and liabilities.
There are inherent limitations in any methodology used to estimate the exposure to changes in market interest rates. The sensitivity analysis described above contemplates only certain movements in interest rates and is performed at a particular point in time based on our 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 “Item 8. Financial Statements and Supplementary Data—Note 9—Derivative Instruments and Hedging Activities.”
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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 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 nominal intercompany funding outstanding was 973 million GBP and 785 million GBP as of December 31, 2023 and 2022, respectively, and 1.6 billion CAD and 1.7 billion CAD as of December 31, 2023 and 2022, respectively. Our nominal EUR-denominated borrowings outstanding were 1.3 billion EUR as of both December 31, 2023 and 2022.
Our non-dollar equity investments in foreign operations expose our balance sheet and capital ratios to translation risk in AOCI. We manage our translation risk by entering into foreign currency derivatives designated as net investment hedges. We measure these exposures by applying a 30% U.S. dollar appreciation shock, which we believe approximates a significant adverse shock over a one-year time horizon, against the value of the equity invested in our foreign operations net of related net investment hedges where applicable. Our gross equity exposures in our U.K. and Canadian operations were 2.2 billion GBP and 1.9 billion GBP as of December 31, 2023 and 2022, respectively, and 2.4 billion CAD and 2.2 billion CAD as of December 31, 2023 and 2022, respectively.
As a result of our derivative management activities, we believe our net exposure to foreign exchange risk is minimal. For more information, see “Item 8. Financial Statements and Supplementary Data—Note 9—Derivative Instruments and Hedging Activities” and “Item 8. Financial Statements and Supplementary Data—Note 10—Stockholders’ Equity.”Risk related to Customer Accommodation DerivativesWe 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 a historical simulation approach using the most recent 500 business days and use a 99 percent confidence level and a holding period of one business day. As a result of offsetting our customer exposures with other counterparties, we believe that our net exposure to market risk in our customer accommodation derivatives is minimal. For further information on our risk related to customer accommodation derivatives, see “Item 8. Financial Statements and Supplementary Data—Note 9—Derivative Instruments and Hedging Activities.”
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Table of ContentsSUPPLEMENTAL TABLETable A—Net Charge-Offs
Year Ended December 31,(Dollars in millions) 2023 2022 2021
Average loans held for investment $ 311,541 $ 292,238 $ 252,730
Net charge-offs 8,414 3,973 2,234
Net charge-off rate 2.70 % 1.36 % 0.88 %Table B— Reconciliation of Non-GAAP Measures
The following non-GAAP measure consists of our adjusted results that we believe helps investors and users of our financial information understand the effect of adjusting items on our selected reported results; however, it may not be comparable to similarly-titled measures reported by other companies. This adjusted result provides alternate measurements of our operating performance, both for the current period and trends across multiple periods. The following table presents reconciliations of the non-GAAP measure to the applicable amounts measured in accordance with U.S. GAAP. The non-GAAP measure below should not be viewed as a substitute for reported results determined in accordance with U.S. GAAP.
December 31,(Dollars in millions, except as noted) 2023 2022 2021Adjusted operating efficiency ratio:Operating expense (U.S. GAAP)
$ 16,307 $ 15,146 $ 13,699
FDIC special assessment
(289) — —
Insurance recoveries and legal reserve activity — 177 (100)
Restructuring charges — (72) —
Adjusted operating expense (non-GAAP) $ 16,018 $ 15,251 $ 13,599
Adjusted net revenue (non-GAAP) $ 36,787 $ 34,250 $ 30,435Operating efficiency ratio (U.S. GAAP)44.33% 44.22% 45.01%
Impact of adjustments noted above (79) bps 31bps (33)bps
Adjusted operating efficiency ratio (non-GAAP) 43.54% 44.53% 44.68%
110Capital One Financial Corporation (COF)
Table of ContentsThe 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 U.S. GAAP. These non-GAAP measures should not be viewed as a substitute for reported results determined in accordance with U.S. GAAP.December 31,(Dollars in millions, except as noted) 2023 2022 2021Tangible Common Equity (Period-End):Stockholders’ equity $ 58,089 $ 52,582 $ 61,029Goodwill and other intangible assets (1)(15,289) (14,902) (14,907)Noncumulative perpetual preferred stock (4,845) (4,845) (4,845)Tangible common equity $ 37,955 $ 32,835 $ 41,277
Tangible Common Equity (Average):
Stockholders’ equity $ 55,195 $ 55,125 $ 62,556
Goodwill and other intangible assets (1)
(15,207) (14,905) (14,805)
Noncumulative perpetual preferred stock (4,845) (4,845) (5,590)
Tangible common equity
$ 35,143 $ 35,375 $ 42,161
Return on Tangible Common Equity (Average):
Net income available to common stockholders $ 4,582 $ 7,044 $ 11,965
Tangible common equity (Average)
35,143 35,375 42,161
Return on tangible common equity (2)
13.04% 19.91% 28.39%Tangible Assets (Period-End):Total assets $ 478,464 $ 455,249 $ 432,381Goodwill and other intangible assets (1)(15,289) (14,902) (14,907)
Tangible assets $ 463,175 $ 440,347 $ 417,474Tangible Assets (Average):Total assets $ 467,807 $ 440,538 $ 424,521Goodwill and other intangible assets (1)(15,207) (14,905) (14,805)
Tangible assets
$ 452,600 $ 425,633 $ 409,716Return on Tangible Assets (Average):Net income $ 4,887 $ 7,360 $ 12,390
Tangible assets (Average)
452,600 425,633 409,716
Return on tangible assets (3)
1.08% 1.73% 3.03%
TCE Ratio
Tangible common equity (Period-end) $ 37,955 $ 32,835 $ 41,277
Tangible Assets (Period-end) 463,175 440,347 417,474
TCE Ratio (4)
8.2% 7.5% 9.9%
Tangible Book Value per Common Share:
Tangible common equity (period-end) $ 37,955 $ 32,835 $ 41,277
Outstanding Common Shares 380.4 381.3 413.9
Tangible book value per common share
$ 99.78 $ 86.11 $ 99.74__________
(1) Includes impact of related deferred taxes.(2) Return on average tangible common equity is a non-GAAP measure calculated based on net income (loss) available to common stockholders less income (loss) from discontinued operations, net of tax, for the period, divided by average TCE.
(3) Return on average tangible assets is a non-GAAP measure calculated based on annualized income (loss) from continuing operations, net of tax, for the period divided by average tangible assets for the period.
(4) TCE ratio is a non-GAAP measure calculated based on TCE divided by period-end tangible assets.
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Glossary and Acronyms
2004 Plan: The Amended and Restated 2004 Stock Incentive Plan.2022 Call Report: Consolidated Reports of Condition and Income as of December 31, 2022.
Allowance coverage ratio: Allowance as a percentage of loans held for investment.Amortized cost: The amount at which a financing receivable or investment is originated or acquired, adjusted for applicable accrued interest, accretion, or amortization of premium, discount, and net deferred fees or costs, collection of cash, write-offs, foreign exchange and fair value hedge accounting adjustments.
AML Act: Anti-Money Laundering Act of 2020, enacted as part of the National Defense Authorization Act, requires the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) to issue a number of rules that will update and expand the BSA’s regulatory requirements.Annual Report: References to “this Report” or our “2023 Form 10-K” or “2023 Annual Report” are to our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
Bank: Refers to (i) CONA from and after the Bank Merger and (ii) CONA and COBNA collectively prior to the Bank Merger.
Bank Merger: The merger of COBNA with and into CONA, with CONA as the surviving entity, that occurred on October 1, 2022.Basel Committee: The Basel Committee on Banking Supervision.
Basel III Capital Rules: The regulatory capital requirements established by the Federal Banking Agencies in July 2013 to implement the Basel III capital framework developed by the Basel Committee as well as certain Dodd-Frank Act and other capital provisions.
Basel III Finalization Proposal: The notice of proposed rulemaking released by the Federal Banking Agencies on July 27, 2023 to revise the Basel III Capital Rules applicable to banking organizations with total assets of $100 billion or more and their subsidiary depository institutions.
Basel III standardized approach: The Basel III Capital Rules modified Basel I to create the Basel III standardized approach.BHC Act: The Bank Holding Company Act of 1956, as amended.Capital One Canada: Capital One Bank (Canada Branch).
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.
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 CECL model) that is based on expected rather than incurred losses, with an anticipated result of more timely loss recognition. This guidance was effective for us on January 1, 2020.
CECL Transition Election: The optional five-year transition period provided to banking institutions to phase in the impact of the CECL standard on their regulatory capital.112Capital One Financial Corporation (COF)
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CECL Transition Rule: A rule adopted by the Federal Banking Agencies and effective in 2020 that provides banking institutions an optional five-year transition period to phase in the impact of the CECL standard on their regulatory capital.COBNA: Capital One Bank (USA), National Association, one of our wholly-owned subsidiaries through September 30, 2022, which offered credit card products along with other lending products and consumer services. On October 1, 2022, the Company completed the merger of COBNA with and into CONA, with CONA as the surviving entity.Common equity Tier 1 (“CET1”) capital: CET1 capital primarily includes qualifying common shareholders’ equity, retained earnings and certain AOCI amounts less certain deductions for goodwill, intangible assets, and certain deferred tax assets.
CONA: Capital One, National Association, one of our wholly-owned subsidiaries, which offers a broad spectrum of banking products and financial services to consumers, small businesses and commercial clients.Contingency Funding Plan (“CFP”): A plan that describes the Company’s event management process and management response plans to ensure that the Company is prepared to respond to a liquidity crisis and to maintain the liquidity necessary to fund normal operating requirements. The plan establishes liquidity monitoring, quantitative assessment (including sizing of potential access to alternative contingent liquidity resources, qualitative and quantitative triggers that would signal risk, the liquidity event management process, and annual testing of the different components of the CFP.
Credit risk: The risk to current or projected financial condition and resilience arising from an obligor’s failure to meet the terms of any contract with the Company or otherwise perform as agreed.
Deposit Insurance Fund (“DIF”): A fund maintained by the FDIC to provide insurance coverage for certain deposits. It is funded through assessments on banks.
Derivative: A contract or agreement whose value is derived from changes in interest rates, foreign exchange rates, prices of securities or commodities, credit worthiness for credit default swaps or financial or commodity indices.
Discontinued operations: The operating results of a component of an entity, as defined by Accounting Standards Codification 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 of 2010 (“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.
Expanded Risk-Based Approach: The proposed framework for calculating risk-weighted assets for credit risk, operational risk, credit valuation adjustment risk and market risk that was introduced by the Basel III Finalization Proposal.
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 Deposit Insurance Corporation (“FDIC”): An independent U.S. governmental agency that administers the Deposit Insurance Fund.
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.Financial Difficulty Modification (“FDM”): A FDM is deemed to occur when a loan modification is made to a borrower experiencing financial difficulty in the form of principal forgiveness, an interest rate reduction, an other-than-insignificant payment delay, a term extension, or a combination of these modifications in the current reporting period. FDMs became effective with the adoption of ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures on January 1, 2023.
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Table of ContentsForeign exchange contracts: Contracts that provide for the future receipt or delivery of foreign currency at previously agreed-upon terms.
Framework: The Capital One enterprise-wide risk management framework.GSE or Agency: A government-sponsored enterprise or agency is a financial services corporation created by the United States Congress. Examples of U.S. government agencies include Federal National Mortgage Association (“Fannie Mae”), Federal Home Loan Mortgage Corporation (“Freddie Mac”), Government National Mortgage Association (“Ginnie Mae”) and the Federal Home Loan Banks (“FHLB”).Interest method: Method of amortization used to arrive at periodic interest income at a constant effective yield on the net investment in a financial asset.
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 a Moody’s long-term rating of Baa3 or better; and/or a S&P long-term rating of BBB- or better; and/or a Fitch 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: The final rules published by the Basel Committee and as implemented by the Federal Banking Agencies in 2014 for the Basel III Liquidity Coverage Ratio (“LCR”) 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 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.
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.
LTD Proposal: The proposed rule released by the Federal Banking Agencies on August 29, 2023 that would require banking organizations with $100 billion or more in total assets to comply with certain long-term debt requirements and clean holding company requirements.
Loss severity: Loss given default.
Managed presentation: A non-GAAP presentation of business segment results derived from our internal management accounting and reporting process, which employs various allocation methodologies, including funds transfer pricing, to assign certain balance sheet assets, deposits and other liabilities and their related revenues and expenses directly or indirectly attributable to each business segment. The results of our individual businesses reflect the manner in which management evaluates performance and makes decisions about funding our operations and allocating resources and are intended to reflect each segment as if it were a stand-alone business.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.114Capital One Financial Corporation (COF)
Table of ContentsMortgage 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. Negative net charge-offs and related rates are captioned as net recoveries.
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 do not report loans classified as held for sale as nonperforming.NSFR Rule: The rule issued by the Federal Banking Agencies in October 2020 implementing the net stable funding ratio (“NSFR”). The NSFR measures the stability of our funding profile and requires us to maintain minimum amounts of stable funding to support our assets, commitments and derivatives exposures over a one-year period.Patriot Act: The USA PATRIOT Act of 2001.
PR Rules: The U.S. prudential regulators’ margin rules for uncleared derivatives.Proposed CFPB Rule: CFPB proposed rule to amend Regulation Z.Proxy Statement: Proxy statement for the 2024 Annual Stockholder Meeting.
Public Fund Deposits: Deposits that are derived from a variety of political subdivisions such as school districts and municipalities.
Purchase Plan: Our Associate Stock Purchase Plan, which is a compensatory plan under the accounting guidance for stock-based compensation.
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.
Recovery Plan: A plan that describes the Company’s approach for effectively responding to severely-adverse stress at both CONA and the Company. The Recovery Plan establishes qualitative and quantitative triggers for CONA and the Company that would signal the risk or existence of severely-adverse stress at the respective entity and identifies several specific remedial actions for recovery status that the Company can use to effectively respond to the stress environment. The Recovery Plan is separate from, but complementary to, the CFP.
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 the business locations and/or activities being exited.
Risk Committee: The Risk Committee of the Board of Directors.
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.
Stress capital buffer requirement: A component of our standardized approach capital conservation buffer, which is recalibrated annually based on the results of our supervisory stress tests.
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Table of ContentsStress Capital Buffer Rule: The final rule issued by the Federal Reserve in March 2020 to implement the stress capital buffer requirement.
Subprime: For purposes of lending in our Credit Card business, we generally consider FICO scores of 660 or below, or other equivalent risk scores, to be subprime. For purposes of auto lending in our Consumer Banking business, we generally consider FICO scores of 620 or below to be subprime.
Tangible common equity (“TCE”): A non-GAAP financial measure calculated as common equity less goodwill and other intangible assets inclusive of any related deferred tax liabilities.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. The accounting guidance for TDRs was eliminated by ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures , which we adopted as of January 1, 2023.Unfunded commitments: Legally binding agreements to provide a defined level of financing until a specified future date.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.
U.S. Real Gross Domestic Product (“GDP”) : An inflation-adjusted measure that reflects the value of all goods and services produced by an economy in a given year.
Variable interest entity (“VIE”): An entity that, by design, either (i) lacks sufficient equity to permit the entity to finance its activities without additional subordinated financial support from other parties; or (ii) has equity investors that do not have (a) the ability to make significant decisions relating to the entity’s operations through voting rights, (b) the obligation to absorb the expected losses, and/or (c) the right to receive the residual returns of the entity.
Virginia Financial Institution Holding Company Act: Chapter 7 of Title 6.2 of the Code of Virginia governing the acquisition of interests in Virginia financial institutions.116Capital One Financial Corporation (COF)
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AcronymsAI: Artificial intelligenceABS: Asset-backed securities
ACL: Allowance for credit losses
AML: Anti-money laundering
AOCI: Accumulated other comprehensive income
ASU: Accounting Standards Update
ATM: Automated teller machine
AWS: Amazon Web Services, Inc.
BHC: Bank holding companybps: Basis points
BSA: The Bank Secrecy ActBTFP: Bank Term Funding ProgramCAD: Canadian dollar
CAP: Compliance Assurance ProcessCCAR: Comprehensive Capital Analysis and ReviewCCP: Central Counterparty Clearinghouse, or Central Clearinghouse
CDE: Community development entities
CECL: Current expected credit loss
CEO: Chief Executive Officer
CET1: Common equity Tier 1 capitalCFPB: Consumer Financial Protection Bureau
CFTC: Commodity Futures Trading Commission
CIBC: Change in Bank Control Act
CIO: Chief Information Officer
CIRCIA: Cyber Incident Reporting for Critical Infrastructure Act
CISA: Cybersecurity and Infrastructure Security Agency
CISO: Chief Information Security OfficerCMBS: Commercial mortgage-backed securities
CME: Chicago Mercantile ExchangeCPRA: California Privacy Rights Act
COBNA: Capital One Bank (USA), National AssociationCOEP: Capital One (Europe) plc
COF: Capital One Financial Corporation
CONA : Capital One, National AssociationCOSO: Committee of the Treadway CommissionCRA: Community Reinvestment Act
CTRO: Chief Technology Risk Officer
CVA: Credit valuation adjustment
DCF: Discounted cash flow
DFAST: Dodd-Frank Act Stress Tests
DIB: Diversity Inclusion and Belonging
DIF : Deposit Insurance Fund
DRR: Designated Reserve Ratio117
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Table of ContentsDTCC: Depository Trust and Clearing Corporation
DVA: Debit valuation adjustment
ECRP: Enterprise Cyber Response Plan
EU: European Union
EU GDPR: EU General Data Protection Regulation
EUR: Euro
Fannie Mae: Federal National Mortgage Association
FASB: Financial Accounting Standards BoardFCA: U.K. Financial Conduct AuthorityFCAC: Financial Consumer Agency of Canada
FCM: Futures commission merchant
FCRA: Fair Credit Reporting Act
FDM: Financial difficulty modification
FDIC: Federal Deposit Insurance Corporation
FDICIA: Federal Deposit Insurance Corporation Improvement Act of 1991
FFIEC: Federal Financial Institutions Examination Council
FHC: Financial Holding CompanyFHLB: Federal Home Loan BanksFICC - GSD : Fixed Income Clearing Corporation - Government Securities Division
FICO: Fair Isaac Corporation
FinCEN: Financial Crimes Enforcement Network
FINRA: Financial Industry Regulatory Authority
FIS: Fidelity Information Services
Fitch: Fitch Ratings
Freddie Mac: Federal Home Loan Mortgage CorporationFVC: Fair Value Committee
GAAP: Generally accepted accounting principles in the U.S.
GBP: Pound sterling
GDP: U.S. Real Gross Domestic ProductGinnie Mae: Government National Mortgage AssociationGLBA: Gramm-Leach Bliley ActG-SIB: Global systemically important banks
GSE or Agency: Government-sponsored enterprise
HFI: Held for Investment
HQLA: High-Quality Liquid Assets
ICE: Intercontinental Exchange
IRM: Independent Risk Management
IRS: Internal Revenue Service
LCH: LCH Group
LCR: Liquidity coverage ratio
LLC: Limited liability company
LTV: Loan-to-Value
Moody’s: Moody’s Investors Service
MSRs: Mortgage servicing rightsNSFR: Net stable funding ratio118
Capital One Financial Corporation (COF)
Table of ContentsNYSE: New York Stock Exchange
OCC: Office of the Comptroller of the Currency
OCI: Other comprehensive income
OFAC: Office of Foreign Assets Control
OPC: Canada’s Office of Privacy Commissioner
OSFI: Office of the Superintendent of Financial Institutions
OTC: Over-the-counter
PCA: Prompt corrective action
PCAOB: Public Company Accounting Oversight Board
PCCR: Purchased credit card relationship
PCD: Purchased Credit-Deteriorated
PIPEDA: Personal Information Protection and Electronic Document Act
PPI: Payment protection insurance
PSU: Performance share units
RMBS: Residential mortgage-backed securities
ROU: Right-of-useRSU: Restricted stock unit
S&P: Standard & Poor’s
SEC: U.S. Securities and Exchange Commission
SOFR: Secured Overnight Financing Rate
TCE: Tangible common equity
TDR: Troubled debt restructuring
TILA: Truth in Lending Act
TSYS: Total System Services LLC
U.K.: United Kingdom
U.K. GDPR: U.K. General Data Protection Regulation
U.S.: United States of America
USD: United States Dollar
VAC: Valuations Advisory Committee
VaR: Value-At-Risk
VIE: Variable interest entity
VOE: Voting interest entityXBRL: Extensible business reporting language
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FY 2024-12-31 (later)
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)This discussion contains forward-looking statements that are based upon management’s current expectations and are subject to significant uncertainties and changes in circumstances. Please review “Part I—Item 1. Business—Forward-Looking Statements” for more information on the forward-looking statements in this Report. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future 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, 2024 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 and financial condition, including capital and liquidity management, 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, 2024 and accompanying notes. MD&A is organized in the following sections:• Selected Financial Data
• Capital Management
• Executive Summary • Risk Management
• Consolidated Results of Operations • Credit Risk Profile
• Consolidated Balance Sheets Analysis • Liquidity Risk Profile
• Off-Balance Sheet Arrangements • Market Risk Profile
• Business Segment Financial Performance • Supplemental Tables
• Critical Accounting Policies and Estimates • Glossary and Acronyms
• Accounting Changes and Developments52Capital One Financial Corporation (COF)
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SELECTED FINANCIAL DATAThe following table presents selected consolidated financial data and performance metrics for the three-year period ended December 31, 2024, 2023 and 2022. We also provide selected key metrics we use in evaluating our performance, including certain metrics that are computed using non-GAAP measures. We consider these metrics to be key financial measures that management uses in assessing our operating performance, capital adequacy and the level of returns generated. We believe these non-GAAP metrics provide useful insight to investors and users of our financial information as they provide an alternate measurement of our performance and assist in assessing our capital adequacy and the level of return generated. These non-GAAP measures should not be viewed as a substitute for reported results determined in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”), nor are they necessarily comparable to non-GAAP measures that may be presented by other companies.Three-Year Summary of Selected Financial Data(Dollars in millions, except per share data and as noted) 2024 2023 2022 2024 vs. 2023 2023 vs. 2022Income statementInterest income $ 46,034 $ 41,938 $ 31,237 10% 34%
Interest expense 14,826 12,697 4,123 17 **
Net interest income $ 31,208 $ 29,241 $ 27,114 7 8
Non-interest income 7,904 7,546 7,136 5 6
Total net revenue 39,112 36,787 34,250 6 7
Provision for credit losses 11,716 10,426 5,847 12 78Non-interest expense:Marketing 4,562 4,009 4,017 14 —
Operating expense 16,924 16,307 15,146 4 8
Total non-interest expense 21,486 20,316 19,163 6 6
Income from continuing operations before income taxes 5,910 6,045 9,240 (2) (35)
Income tax provision 1,163 1,158 1,880 — (38)
Income from continuing operations, net of tax 4,747 4,887 7,360 (3) (34)
Income (loss) from discontinued operations, net of tax 3 — — ** —
Net income 4,750 4,887 7,360 (3) (34)
Dividends and undistributed earnings allocated to participating securities (77) (77) (88) — (13)
Preferred stock dividends (228) (228) (228) — —
Net income available to common stockholders $ 4,445 $ 4,582 $ 7,044 (3) (35)Common share statistics
Basic earnings per common share:Net income from continuing operations $ 11.60 $ 11.98 $ 17.98 (3)% (33)%
Income (loss) from discontinued operations 0.01 — — ** —
Net income per basic common share $ 11.61 $ 11.98 $ 17.98 (3) (33)Diluted earnings per common share:Net income from continuing operations $ 11.58 $ 11.95 $ 17.91 (3)% (33)%
Income (loss) from discontinued operations 0.01 — — ** —
Net income per diluted common share $ 11.59 $ 11.95 $ 17.91 (3) (33)
Common shares outstanding (period-end, in millions) 381.2 380.4 381.3 — —
Dividends declared and paid per common share $ 2.40 $ 2.40 $ 2.40 — —
Book value per common share (period-end) 159.44 152.71 137.90 4 11Tangible book value per common share (period-end) (1)106.97 99.78 86.11 7 16
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Table of Contents(Dollars in millions, except per share data and as noted) 2024 2023 2022 2024 vs. 2023 2023 vs. 2022Common dividend payout ratio (2)20.67% 20.03% 13.35% 1 7
Stock price per common share (period-end) $ 178.32 $ 131.12 $ 92.96 36 41
Total market capitalization (period-end) 67,981 49,877 35,447 36 41Balance sheet (average balances)Loans held for investment $ 317,421 $ 311,541 $ 292,238 2% 7%
Interest-earning assets 453,481 441,238 406,646 3 9
Total assets 480,451 467,807 440,538 3 6
Interest-bearing deposits 324,297 313,737 277,208 3 13
Total deposits 351,168 343,554 313,551 2 10
Borrowings 48,465 49,332 51,006 (2) (3)
Common equity 54,953 50,349 50,279 9 —
Total stockholders’ equity 59,799 55,195 55,125 8 —Selected performance metricsPurchase volume $ 654,436 $ 620,290 $ 587,283 6% 6%Total net revenue margin (3)8.62% 8.34% 8.42 % 28bps (8) bps
Net interest margin 6.88 6.63 6.67 25 (4)Return on average assets (4)0.99 1.04 1.67 (5) (63)Return on average tangible assets (5)1.02 1.08 1.73 (6) (65)Return on average common equity (6)8.08 9.10 14.01 (102) (491)Return on average tangible common equity (7)11.18 13.04 19.91 (186) (687)Equity-to-assets ratio (8)12.45 11.80 12.51 65 (71)Efficiency ratio (9)54.93 55.23 55.95 (30) (72)Operating efficiency ratio (10)43.27 44.33 44.22 (106) 11Adjusted operating efficiency ratio (11)42.35 43.54 44.53 (119) (99)
Effective income tax rate from continuing operations 19.7 19.2 20.3 50 (110)
Net charge-offs $ 10,748 $ 8,414 $ 3,973 28% 112%
Net charge-off rate 3.39 % 2.70 % 1.36 % 69bps 134 bpsDecember 31, Change(Dollars in millions, except as noted) 2024 2023 2022 2024 vs. 2023 2023 vs. 2022Balance sheet (period-end)Loans held for investment $ 327,775 $ 320,472 $ 312,331 2% 3%
Interest-earning assets 463,058 449,701 427,248 3 5
Total assets 490,144 478,464 455,249 2 5
Interest-bearing deposits 336,585 320,389 300,789 5 7
Total deposits 362,707 348,413 332,992 4 5
Borrowings 45,551 49,856 48,715 (9) 2
Common equity 55,938 53,244 47,737 5 12
Total stockholders’ equity 60,784 58,089 52,582 5 10Credit quality metricsAllowance for credit losses $ 16,258 $ 15,296 $ 13,240 6% 16%Allowance coverage ratio4.96 % 4.77 % 4.24% 19bps 53 bps
30+ day performing delinquency rate 3.69 3.71 2.96 (2) 75
30+ day delinquency rate 3.98 3.99 3.21 (1) 78
54Capital One Financial Corporation (COF)
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December 31, Change(Dollars in millions, except as noted) 2024 2023 2022 2024 vs. 2023 2023 vs. 2022Capital ratios
Common equity Tier 1 capital (12)13.5 % 12.9 % 12.5% 60 bps 40 bpsTier 1 capital (12)14.8 14.2 13.9 60 30Total capital (12)16.4 16.0 15.8 40 20Tier 1 leverage (12)11.6 11.2 11.1 40 10Tangible common equity (13)8.6 8.2 7.5 39 70Supplementary leverage (12)9.9 9.6 9.5 30 10OtherEmployees (period end, in thousands) 52.6 52.0 56.0 1% (7)%__________(1) Tangible book value per common share is a non-GAAP measure calculated based on tangible common equity (“TCE”) divided by common shares outstanding. See “Supplemental Table—Table B—Reconciliation of Non-GAAP Measures” for additional information on non-GAAP measures.(2) Common dividend payout ratio is calculated based on dividends per common share for the period divided by basic earnings per common share for the period.
(3) Total net revenue margin is calculated based on total net revenue for the period divided by average interest-earning assets for the period.
(4) Return on average assets is calculated based on income from continuing operations, net of tax, for the period divided by average total assets for the period.(5) Return on average tangible assets is a non-GAAP measure calculated based on income from continuing operations, net of tax, for the period divided by average tangible assets for the period. See “Supplemental Table—Table B—Reconciliation of Non-GAAP Measures” for additional information on non-GAAP measures.(6) Return on average common equity is calculated based on net income (loss) available to common stockholders less income (loss) from discontinued operations, net of tax, for the period, divided by average common equity. Our calculation of return on average common equity may not be comparable to similarly-titled measures reported by other companies.(7) Return on average tangible common equity is a non-GAAP measure calculated based on net income (loss) available to common stockholders less income (loss) from discontinued operations, net of tax, for the period, divided by average TCE. Our calculation of return on average TCE may not be comparable to similarly-titled measures reported by other companies. See “Supplemental Table—Table B—Reconciliation of Non-GAAP Measures” for additional information on non-GAAP measures.(8) Equity-to-assets ratio is calculated based on average stockholders’ equity for the period divided by average total assets for the period.
(9) Efficiency ratio is calculated based on total non-interest expense for the period divided by total net revenue for the period.
(10) Operating efficiency ratio is calculated based on operating expense for the period divided by total net revenue for the period.(11) Adjusted operating efficiency ratio is a non-GAAP measure. See “Supplemental Table—Table B—Reconciliation of Non-GAAP Measures” for a reconciliation of our adjusted operating efficiency ratio (non-GAAP) to our operating efficiency ratio (GAAP).
(12) Capital ratios are calculated based on the Basel III standardized approach framework. See “Capital Management” for additional information.
(13) Tangible common equity ratio is a non-GAAP measure calculated based on TCE divided by tangible assets. See “Supplemental Table—Table B—Reconciliation of Non-GAAP Measures” for the calculation of this measure and reconciliation to the comparative U.S. GAAP measure.** Not meaningful.55Capital One Financial Corporation (COF)
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EXECUTIVE SUMMARY
Financial HighlightsWe reported net income of $4.8 billion ($11.59 per diluted common share) on total net revenue of $39.1 billion for 2024. In comparison, we reported net income of $4.9 billion ($11.95 per diluted common share) on total net revenue of $36.8 billion for 2023 and net income of $7.4 billion ($17.91 per diluted common share) on total net revenue of $34.3 billion for 2022.
Our CET1 capital ratio as calculated under the Basel III standardized approach was 13.5% and 12.9% of December 31, 2024 and 2023, respectively. See “Capital Management” for additional information.
For the year ended December 31, 2024, we declared and paid common stock dividends of $937 million and repurchased $553 million of shares of our common stock. See “Capital Management—Dividend Policy and Stock Purchases” for additional information.
Below are additional highlights of our performance in 2024. These highlights are based on a comparison between the results of 2024 and 2023, except as otherwise noted. The changes in our financial condition and credit performance are generally based on our financial condition and credit performance as of December 31, 2024 compared to December 31, 2023. We provide a more detailed discussion of our financial performance in the sections following this “Executive Summary.”Total Company Performance
• Earnings:Our net income decreased by $137 million to $4.8 billion in 2024 compared to 2023 primarily driven by:
◦ Higher provision for credit losses primarily driven by higher net charge-offs in our domestic credit card loan portfolio, including the impacts of the elimination of loss sharing provisions due to the Walmart Program Termination, partially offset by a lower allowance build.
◦ Higher non-interest expense primarily driven by growth in our Credit Card business, including increased marketing spend.These drivers were partially offset by:◦ Higher net-interest income primarily driven by higher average loan balances and margins in our credit card loan portfolio, including the impacts of the elimination of revenue sharing provisions due to the Walmart Program Termination, partially offset by higher rates paid on interest-bearing deposits.• Loans Held for Investment:◦ Period-end loans held for investment increased by $7.3 billion to $327.8 billion as of December 31, 2024 from December 31, 2023 primarily driven by growth in our credit card loan portfolio.
◦ Average loans held for investment increased by $5.9 billion to $317.4 billion in 2024 compared to 2023 primarily driven by growth in our credit card loan portfolio.• Net Charge-Off and Delinquency Metrics:◦ Our net charge-off rate increased by 69 basis points (“bps”) to 3.39% in 2024 compared to 2023.
◦ Our 30+ day delinquency rate remained substantially flat at 3.98% as of December 31, 2024 compared to 3.99% as of December 31, 2023.
• Allowance for Credit Losses: Our allowance for credit losses increased by $962 million to $16.3 billion and our allowance coverage ratio increased by 19 bps to 4.96% as of December 31, 2024 compared to December 31, 2023 primarily driven by an allowance build due to the Walmart Program Termination in the second quarter of 2024.
56Capital One Financial Corporation (COF)
Table of ContentsCONSOLIDATED RESULTS OF OPERATIONSThe section below provides a comparative discussion of our consolidated financial performance for 2024, 2023 and 2022. We provide a discussion of our business segment results in the following section, “Business Segment Financial Performance.” This section should be read together with our “Executive Summary,” where we discuss trends and other factors that we expect will affect our future results of operations.Net Interest IncomeNet interest income represents the difference between interest income, including certain fees, earned on our interest-earning assets and the interest expense incurred on our interest-bearing liabilities. Our 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, net of reversals, on loans that we deem collectible. Our net interest margin 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.
57Capital One Financial Corporation (COF)
Table of ContentsTable 1 below presents the average outstanding balance, interest income earned, interest expense incurred and average yield for 2024, 2023 and 2022 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 31,2024 2023 2022(Dollars in millions) Average Balance Interest Income/ Expense Average Yield/
Rate (1)
Average Balance Interest Income/ Expense Average Yield/
Rate (1)
Average Balance Interest Income/ Expense Average Yield/
Rate (1)
Assets:
Interest-earning assets:
Loans: (2)Credit card $ 153,115 $ 29,226 19.09 % $ 141,675 $ 26,267 18.54 % $ 121,055 $ 19,626 16.21 %
Consumer banking 75,974 6,612 8.70 77,514 6,041 7.79 80,511 5,782 7.18Commercial banking (3)89,007 6,301 7.08 92,984 6,363 6.84 92,273 3,702 4.01Other (4)— (1,245) ** — (1,261) ** — (200) **
Total loans, including loans held for sale 318,096 40,894 12.86 312,173 37,410 11.98 293,839 28,910 9.84
Investment securities 90,250 2,873 3.18 89,105 2,550 2.86 90,608 1,884 2.08
Cash equivalents and other interest-earning assets 45,135 2,267 5.02 39,960 1,978 4.95 22,199 443 2.00
Total interest-earning assets 453,481 46,034 10.15 441,238 41,938 9.50 406,646 31,237 7.68
Cash and due from banks 3,793 3,869 5,054
Allowance for credit losses (15,968) (14,290) (11,620)
Premises and equipment, net 4,409 4,373 4,265
Other assets 34,736 32,617 36,193
Total assets $ 480,451 $ 467,807 $ 440,538Liabilities and stockholders’ equity:
Interest-bearing liabilities:Interest-bearing deposits $ 324,297 $ 11,493 3.54 % $ 313,737 $ 9,489 3.02% $ 277,208 $ 2,535 0.91 %
Securitized debt obligations 16,507 958 5.80 17,675 959 5.42 15,603 384 2.46
Senior and subordinated notes 31,529 2,333 7.40 31,109 2,204 7.08 29,286 1,074 3.67
Other borrowings and interest-bearing liabilities (5)
2,424 42 1.71 2,394 45 1.89 7,800 130 1.67
Total interest-bearing liabilities 374,757 14,826 3.96 364,915 12,697 3.48 329,897 4,123 1.25
Non-interest-bearing deposits 26,871 29,817 36,343
Other liabilities 19,024 17,880 19,173
Total liabilities 420,652 412,612 385,413
Stockholders’ equity 59,799 55,195 55,125
Total liabilities and stockholders’ equity $ 480,451 $ 467,807 $ 440,538
Net interest income/spread $ 31,208 6.20 $ 29,241 6.03 $ 27,114 6.43
Impact of non-interest-bearing funding 0.68 0.60 0.24
Net interest margin (6)
6.88 % 6.63% 6.67 %__________
(1) Average yield is calculated based on interest income for the period divided by average loans during the period. Interest income does not include any allocations, such as funds transfer pricing. Average yield is calculated using whole dollar values for average balances and interest income/expense.(2) Past due fees, net of reversals, included in interest income totaled approximately $2.3 billion in 2024, $2.2 billion in 2023 and $1.9 billion in 2022.
(3) Some of our commercial investments generate tax-exempt income, tax credits or other tax benefits. Accordingly, we present our Commercial Banking revenue and yields on a taxable-equivalent basis, calculated using the federal statutory tax rate of 21% and state taxes where applicable, with offsetting reductions to the Other category. Taxable-equivalent adjustments included in the interest income and yield computations for our commercial loans totaled approximately $79 million in 2024 and $74 million in both 2023 and 2022, with corresponding reductions to the Other category.
(4) Interest income/expense in the Other category represents the impact of hedge accounting on our loan portfolios and the offsetting reduction of the taxable-equivalent adjustments of our commercial loans as described above.
(5) Includes amounts related to entities that provide capital to low-income and rural communities of $2.0 billion, $1.8 billion and $1.7 billion in 2024, 2023 and 2022, respectively. Related interest expense was $31 million , $32 million and $29 million for 2024, 2023 and 2022, respectively.
(6) The Walmart Program Termination increased net interest margin by 13 bps in 2024.
58Capital One Financial Corporation (COF)
Table of Contents** Not meaningful.Net interest income increased by $2.0 billion to $31.2 billion in 2024 compared to 2023 primarily driven by higher average loan balances and margins in our credit card loan portfolio, including the impacts of the elimination of revenue sharing provisions due to the Walmart Program Termination, partially offset by higher rates paid on interest-bearing deposits.
Net interest margin increased by 25 bps to 6.88% in 2024 compared to 2023 primarily driven by higher asset yields and growth in our credit card loan portfolio, partially offset by higher rates paid on interest-bearing deposits.
Our total company cumulative interest-bearing deposit beta for the rising rate cycle peaked at 62% in the second quarter of 2024 before the federal funds rate began to decrease. As of December 31, 2024, our total company cumulative deposit beta for the falling rate cycle was 11% as our total company deposit rate decreased as the federal funds rate decreased.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)2024 vs. 2023 2023 vs. 2022(Dollars in millions) Total Variance Volume Rate Total Variance Volume Rate
Interest income:
Loans:Credit card $ 2,959 $ 2,166 $ 793 $ 6,641 $ 3,584 $ 3,057
Consumer banking 571 (120) 691 259 (215) 474Commercial banking (2)(62) (272) 210 2,661 29 2,632Other (3)16 — 16 (1,061) — (1,061)
Total loans, including loans held for sale 3,484 1,774 1,710 8,500 3,398 5,102
Investment securities 323 33 290 666 (31) 697
Cash equivalents and other interest-earning assets 289 259 30 1,535 476 1,059
Total interest income 4,096 2,066 2,030 10,701 3,843 6,858Interest expense:Interest-bearing deposits 2,004 328 1,676 6,954 371 6,583
Securitized debt obligations (1) (64) 63 575 56 519
Senior and subordinated notes 129 30 99 1,130 71 1,059
Other borrowings and liabilities (3) 1 (4) (85) (90) 5
Total interest expense 2,129 295 1,834 8,574 408 8,166
Net interest income $ 1,967 $ 1,771 $ 196 $ 2,127 $ 3,435 $ (1,308)__________
(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 investments generate tax-exempt income, tax credits or other tax benefits. Accordingly, we present our Commercial Banking revenue and yields on a taxable-equivalent basis, calculated using the federal statutory tax rate of 21% and state taxes where applicable, with offsetting reductions to the Other category.
(3) Interest income/expense in the Other category represents the impact of hedge accounting on our loan portfolios and the offsetting reduction of the taxable-equivalent adjustments of our commercial loans as described above.59Capital One Financial Corporation (COF)
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Non-Interest IncomeTable 3 displays the components of non-interest income for 2024, 2023 and 2022.Table 3: Non-Interest Income
Year Ended December 31,(Dollars in millions) 2024 2023 2022
Interchange fees, net $ 4,882 $ 4,793 $ 4,606
Service charges and other customer-related fees 1,976 1,667 1,625
Net securities losses
(35) (34) (9)Other (1)(2)1,081 1,120 914
Total non-interest income $ 7,904 $ 7,546 $ 7,136________(1) Primarily consists of revenue from Capital One Shopping, treasury and other investment income and commercial mortgage banking revenue.
(2) Includes gains of $94 million and $86 million and losses of $78 million on deferred compensation plan investments for 2024 , 2023 and 2022, respectively. These amounts have corresponding offsets in non-interest expense.
Non-interest income increased by $358 million to $7.9 billion in 2024 compared to 2023 primarily driven by higher capital markets activity in our Commercial Banking business and growth in our Credit Card business.
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Capital One Financial Corporation (COF)
Table of ContentsProvision for Credit LossesOur provision for credit losses in each period is driven by net charge-offs, changes to the allowance for credit losses and changes to the reserve for unfunded lending commitments. We recorded a provision for credit losses of $11.7 billion in 2024, $10.4 billion in 2023 and $5.8 billion in 2022.
Our provision for credit losses increased by $1.3 billion to $11.7 billion in 2024 as compared to 2023 driven by higher net charge-offs in our domestic credit card loan portfolio, including the impacts of the elimination of loss sharing provisions due to the Walmart Program Termination, partially offset by a lower allowance build.
We provide additional information on the provision for credit losses and changes in the allowance for credit losses within “Credit Risk Profile” and “Item 8. Financial Statements and Supplementary Data—Note 5—Allowance for Credit Losses and Reserve for Unfunded Lending Commitments.” For information on the allowance methodology for each of our loan categories, see “Item 8. Financial Statements and Supplementary Data—Note 1—Summary of Significant Accounting Policies.”
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Non-Interest ExpenseTable 4 displays the components of non-interest expense for 2024, 2023 and 2022.Table 4: Non-Interest Expense
Year Ended December 31,(Dollars in millions) 2024 2023 2022Operating Expense:
Salaries and associate benefits (1)$ 9,398 $ 9,302 $ 8,425
Occupancy and equipment 2,366 2,160 2,050
Professional services 1,610 1,268 1,807
Communications and data processing 1,462 1,383 1,379
Amortization of intangibles 77 82 70Other non-interest expense:Bankcard, regulatory and other fee assessments 304 548 264
Collections 366 353 331
Other 1,341 1,211 820
Total other non-interest expense 2,011 2,112 1,415
Total operating expense $ 16,924 $ 16,307 $ 15,146
Marketing 4,562 4,009 4,017
Total non-interest expense $ 21,486 $ 20,316 $ 19,163_________(1) Includes expenses of $94 million and $86 million and a benefit of $78 million related to our deferred compensation plan for 2024, 2023 and 2022, respectively. These amounts have corresponding offsets from investments in other non-interest income.
Non-interest expense increased by $1.2 billion to $21.5 billion in the year ended 2024 compared to 2023, primarily driven by growth in our Credit Card business, including increased marketing spend.
For the year ended December 31, 2024, we have incurred $234 million of integration expenses related to the Transaction, primarily driven by professional services, which are included within operating expense in our consolidated statements of income.
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Income TaxesWe recorded an income tax provision of $1.2 billion (19.7% effective income tax rate), $1.2 billion (19.2% effective income tax rate) and $1.9 billion (20.3% effective income tax rate) in 2024, 2023 and 2022, respectively. Our effective tax rate on income from continuing operations varies between periods due, in part, to the impact of changes in pre-tax income and changes in tax credits, tax-exempt income and non-deductible expenses relative to our pre-tax earnings.
Our effective income tax rate in 2024 increased by 0.5% compared to 2023. We recorded discrete tax benefit of $27 million in 2024, discrete tax expense of $6 million in 2023, and discrete tax benefit of $71 million in 2022.
We provide additional information on items affecting our income taxes and effective tax rate in “Item 8. Financial Statements and Supplementary Data—Note 16—Income Taxes.”CONSOLIDATED BALANCE SHEETS ANALYSISTotal assets increased by $11.7 billion to $490.1 billion as of December 31, 2024 from December 31, 2023 primarily driven by higher loans held for investment and securities available for sale balances.
Total liabilities increased by $9.0 billion to $429.4 billion as of December 31, 2024 from December 31, 2023 primarily driven by deposit growth due to our national consumer banking strategy, partially offset by net maturities and paydowns of our securitized debt obligations. Our national consumer banking strategy includes our national brand and marketing strategy, cafés and tech / digital investments, which have enabled us to both deepen and grow our overall customer base.
Stockholders’ equity increased by $2.7 billion to $60.8 billion as of December 31, 2024 from December 31, 2023 primarily driven by net income of $4.8 billion, partially offset by stock dividends and an increase in accumulated other comprehensive loss.
The following is a discussion of material changes in the major components of our assets and liabilities during 2024. Period-end balance sheet amounts may vary from average balance sheet amounts due to the timing of normal balance sheet management activities that are intended to support our capital and liquidity positions, our market risk profile and the needs of our customers.Investment SecuritiesOur investment securities portfolio consists of the following: U.S. government-sponsored enterprise or agency (“GSE” or “Agency”) and non-agency residential mortgage-backed securities (“RMBS”), agency commercial mortgage-backed securities (“CMBS”), U.S. Treasury securities and other securities. Agency securities include Government National Mortgage Association (“Ginnie Mae”) guaranteed securities, Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”) issued securities. The carrying value of our investments in Agency and U.S. Treasury securities represented 96% and 97% of our total investment securities portfolio as of December 31, 2024 and 2023, respectively.
The fair value of our available for sale securities portfolio increased by $3.9 billion to $83.0 billion as of December 31, 2024 from December 31, 2023, primarily driven by net purchases. See “Item 8. Financial Statements and Supplementary Data—Note 3—Investment Securities” for more information.
63Capital One Financial Corporation (COF)
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Loans Held for InvestmentTotal loans held for investment consists of both unsecuritized loans and loans held in our consolidated trusts. Table 5 summarizes, by portfolio segment, the carrying value of our loans held for investment, the allowance for credit losses and net loan balance as of December 31, 2024 and 2023.Table 5: Loans Held for InvestmentDecember 31, 2024 December 31, 2023(Dollars in millions) Loans Allowance Net Loans Loans Allowance Net LoansCredit Card $ 162,508 $ (12,974) $ 149,534 $ 154,547 $ (11,709) $ 142,838
Consumer Banking 78,092 (1,884) 76,208 75,437 (2,042) 73,395
Commercial Banking 87,175 (1,400) 85,775 90,488 (1,545) 88,943
Total $ 327,775 $ (16,258) $ 311,517 $ 320,472 $ (15,296) $ 305,176
Loans held for investment increased by $7.3 billion to $327.8 billion as of December 31, 2024 compared to December 31, 2023 primarily driven by growth in our credit card loan portfolio.
We provide additional information on the composition of our loan portfolio and credit quality in “Credit Risk Profile,” “Consolidated Results of Operations” and “Item 8. Financial Statements and Supplementary Data—Note 4—Loans.”Funding SourcesOur primary source of funding comes from insured retail deposits, as they are a relatively stable and lower cost source of funding. In addition to deposits, we raise funding through the issuance of senior and subordinated notes, securitized debt obligations, federal funds purchased, securities loaned or sold under agreements to repurchase, and Federal Home Loan Bank (“FHLB”) advances secured by certain portions of our loan and securities portfolios.
Table 6 provides the composition of our primary sources of funding as of December 31, 2024 and 2023.Table 6: Funding Sources CompositionDecember 31, 2024 December 31, 2023(Dollars in millions) Amount % of Total Amount % of Total
Deposits:Consumer Banking $ 318,329 78 % $ 296,171 74 %
Commercial Banking 31,691 8 32,712 8Other (1)12,687 3 19,530 5Total deposits362,707 89 348,413 87
Securitized debt obligations 14,264 3 18,043 5
Other debt 31,287 8 31,813 8
Total funding sources $ 408,258 100 % $ 398,269 100 %__________(1) Includes brokered deposits of $11.6 billion and $18.5 billion as of December 31, 2024 and 2023, respectively.
Total deposits increased by $14.3 billion to $362.7 billion as of December 31, 2024 from December 31, 2023 primarily driven by our national consumer banking strategy, partially offset by maturities in brokered deposits.
As of December 31, 2024 and 2023, we held $64.9 billion and $64.2 billion, respectively, of estimated uninsured deposits. These amounts were primarily comprised of checking and savings deposits. These estimated uninsured deposits comprised approximately 18% of our total deposits as of both December 31, 2024 and 2023. We estimate our uninsured amounts based on methodologies and assumptions used for our “Consolidated Reports of Condition and Income” (FFIEC 031) filed with the Federal Banking Agencies, adjusted to exclude intercompany balances and cash collateral received on certain derivative contracts which are not presented within deposits on our consolidated balance sheet.
64Capital One Financial Corporation (COF)
Table of ContentsSecuritized debt obligations decreased by $3.8 billion to $14.3 billion as of December 31, 2024 from December 31, 2023 primarily driven by net maturities of securitized debt obligations .
Other debt decreased by $526 million to $31.3 billion as of December 31, 2024 from December 31, 2023 primarily driven by net maturities of unsecured senior debt.
We provide additional information on our funding sources in “Liquidity Risk Profile” and “Item 8. Financial Statements and Supplementary Data—Note 9—Deposits and Borrowings.”
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Capital One Financial Corporation (COF)
Table of ContentsDeferred 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 make these estimates.Deferred tax assets, net of deferred tax liabilities and valuation allowances, were approximately $9.1 billion as of December 31, 2024, an increase of $1.1 billion from December 31, 2023. The increase in our net deferred tax assets was primarily driven by an increase in our capitalized research costs, an increase in unrealized losses related to our available for sale securities and derivatives and an increase in our allowance for credit losses.
Our recorded valuation allowance balances were $529 million and $496 million as of December 31, 2024 and 2023, respectively. 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 “Consolidated Results of Operations” and “Item 8. Financial Statements and Supplementary Data—Note 16—Income Taxes.”
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Capital One Financial Corporation (COF)
Table of ContentsOFF-BALANCE SHEET ARRANGEMENTSIn 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 “Item 8. Financial Statements and Supplementary Data—Note 6—Variable Interest Entities and Securitizations” and “Item 8. Financial Statements and Supplementary Data—Note 19—Commitments, Contingencies, Guarantees and Others.”
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BUSINESS SEGMENT FINANCIAL PERFORMANCEOur 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 or managed as a part of our existing business segments. Certain activities that are not part of a business segment are included in the Other category, such as the management of our corporate investment portfolio and asset/liability positions performed by our centralized Corporate Treasury group and any residual tax expense or benefit beyond what is assessed to our business segments in order to arrive at the consolidated effective tax rate. The Other category also includes 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 and integration expenses related to the Transaction.
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 revenues 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 is managed by our centralized Corporate Treasury group and 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 business segment. The allocation is unique to each business segment and acquired business and is based on the composition of assets and liabilities. The funds transfer pricing process considers the interest rate and liquidity risk characteristics of assets and liabilities and off-balance sheet products. Periodically, the methodology and assumptions utilized in the funds transfer pricing process are adjusted to reflect economic conditions and other factors, which may impact the allocation of net interest income to the business segments. 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 on U.S. GAAP. There is no comprehensive authoritative body of guidance for management accounting equivalent to U.S. GAAP; therefore, the managed presentation of our business segment results may not be comparable to similar information provided by other financial services companies. In addition, our individual business segment results should not be used as a substitute for comparable results determined in accordance with U.S. GAAP.We summarize our business segment results for the years ended December 31, 2024, 2023 and 2022 and provide a comparative discussion of these results for 2024 and 2023, as well as changes in our financial condition and credit performance metrics as of December 31, 2024 compared to December 31, 2023. We provide a reconciliation of our total business segment results to our reported consolidated results in “Item 8. Financial Statements and Supplementary Data—Note 18—Business Segments and Revenue from Contracts with Customers.”
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Business Segment Financial PerformanceTable 7 summarizes our business segment results, which we report based on total net revenue (loss) and net income (loss) from continuing operations, for the years ended December 31, 2024, 2023 and 2022. We provide information on the allocation methodologies used to derive our business segment results in “Item 8. Financial Statements and Supplementary Data—Note 18—Business Segments and Revenue from Contracts with Customers.”Table 7 : Business Segment Results
Year Ended December 31,2024 2023 2022Total Net Revenue (Loss) (1)
Net Income
(Loss) (2)
Total Net Revenue (Loss) (1)
Net Income
(Loss) (2)
Total Net Revenue (Loss) (1)
Net Income
(Loss) (2)
(Dollars in millions) Amount % of Total Amount % of Total Amount % of Total Amount % of Total Amount % of Total Amount % of TotalCredit Card $ 28,164 72% $ 3,292 69% $ 25,669 70% $ 3,457 71% $ 22,355 65% $ 4,927 67%
Consumer Banking 8,718 22 1,460 31 9,302 25 2,258 46 9,434 28 2,250 31Commercial Banking (3)3,601 9 1,209 25 3,520 10 691 14 3,590 10 843 11Other (3)(1,371) (3) (1,214) (25) (1,704) (5) (1,519) (31) (1,129) (3) (660) (9)
Total $ 39,112 100% $ 4,747 100% $ 36,787 100% $ 4,887 100% $ 34,250 100% $ 7,360 100%__________
(1) Total net revenue (loss) consists of net interest income and non-interest income.
(2) Net income (loss) for our business segments and the Other category is based on income (loss) from continuing operations, net of tax.
(3) Some of our commercial investments generate tax-exempt income, tax credits or other tax benefits. Accordingly, we present our Commercial Banking revenue and yields on a taxable-equivalent basis, calculated using the federal statutory tax rate of 21% and state taxes where applicable, with offsetting reductions to the Other category.69Capital One Financial Corporation (COF)
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Credit Card BusinessThe primary sources of revenue for our Credit Card business are net interest income, net interchange income and annual membership 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 $3.3 billion, $3.5 billion and $4.9 billion in 2024, 2023 and 2022, respectively.Table 8 summarizes the financial results of our Credit Card business and displays selected key metrics for the periods indicated.
Table 8: Credit Card Business Results
Year Ended December 31, Change(Dollars in millions, except as noted) 2024 2023 2022 2024 vs. 2023 2023 vs. 2022Selected income statement data:Net interest income $ 22,088 $ 19,729 $ 16,584 12% 19%
Non-interest income 6,076 5,940 5,771 2 3Total net revenue (1)28,164 25,669 22,355 10 15
Provision for credit losses
10,272 8,651 4,265 19 103
Non-interest expense 13,576 12,490 11,627 9 7
Income from continuing operations before income taxes 4,316 4,528 6,463 (5) (30)
Income tax provision 1,024 1,071 1,536 (4) (30)
Income from continuing operations, net of tax $ 3,292 $ 3,457 $ 4,927 (5) (30)Selected performance metrics:Average loans held for investment $ 152,868 $ 141,572 $ 120,392 8 18Average yield on loans (2)19.09 % 18.54 % 16.21 % 55bps 233bpsTotal net revenue margin (3)18.39 18.12 18.47 27 (35)
Net charge-offs $ 8,987 $ 6,472 $ 3,048 39% 112%
Net charge-off rate 5.88 % 4.57 % 2.53 % 131bps 204bps
Purchase volume $ 654,436 $ 620,290 $ 587,283 6% 6%
(Dollars in millions, except as noted) December 31, 2024 December 31, 2023 ChangeSelected period-end data:Loans held for investment $ 162,508 $ 154,547 5%
30+ day performing delinquency rate 4.53 % 4.61 % (8)bps
30+ day delinquency rate 4.54 4.62 (8)Nonperforming loan rate (4)
0.01 0.01 —Allowance for credit losses $ 12,974 $ 11,709 11%
Allowance coverage ratio 7.98% 7.58 % 40bps__________(1) We recognize finance charges and fee income on open-ended loans in accordance with the contractual provisions of the credit arrangements and charge off any uncollectible amounts. Total net revenue was reduced by $2.6 billion, $1.9 billion, and $946 million in 2024, 2023 and 2022, respectively, for finance charges and fees charged-off as uncollectible.(2) Average yield is calculated based on interest income for the period divided by average loans during the period and does not include any allocations, such as funds transfer pricing.
(3) Total net revenue margin is calculated based on total net revenue for the period divided by average loans during the period.(4) Within our credit card loan portfolio, certain loans in our international card businesses are classified as nonperforming. See “Nonperforming Loans and Other Nonperforming Assets” for additional information.
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Table of ContentsKey factors affecting the results of our Credit Card business for 2024 compared to 2023, and changes in financial condition and credit performance between December 31, 2024 and 2023 include the following:
• Net Interest Income: Net interest income increased by $2.4 billion to $22.1 billion in 2024 primarily driven by higher average loan balances and margins, including the impacts of the elimination of revenue sharing provisions due to the Walmart Program Termination.
• Non-Interest Income: Non-interest income increased by $136 million to $6.1 billion in 2024 due to growth in our Credit Card business.
• Provision for Credit Losses: Provision for credit losses increased by $1.6 billion to $10.3 billion in 2024 primarily driven by higher net charge-offs, including the impacts of the elimination of loss sharing provisions due to the Walmart Program Termination, partially offset by a lower allowance build.
• Non-Interest Expense: Non-interest expense increased by $1.1 billion to $13.6 billion in 2024 primarily driven by growth in our Credit Card business and increased marketing spend.Loans Held for Investment:• Period-end loans held for investment increased by $8.0 billion to $162.5 billion as of December 31, 2024 from December 31, 2023 driven by growth across our portfolio.
• Average loans held for investment increased by $11.3 billion to $152.9 billion in 2024 compared to 2023 driven by growth across our portfolio.Net Charge-Off and Delinquency Metrics:• The net charge-off rate increased by 131 bps to 5.88% in 2024 compared to 2023.
• The 30+ day delinquency rate decreased by 8 bps to 4.54% as of December 31, 2024 compared to December 31, 2023.
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Domestic Card BusinessThe Domestic Card business generated net income from continuing operations of $3.1 billion, $3.3 billion and $4.7 billion in 2024, 2023 and 2022, respectively. In 2024, 2023 and 2022, the Domestic Card business accounted for greater than 90% of total net revenue of our Credit Card business.Table 8.1 summarizes the financial results for our Domestic Card business and displays selected key metrics for the periods indicated.
Table 8.1: Domestic Card Business Results
Year Ended December 31, Change(Dollars in millions, except as noted) 2024 2023 2022 2024 vs. 2023 2023 vs. 2022Selected income statement data:Net interest income $ 20,881 $ 18,610 $ 15,616 12% 19%
Non-interest income 5,811 5,672 5,363 2 6Total net revenue (1)26,692 24,282 20,979 10 16
Provision for credit losses
9,867 8,268 4,020 19 106
Non-interest expense 12,727 11,648 10,827 9 8
Income from continuing operations before income taxes 4,098 4,366 6,132 (6) (29)
Income tax provision 967 1,030 1,453 (6) (29)
Income from continuing operations, net of tax $ 3,131 $ 3,336 $ 4,679 (6) (29)Selected performance metrics:Average loans held for investment $ 146,000 $ 135,213 $ 114,506 8 18Average yield on loans (2)19.03 % 18.46 % 16.07% 57bps 239 bps
Total net revenue margin (3)(4)
18.25 17.94 18.28 31 (34)
Net charge-offs $ 8,634 $ 6,164 $ 2,833 40% 118%
Net charge-off rate (5)
5.91 % 4.56 % 2.47% 135bps 209 bps
Purchase volume $ 639,341 $ 605,664 $ 568,752 6% 6%
(Dollars in millions, except as noted) December 31, 2024 December 31, 2023 ChangeSelected period-end data:Loans held for investment $ 155,618 $ 147,666 5%
30+ day performing delinquency rate 4.53 % 4.61 % (8)bps
Allowance for credit losses $ 12,494 $ 11,261 11%
Allowance coverage ratio (6)
8.03 % 7.63 % 40bps__________
(1) We recognize finance charges and fee income on open-ended loans in accordance with the contractual provisions of the credit arrangements and charge off any uncollectible amounts. Finance charges and fees charged off as uncollectible are reflected as a reduction in total net revenue.
(2) Average yield is calculated based on interest income for the period divided by average loans during the period and does not include any allocations, such as funds transfer pricing.
(3) Total net revenue margin is calculated based on total net revenue for the period divided by average loans during the period.(4) The Walmart Program Termination increased revenue margin by 30 bps in 2024.
(5) The Walmart Program Termination increased the net charge-off rate by 24 bps in 2024.
(6) The Walmart Program Termination resulted in an allowance for credit losses build of $826 million in the second quarter of 2024.
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 decreased in 2024 compared to 2023 primarily driven by:
• Higher provision for credit losses driven by higher net charge-offs, including the impacts of the elimination of loss sharing provisions due to the Walmart Program Termination, partially offset by a lower allowance build.
• Higher non-interest expense primarily driven by growth in our Credit Card business and increased marketing spend.
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Table of ContentsThese drivers were partially offset by:• Higher net interest income primarily driven by higher average loan balances and margins, including the impacts of the elimination of revenue sharing provisions due to the Walmart Program Termination.Consumer Banking BusinessThe primary sources of revenue for our Consumer Banking business are net interest income from loans and deposits as well as service charges and customer-related fees. Expenses primarily consist of the provision for credit losses and operating costs.
Our Consumer Banking business generated net income from continuing operations of $1.5 billion in 2024 and $2.3 billion in both 2023 and 2022.Table 9 summarizes the financial results of our Consumer Banking business and displays selected key metrics for the periods indicated.
Table 9: Consumer Banking Business Results
Year Ended December 31, Change(Dollars in millions, except as noted) 2024 2023 2022 2024 vs. 2023 2023 vs. 2022Selected income statement data:Net interest income $ 8,023 $ 8,713 $ 8,965 (8)% (3)%
Non-interest income 695 589 469 18 26
Total net revenue 8,718 9,302 9,434 (6) (1)
Provision for credit losses
1,435 1,169 1,173 23 —
Non-interest expense 5,372 5,178 5,312 4 (3)
Income from continuing operations before income taxes 1,911 2,955 2,949 (35) —
Income tax provision 451 697 699 (35) —
Income from continuing operations, net of tax $ 1,460 $ 2,258 $ 2,250 (35) —Selected performance metrics:
Average loans held for investment:Auto $ 74,692 $ 76,067 $ 78,772 (2) (3)
Retail banking 1,281 1,446 1,663 (11) (13)
Total consumer banking $ 75,973 $ 77,513 $ 80,435 (2) (4)Average yield on loans held for investment (1)8.70 % 7.79% 7.19% 91bps 60 bps
Average deposits $ 303,873 $ 285,880 $ 257,089 6% 11%
Average deposits interest rate 3.23 % 2.59 % 0.72 % 64bps 187 bps
Net charge-offs $ 1,593 $ 1,364 $ 854 17% 60%
Net charge-off rate 2.10 % 1.76 % 1.06 % 34bps 70 bps
Auto loan originations $ 34,542 $ 26,980 $ 36,965 28% (27)%
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(Dollars in millions, except as noted) December 31, 2024 December 31, 2023 ChangeSelected period-end data:
Loans held for investment:Auto $ 76,829 $ 74,075 4%
Retail banking 1,263 1,362 (7)
Total consumer banking $ 78,092 $ 75,437 4
30+ day performing delinquency rate 5.87 % 6.25 % (38)bps
30+ day delinquency rate 6.73 7.08 (35)
Nonperforming loan rate 0.99 1.00 (1)Nonperforming asset rate (2)1.08 1.09 (1)
Allowance for credit losses $ 1,884 $ 2,042 (8)%
Allowance coverage ratio 2.41 % 2.71 % (30)bps
Deposits $ 318,329 $ 296,171 7%_________
(1) Average yield is calculated based on interest income for the period divided by average loans during the period and does not include any allocations, such as funds transfer pricing.
(2) Nonperforming assets primarily consist of nonperforming loans and repossessed assets. The total nonperforming asset rate is calculated based on total nonperforming assets divided by the combined period-end total loans held for investment and repossessed assets.Key factors affecting the results of our Consumer Banking business for 2024 compared to 2023, and changes in financial condition and credit performance between December 31, 2024 and 2023 include the following:
• Net Interest Income: Net interest income decreased by $690 million to $8.0 billion in 2024 primarily driven by lower margins in our retail banking business, partially offset by higher deposits in our retail banking business.
• Non-Interest Income: Non-interest income increased by $106 million to $695 million in 2024 primarily driven by higher interchange revenue from an increase in debit card purchase volume and revenue earned from auto industry services.
• Provision for Credit Losses: Provision for credit losses increased by $266 million to $1.4 billion in 2024 primarily driven by higher net charge-offs and a lower allowance release in our auto loan portfolio.
• Non-Interest Expense: Non-interest expense increased by $194 million to $5.4 billion in 2024 primarily driven by a legal reserve build in the fourth quarter of 2024 and higher professional services.Loans Held for Investment:• Period-end loans held for investment increased by $2.7 billion to $78.1 billion as of December 31, 2024 from December 31, 2023 primarily driven by growth in our auto loan portfolio.
• Average loans held for investment decreased by $1.5 billion to $76.0 billion in 2024 compared to 2023 primarily driven by the impact of lower auto originations in the second half of 2022 and throughout 2023, partially offset by growth in our auto loan portfolio in 2024.Deposits:• Period-end deposits increased by $22.2 billion to $318.3 billion as of December 31, 2024 from December 31, 2023 primarily driven by continued growth from our national consumer banking strategy.Net Charge-Off and Delinquency Metrics:• The net charge-off rate increased by 34 bps to 2.10% in 2024 compared to 2023.
• The 30+ day delinquency rate decreased by 35 bps to 6.73% as of December 31, 2024 compared to December 31, 2023.
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Table of ContentsCommercial Banking Business
The primary sources of revenue for our Commercial Banking business are net interest income from loans and deposits and non-interest income earned from products and services provided to our clients such as capital markets, advisory services, net interchange and treasury management. Because our Commercial Banking business has loans and investments that generate tax-exempt income, tax credits or other tax benefits, we present the revenues on a taxable-equivalent basis. Expenses primarily consist of the provision for credit losses and operating costs.
Our Commercial Banking business generated net income from continuing operations of $1.2 billion, $691 million and $843 million in 2024, 2023 and 2022, respectively.Table 10 summarizes the financial results of our Commercial Banking business and displays selected key metrics for the periods indicated.
Table 10: Commercial Banking Business Results
Year Ended December 31, Change(Dollars in millions, except as noted) 2024 2023 2022 2024 vs. 2023 2023 vs. 2022Selected income statement data:Net interest income $ 2,391 $ 2,518 $ 2,461 (5)% 2%
Non-interest income 1,210 1,002 1,129 21 (11)Total net revenue (1)3,601 3,520 3,590 2 (2)
Provision for credit losses (2)
8 605 415 (99) 46
Non-interest expense 2,011 2,011 2,070 — (3)
Income from continuing operations before income taxes 1,582 904 1,105 75 (18)
Income tax provision 373 213 262 75 (19)
Income from continuing operations, net of tax $ 1,209 $ 691 $ 843 75 (18)Selected performance metrics:
Average loans held for investment:Commercial and multifamily real estate $ 33,141 $ 36,448 $ 36,639 (9) (1)
Commercial and industrial 55,439 56,008 54,772 (1) 2
Total commercial banking $ 88,580 $ 92,456 $ 91,411 (4) 1Average yield on loans held for investment (1)(3)7.09 % 6.86 % 4.02 % 23bps 284bps
Average deposits $ 31,140 $ 37,411 $ 42,018 (17)% (11)%
Average deposits interest rate 2.51 % 2.68 % 0.73 % (17)bps 195bps
Net charge-offs $ 168 $ 578 $ 71 (71)% **
Net charge-off rate 0.19 % 0.62 % 0.08 % (43)bps 54bps
(Dollars in millions, except as noted) December 31, 2024 December 31, 2023 ChangeSelected period-end data:
Loans held for investment:Commercial and multifamily real estate $ 31,903 $ 34,446 (7)%
Commercial and industrial 55,272 56,042 (1)
Total commercial banking $ 87,175 $ 90,488 (4)
Nonperforming loan rate 1.39 % 0.84 % 55bpsNonperforming asset rate (4)1.39 0.84 55Allowance for credit losses (2)$ 1,400 $ 1,545 (9)%
Allowance coverage ratio 1.61% 1.71% (10)bps
Deposits $ 31,691 $ 32,712 (3)%
Loans serviced for others 52,749 52,341 1__________
(1) Some of our commercial investments generate tax-exempt income, tax credits or other tax benefits. Accordingly, we present our Commercial Banking revenue and yields on a taxable-equivalent basis, calculated using the federal statutory tax rate of 21% and state taxes where applicable, with offsetting reductions to the Other category.75
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(2) The provision for losses on unfunded lending commitments is included in the provision for credit losses in our consolidated statements of income and the related reserve is included in other liabilities on our consolidated balance sheets. Our reserve for unfunded lending commitments totaled $143 million, $158 million and $218 million as of December 31, 2024, 2023 and 2022, respectively.(3) Average yield is calculated based on interest income for the period divided by average loans during the period and does not include any allocations, such as funds transfer pricing.
(4) Nonperforming assets consist of nonperforming loans and other foreclosed assets. The total nonperforming asset rate is calculated based on total nonperforming assets divided by the combined period-end total loans held for investment and other foreclosed assets.
** Not meaningful.Key factors affecting the results of our Commercial Banking business for 2024 compared to 2023, and changes in financial condition and credit performance between December 31, 2024 and 2023 include the following:
• Net Interest Income: Net interest income decreased by $127 million to $2.4 billion in 2024 primarily driven by lower average loan and deposit balances.
• Non-Interest Income: Non-interest income increased by $208 million to $1.2 billion in 2024 primarily driven by increased fees in our capital markets business.
• Provision for Credit Losses: Provision for credit losses decreased by $597 million to $8 million in 2024 primarily driven by lower net charge-offs in our office real estate portfolio and an allowance release compared to an allowance build in 2023.
• Non-Interest Expense: Non-interest expense remained flat at $2.0 billion in 2024 compared to 2023.Loans Held for Investment:• Period-end loans held for investment decreased by $3.3 billion to $87.2 billion as of December 31, 2024 from December 31, 2023 primarily driven by customer payments outpacing originations.
• Average loans held for investment decreased by $3.9 billion to $88.6 billion in 2024 compared to 2023 primarily driven by customer payments outpacing originations.Deposits:• Period-end deposits decreased by $1.0 billion to $31.7 billion as of December 31, 2024 from December 31, 2023 primarily driven by an intentional reduction in lower margin deposit balances in the first half of the year, partially offset by growth in the second half of the year.Net Charge-Off and Nonperforming Metrics:• The net charge-off rate decreased by 43 bps to 0.19% in 2024 compared to 2023 primarily driven by lower net charge-offs in our office real estate portfolio.
• The nonperforming loan rate increased by 55 bps to 1.39% as of December 31, 2024 compared to December 31, 2023 primarily driven by credit downgrades.Other Category
Other includes unallocated amounts related to our centralized Corporate Treasury group activities, such as management of our corporate investment securities portfolio, asset/liability management and oversight of our funds transfer pricing process. 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 and integration expenses related to the Transaction;• 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; and76Capital One Financial Corporation (COF)
Table of Contents• foreign exchange-rate fluctuations on foreign currency-denominated balances.Table 11 summarizes the financial results of our Other category for the periods indicated.
Table 11: Other Category Results
Year Ended December 31, Change(Dollars in millions) 2024 2023 2022 2024 vs. 2023 2023 vs. 2022Selected income statement data:Net interest loss $ (1,294) $ (1,719) $ (896) (25)% 92%
Non-interest income (loss) (77) 15 (233) ** **Total net loss (1)(1,371) (1,704) (1,129) (20) 51
Provision (benefit) for credit losses 1 1 (6) — **
Non-interest expense 527 637 154 (17) **
Loss from continuing operations before income taxes (1,899) (2,342) (1,277) (19) 83
Income tax benefit (685) (823) (617) (17) 33
Loss from continuing operations, net of tax $ (1,214) $ (1,519) $ (660) (20) 130__________
(1) Some of our commercial investments generate tax-exempt income, tax credits or other tax benefits. Accordingly, we present our Commercial Banking revenue and yields on a taxable-equivalent basis, calculated using the federal statutory tax rate of 21% and state taxes where applicable, with offsetting reductions to the Other category.
** Not meaningful.Loss from continuing operations decreased by $305 million to a loss of $1.2 billion in 2024 compared to 2023 primarily driven by higher treasury income.
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Capital One Financial Corporation (COF)
Table of ContentsCRITICAL 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 “Item 8. Financial Statements and Supplementary Data—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
• Goodwill
• Fair value
• Customer rewards reserve
We evaluate our critical accounting estimates and judgments on an ongoing basis and update them as necessary, based on changing conditions.Loan Loss ReservesWe maintain an allowance for credit losses that represents management’s current estimate of expected credit losses inherent in our credit card, consumer banking and commercial banking loans held for investment portfolios as of each balance sheet date. We also reserve for the uncollectible portion of finance charges and fees related to credit card loan receivables in the allowance for credit losses consistent with the methodology we use to estimate the allowance for credit losses on the principal portion of our credit card loan receivables. We also separately reserve for unfunded lending commitments that are not unconditionally cancellable. We recognize changes in our allowance for credit losses and reserve for unfunded lending commitments through the provision for credit losses. The allowance for credit losses was $16.3 billion as of December 31, 2024, compared to $15.3 billion as of December 31, 2023.Our allowance for credit losses and reserve for unfunded lending commitments utilize models to derive a quantitative estimate of credit losses that is supplemented with additional qualitative considerations to capture risks and uncertainties not included in the quantitative result. Our estimate of expected credit losses, for all loan and unfunded lending commitments, includes a reasonable and supportable forecast period of one year and then reverts over a one-year period to historical losses at each relevant loss component of the estimate. We use externally produced consensus estimates as inputs for our forward-looking macroeconomic forecast and consider other forecasts and sources of uncertainty to develop the quantitative component. This quantitative result is then supplemented qualitatively by management for economic uncertainty, including the consideration of alternative macroeconomic scenarios, changes and trends in loan portfolios that may not be captured in the quantitative component. These adjustments represent management’s judgment of the imprecision and risks inherent in the processes and assumptions used in establishing the allowance for credit losses.We have an established process, using analytical tools and management judgment, to determine our allowance for credit losses. Significant management judgment is required to determine the relevant information and estimation methods used to arrive at our best estimate of lifetime credit losses. Establishing the allowance on a quarterly basis involves evaluating and forecasting both credit and macroeconomic variables. The macroeconomic forecast used to inform both quantitative and qualitative components of our allowance for credit losses estimate is sensitive to certain variables, such as the U.S. Unemployment Rate, and the U.S. Real Gross Domestic Product (“U.S. Real GDP”) Growth Rate assu mptions. Our December 31, 2024 allowance assumes that the quarterly average U.S. unemployment rate is approximately 4.3% by the fourth quarter of 2025 and annual U.S. Real GDP grows by 1.8% in 2025.
In addition to macroeconomic factors, many credit factors inform our allowance for credit losses, including, but not limited to, historical loss and recovery experience, recent trends in delinquencies and charge-offs, risk ratings, the impact of bankruptcy
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filings, the value of collateral underlying secured loans, account seasoning, changes in our credit evaluation, underwriting and collection management policies, seasonality, credit bureau scores, current general economic conditions, changes in the legal and regulatory environment and uncertainties in forecasting and modeling techniques used in estimating our allowance for credit losses.We have a governance framework supported by processes and controls intended to ensure that our estimate of the allowance for credit losses is appropriate. Our governance framework provides for oversight of methods, models, qualitative adjustments, process controls and results. At least quarterly, representatives from the Finance and Risk Management organizations review and assess our allowance methodologies, key assumptions and the appropriateness of the allowance for credit losses. Groups independent of our estimation functions participate in the review and validation process. Tasks performed by these groups include periodic review of the rationale for and quantification of inputs requiring judgment as well as adjustments to results.
We have model policies, established by an independent Model Risk Office, which govern the validation of models and related supporting documentation to ensure the appropriate use of models for estimating credit losses. The Model Risk Office validates all models and requires ongoing monitoring of their performance.
In addition to the allowance for credit losses, on a quarterly basis, we review and assess our estimate of expected losses related to unfunded lending commitments that are not unconditionally cancellable which are generally in our Commercial Banking business. The factors impacting our assessment generally align with those considered in our evaluation of the allowance for credit losses for the Commercial Banking business. The reserve for losses on unfunded lending commitments is included in other liabilities on our consolidated balance sheets and changes to it are recorded through the provision for credit losses in our consolidated statements of income.Although we examine a variety of externally available data, as well as our internal loan performance data, to determine our allowance for credit losses and reserve for unfunded lending commitments, our estimation process is subject to risks and uncertainties, including a reliance on historical loss and trend information that may not be representative of current conditions and indicative of future performance as well as economic forecasts that may not align with actual future economic conditions. Accordingly, our actual credit loss experience may not be in line with our expectations. We provide additional information on the methodologies and key assumptions used in determining our allowance for credit losses for each of our loan portfolio segments in “Item 8. Financial Statements and Supplementary Data—Note 1—Summary of Significant Accounting Policies.” We provide information on the components of our allowance, disaggregated by operating segment, and changes in our allowance in “Item 8. Financial Statements and Supplementary Data—Note 5—Allowance for Credit Losses and Reserve for Unfunded Lending Commitments.”GoodwillGoodwill represents the excess of the fair value of the consideration transferred, plus the fair value of any non-controlling interests in the acquiree, over the fair value of the assets acquired and liabilities assumed as of the acquisition date.
Goodwill totaled $15.1 billion as of both December 31, 2024 and 2023. We did not recognize any goodwill impairment in 2024 or 2023. See “Item 8. Financial Statements and Supplementary Data—Note 7—Goodwill and Other Intangible Assets” for additional information.We perform our goodwill impairment test annually on October 1 at a reporting unit level. We are also required to test goodwill for impairment whenever events or circumstances indicate it is more-likely-than-not that an impairment may have occurred. An impairment of a reporting unit’s goodwill is determined based on the amount by which the reporting unit’s carrying amount exceeds its fair value, limited to the amount of goodwill allocated to the reporting unit. We have four reporting units: Credit Card, Auto Finance, Other Consumer Banking, and Commercial Banking.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 and underlying risks. The carrying amount for a reporting unit is the sum of its respective capital requirements, goodwill and other intangibles balances. Consolidated stockholder’s equity in excess of the sum of all reporting units capital requirements that is not identified for future capital needs, such as dividends, share buybacks, or other strategic initiatives, is allocated to the reporting units and the Other category and assumed to be distributed to equity holders in future periods.
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 calculate the fair value of our reporting units using a discounted cash flow (“DCF”) calculation, a
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Table of Contentsform of the income approach. This DCF calculation uses projected cash flows based on each reporting unit’s internal forecast and the perpetuity growth method to calculate terminal values. Our DCF calculation requires 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 are then discounted using discount rates based on our external cost of capital with adjustments for the risk inherent in each reporting unit. Discount rates used for our reporting units ranged from 8.4% to 12.7%, and we applied a terminal year long-term growth rate of 3.8% to all reporting units. The reasonableness of our DCF calculation is assessed by reference to a market-based approach using comparable market multiples and recent market transactions where available. The usefulness of market data is inherently limited due to the size and scope of our operations compared to most peer institutions and recent market transactions. The results of the 2024 annual impairment test indicated that the estimated fair values of the reporting units exceeded their carrying amounts by between 11% and 83%. We also compare the aggregate fair values of our reporting units to our market capitalization. Our assessment considers the level of premium expected to assume control of the Company in a market transaction including anticipated cost savings and other synergies that would be realized in a hypothetical transaction.
The results of the 2024 annual goodwill impairment test for our Commercial Banking reporting unit concluded that, while the estimated fair value of this reporting unit exceeded its carrying amount, the percentage by which the estimated fair value of this reporting unit exceeded its carrying amount was 11%. The assumptions leveraged in the valuation of each reporting unit, including the Commercial Banking reporting unit, and the related risk of changes in those assumptions are described further below.
Assumptions used in estimating the fair value of a reporting unit are judgmental and inherently uncertain. A change in the economic conditions of a reporting unit, such as declines in business performance as a result of industry or macroeconomic trends or changes in our strategy, adverse impacts to loan or deposit growth trends, decreases in revenue, increases in expenses, deterioration in a significant loan portfolio, increases in credit losses, increases in capital requirements, deterioration of market conditions, declines in long-term growth expectations, an increase in disposition activity, 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. We perform sensitivity analyses around certain assumptions in order to assess the reasonableness of the assumptions and the resulting estimated fair values.We have a governance framework supported by processes and controls intended to ensure that the accounting and disclosure for goodwill is appropriate. Our governance framework provides for oversight of assumptions, forecast inputs, methods, process controls and results.
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 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, DCF 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 inputs. 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.
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Table of ContentsWe 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 “Item 8. Financial Statements and Supplementary Data—Note 17—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 verification of fair value measurements at least quarterly 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 reviews and approves our fair valuations at least quarterly to ensure that our valuation practices are consistent with industry standards and adhere to regulatory and accounting guidance.We have model policies, established by an independent Model Risk Office, which govern 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 (“CFO”) and includes other members of senior management. There were no disputes escalated to the VAC for the years ended December 31, 2024 and 2023.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 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 judgment regarding 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 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 substantial majority of all rewards earned will eventually be redeemed. We use the weighted-average redemption cost during the previous twelve months, adjusted as appropriate for recent changes in redemption costs, including changes related to 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
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Table of Contentsconditions of the rewards program and other factors. While the rewards liability is sensitive to changes in assumptions for redemption rates and costs and involves management judgment, we believe portfolio characteristics and historical performance are the best indication of future reward redemption behavior and are the primary basis for our estimate. We recognized customer rewards expense of $9.0 billion, $8.2 billion and $7.6 billion in 2024, 2023 and 2022, respectively. Our customer rewards reserve, which is included in other liabilities on our consolidated balance sheets, totaled $8.2 billion and $7.4 billion as of December 31, 2024 and 2023, respectively.
We have a governance framework supported by processes and controls that are intended to ensure that our rewards liability estimate is appropriate and reliable. Our governance framework provides for oversight of assumptions, inputs, methods, process controls and results. Additional controls are performed to ensure all underlying data used to derive the rewards liability is complete and accurate.ACCOUNTING CHANGES AND DEVELOPMENTSAccounting Standards Issued but Not Adopted as of December 31, 2024Standard Guidance Adoption Timing and Financial Statement Impacts
Income Tax Disclosures
Accounting Standards Update (“ASU”) No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures
Issued December 2023Requires entities to annually provide additional information on income tax rate reconciliations and make additional disclosures about income taxes paid.
Effective beginning with our annual period ending on December 31, 2025, with early adoption permitted. Prospective application is required and retrospective application is also permitted.
We plan to adopt this standard for the above annual period and to apply the new requirements prospectively. We are still assessing the extent of the impacts of adoption to the disclosures.
Disaggregation of Income Statement Expenses
ASU No. 2024-03, Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses
Issued November 2024
Requires entities to separately disclose specific disaggregated expense categories on an annual and interim basis as well as disclose selling expenses on an annual basis.
Effective beginning with our annual period ending on December 31, 2027, with early adoption permitted. Prospective application is required and retrospective application is also permitted.
We are still assessing the extent of the impacts of adoption to the disclosures.
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CAPITAL MANAGEMENT
The level and composition of our capital are determined by multiple factors, including our consolidated regulatory capital requirements as described in more detail below and internal risk-based capital assessments such as internal stress testing. 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
The Company and the Bank are subject to the Basel III Capital Rules. The Basel III Capital Rules implement certain capital requirements published by the Basel Committee, along with certain provisions of the Dodd-Frank Act and other capital provisions.
As a BHC with total consolidated assets of at least $250 billion but less than $700 billion and not exceeding any of the applicable risk-based thresholds, the Company is a Category III institution under the Basel III Capital Rules.
The Bank, as a subsidiary of a Category III institution, is a Category III bank. Moreover, the Bank, as an insured depository institution, is subject to PCA capital regulations.
Basel III and U.S. Capital Rules
Under the Basel III Capital Rules, we must maintain a minimum CET1 capital ratio of 4.5%, a Tier 1 capital ratio of 6.0% and a total capital ratio of 8.0%, in each case in relation to risk-weighted assets. In addition, we must maintain a minimum leverage ratio of 4.0% and a minimum supplementary leverage ratio of 3.0%. We are also subject to the capital conservation buffer requirement and countercyclical capital buffer requirement, each as described below. Our capital and leverage ratios are calculated based on the Basel III standardized approach framework.
We have elected to exclude certain elements of AOCI from our regulatory capital as permitted for a Category III institution. For information on the recognition of AOCI in regulatory capital under the proposed changes to the Basel III Capital Rules, see “Part I—Item 1. Business—Supervision and Regulation—Prudential Regulation of Banking—Capital and Stress Testing Regulation—Basel III Finalization Proposal.”
G-SIBs that are based in the U.S. are subject to an additional CET1 capital requirement known as the “G-SIB Surcharge.” We are not a G-SIB based on the most recent available data and thus we are not subject to a G-SIB Surcharge.
Stress Capital Buffer RuleThe Basel III Capital Rules require banking institutions to maintain a capital conservation buffer, composed of CET1 capital, above the regulatory minimum ratios. Under the Stress Capital Buffer Rule, the Company’s “standardized approach capital conservation buffer” includes its stress capital buffer requirement (as described below), any G-SIB Surcharge (which is not applicable to us) and the countercyclical capital buffer requirement (which is currently set at 0% ). Any 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 Company’s stress capital buffer requirement is recalibrated every year based on the Company’s supervisory stress test results. In particular, the Company’s stress capital buffer requirement equals, subject to a floor of 2.5%, the sum of (i) the difference between the Company’s starting CET1 capital ratio and its lowest projected CET1 capital ratio under the severely adverse scenario of the Federal Reserve’s supervisory stress test plus (ii) the ratio of the Company’s projected four quarters of common stock dividends (for the fourth to seventh quarters of the planning horizon) to the projected risk-weighted assets for the quarter in which the Company’s projected CET1 capital ratio reaches its minimum under the supervisory stress test.Based on the Company’s 2023 supervisory stress test results, the Company’s stress capital buffer requirement for the period beginning on October 1, 2023 through September 30, 2024 was 4.8%. Therefore, the Company’s minimum capital requirements plus the standardized approach capital conservation buffer for CET1 capital, Tier 1 capital and total capital ratios under the stress capital buffer framework were 9.3%, 10.8% and 12.8%, respectively, for the period from October 1, 2023 through September 30, 2024.
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Table of ContentsBased on the Company’s 2024 supervisory stress test results, the Company’s stress capital buffer requirement for the period beginning on October 1, 2024 through September 30, 2025 is 5.5%. Therefore, the Company’s minimum capital requirements plus the standardized approach capital conservation buffer for CET1 capital, Tier 1 capital and total capital ratios under the stress capital buffer framework are 10.0%, 11.5% and 13.5%, respectively, for the period from October 1, 2024 through September 30, 2025 .
The Stress Capital Buffer Rule does not apply to the Bank. Pursuant to the OCC’s capital regulations, which are only applicable to the Bank, the capital conservation buffer for the Bank continues to be fixed at 2.5%. Therefore, the Bank’s minimum capital requirements plus its capital conservation buffer for CET1 capital, Tier 1 capital and total capital ratios are 7.0%, 8.5% and 10.5%, respectively.
If the Company or the Bank fails to maintain its capital ratios above the minimum capital requirements plus the applicable capital conservation buffers, it will face increasingly strict automatic limitations on capital distributions and discretionary bonus payments to certain executive officers.
As of December 31, 2024 and 2023, respectively, the Company and the Bank each exceeded the minimum capital requirements and the capital conservation buffer requirements applicable to them, and the Company and the Bank were each “ well-capitalized. ” The “well-capitalized” standards applicable to the Company are established in the Federal Reserve’s regulations, and the “well-capitalized” standards applicable to the Bank are established in the OCC’s PCA capital requirements.CECL Transition Rule
The Federal Banking Agencies adopted the CECL Transition Rule that provides banking institutions an optional five-year transition period to phase in the impact of the CECL standard on their regulatory capital, the CECL Transition Election. We adopted the CECL standard (for accounting purposes) as of January 1, 2020, and made the CECL Transition Election (for regulatory capital purposes) in the first quarter of 2020. Therefore, the applicable amounts presented in this Report reflect such election.Pursuant to the CECL Transition Rule, a banking institution could elect to delay the estimated impact of adopting CECL on its regulatory capital through December 31, 2021 and then phase in the estimated cumulative impact from January 1, 2022 through December 31, 2024. For the “day 2” ongoing impact of CECL during the initial two years, the Federal Banking Agencies used a uniform “scaling factor” of 25% as an approximation of the increase in the allowance under the CECL standard compared to the prior incurred loss methodology. Accordingly, from January 1, 2020 through December 31, 2021, electing banking institutions were permitted to add back to their regulatory capital an amount equal to the sum of the after-tax “day 1” CECL adoption impact and 25% of the increase in the allowance since the adoption of the CECL standard. From January 1, 2022 through December 31, 2024, the after-tax “day 1” CECL adoption impact and the cumulative “day 2” ongoing impact were being phased in to regulatory capital at 25% per year. The following table summarizes the capital impact delay and phase in period on our regulatory capital from years 2020 to 2025.Capital Impact Delayed Phase In Period
2020 2021 2022 2023 2024 2025
“Day 1” CECL adoption impact Capital impact delayed to 2022 25% Phased In 50% Phased In 75% Phased In Fully Phased In
Cumulative “day 2” ongoing impact 25% scaling factor as an approximation of the increase in allowance under CECLAs of December 31, 2021, we added back an aggregate amount of $2.4 billion to our regulatory capital pursuant to the CECL Transition Rule. Consistent with the rule, we have phased in 75% of this amount as of January 1, 2024. The remaining $600 million has been phased in on January 1, 2025. As of December 31, 2024, the Company’s CET1 capital ratio, reflecting the CECL Transition Rule, was 13 .5% and would have been 13 .3% excluding the impact of the CECL Transition Rule (or “on a fully phased-in basis”).
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Table of ContentsMarket Risk Rule
The “Market Risk Rule” supplements the Basel III Capital Rules by requiring institutions subject to the rule to adjust their risk-based capital ratios to reflect the market risk in their trading book. The Market Risk Rule generally applies to institutions with aggregate trading assets and liabilities equal to 10% or more of total assets or $1 billion or more. As of December 31, 2024, the Company and the Bank are subject to the Market Risk Rule. See “Market Risk Profile” below for additional information.For the description of the regulatory capital rules to which we are subject, including recent proposed amendments to these rules under the Basel III Finalization Proposal, see “Part I—Item 1. Business—Supervision and Regulation.”Table 12 provides a comparison of our regulatory capital ratios under the Basel III standardized approach, the regulatory minimum capital adequacy ratios and the applicable well-capitalized standards as of December 31, 2024 and 2023.Table 12: Capital Ratios Under Basel III (1)December 31, 2024 December 31, 2023Ratio Minimum Capital Adequacy Well- Capitalized Ratio Minimum Capital Adequacy Well- Capitalized
Capital One Financial Corp:
Common equity Tier 1 capital (2)13.5 % 4.5 % N/A 12.9 % 4.5 % N/ATier 1 capital (3)14.8 6.0 6.0 % 14.2 6.0 6.0 %Total capital (4)16.4 8.0 10.0 16.0 8.0 10.0Tier 1 leverage (5)11.6 4.0 N/A 11.2 4.0 N/ASupplementary leverage (6)9.9 3.0 N/A 9.6 3.0 N/ACONA:
Common equity Tier 1 capital (2)13.6 4.5 6.5 13.1 4.5 6.5Tier 1 capital (3)13.6 6.0 8.0 13.1 6.0 8.0Total capital (4)15.2 8.0 10.0 14.3 8.0 10.0Tier 1 leverage (5)10.7 4.0 5.0 10.3 4.0 5.0Supplementary leverage (6)9.2 3.0 N/A 8.8 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 of ContentsTable 13 presents regulatory capital under the Basel III standardized approach and regulatory capital metrics as of December 31, 2024 and 2023.Table 13: Regulatory Risk-Based Capital Components and Regulatory Capital Metrics(Dollars in millions) December 31, 2024 December 31, 2023Regulatory capital under Basel III standardized approachCommon equity excluding AOCI $ 65,823 $ 62,710Adjustments and deductions:
AOCI, net of tax (1)1 27
Goodwill, net of related deferred tax liabilities (14,786) (14,811)
Other intangible and deferred tax assets, net of deferred tax liabilities (231) (311)
Common equity Tier 1 capital 50,807 47,615Tier 1 capital instruments 4,845 4,845Tier 1 capital 55,652 52,460
Tier 2 capital instruments 1,307 1,936
Qualifying allowance for credit losses 4,846 4,728
Tier 2 capital 6,153 6,664
Total capital $ 61,805 $ 59,124Regulatory capital metricsRisk-weighted assets $ 377,145 $ 369,206Adjusted average assets (2)480,794 467,553Total leverage exposure (3)559,399 546,909__________(1) Excludes certain components of AOCI in accordance with rules applicable to Category III institutions. See “Capital Management—Capital Standards and Prompt Corrective Action—Basel III and U.S. Capital Rules” in this Report.(2) Includes on-balance sheet asset adjustments subject to deduction from Tier 1 capital under the Basel III Capital Rules.
(3) Reflects on- and off-balance sheet amounts for the denominator of the supplementary leverage ratio as set forth by the Basel III Capital Rules.
Capital Planning and Regulatory Stress TestingWe repurchased $150 million of shares of our common stock during the fourth quarter of 2024 and $553 million of shares of our common stock during the year ended 2024.
On August 28, 2024, the Federal Reserve confirmed and announced individual stress capital buffer requirements for all large banking institutions, including the Company. The Company’s final stress capital buffer requirement for the period beginning on October 1, 2024 through September 30, 2025 is 5.5%. Therefore, the Company’s minimum capital requirements plus the standardized approach capital conservation buffer for CET1 capital, Tier 1 capital and total capital ratios under the stress capital buffer framework are 10.0%, 11.5% and 13.5%, respectively, for the period from October 1, 2024 through September 30 , 2025.For the description of the regulatory capital planning rules and stress testing requirements to which we are subject, see “Part I—Item 1. Business—Supervision and Regulation.”The Federal Reserve’s capital plan rule further provides that if a covered company determines there has been or will be a material change in its risk profile, financial condition, or corporate structure since it last submitted its capital plan, it must update and resubmit its capital plan within 30 calendar days, subject to a potential 60-day extension. We determined that our proposed acquisition of Discover constitutes a material change and submitted an updated capital plan as required by the capital plan rule. In addition, the capital plan rule provides that upon the occurrence of an event requiring resubmission, a covered company may not make any capital distribution unless it has received approval of the Federal Reserve. Accordingly, all our capital distributions are now subject to the prior approval of the Federal Reserve pending the Federal Reserve’s consideration of our resubmitted capital plan. We have received prior approval of the Federal Reserve to make certain capital distributions.
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Dividend Policy and Stock PurchasesFor the year ended December 31, 2024, we declared and paid common stock dividends of $937 million, or $2.40 per share, and preferred stock dividends of $228 million. While the Merger Agreement is in effect and until the Merger Agreement is terminated or the Transaction is completed, we are restricted from paying quarterly cash dividends on our common stock in excess of $0.60 per share per quarter.
The following table summarizes the dividends paid per share on our various preferred stock series in each quarter of 2024.Table 14: Preferred Stock Dividends Paid Per ShareSeries Description Issuance Date Per Annum Dividend Rate Dividend Frequency 2024Q4 Q3 Q2 Q1
Series I 5.000% Non-Cumulative September 11, 2019 5.000% Quarterly $12.50 $12.50 $12.50 $12.50
Series J 4.800% Non-Cumulative January 31, 2020 4.800 Quarterly 12.00 12.00 12.00 12.00
Series K 4.625% Non-Cumulative September 17, 2020 4.625 Quarterly 11.56 11.56 11.56 11.56
Series L 4.375% Non-Cumulative May 4, 2021 4.375 Quarterly 10.94 10.94 10.94 10.94
Series M 3.950% Fixed Rate Reset Non-Cumulative June 10, 2021 3.950% through 8/31/2026; resets 9/1/2026 and every subsequent 5 year anniversary at 5-Year Treasury Rate +3.157% Quarterly 9.88 9.88 9.88 9.88
Series N 4.250% Non-Cumulative July 29, 2021 4.250 Quarterly 10.63 10.63 10.63 10.63The declaration and payment of dividends to our stockholders, as well as the amount thereof, are subject to the discretion of our Board of Directors and depend upon our results of operations, financial condition, capital levels, cash requirements, future prospects, regulatory requirements and other factors deemed relevant by the Board of Directors. For additional information related to capital distributions as a result of the capital plan resubmission, see “ Capital Management—Capital Planning and Regulatory Stress Testing ” in this Report.
As a BHC, our ability to pay dividends is largely dependent upon the receipt of dividends or other payments from our subsidiaries. The Bank is subject to regulatory restrictions that limit its ability to transfer funds to our BHC. As of December 31, 2024, funds available for dividend payments from the Bank were $8.9 billion. There can be no assurance that we will declare and pay any dividends to stockholders.
We repurchased $150 million of shares of our common stock during the fourth quarter of 2024 and $553 million of shares of our common stock during the year ended 2024. 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. The Board authorized stock repurchase program does not include specific price targets, may be executed through open market purchases, tender offers, or privately negotiated transactions, including utilizing Rule 10b5-1 programs, does not have a set expiration date and may be suspended at any time. For additional information on dividends and stock repurchases, see “Capital Management—Capital Planning and Regulatory Stress Testing,” and “Part I—Item 1. Business—Supervision and Regulation— Funding and Dividends from Subsidiaries. ”
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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.
First Line
Identifies and Owns Risk
Second Line
Advises & Challenges First Line
Third Line
Provides Independent AssuranceDefinition Business areas that are accountable for risk and responsible for: i) generating revenue or reducing expenses; ii) supporting the business to provide products or services to customers; or iii) providing technology services for the first line. Independent Risk Management (“IRM”) and Support Functions (e.g., Human Resources, Accounting, Legal) that provide support services to the Company. Internal Audit and Credit Review.Key Responsibilities Identify, assess, measure, monitor, control, and report the risks associated with their business. IRM: Independently oversees and assesses risk taking activities for the first line of defense.
Support Functions: Centers of specialized expertise that provide support services to the enterprise. Provides independent and objective assurance to the Board of Directors and senior management that the systems and governance processes are designed and working as intended.88Capital One Financial Corporation (COF)
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Our Framework sets consistent expectations for risk management across the Company and consists of the following nine elements:
Governance and Accountability
Strategy and Risk Alignment
Risk Identification
Assessment, Measurement and Response
Monitoring and Testing
Aggregation, Reporting and Escalation
Capital and Liquidity Management (including Stress Testing)
Risk Data and Enabling Technology
Culture and Talent Management
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.
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 considers 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 identify new and emerging risks, including concentration of risk, 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.89Capital One Financial Corporation (COF)
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Assessment, Measurement and Response
Management assesses risks associated with our activities. Risks identified are assessed to understand the severity of each risk and likelihood of occurrence under both normal and stressful conditions. 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 determines the appropriate risk response. Risks may be mitigated or accepted. Actions taken to respond to the risk 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, including established concentration risk limits. 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 required to evaluate 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.
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. Our risk aggregation processes are designed to aggregate risk information from lower levels of the business hierarchy to high levels and to aggregate risk information to determine material risk themes.
Material risks, new or 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 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.
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.
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 are core Governance, Risk Management and Compliance systems which are 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.90Capital One Financial Corporation (COF)
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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 execute appropriate risk management across the enterprise.
Risk Categories
We apply our Framework to protect the Company from the major categories of risk that we are exposed to through our business activities. We have seven major categories of risk as noted below.
Major Categories of Risk
Compliance The risk to current or anticipated earnings or capital arising from violations of laws, rules or regulations. Compliance risk can also arise from nonconformance with prescribed practices, internal policies and procedures, contractual obligations or ethical standards that reinforce those laws, rules or regulations
Credit The risk to current or projected financial condition and resilience arising from an obligor’s failure to meet the terms of any contract with the Company or otherwise perform as agreed
Liquidity 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
Market 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
Operational The risk of loss, capital impairment, adverse customer experience or reputational impact resulting from failure to comply with policies and procedures, failed internal processes or systems, or from external events
Reputation The risk to market value, recruitment and retention of talented associates and maintenance of a loyal customer base due to the negative perceptions of our internal and external constituents regarding our business strategies and activities
Strategic 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 that can affect that position; lack of responsiveness to these conditions; strategic decisions to change the Company’s scale, market position or operating model; or, failure to appropriately consider implementation risks inherent in the Company’s strategy
We provide an overview of how we manage our seven 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.91Capital One Financial Corporation (COF)
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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 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 Credit and Financial Risk Officer, in conjunction with the 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 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 Credit and Financial 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.See also “Credit Risk Profile” below for more information about how we manage credit risk.Liquidity Risk Management
We recognize that liquidity risk is embedded within our day-to-day and strategic decisions. Liquidity is essential for banks to meet customer withdrawals, account for balance sheet changes, and provide funding for growth. We have acquired and built deposit gathering businesses and actively monitor our funding concentration. We manage our liquidity risk, which is driven by both internal and external factors, centrally and establish quantitative risk limits to continually assess our liquidity adequacy.The Chief Credit and Financial Risk Officer, in conjunction with the Head of Liquidity, Market and Capital Risk Oversight, 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. Results are reported to the Asset Liability Committee monthly and to the Risk Committee no less than quarterly. We also 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.We use internal and regulatory stress testing and the evaluation of other balance sheet metrics within our Liquidity Framework to confirm we maintain a fortified balance sheet. We rely on a combination of stable and diversified funding sources, along with a stockpile of liquidity reserves, to effectively manage our liquidity risk. We maintain a sizable liquidity reserve of cash and cash equivalents, high-quality unencumbered securities and investment securities and certain loans that are either readily-marketable or pledgeable. We also continue to maintain access to secured and unsecured debt markets through regular issuance.See also “Liquidity Risk Profile” below for more information about how we manage liquidity risk.
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Table of ContentsMarket Risk Management
We recognize that interest rate and foreign exchange risk are present in our business due to the nature of our assets and liabilities. 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.The Chief Credit and Financial Risk Officer, in conjunction with the Head of Liquidity, Market, and Capital Risk Oversight, is responsible for the establishment of market risk management policies and standards for the governance and monitoring of market risk at a corporate level. The market risk position is calculated and analyzed against pre-established limits. We use industry accepted techniques to analyze and measure interest rate and foreign exchange risk and we perform sensitivity analysis to identify our risk exposures under a broad range of scenarios. Results are reported to the Asset Liability Committee monthly and to the Risk Committee no less than quarterly.
Management is authorized to utilize financial instruments as outlined in our policy to actively manage market risk exposure. 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.
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, in collaboration with the CTRO, is responsible for establishing and overseeing our Operational Risk Management Program. 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, cybersecurity and technology risk, data management, model risk, third-party management, and business continuity. Operational Risk Management and Technology Risk Management enforce these practices and delivers reporting of operational risk results to senior business leaders, the executive committee and the Board of Directors. For additional information on how we manage cybersecurity and technology risk, see “Part I—Item 1C. Cybersecurity” of this Report.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 recognize that strategic risk is present within our business and the Company’s strategy. We monitor risks for the impact on current or future earnings, capital growth or enterprise value arising from changes to the Company’s competitive and market positions, including as a result of evolving forces in the industry. Additionally, we monitor timely and effective responsiveness to these conditions, strategic decisions that impact the Company’s scale, market position or operating model and failure to appropriately consider implementation risks in the Company’s strategy. Potential areas of opportunity or risk inform the Company’s strategy, which is led by the Chief Executive Officer and other senior executives. The Chief Enterprise Risk Officer, in consultation with the Chief Credit and Financial Risk Officer, oversees the identification and assessment of risks associated with the Company’s strategy and the monitoring of these risks throughout the year.93Capital One Financial Corporation (COF)
Table of ContentsOur Strategic Risk Management Policy, processes and controls encompass an ongoing assessment of risks associated with corporate or line of business specific strategies. These risks are managed through periodic reviews, along with regular updates to senior management and the Board.CREDIT RISK PROFILE
Our loan portfolio accounts for the substantial majority of our credit risk exposure. Our lending activities are governed under our credit policies and are subject to independent review and approval. Below we provide information about the composition of our loan portfolio, key concentrations and credit performance metrics.We also engage in certain non-lending activities that may give rise to ongoing credit and counterparty settlement risk, including purchasing securities for our investment securities portfolio, entering into derivative transactions to manage our market risk exposure and to accommodate customers, extending short-term advances on syndication activity including bridge financing transactions we have underwritten, depositing certain operational cash balances in other financial institutions, executing certain foreign exchange transactions and extending customer overdrafts. We provide additional information related to our investment securities portfolio under “Consolidated Balance Sheets Analysis—Investment Securities” and “Item 8. Financial Statements and Supplementary Data—Note 3—Investment Securities” as well as credit risk related to derivative transactions in “Item 8. Financial Statements and Supplementary Data—Note 10—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.
• 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 and marketing 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 Fair Isaac Corporation (“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 have fixed interest rates and loan terms of 84 months or less. Loan size limits are customized by program and are generally less than $75,000. Similar to credit card accounts, the underwriting criteria are customized for individual products and marketing programs and based on analysis of net present value of expected revenues, expenses and losses, and are 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.• 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 where we retain certain levels of residual risk after the loans are sold.94Capital One Financial Corporation (COF)
Table of ContentsPortfolio 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. The information presented in this section excludes loans held for sale, which totaled $202 million and $854 million as of December 31, 2024 and 2023, respectively.
Table 15 presents the maturities of our loans held for investment portfolio as of December 31, 2024. Determinations of maturities are based on scheduled repayments. Due to the revolving nature of credit card loans, we report the majority of our credit card loans as due in one year or less.
Table 15: Loan Maturity Schedule
December 31, 2024(Dollars in millions) Due Up to 1 Year > 1 Year to 5 Years > 5 Years to 15 Years > 15 Years Total
Fixed rate:
Credit card$ 16,791 $ 396 — — $ 17,187
Consumer banking 18,129 54,204 $ 5,396 $ 53 77,782
Commercial banking 1,116 4,135 5,805 993 12,049
Total fixed-rate loans 36,036 58,735 11,201 1,046 107,018Variable rate:
Credit card145,321 — — — 145,321
Consumer banking 290 11 9 — 310
Commercial banking 12,459 53,792 8,788 87 75,126
Total variable-rate loans 158,070 53,803 8,797 87 220,757
Total loans $ 194,106 $ 112,538 $ 19,998 $ 1,133 $ 327,775
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Table of ContentsGeographic CompositionWe market our credit card products throughout the United States, the United Kingdom and Canada. 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, 2024 and 2023.
Table 16: Credit Card Portfolio by Geographic Region
December 31, 2024 December 31, 2023(Dollars in millions) Amount % of Total Amount % of Total
Domestic credit card:California $ 15,978 9.8 % $ 15,167 9.8%
Texas 13,430 8.3 12,318 8.0
Florida 12,039 7.4 11,148 7.2
New York 10,010 6.2 9,578 6.2
Pennsylvania 6,299 3.9 5,824 3.8
Illinois 5,921 3.6 5,581 3.6
Ohio 5,314 3.3 4,845 3.1
New Jersey 5,097 3.1 4,702 3.0
Georgia 4,965 3.1 4,606 3.0
North Carolina
4,477 2.8 4,088 2.6
Other 72,088 44.3 69,809 45.2
Total domestic credit card 155,618 95.8 147,666 95.5International card businesses:United Kingdom 3,980 2.4 3,639 2.4
Canada 2,910 1.8 3,242 2.1
Total international card businesses 6,890 4.2 6,881 4.5
Total credit card $ 162,508 100.0 % $ 154,547 100.0%
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Table of ContentsOur auto loan portfolio is geographically diversified in the United States due to our product and marketing approach. Retail banking includes small business loans and other consumer lending products originated through our branch and café network. The table below presents the geographic profile of our auto loan and retail banking portfolios as of December 31, 2024 and 2023.
Table 17: Consumer Banking Portfolio by Geographic Region
December 31, 2024 December 31, 2023(Dollars in millions) Amount % of Total Amount % of Total
Auto:Texas $ 9,459 12.1 % $ 9,020 11.9 %
California 8,786 11.2 8,747 11.6
Florida 6,866 8.8 6,488 8.6
Pennsylvania 3,408 4.4 3,215 4.3
Ohio 3,402 4.4 3,130 4.1
Illinois 3,124 4.0 2,988 4.0
Georgia 2,962 3.8 2,971 3.9
New Jersey 2,662 3.4 2,626 3.5
Other 36,160 46.3 34,890 46.3
Total auto 76,829 98.4 74,075 98.2Retail banking:New York 376 0.5 417 0.6
Texas 278 0.4 297 0.4
Louisiana 198 0.2 234 0.3
New Jersey 84 0.1 94 0.1
Maryland 71 0.1 81 0.1
Florida 53 0.1 45 0.1
Other 203 0.2 194 0.2
Total retail banking 1,263 1.6 1,362 1.8
Total consumer banking $ 78,092 100.0 % $ 75,437 100.0 %
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Table of ContentsWe originate commercial and multifamily real estate loans in most regions of the United States. The table below presents the geographic profile of our commercial real estate portfolio as of December 31, 2024 and 2023.
Table 18: Commercial Real Estate Portfolio by Region
December 31, 2024 December 31, 2023(Dollars in millions) Amount % of Total Amount % of Total
Geographic concentration: (1)Northeast $ 12,152 38.1 % $ 13,931 40.5 %
South 7,900 24.8 7,073 20.5
Pacific West 4,213 13.2 5,342 15.5
Mid-Atlantic 2,901 9.1 4,138 12.0Mountain2,536 7.9 1,910 5.5
Midwest
2,201 6.9 2,052 6.0
Total $ 31,903 100.0 % $ 34,446 100.0 %__________
(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, RI and VT. South consists of AL, AR, FL, GA, KY, LA, MS, NC, OK, SC, TN and TX. Pacific West consists of: AK, CA, HI, OR and WA. Mid-Atlantic consists of DC, DE, MD, VA and WV. Midwest consists of: IA, IL, IN, KS, MI, MN, MO, ND, NE, OH, SD and WI. Mountain consists of: AZ, CO, ID, MT, NM, NV, UT and WY.98
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Table of ContentsCommercial Loans by IndustryTable 19 summarizes our commercial loans held for investment portfolio by industry classification as of December 31, 2024 and 2023. Industry classifications below are based on our interpretation of the Federal Loan Classification codes as they pertain to each individual loan.
Table 19: Commercial Loans by Industry
(Percentage of portfolio) December 31, 2024 December 31, 2023
Industry Classification:
Finance (1)
39% 31 %Real Estate & Construction (2)26 30Government & Education 8 8Health Care & Pharmaceuticals 4 6Commercial Services 4 4
Technology, Telecommunications & Media3 2Oil, Gas & Pipelines
3 3Other 13 16Total 100 % 100 %
__________(1) Beginning in the fourth quarter of 2024, we made certain reporting presentation changes which increased the percentage of Finance loans, and decreased the percentage of Real Estate & Construction loans and Healthcare loans, in relation to our total loans held for investment portfolio. This change was made on a prospective basis in accordance with regulatory reporting changes made to the “Consolidated Reports of Condition and Income” (FFIEC 031) non-depository financial institution definition, effective December 31, 2024.
(2) The funded balance for commercial office real estate held for investment totaled $1.8 billion, or 2.1% and $2.3 billion, or 2.5%, as of December 31, 2024 and 2023, respectively. Commercial office real estate exposure does not include loans in our healthcare real estate business secured by medical office properties and loans to office real estate investment trusts or real estate investment funds.
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Credit Risk Measurement
We closely monitor economic conditions and loan performance trends to assess and manage our exposure to credit risk. Trends in delinquency rates are the key credit quality indicator for our credit card and retail banking loan portfolios as changes in delinquency rates can provide an early warning of changes in potential future credit losses. The key indicator we monitor when assessing the credit quality and risk of our auto loan portfolio is borrower credit scores as they provide insight into borrower risk profiles, which give indications of potential future credit losses. The key credit quality indicator for our commercial loan portfolios is our internal risk ratings as we generally classify loans that have been delinquent for an extended period of time and other loans with significant risk of loss as nonperforming. In addition to these credit quality indicators, we also manage and monitor other credit quality metrics such as level of nonperforming loans and net charge-off rates.
We underwrite most consumer loans using proprietary models, which typically include credit bureau data, such as borrower credit scores, application information and, where applicable, collateral and deal structure data. We continuously adjust our management of credit lines and collection strategies based on customer behavior and risk profile changes. We also use borrower credit scores for subprime classification, for competitive benchmarking and, in some cases, to drive product segmentation decisions.Table 20 provides details on the credit scores of our domestic credit card and auto loan portfolios as of December 31, 2024 and 2023.
Table 20: Credit Score Distribution
(Percentage of portfolio) December 31, 2024 December 31, 2023Domestic credit card—Refreshed FICO scores: (1)Greater than 660 69 % 68 %
660 or below 31 32Total 100 % 100 %
Auto — At origination FICO scores: (2)Greater than 660 54 % 53 %
621 - 660 19 20620 or below 27 27
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.
In our commercial loan portfolio, 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.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 “Item 8. Financial Statements and Supplementary Data—Note 4—Loans” for additional credit quality information and see “Item 8. Financial Statements and Supplementary Data—Note 1—Summary of Significant Accounting Policies” for information on our accounting policies for delinquent and nonperforming loans, charge-offs and loan modifications and restructurings for each of our loan categories.
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Table of ContentsDelinquency 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 all loans held for investment 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 “Item 8. Financial Statements and Supplementary Data—Note 1—Summary of Significant Accounting Policies” for information on our policies for classifying loans as nonperforming for each of our loan categories. We provide additional information on our credit quality metrics in “Business Segment Financial Performance.”
Table 21 presents our 30+ day performing delinquency rates and 30+ day delinquency rates of our portfolio of loans held for investment, by portfolio segment, as of December 31, 2024 and 2023.
Table 21: 30+ Day Delinquencies
December 31, 2024 December 31, 202330+ Day Performing Delinquencies 30+ Day Delinquencies 30+ Day Performing Delinquencies 30+ Day Delinquencies
(Dollars in millions) Amount Rate (1)
Amount Rate (1)
Amount Rate (1)
Amount Rate (1)
Credit Card:Domestic credit card $ 7,053 4.53 % $ 7,053 4.53 % $ 6,806 4.61 % $ 6,806 4.61 %
International card businesses 311 4.52 320 4.64 321 4.67 329 4.77
Total credit card 7,364 4.53 7,373 4.54 7,127 4.61 7,135 4.62Consumer Banking:Auto 4,572 5.95 5,229 6.81 4,696 6.34 5,307 7.16
Retail banking 14 1.12 26 2.05 17 1.19 33 2.40
Total consumer banking 4,586 5.87 5,255 6.73 4,713 6.25 5,340 7.08Commercial Banking:Commercial and multifamily real estate 40 0.13 170 0.53 — — 121 0.35
Commercial and industrial 99 0.18 242 0.44 55 0.10 181 0.32
Total commercial banking 139 0.16 412 0.47 55 0.06 302 0.33
Total $ 12,089 3.69 $ 13,040 3.98 $ 11,895 3.71 $ 12,777 3.99__________
(1) Delinquency rates are calculated by dividing delinquency amounts by period-end loans held for investment for each specified loan category.101
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Table 22 presents our 30+ day delinquent loans held for investment, by aging and geography, as of December 31, 2024 and 2023.
Table 22: Aging and Geography of 30+ Day Delinquent Loans
December 31, 2024 December 31, 2023(Dollars in millions) Amount Rate (1)
Amount Rate (1)
Delinquency status:30 – 59 days $ 5,276 1.61 % $ 5,367 1.68 %
60 – 89 days 3,138 0.96 3,119 0.97> 90 days4,626 1.41 4,291 1.34
Total $ 13,040 3.98 % $ 12,777 3.99 %Geographic region:Domestic $ 12,720 3.88 % $ 12,448 3.89 %
International 320 0.10 329 0.10
Total $ 13,040 3.98 % $ 12,777 3.99 %__________
(1) Delinquency rates are calculated by dividing delinquency amounts by total period-end loans held for investment.102Capital One Financial Corporation (COF)
Table of ContentsTable 23 summarizes loans that were 90+ days delinquent, in regards to interest or principal payments, and still accruing interest as of December 31, 2024 and 2023. These loans consist primarily of credit card accounts between 90 days and 179 days past due. As permitted by regulatory guidance issued by the FFIEC, we continue to accrue interest and fees on domestic credit card loans through the date of charge off, which is typically in the period the account becomes 180 days past due.
Table 23: 90+ Day Delinquent Loans Accruing Interest
December 31, 2024 December 31, 2023(Dollars in millions) Amount Rate (1)
Amount Rate (1)
Loan category:Credit card $ 3,711 2.28 % $ 3,499 2.26 %
Commercial banking 96 0.11 55 0.06
Total $ 3,807 1.16 $ 3,554 1.11Geographic region:Domestic $ 3,673 1.14 % $ 3,422 1.09 %
International 134 1.95 132 1.91
Total $ 3,807 1.16 $ 3,554 1.11__________
(1) Delinquency rates are calculated by dividing delinquency amounts by period-end loans held for investment for each specified loan category.103
Capital One Financial Corporation (COF)
Table of ContentsNonperforming Loans and Nonperforming Assets
Nonperforming loans include loans that have been placed on nonaccrual status. Nonperforming assets consist of nonperforming loans, repossessed assets and other foreclosed assets. See “Item 8. Financial Statements and Supplementary Data—Note 1—Summary of Significant Accounting Policies” for information on our policies for classifying loans as nonperforming for each of our loan categories.Table 24 presents our nonperforming loans, by portfolio segment, and other nonperforming assets as of December 31, 2024 and 2023. We do not classify loans held for sale as nonperforming. We provide additional information on our credit quality metrics in “Business Segment Financial Performance.”
Table 24: Nonperforming Loans and Other Nonperforming Assets (1)
December 31, 2024 December 31, 2023(Dollars in millions) Amount Rate Amount Rate
Nonperforming loans held for investment: (2)
Credit Card:International card businesses $ 10 0.15 % $ 9 0.13 %
Total credit card 10 0.01 9 0.01Consumer Banking:Auto 750 0.98 712 0.96
Retail banking 25 1.94 46 3.36
Total consumer banking 775 0.99 758 1.00Commercial Banking:Commercial and multifamily real estate 509 1.60 425 1.23
Commercial and industrial 701 1.27 336 0.60
Total commercial banking 1,210 1.39 761 0.84Total nonperforming loans held for investment (3)1,995 0.61 1,528 0.48Other nonperforming assets (4)65 0.02 62 0.02
Total nonperforming assets $ 2,060 0.63 $ 1,590 0.50__________(1) We recognized interest income for loans classified as nonperforming of $111 million and $91 million in 2024 and 2023, respectively.(2) Nonperforming loan rates are calculated based on nonperforming loans for each category divided by period-end total loans held for investment for each respective category.(3) Excluding the impact of domestic credit card loans, nonperforming loans as a percentage of total loans held for investment was 1.16% and 0.88% as of December 31, 2024 and 2023, respectively.(4) The denominators used in calculating nonperforming asset rates consist of total loans held for investment and other nonperforming assets.104
Capital One Financial Corporation (COF)
Table of ContentsNet Charge-Offs
Net charge-offs consist of the amortized cost basis, excluding accrued interest, of loans held for investment that we determine to be uncollectible, net of recovered amounts. We charge off loans as a reduction to the allowance for credit losses when we determine the loan is uncollectible and record subsequent recoveries of previously charged off amounts as increases to the allowance for credit losses. Uncollectible finance charges and fees are reversed through revenue and certain fraud losses are recorded in other non-interest expense. Generally, costs to recover charged off loans are recorded as collection expenses as incurred and are 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 “Item 8. Financial Statements and Supplementary Data—Note 1—Summary of Significant Accounting Policies” for information on our charge-off policy for each of our loan categories.Table 25 presents our net charge-off amounts and rates, by portfolio segment, in 2024, 2023 and 2022.
Table 25: Net Charge-Offs (Recoveries)Year Ended December 31,2024 2023 2022(Dollars in millions) Amount Rate (1)
Amount Rate (1)
Amount Rate (1)
Credit Card:Domestic credit card (2)
$ 8,634 5.91 % $ 6,164 4.56 % $ 2,833 2.47 %
International card businesses 353 5.15 308 4.84 215 3.65
Total credit card 8,987 5.88 6,472 4.57 3,048 2.53Consumer Banking:Auto 1,528 2.05 1,308 1.72 784 1.00
Retail banking 65 5.11 56 3.89 70 4.24
Total consumer banking 1,593 2.10 1,364 1.76 854 1.06Commercial Banking:Commercial and multifamily real estate 87 0.26 489 1.34 — —
Commercial and industrial 81 0.15 89 0.16 71 0.13
Total commercial banking 168 0.19 578 0.62 71 0.08
Total net charge-offs $ 10,748 3.39 $ 8,414 2.70 $ 3,973 1.36
Average loans held for investment $ 317,421 $ 311,541 $ 292,238__________
(1) Net charge-off rates are calculated by dividing net charge-offs by average loans held for investment for the period for each loan category.(2) The Walmart Program Termination increased the Domestic Card net charge-off rate by 24 bps in 2024.
105Capital One Financial Corporation (COF)
Table of Contents
Financial Difficulty Modifications to BorrowersA financial difficulty modification (“FDM”) occurs when a modification in the form of principal forgiveness, interest rate reduction, an other-than-insignificant payment delay, a term extension or a combination of these modifications is granted to a borrower experiencing financial difficulty.
As part of our loss mitigation efforts, we may provide short-term (one to twelve months) or long-term (greater than twelve months) modifications to a borrower experiencing financial difficulty to improve long-term collectibility of the loan and to avoid the need for repossession or foreclosure of collateral.We consider the impact of all loan modifications, including FDMs, when estimating the credit quality of our loan portfolio and establishing allowance levels. For our Commercial Banking customers, loan modifications are also considered in the assignment of an internal risk rating.
In our Credit Card business, the majority of our FDMs receive an interest rate reduction and are placed on a fixed payment plan not exceeding 60 months. 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 being 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 FDMs receive an extension, an interest rate reduction, principal reduction, or a combination of these modifications.
In our Commercial Banking business, the majority of our FDMs receive an extension. A portion of FDMs receive an interest rate reduction, principal reduction, or a combination of modifications.For more information on FDMs, see “Item 8. Financial Statements—Note 4—Loans.”Allowance for Credit Losses and Reserve for Unfunded Lending Commitments
Our allowance for credit losses represents management’s current estimate of expected credit losses over the contractual terms of our loans held for investment as of each balance sheet date. Expected recoveries of amounts previously charged off or expected to be charged off are recognized within the allowance. We also estimate expected credit losses related to unfunded lending commitments that are not unconditionally cancellable. The provision for losses on unfunded lending commitments is included in the provision for credit losses in our consolidated statements of income and the related reserve for unfunded lending commitments is included in other liabilities on our consolidated balance sheets. We provide additional information on the methodologies and key assumptions used in determining our allowance for credit losses in “Item 8. Financial Statements and Supplementary Data—Note 1—Summary of Significant Accounting Policies.”106Capital One Financial Corporation (COF)
Table of ContentsTable 26 presents changes in our allowance for credit losses and reserve for unfunded lending commitments for 2024 and 2023, and details by portfolio segment for the provision for credit losses, charge-offs and recoveries.
Table 26: Allowance for Credit Losses and Reserve for Unfunded Lending Commitments ActivityCredit Card Consumer Banking
(Dollars in millions) Domestic Card International Card Businesses Total Credit Card Auto Retail Banking Total Consumer Banking Commercial Banking Total
Allowance for credit losses:Balance as of December 31, 2022 $ 9,165 $ 380 $ 9,545 $ 2,187 $ 50 $ 2,237 $ 1,458 $ 13,240Cumulative effects of accounting standards adoption (1)(40) (23) (63) — — — — (63)
Balance as of January 1, 2023 9,125 357 9,482 2,187 50 2,237 1,458 13,177Charge-offs (7,348) (439) (7,787) (2,252) (75) (2,327) (588) (10,702)
Recoveries (2)1,184 131 1,315 944 19 963 10 2,288
Net charge-offs (6,164) (308) (6,472) (1,308) (56) (1,364) (578) (8,414)
Provision for credit losses 8,268 383 8,651 1,123 46 1,169 665 10,485
Allowance build (release) for credit losses 2,104 75 2,179 (185) (10) (195) 87 2,071Other changes (3)32 16 48 — — — — 48
Balance as of December 31, 2023 11,261 448 11,709 2,002 40 2,042 1,545 15,296
Reserve for unfunded lending commitments:
Balance as of December 31, 2022 — — — — — — 218 218Provision (benefit) for losses on unfunded lending commitments — — — — — — (60) (60)Balance as of December 31, 2023 — — — — — — 158 158
Combined allowance and reserve as of December 31, 2023 $ 11,261 $ 448 $ 11,709 $ 2,002 $ 40 $ 2,042 $ 1,703 $ 15,454Allowance for credit losses:
Balance as of December 31, 2023 $ 11,261 $ 448 $ 11,709 $ 2,002 $ 40 $ 2,042 $ 1,545 $ 15,296
Charge-offs
(10,246) (511) (10,757) (2,674) (84) (2,758) (234) (13,749)
Recoveries (2)
1,612 158 1,770 1,146 19 1,165 66 3,001
Net charge-offs (8,634) (353) (8,987) (1,528) (65) (1,593) (168) (10,748)
Provision for credit losses 9,867 405 10,272 1,385 50 1,435 23 11,730
Allowance build (release) for credit losses (4)
1,233 52 1,285 (143) (15) (158) (145) 982
Other changes (3)
— (20) (20) — — — — (20)
Balance as of December 31, 2024 12,494 480 12,974 1,859 25 1,884 1,400 16,258
Reserve for unfunded lending commitments:
Balance as of December 31, 2023 — — — — — — 158 158
Provision (benefit) for losses on unfunded lending commitments — — — — — — (15) (15)
Balance as of December 31, 2024 — — — — — — 143 143
Combined allowance and reserve as of December 31, 2024 $ 12,494 $ 480 $ 12,974 $ 1,859 $ 25 $ 1,884 $ 1,543 $ 16,401
__________
(1) Impact from the adoption of ASU No. 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings (“TDR”) and Vintage Disclosures as of January 1, 2023.
(2) The amount and timing of recoveries are 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) Primarily represents foreign currency translation adjustments for the year ended December 31, 2024. Primarily represents foreign currency translation adjustments and the initial allowance for purchased credit-deteriorated (“PCD”) loans for the years ended December 31, 2023 and 2022. The initial allowance of PCD loans was $32 million and $10 million for the years ended December 31, 2023 and 2022, respectively.
(4) The Walmart Program Termination resulted in an allowance for credit losses build in Domestic Card of $826 million in the second quarter of 2024.
107Capital One Financial Corporation (COF)
Table of ContentsAllowance Coverage Ratios for Specified Loan Category
O ur allowance for credit losses increased by $962 million to $16.3 billion as of December 31, 2024 compared to 2023 and our allowance coverage ratio increased by 19 bps to 4.96% as of December 31, 2024 compared to 2023.
The ratio of the allowance for credit losses divided by total nonperforming loans held for investment of $2.0 billion and $1.5 billion as of December 31, 2024 and 2023, respectively, decreased by 186% to 815% as of December 31, 2024 from 1,001% as of December 31, 2023. Excluding the impact of the allowance for credit losses related to Domestic Card of $12.5 billion and $11.3 billion as of December 31, 2024 and 2023, respectively, this ratio decreased by 75% to 189% as of December 31, 2024 from 264% as of December 31, 2023. The decrease in the ratio for the allowance for credit losses divided by total nonperforming loans was driven by an increase in nonperforming loans partially offset by an increase in our allowance for credit losses.LIQUIDITY RISK PROFILEWe manage our funding and liquidity risk in an integrated manner in support of the current and future cash flow needs of our business. We maintained liquidity reserves of $123.8 billion and $120.7 billion as of December 31, 2024 and 2023, respectively, as shown in Table 27 below. Included in liquidity reserves are cash and cash equivalents, investment securities and FHLB borrowing capacity secured by loans.
As of December 31, 2024, we had available issuance capacity of $40.2 billion under shelf registrations associated with our credit card and auto loan securitization programs. We also maintain a shelf registration that enables us to issue an indeterminate amount of senior or subordinated debt securities, preferred stock, depositary shares, common stock, purchase contracts, warrants and units. Our ability to issue under each shelf registration is subject to market conditions.
Finally, as of December 31, 2024, we had access to available contingent liquidity sources totaling $102.6 billion through the prepositioning of collateral, including a portion of the investment securities included in the liquidity reserves amount in the following table, at the Federal Reserve Discount Window, the Standing Repo Facility, FHLB and the Fixed Income Clearing Corporation—Government Securities Division (“FICC—GSD”).
As of December 31, 2024 and 2023, our funding sources totaled $408.3 billion and $398.3 billion, respectively, primarily composed of consumer deposits , as shown in “Consolidated Balance Sheets Analysis—Table 6: Funding Sources Composition.”Our liquidity reserves, borrowing capacity, contingent liquidity sources and total funding sources are all discussed in more detail in the following sections.Table 27 below presents the composition of our liquidity reserves as of December 31, 2024 and 2023.
Table 27: Liquidity Reserves
(Dollars in millions) December 31, 2024 December 31, 2023
Cash and cash equivalents $ 43,230 $ 43,297
Securities available for sale (1)
83,013 79,117
FHLB borrowing capacity secured by loans 4,279 5,205
Outstanding FHLB advances and letters of credit secured by loans and investment securities (48) (50)
Other encumbrances of investment securities (6,648) (6,917)
Total liquidity reserves $ 123,826 $ 120,652
________
(1) Includes securities that have been pledged or otherwise encumbered within the below Liquidity Reserves line items “Outstanding FHLB advances and letters of credit secured by loans and investment securities” and “Other encumbrances of investment securities . ”
Our liquidity reserves increased by $3.2 billion to $123.8 billion as of December 31, 2024 from December 31, 2023, primarily due to increases in securities available for sale. In addition to these liquidity reserves, we maintain access to a diversified mix of funding sources as discussed in the “Borrowing Capacity” and “Funding” sections below. See “Risk Management” for additional information on our management of liquidity risk.
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Liquidity Coverage RatioWe are subject to the LCR Rule as implemented by the Federal Reserve and the OCC. The LCR Rule requires each of the Company and the Bank to calculate its respective 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 2024 was 155%, which exceeded the LCR Rule requirement of 100%. The calculation and the underlying components are based on our interpretations, expectations and assumptions of relevant regulations, as well as interpretations provided by our regulators, and are subject to change based on changes to future regulations and interpretations. See “Part I—Item 1. Business—Supervision and Regulation” for additional information.Net Stable Funding RatioWe are subject to the NSFR Rule as implemented by the Federal Reserve and the OCC. The NSFR Rule requires each of the Company and the Bank to maintain an NSFR of 100% on an ongoing basis. It also requires the Company to publicly disclose, on a semi-annual basis each second and fourth quarter, its NSFR, certain related quantitative liquidity metrics and qualitative discussion of its NSFR. Our average NSFR for each of the third and fourth quarter of 2024 was 135%, which exceeded the NSFR Rule requirement of 100%. The calculation and the underlying components are based on our interpretations, expectations and assumptions of the relevant regulations, as well as interpretations provided by our regulators, and are subject to change based on changes to future regulations and interpretations. See “Part I—Item 1. Business—Supervision and Regulation” for additional information.Borrowing CapacityWe maintain a shelf registration with the SEC so that we may periodically offer and sell an indeterminate aggregate amount of senior or subordinated debt securities, preferred stock, depositary shares, common stock, purchase contracts, warrants and units. There is no limit under this shelf registration to the amount or number of such securities that we may offer and sell, subject to market conditions. In addition, we also maintain a shelf registration associated with our credit card securitization trust that allows us to periodically offer and sell up to $30.0 billion of securitized debt obligations and a shelf registration associated with our auto loan securitization trusts that allows us to periodically offer and sell up to $25.0 billion of securitized debt obligations. The registered amounts under these shelf registration statements are subject to continuing review and change in the future, including as part of the routine renewal process. As of December 31, 2024, we had $21.6 billion and $18.6 billion of available issuance capacity in our credit card and auto loan securitization programs, respectively.
In addition to our issuance capacity under the shelf registration statements, we also have collateral pledged to support our access to FHLB advances, the Federal Reserve Discount Window, the Standing Repo Facility and FICC—GSD general collateral financing repurchase agreement service. For each of these programs, the ability to borrow utilizing these sources is dependent on meeting the respective membership requirements. Our borrowing capacity in each program is a function of the collateral the Bank has posted with each counterparty, including any respective haircuts applied to that collateral.
As of December 31, 2024, we pledged loans and securities to the FHLB to secure a maximum borrowing capacity of $35.1 billion, of which $48 million was used. Our FHLB membership is supported by our investment in FHLB stock of $18 million as of both December 31, 2024 and 2023.
As a member of FICC—GSD, we have $20.8 billion of readily available borrowing capacity secured by securities from our investment portfolio as of December 31, 2024. Our FICC—GSD membership is supported by our investment in Depository Trust and Clearing Corporation (“DTCC”) common stock of $412 thousand and $375 thousand as of December 31, 2024 and 2023, respectively.
As of December 31, 2024, we pledged loans to secure a borrowing capacity of $46.7 billion under the Federal Reserve Discount Window. Our membership with the Federal Reserve is supported by our investment in Federal Reserve stock, which totaled $1.3 billion as of both December 31, 2024 and 2023.
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DepositsTable 28 provides a comparison of the average balance, interest expense and average deposits interest rate for December 31, 2024, 2023 and 2022.
Table 28: Deposits Composition and Average Deposits Interest RatesYear Ended December 31,2024 2023 2022(Dollars in millions) Average Balance Interest Expense Average Deposits Interest Rate Average Balance Interest Expense Average Deposits Interest Rate Average Balance Interest Expense Average Deposit Interest Rate
Interest-bearing checking accounts (1)$ 34,904 $ 544 1.56 % $ 41,555 $ 797 1.92 % $ 48,291 $ 312 0.65 %Saving deposits (2)211,120 7,083 3.36 197,896 5,353 2.71 202,454 1,628 0.80
Time deposits 78,273 3,866 4.94 74,286 3,339 4.49 26,463 595 2.25
Total interest-bearing deposits $ 324,297 $ 11,493 3.54 $ 313,737 $ 9,489 3.02 $ 277,208 $ 2,535 0.91__________
(1) Includes negotiable order of withdrawal accounts.
(2) Includes money market deposit accounts.The FDIC limits the acceptance of brokered deposits to well-capitalized insured depository institutions and, with a waiver from the FDIC, to adequately-capitalized institutions. The Bank was well-capitalized, as defined under the federal banking regulatory guidelines, as of both December 31, 2024 and 2023. See “Part I—Item 1. Business—Supervision and Regulation” for additional information. We provide additional information on the composition of deposits in “Consolidated Balance Sheets Analysis—Table 6: Funding Sources Composition” and in “Item 8. Financial Statements and Supplementary Data—Note 9—Deposits and Borrowings.”FundingOur primary source of funding comes from insured retail deposits, as they are a relatively stable and lower cost source of funding. In addition to deposits, we raise funding through the issuance of senior and subordinated notes and securitized debt obligations, federal funds purchased, securities loaned or sold under agreements to repurchase and FHLB advances secured by certain portions of our loan and securities portfolios. A key objective in our use of these markets is to maintain access to a diversified mix of wholesale funding sources. See “Consolidated Balance Sheets Analysis—Table 6: Funding Sources Composition” for additional information on our primary sources of funding.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. The actual timing and amounts of future cash payments may vary over time due to a number of factors, such as early debt redemptions and changes in deposit balances.110Capital One Financial Corporation (COF)
Table of ContentsAs of December 31, 2024 and 2023, we held $64.9 billion and $64.2 billion, respectively, of estimated uninsured deposits. These amounts were primarily comprised of checking and savings deposits. These estimated uninsured deposits comprised approximately 18% of our total deposits as of both December 31, 2024 and 2023. We estimate our uninsured amounts based on methodologies and assumptions used for our “Consolidated Reports of Condition and Income” (FFIEC 031) filed with the Federal Banking Agencies, adjusted to exclude intercompany balances and cash collateral received on certain derivative contracts which are not presented within deposits on our consolidated balance sheet.
Table 29 presents, by contractual maturity, the estimated uninsured portion of total time deposits as of December 31, 2024 and 2023. Our funding and liquidity management activities factor in the expected maturities of these deposits.
Table 29: Amount of Uninsured Time Deposits by Contractual Maturity 1
December 31, 2024 December 31, 2023(Dollars in millions) Amount % of Total Amount % of TotalUp to three months $ 4,619 45.6 % $ 4,784 53.2 %
> 3 months to 6 months 1,675 16.6 537 6.0
> 6 months to 12 months 2,596 25.6 2,095 23.3
> 12 months 1,230 12.2 1,577 17.5
Total $ 10,120 100.0 % $ 8,993 100.0 %__________(1) Some customers have time deposits in excess of the federal deposit insurance limit, making a portion of the deposit uninsured. As of December 31, 2024 and 2023, the total time deposit amount with some portion in excess of the insured amount was $15.2 billion and $15.8 billion, respectively.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 have access to short-term and long-term FHLB advances secured by certain investment securities, multifamily real estate loans and commercial real estate loans.Our short-term borrowings, which include those borrowings with an original contractual maturity of one year or less, typically consist of federal funds purchased, securities loaned or sold under agreements to repurchase or short-term FHLB advances, and do not include the current portion of long-term debt. Our short-term borrowings increased by $24 million to $562 million as of December 31, 2024 from December 31, 2023 driven by an increase in repurchase agreements.
Our long-term funding, which primarily consists of securitized debt obligations and senior and subordinated notes, decreased by $4.3 billion to $45.0 billion as of December 31, 2024 from December 31, 2023 primarily driven by net maturities of securitized debt obligations. We provide more information on our securitization activity in “Item 8. Financial Statements and Supplementary Data—Note 6—Variable Interest Entities and Securitizations” and on our borrowings in “Item 8. Financial Statements and Supplementary Data—Note 9—Deposits and Borrowings.”
The following table summarizes issuances of securitized debt obligations, senior and subordinated notes, long term FHLB advances and their respective maturities or redemptions for the years ended December 31, 2024, 2023 and 2022.
Table 30: Long-Term Debt Funding ActivitiesIssuances Maturities/Redemptions
Year Ended December 31, Year Ended December 31,(Dollars in millions) 2024 2023 2022 2024 2023 2022
Securitized debt obligations $ 1,810 $ 3,300 $ 9,750 $ 5,828 $ 2,483 $ 7,060
Senior and subordinated notes 4,000 8,250 9,300 4,411 8,436 3,561
FHLB advances — — 12,000 — — 12,000
Total $ 5,810 $ 11,550 $ 31,050 $ 10,239 $ 10,919 $ 22,621
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Table of ContentsCredit RatingsOur credit ratings impact our ability to access capital markets and our borrowing costs. For more information, see “Part I—Item 1A. Risk Factors”— “A downgrade in our credit ratings could significantly impact our liquidity, funding costs and access to the capital markets.”
Table 31 provides a summary of the credit ratings for the senior unsecured long-term debt of Capital One Financial Corporation and CONA as of December 31, 2024 and 2023.
Table 31: Senior Unsecured Long-Term Debt Credit Ratings
December 31, 2024 December 31, 2023Capital One Financial Corporation CONA Capital One Financial Corporation CONA
Moody’s Baa1 A3 Baa1 A3
S&P BBB BBB+ BBB BBB+
Fitch A- A A- AAs of February 11, 2025 Standard & Poor’s (“S&P”) and Fitch Ratings (“Fitch”) have our credit ratings on a stable outlook. Following the Company’s February 19, 2024 announcement of its agreement to acquire Discover, Moody’s Investors Service (“Moody’s”) placed our credit ratings on review for a downgrade. Moody’s said its review for downgrade may continue until the Transaction has been completed.Other Commitments
In the normal course of business, we enter into other contractual obligations that may require future cash payments that affect our short-term and long-term liquidity and capital resource needs. Our other contractual obligations include lending commitments, leases, purchase obligations and other contractual arrangements.As of December 31, 2024 and 2023, our total unfunded lending commitments were $458.1 billion and $441.3 billion, respectively, consisting 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. 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 additional information, refer to “Item 8. Financial Statements and Supplementary Data—Note 19—Commitments, Contingencies, Guarantees and Others” in this Report.
Our primary involvement with leases is in the capacity as a lessee where we lease premises to support our business. The majority of our leases are operating leases of office space, retail bank branches and cafés. Our operating leases expire at various dates through 2071, although some 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. As of both December 31, 2024 and 2023, we had $1.5 billion in aggregate operating lease obligations, of which $235 million will be due the following 12 months. We provide more information on our lease activity in “Item 8. Financial Statements and Supplementary Data—Note 8—Premises, Equipment and Leases.”
We have enforceable and legally binding purchase obligations for goods and services such as data management, media and other software and third-party services. As of December 31, 2024 and 2023, we had $4.0 billion and $789 million, respectively, in aggregate purchase obligations. This increase is mainly due to recently renewed commitments for certain long term purchase obligations for goods and services.
We also enter into various contractual arrangements that may require future cash payments, including 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. These arrangements are discussed in more detail in “Item 8. Financial Statements and Supplementary Data—Note 6—Variable Interest Entities and Securitizations,” “Item 8. Financial Statements and Supplementary Data—Note 15—Employee Benefit Plans” and “Item 8. Financial Statements and Supplementary Data—Note 19—Commitments, Contingencies, Guarantees and Others.”
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Capital One Financial Corporation (COF)
Table of ContentsMARKET RISK PROFILE
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 U.K. and Canada within our Credit Card business; and
• Customer accommodation activities within our Commercial Banking business.
We have enterprise-wide risk management policies and limits, approved by our Board of Directors, which govern our market risk management activities. Our objective is to manage our exposure to market risk in accordance with these policies and limits based on prevailing market conditions and long-term expectations. We provide additional information below about our primary sources of market risk, our market risk management strategies and the measures that we use to evaluate these exposures.
Interest Rate Risk
Interest rate risk represents exposure to financial instruments whose values vary with the level or volatility of interest rates. We are exposed to interest rate risk primarily from the differences in the timing between the maturities or repricing of assets and liabilities. We manage our interest rate risk primarily by entering into interest rate swaps and other derivative instruments which could include caps, floors, options, futures and forward contracts.We use various industry standard market risk measurement techniques and analyses to measure, assess and manage the impact of changes in interest rates on our net interest income and our economic value of equity and changes in foreign exchange rates on our non-dollar-denominated funding and non-dollar equity investments in foreign operations.
Net Interest Income Sensitivity
Our net interest income sensitivity measure estimates the impact of hypothetical instantaneous movements in interest rates relative to our baseline interest rate forecast on our projected 12-month net interest income. Net interest income sensitivity metrics are derived using the following key assumptions:• As of December 31, 2024, our metrics assume a market implied baseline interest rate projection for the upper limit of the Federal Funds Target Rate of 4.00% at both December 31, 2025 and 2026.• In addition to our existing assets, liabilities and derivative positions, we incorporate expected future business growth assumptions. These assumptions include loan and deposit growth, pricing, plans for projected changes in our funding mix and our securities and cash position from our internal corporate outlook that is used in our financial planning process.
• The analysis assumes this forecast of expected future business growth remains unchanged between the baseline rate forecast and rate shock scenarios, including no changes to our interest rate risk management activities like securities and hedging actions.• We incorporate the dynamic nature of deposit re-pricing, which includes pricing lags and changes in deposit beta and mix as interest rates change, and the prepayment sensitivity of our mortgage securities to the level of interest rates. In our models, deposit betas and mortgage security prepayments vary dynamically based on the level of interest rates and by product type. In the contexts used in this section, “beta” refers to the change in deposit rate paid relative to the change in the federal funds rate.
• In instances where an interest rate scenario would result in a rate less than 0%, we assume a rate of 0% for that scenario. This assumption applies only to jurisdictions that do not have a practice of employing negative policy rates. In jurisdictions that have negative policy rates, we do not floor interest rates at 0%.
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Table of ContentsAt the current level of interest rates, our projected 12-month net interest income is expected to increase in higher rate scenarios and decrease in lower rate scenarios. The decrease in lower rate scenarios is driven by lower interest income from our assets, including floating rate credit card and commercial loans, being partially offset by lower interest expense from our deposits and other liabilities, net of our interest rate hedges. Our 12-month net interest income sensitivity was largely unchanged as compared to December 31, 2023.Economic Value of Equity Sensitivity
Our economic value of equity sensitivity measure estimates the impact of hypothetical instantaneous movements in interest rates on the net present value of our assets and liabilities, including derivative exposures. Economic value of equity sensitivity metrics are derived using the following key assumptions:• As of December 31, 2024, our metrics assume a market implied baseline interest rate projection for the upper limit of the Federal Funds Target Rate of 4.00% at both December 31, 2025 and 2026.• The analysis includes only existing assets, liabilities and derivative positions and does not incorporate business growth assumptions or projected balance sheet changes.
• Similar to our net interest income sensitivity measure, we incorporate the dynamic nature of deposit repricing and attrition, which includes pricing lags and changes in deposit beta as interest rates change and the prepayment sensitivity of our mortgage securities to the level of interest rates. In our models, deposit betas and mortgage security prepayments vary dynamically based on the level of interest rates and by product type.
• Balance attrition assumptions for loans, including credit card, auto and commercial loans, remain unchanged between the baseline interest rate forecast and interest rate shock scenarios as those loans are mainly floating rate or shorter duration fixed rate loans and hence paydowns have a low sensitivity to the level of interest rates.• For assets and liabilities with embedded optionality, such as mortgage securities and deposit balances, we utilize Monte Carlo simulations to assess economic value with industry-standard term structure modeling of interest rates.• Our calculations of net present value apply appropriate spreads over the benchmark yield curve for select assets and liabilities to capture the inherent risks (including credit risk) to discount expected interest and principal cash flows.• In instances where an interest rate scenario would result in a rate less than 0%, we assume a rate of 0% for that scenario. This assumption applies only to jurisdictions that do not have a practice of employing negative policy rates. In jurisdictions that have negative policy rates, we do not floor interest rates at 0%.
Our current economic value of equity sensitivity profile demonstrates that our economic value of equity decreases in higher interest rate scenarios and increases in lower interest rate scenarios. The decrease in higher rate scenarios is due to the declines in the projected value of our fixed rate assets being only partially offset by corresponding movements in the projected value of our deposits and other liabilities. The pace of economic value of equity decrease is larger for the +200 bps scenario as our deposits are assumed to reprice more rapidly in higher interest rate environments. Our current economic value of equity sensitivity decreased modestly in higher rate scenarios while remaining largely unchanged for lower rate scenarios as compared to December 31, 2023. The decrease in economic value of equity sensitivity in higher rate scenarios is mainly driven by modeling enhancements made to our deposit balance attrition forecast assumptions. The enhancement modestly increased the projected average life (and duration) of our deposit balances. In higher rate scenarios, the value of these deposits increased more due to longer duration, which provided modestly more offset to the decline in value of fixed-rate assets in these higher rate scenarios.
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Table of ContentsTable 32 shows the estimated percentage impact on our projected baseline net interest income and our current economic value of equity calculated under the methodology described above as of December 31, 2024 and 2023.
Table 32: Interest Rate Sensitivity Analysis
December 31, 2024 December 31, 2023Estimated impact on projected baseline net interest income:+200 basis points 1.3 % 0.7 %+100 basis points 0.8 0.8
+50 basis points 0.4 0.4–50 basis points (0.4) (0.5)
–100 basis points (0.8) (0.9)
–200 basis points (1.9) (2.0)Estimated impact on economic value of equity:+200 basis points (6.3) (8.4)
+100 basis points (3.0) (3.7)
+50 basis points (1.4) (1.8)
–50 basis points 1.3 1.6
–100 basis points 2.5 2.9
–200 basis points 3.9 4.0In addition to these industry standard measures, we also consider the potential impact of alternative interest rate scenarios, such as larger rate shocks, higher than +/- 200 bps, as well as steepening and flattening yield curve scenarios in our internal interest rate risk management decisions. We also regularly review the sensitivity of our interest rate risk metrics to changes in our key modeling assumptions, such as our loan and deposit balance forecasts, mortgage prepayments and deposit repricing.
Limitations of Market Risk Measures
The interest rate risk models that we use in deriving these measures incorporate contractual information, internally-developed assumptions and proprietary modeling methodologies, which project borrower and depositor behavior patterns in certain interest rate environments. Other market inputs, such as interest rates, market prices and interest rate volatility, are also critical components of our interest rate risk measures. We regularly evaluate, update and enhance these assumptions, models and analytical tools as we believe appropriate to reflect our best assessment of the market environment and the expected behavior patterns of our existing assets and liabilities.
There are inherent limitations in any methodology used to estimate the exposure to changes in market interest rates. The sensitivity analysis described above contemplates only certain movements in interest rates and is performed at a particular point in time based on our 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 “Item 8. Financial Statements and Supplementary Data—Note 10—Derivative Instruments and Hedging Activities.”
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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 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 nominal intercompany funding outstanding was 1.3 billion GBP and 973 million GBP as of December 31, 2024 and 2023, respectively, and 1.4 billion CAD and 1.6 billion CAD as of December 31, 2024 and 2023, respectively. Our nominal EUR-denominated borrowings outstanding were 505 million EUR and 1.3 billion EUR as of December 31, 2024 and 2023, respectively.
Our non-dollar equity investments in foreign operations expose our balance sheet and capital ratios to translation risk in AOCI. We manage our translation risk by entering into foreign currency derivatives designated as net investment hedges. We measure these exposures by applying a 30% U.S. dollar appreciation shock, which we believe approximates a significant adverse shock over a one-year time horizon, against the value of the equity invested in our foreign operations net of related net investment hedges where applicable. Our gross equity exposures in our U.K. and Canadian operations were 2.2 billion GBP as of both December 31, 2024 and 2023, and 2.6 billion CAD and 2.4 billion CAD as of December 31, 2024 and 2023, respectively.
As a result of our derivative management activities, we believe our net exposure to foreign exchange risk is minimal. For m ore information, see “ Item 8. Financial Statements and Supplementary Data —Note 10—Derivative Instruments and Hedging Activities” and “ Item 8. Financial Statements and Supplementary Data —Note 11—Stockholders’ Equity.”Risk related to Customer Accommodation DerivativesWe 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 a historical simulation approach using the most recent 500 business days and use a 99% 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 “Item 8. Financial Statements and Supplementary Data—Note 10—Derivative Instruments and Hedging Activities.”
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Table of ContentsSUPPLEMENTAL TABLESTable A—Net Charge-Offs
Year Ended December 31,(Dollars in millions) 2024 2023 2022
Average loans held for investment $ 317,421 $ 311,541 $ 292,238
Net charge-offs 10,748 8,414 3,973
Net charge-off rate 3.39 % 2.70 % 1.36 %Table B— Reconciliation of Non-GAAP Measures
The following non-GAAP measure consists of our adjusted results that we believe helps investors and users of our financial information understand the effect of adjusting items on our selected reported results; however, it may not be comparable to similarly-titled measures reported by other companies. This adjusted result provides alternate measurements of our operating performance, both for the current period and trends across multiple periods. The following table presents reconciliations of the non-GAAP measure to the applicable amounts measured in accordance with U.S. GAAP. The non-GAAP measure below should not be viewed as a substitute for reported results determined in accordance with U.S. GAAP.
December 31,(Dollars in millions, except as noted) 2024 2023 2022Adjusted operating efficiency ratio:Operating expense (U.S. GAAP) $ 16,924 $ 16,307 $ 15,146
Discover integration expenses (234) — —
FDIC special assessment (41) (289) —
Legal reserve activity (75) — —
Insurance recoveries and legal reserve activity — — 177
Restructuring charges — — (72)
Adjusted operating expense (non-GAAP) $ 16,574 $ 16,018 $ 15,251
Total net revenue (U.S. GAAP) $ 39,112 $ 36,787 $ 34,250
Walmart program agreement termination contra revenue impact 27 — —
Adjusted net revenue (non-GAAP) $ 39,139 $ 36,787 $ 34,250Operating efficiency ratio (U.S. GAAP)43.27% 44.33% 44.22%
Impact of adjustments noted above (92)bps (79) bps 31bps
Adjusted operating efficiency ratio (non-GAAP) 42.35% 43.54% 44.53%
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 U.S. GAAP. These non-GAAP measures should not be viewed as a substitute for reported results determined in accordance with U.S. GAAP.
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Table of ContentsDecember 31,(Dollars in millions, except as noted) 2024 2023 2022Tangible Common Equity (Period-End):Stockholders’ equity $ 60,784 $ 58,089 $ 52,582Goodwill and other intangible assets (1)(15,157) (15,289) (14,902)Noncumulative perpetual preferred stock (4,845) (4,845) (4,845)Tangible common equity $ 40,782 $ 37,955 $ 32,835Tangible Assets (Period-End):Total assets $ 490,144 $ 478,464 $ 455,249Goodwill and other intangible assets (1)(15,157) (15,289) (14,902)
Tangible assets $ 474,987 $ 463,175 $ 440,347
Tangible Common Equity (Average):
Stockholders’ equity $ 59,799 $ 55,195 $ 55,125
Goodwill and other intangible assets (1)
(15,237) (15,207) (14,905)
Noncumulative perpetual preferred stock (4,845) (4,845) (4,845)
Tangible common equity $ 39,717 $ 35,143 $ 35,375Tangible Assets (Average):Total assets $ 480,451 $ 467,807 $ 440,538Goodwill and other intangible assets (1)(15,237) (15,207) (14,905)
Tangible assets $ 465,214 $ 452,600 $ 425,633
TCE Ratio:
Tangible common equity (period-end) $ 40,782 $ 37,955 $ 32,835
Tangible assets (period-end) 474,987 463,175 440,347
TCE Ratio (2)
8.6% 8.2% 7.5%
Tangible Book Value per Share:
Tangible common equity (period-end) $ 40,782 $ 37,955 $ 32,835
Outstanding Common Shares 381.2 380.4 381.3
Tangible book value per common share (period-end) (3)
$ 106.97 $ 99.78 $ 86.11Return on Tangible Assets (Average):Net income $ 4,750 $ 4,887 $ 7,360
Tangible assets (Average) 465,214 452,600 425,633
Return on tangible assets (4)
1.02% 1.08% 1.73%
Return on Tangible Common Equity (Average):
Net income available to common stockholders $ 4,445 $ 4,582 $ 7,044
Tangible common equity (Average) 39,717 35,143 35,375
Return on tangible common equity (5)
11.18% 13.04% 19.91%__________
(1) Includes impact of related deferred taxes.(2) TCE ratio is a non-GAAP measure calculated based on TCE divided by period-end tangible assets.
(3) Tangible book value per common share is a non-GAAP measure calculated based on TCE divided by common shares outstanding.
(4) Return on average tangible assets is a non-GAAP measure calculated based on annualized net income (loss) from continuing operations, net of tax, for the period divided by average tangible assets for the period.
(5) Return on average tangible common equity is a non-GAAP measure calculated based on annualized net income (loss) available to common stockholders less income (loss) from discontinued operations, net of tax, for the period, divided by average TCE.
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Glossary and Acronyms
2004 Plan: The Amended and Restated 2004 Stock Incentive Plan.2019 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.
2022 Call Report: Consolidated Reports of Condition and Income, (“FFIEC 031”) as of December 31, 2022.
Allowance coverage ratio: Allowance for credit losses as a percentage of loans held for investment.Amortized cost: The amount at which a financing receivable or investment is originated or acquired, adjusted for applicable accrued interest, accretion, or amortization of premium, discount, and net deferred fees or costs, collection of cash, write-offs, foreign exchange and fair value hedge accounting adjustments.
AML Act: Anti-Money Laundering Act of 2020, enacted as part of the National Defense Authorization Act, requires the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) to issue a number of rules that will update and expand the BSA’s regulatory requirements.Annual Report: References to “this Report” or our “2024 Form 10-K” or “2024 Annual Report” are to our Annual Report on Form 10-K for the fiscal year ended December 31, 2024.
Bank: CONA, Capital One Financial Corporation’s principal operating subsidiary.Basel Committee: The Basel Committee on Banking Supervision.
Basel III Capital Rules: The regulatory capital requirements established by the Federal Banking Agencies in July 2013 to implement the Basel III capital framework developed by the Basel Committee as well as certain Dodd-Frank Act and other capital provisions.
Basel III Finalization Proposal: The notice of proposed rulemaking released by the Federal Banking Agencies on July 27, 2023 to revise the Basel III Capital Rules applicable to banking organizations with total assets of $100 billion or more and their subsidiary depository institutions.
Basel III standardized approach: The Basel III Capital Rules modified Basel I to create the Basel III standardized approach.BHC Act:Capital One Canada: Capital One Bank (Canada Branch).
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.
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 CECL model) that is based on expected rather than incurred losses, with an anticipated result of more timely loss recognition. This guidance was effective for us on January 1, 2020.
CECL Transition Election: The optional five-year transition period provided to banking institutions to phase in the impact of the CECL standard on their regulatory capital.119Capital One Financial Corporation (COF)
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CECL Transition Rule: A rule adopted by the Federal Banking Agencies and effective in 2020 that provides banking institutions an optional five-year transition period to phase in the impact of the CECL standard on their regulatory capital.CODM : The Chief Operating Decision Maker for each of our business segments.Common equity Tier 1 (“CET1”) capital: CET1 capital primarily includes qualifying common shareholders’ equity, retained earnings and certain AOCI amounts less certain deductions for goodwill, intangible assets, and certain deferred tax assets.
CONA: Capital One, National Association, one of our wholly-owned subsidiaries, which offers a broad spectrum of banking products and financial services to consumers, small businesses and commercial clients.CONA Bank Merger: The merger of Discover Bank, a Delaware-chartered bank and wholly owned subsidiary of Discover, with and into CONA, with CONA as the surviving entity.Contingency Funding Plan (“CFP”): A plan that describes the Company’s event management process and management response plans to ensure that the Company is prepared to respond to a liquidity crisis and to maintain the liquidity necessary to fund normal operating requirements. The plan establishes liquidity monitoring, quantitative assessment (including sizing of potential access to alternative contingent liquidity resources, qualitative and quantitative triggers that would signal risk, the liquidity event management process, and annual testing of the different components of the CFP.
Credit risk: The risk to current or projected financial condition and resilience arising from an obligor’s failure to meet the terms of any contract with the Company or otherwise perform as agreed.
Deposit Insurance Fund (“DIF”): A fund maintained by the FDIC to provide insurance coverage for certain deposits. It is funded through assessments on banks.
Derivative: A contract or agreement whose value is derived from changes in interest rates, foreign exchange rates, prices of securities or commodities, credit worthiness for credit default swaps or financial or commodity indices.
Discontinued operations: The operating results of a component of an entity, as defined by Accounting Standards Codification 205, that are removed from continuing operations when that component has been disposed of or it is management’s intention to sell the component.Discover: Discover Financial Services, a Delaware corporationDodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“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.
Expanded Risk-Based Approach: The proposed framework for calculating risk-weighted assets for credit risk, operational risk, credit valuation adjustment risk and market risk that was introduced by the Basel III Finalization Proposal.
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 Deposit Insurance Corporation (“FDIC”): An independent U.S. governmental agency that administers the Deposit Insurance Fund.
Federal Reserve: The Board of Governors of the Federal Reserve System.FFIEC 031: Consolidated Reports of Condition and Income for a Bank with Domestic and Foreign Offices filed quarterly with the Federal Banking Agencies.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.120Capital One Financial Corporation (COF)
Table of ContentsFinancial Difficulty Modification (“FDM”): A FDM is deemed to occur when a loan modification is made to a borrower experiencing financial difficulty in the form of principal forgiveness, an interest rate reduction, an other-than-insignificant payment delay, a term extension, or a combination of these modifications in the current reporting period. FDMs became effective with the adoption of ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures on January 1, 2023.Foreign exchange contracts: Contracts that provide for the future receipt or delivery of foreign currency at previously agreed-upon terms.
Framework: The Capital One enterprise-wide risk management framework.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 Bank (“FHLB”).Interest method: Method of amortization used to arrive at periodic interest income at a constant effective yield on the net investment in a financial asset.
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 a Moody’s long-term rating of Baa3 or better; and/or a S&P long-term rating of BBB- or better; and/or a Fitch 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: The final rules published by the Basel Committee and as implemented by the Federal Banking Agencies in 2014 for the Basel III Liquidity Coverage Ratio (“LCR”) 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 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.
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.
LTD Proposal: The proposed rule released by the Federal Banking Agencies on August 29, 2023 that would require banking organizations with $100 billion or more in total assets to comply with certain long-term debt requirements and clean holding company requirements.
Loss severity: Loss given default.
Managed presentation: A non-GAAP presentation of business segment results derived from our internal management accounting and reporting process, which employs various allocation methodologies, including funds transfer pricing, to assign certain balance sheet assets, deposits and other liabilities and their related revenues and expenses directly or indirectly attributable to each business segment. The results of our individual businesses reflect the manner in which management evaluates performance and makes decisions about funding our operations and allocating resources and are intended to reflect each segment as if it were a stand-alone business.121
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Table of ContentsMarket 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.Merger Agreement: Agreement and Plan of Merger, dated as of February 19, 2024, by and among Discover, Capital One and Merger Sub.
Merger: The merger of Merger Sub with and into Discover, with Discover as the surviving entity, pursuant to the Merger Agreement.
Merger Sub: Vega Merger Sub, Inc.
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Table of ContentsMortgage servicing rights (“MSRs”): The right to service a mortgage loan when the underlying loan is sold or securitized. Servicing includes collections of 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. Negative net charge-offs and related rates are captioned as net recoveries.
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 do not report loans classified as held for sale as nonperforming.NSFR Rule: The final rules published by the Basel Committee and as issued by the Federal Banking Agencies in October 2020 implementing the net stable funding ratio (“NSFR”) in the United States. The NSFR measures the stability of our funding profile and requires us to maintain minimum amounts of stable funding to support our assets, commitments and derivatives exposures over a one-year period.Patriot Act: The USA PATRIOT Act of 2001.
PR Rules: The U.S. prudential regulators’ margin rules for uncleared derivatives.Proxy Statement: Proxy statement for the 2024 Annual Stockholder Meeting.
Public Fund Deposits: Deposits that are derived from a variety of political subdivisions such as school districts and municipalities.
Purchase Plan: Our Associate Stock Purchase Plan, which is a compensatory plan under the accounting guidance for stock-based compensation.
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.
Recovery Plan: A plan that describes the Company’s approach for effectively responding to severely-adverse stress at both CONA and the Company. The Recovery Plan establishes qualitative and quantitative triggers for CONA and the Company that would signal the risk or existence of severely-adverse stress at the respective entity and identifies several specific remedial actions for recovery status that the Company can use to effectively respond to the stress environment. The Recovery Plan is separate from, but complementary to, the CFP.
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 the business locations and/or activities being exited.
Risk Committee: The Risk Committee of the Board of Directors.
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.Second Step Merger: The merger of Discover with and into Capital One, with Capital One as the surviving entity
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Table of ContentsSecuritized debt obligations: A type of asset-backed security and structured credit product constructed from a portfolio of fixed-income assets.
Stress capital buffer requirement: A component of our standardized approach capital conservation buffer, which is recalibrated annually based on the results of our supervisory stress tests.Stress Capital Buffer Rule: The final rule issued by the Federal Reserve in March 2020 to implement the stress capital buffer requirement.
Subprime: For purposes of lending in our Credit Card business, we generally consider FICO scores of 660 or below, or other equivalent risk scores, to be subprime. For purposes of auto lending in our Consumer Banking business, we generally consider FICO scores of 620 or below to be subprime.
Tangible common equity (“TCE”): A non-GAAP financial measure calculated as common equity less goodwill and other intangible assets inclusive of any related deferred tax liabilities.This Report: This Annual Report on Form 10-K for the period ended December, 31 2024.
Transaction: On February 19, 2024, we entered into the Merger Agreement to acquire Discover in an all-stock transaction.
Trapped liquidity: The amount of high-quality liquid assets (HQLA) held by a bank that may not be transferred to other affiliates. This amount is excluded from the bank's HQLA amount.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. The accounting guidance for TDRs was eliminated by ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures , which we adopted as of January 1, 2023.Unfunded lending commitments: Legally binding agreements to provide a defined level of financing until a specified future date.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.
U.S. Real Gross Domestic Product (“GDP”) : An inflation-adjusted measure that reflects the value of all goods and services produced by an economy in a given year.
Variable interest entity (“VIE”): An entity that, by design, either (i) lacks sufficient equity to permit the entity to finance its activities without additional subordinated financial support from other parties; or (ii) has equity investors that do not have (a) the ability to make significant decisions relating to the entity’s operations through voting rights, (b) the obligation to absorb the expected losses, and/or (c) the right to receive the residual returns of the entity.
Virginia Financial Institution Holding Company Act: Chapter 7 of Title 6.2 of the Code of Virginia governing the acquisition of interests in Virginia financial institutions.124Capital One Financial Corporation (COF)
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AcronymsABS: Asset-backed securities
ACL: Allowance for credit losses
AML: Anti-money laundering
AOCI: Accumulated other comprehensive income
ASU: Accounting Standards Update
ATM: Automated teller machine
AWS: Amazon Web Services, Inc.
BHC: Bank holding companyBHC Act: The Bank Holding Company Act of 1956, as amended.bps: Basis points
BSA: The Bank Secrecy ActCAD: Canadian dollar
CAP: Compliance Assurance ProcessCCPA: California Consumer Privacy Act (as amended by the California Privacy Rights Act)CCP: Central Counterparty Clearinghouse, or Central Clearinghouse
CDE: Community development entities
CECL: Current expected credit loss
CEO: Chief Executive Officer
CET1: Common equity Tier 1 capitalCFO: Chief Financial OfficerCFPB: Consumer Financial Protection Bureau
CFTC: Commodity Futures Trading Commission
CIBC: Change in Bank Control Act
CIO: Chief Information Officer
CIRCIA: Cyber Incident Reporting for Critical Infrastructure Act
CISA: Cybersecurity and Infrastructure Security Agency
CISO: Chief Information Security Officer125
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Table of ContentsCMBS: Commercial mortgage-backed securities
CME: Chicago Mercantile ExchangeCODM: Chief Operating Decision MakerCOEP: Capital One (Europe) plc
COF: Capital One Financial Corporation
CONA : Capital One, National AssociationCOSO: Committee of Sponsoring Organizations of the Treadway CommissionCRA: Community Reinvestment Act
CTRO: Chief Technology Risk Officer
CVA: Credit valuation adjustment
DCF: Discounted cash flow
DFAST: Dodd-Frank Act Stress Tests
DIB: Diversity Inclusion and Belonging
DIF : Deposit Insurance Fund
DRR: Designated Reserve RatioDTCC: Depository Trust and Clearing Corporation
DVA: Debit valuation adjustment
ECRP: Enterprise Cyber Response Plan
EU: European Union
EU GDPR: EU General Data Protection Regulation
EUR: Euro
Fannie Mae: Federal National Mortgage Association
FASB: Financial Accounting Standards BoardFCA: Financial Conduct AuthorityFCAC: Financial Consumer Agency of Canada
FCM: Futures commission merchant
FCRA: Fair Credit Reporting Act
FDM: Financial difficulty modification
FDIC: Federal Deposit Insurance Corporation
FDICIA: Federal Deposit Insurance Corporation Improvement Act of 1991
FFIEC: Federal Financial Institutions Examination Council
FHC: Financial Holding CompanyFHLB: Federal Home Loan BankFICC - GSD : Fixed Income Clearing Corporation - Government Securities Division
FICO: Fair Isaac Corporation
FinCEN: Financial Crimes Enforcement Network
FINRA: Financial Industry Regulatory Authority
FIS: Fidelity Information Services
Fitch: Fitch Ratings
Freddie Mac: Federal Home Loan Mortgage CorporationFS-ISAC: Financial Services Information Sharing and Analysis CenterFVC: Fair Value Committee
GAAP: Generally accepted accounting principles in the U.S.
GBP: Pound sterling
GDP: U.S. Real Gross Domestic Product126
Capital One Financial Corporation (COF)
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GDPR: General Data Protection RegulationGinnie Mae: Government National Mortgage AssociationGLBA: Gramm-Leach-Bliley ActG-SIB: Global systemically important banks
GSE or Agency: Government-sponsored enterprise
HFI: Held for Investment
HQLA: High-Quality Liquid Assets
ICE: Intercontinental Exchange
IRM: Independent Risk Management
IRS: Internal Revenue Service
LCH: LCH Group
LCR: Liquidity coverage ratio
LLC: Limited liability company
LTV: Loan-to-Value
Moody’s: Moody’s Investors Service
MSRs: Mortgage servicing rightsNORA: Notice of Opportunity to Respond and Advise
NOIT: Notice of Intent to TerminateNSFR: Net stable funding ratioNYSE: New York Stock Exchange
OCC: Office of the Comptroller of the Currency
OCI: Other comprehensive income
OFAC: Office of Foreign Assets Control
OPC: Canada’s Office of Privacy Commissioner
OSFI: Office of the Superintendent of Financial Institutions
OTC: Over-the-counter
PCA: Prompt corrective action
PCAOB: Public Company Accounting Oversight Board
PCCR: Purchased credit card relationship
PCD: Purchased Credit-Deteriorated
PIPEDA: Personal Information Protection and Electronic Document Act
PPI: Payment protection insurance
PSU: Performance share units
RMBS: Residential mortgage-backed securities
ROU: Right-of-use127
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Table of ContentsRSU: Restricted stock unit
S&P: Standard & Poor’s
SEC: U.S. Securities and Exchange Commission
SOFR: Secured Overnight Financing Rate
TCE: Tangible common equity
TDR: Troubled debt restructuring
TILA: Truth in Lending Act
TSYS: Total System Services LLC
U.K.: United Kingdom
U.K. GDPR: U.K. General Data Protection Regulation
U.S.: United States of America
USD: United States Dollar
VAC: Valuations Advisory Committee
VaR: Value-At-Risk
VIE: Variable interest entity
VOE: Voting interest entity128Capital One Financial Corporation (COF)
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