UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-K

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

For the fiscal year ended December 31, 2019

OR

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

For the transition period from              to             

Commission File No. 001-13300

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CAPITAL ONE FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter) 

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

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

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

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

Securities registered pursuant to section 12(g) of the Act: None

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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

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

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

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

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

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

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

The aggregate market value of the voting stock held by non-affiliates of the registrant as of the close of business on June 28, 2019 was approximately $42.4 billion. As of January 31, 2020, there were 457,122,734 shares of the registrant’s Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

1. Portions of the Proxy Statement for the annual meeting of stockholders to be held on April 30, 2020, are incorporated by reference into Part III.

TABLE OF CONTENTS

		Page
PART I		4
Item 1.	Business	4
	Overview	4
	Operations and Business Segments	6
	Competition	7
	Supervision and Regulation	7
	Employees	14
	Additional Information	15
	Forward-Looking Statements	15
Item 1A.	Risk Factors	18
Item 1B.	Unresolved Staff Comments	32
Item 2.	Properties	32
Item 3.	Legal Proceedings	33
Item 4.	Mine Safety Disclosures	33
PART II		34
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	34
Item 6.	Selected Financial Data	37
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)	40
	Executive Summary and Business Outlook	40
	Consolidated Results of Operations	43
	Consolidated Balance Sheets Analysis	48
	Off-Balance Sheet Arrangements	50
	Business Segment Financial Performance	50
	Critical Accounting Policies and Estimates	59
	Accounting Changes and Developments	63
	Capital Management	64
	Risk Management	69
	Credit Risk Profile	74
	Liquidity Risk Profile	87
	Market Risk Profile	91
	Supplemental Tables	95
	Glossary and Acronyms	102
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	109
Item 8.	Financial Statements and Supplementary Data	109
	Consolidated Statements of Income	115
	Consolidated Statements of Comprehensive Income	116
	Consolidated Balance Sheets	117
	Consolidated Statements of Changes in Stockholders’ Equity	118
	Consolidated Statements of Cash Flows	119

1 Capital One Financial Corporation (COF)

	Notes to Consolidated Financial Statements	120
	Note 1—Summary of Significant Accounting Policies	120
	Note 2—Investment Securities	134
	Note 3—Loans	139
	Note 4—Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments	148
	Note 5—Variable Interest Entities and Securitizations	151
	Note 6—Goodwill and Intangible Assets	155
	Note 7—Premises, Equipment and Leases	158
	Note 8—Deposits and Borrowings	160
	Note 9—Derivative Instruments and Hedging Activities	162
	Note 10—Stockholders’ Equity	170
	Note 11—Regulatory and Capital Adequacy	174
	Note 12—Earnings Per Common Share	176
	Note 13—Stock-Based Compensation Plans	177
	Note 14—Employee Benefit Plans	179
	Note 15—Income Taxes	181
	Note 16—Fair Value Measurement	185
	Note 17—Business Segments and Revenue from Contracts with Customers	194
	Note 18—Commitments, Contingencies, Guarantees and Others	198
	Note 19—Capital One Financial Corporation (Parent Company Only)	202
	Note 20—Related Party Transactions	204
	Note 21—Business Developments	205
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	206
Item 9A.	Controls and Procedures	206
Item 9B.	Other Information	206
PART III		207
Item 10.	Directors, Executive Officers and Corporate Governance	207
Item 11.	Executive Compensation	207
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	207
Item 13.	Certain Relationships and Related Transactions, and Director Independence	207
Item 14.	Principal Accountant Fees and Services	207
PART IV		208
Item 15.	Exhibits, Financial Statement Schedules	208
Item 16.	Form 10-K Summary	208
EXHIBIT INDEX		209
SIGNATURES		213

2 Capital One Financial Corporation (COF)

INDEX OF MD&A AND SUPPLEMENTAL TABLES

MD&A Tables:		Page
1	Average Balances, Net Interest Income and Net Interest Margin	44
2	Rate/Volume Analysis of Net Interest Income	45
3	Non-Interest Income	46
4	Non-Interest Expense	47
5	Investment Securities	48
6	Loans Held for Investment	49
7	Funding Sources Composition	49
8	Business Segment Results	51
9	Credit Card Business Results	52
9.1	Domestic Card Business Results	54
10	Consumer Banking Business Results	55
11	Commercial Banking Business Results	56
12	Other Category Results	58
13	Capital Ratios under Basel III	66
14	Regulatory Risk-Based Capital Components and Regulatory Capital Metrics	67
15	Preferred Stock Dividends Paid Per Share	67
16	Portfolio Composition of Loans Held for Investment	75
17	Loan Maturity Schedule	76
18	Credit Card Portfolio by Geographic Region	76
19	Consumer Banking Portfolio by Geographic Region	77
20	Commercial Banking Portfolio by Geographic Region	77
21	Commercial Loans by Industry	78
22	Credit Score Distribution	78
23	30+ Day Delinquencies	79
24	Aging and Geography of 30+ Day Delinquent Loans	80
25	90+ Day Delinquent Loans Accruing Interest	81
26	Nonperforming Loans and Other Nonperforming Assets	81
27	Net Charge-Offs (Recoveries)	83
28	Troubled Debt Restructurings	84
29	Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments Activity	86
30	Allowance Coverage Ratios	87
31	Liquidity Reserves	87
32	Deposits Composition and Average Deposits Interest Rates	89
33	Maturities of Large-Denomination Domestic Time Deposits—$100,000 or More	89
34	Long-Term Funding	90
35	Senior Unsecured Long-Term Debt Credit Ratings	90
36	Contractual Obligations	90
37	Interest Rate Sensitivity Analysis	92
Supplemental Tables:
A	Loans Held for Investment Portfolio Composition	95
B	Performing Delinquencies	96
C	Nonperforming Loans and Other Nonperforming Assets	97
D	Net Charge-Offs	98
E	Summary of Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments	99
F	Reconciliation of Non-GAAP Measures	100
G	Selected Quarterly Financial Information	101

3 Capital One Financial Corporation (COF)

PART I

Item 1. Business

OVERVIEW

General

Capital One Financial Corporation, a Delaware corporation established in 1994 and headquartered in McLean, Virginia, is a diversified financial services holding company with banking and non-banking subsidiaries. Capital One Financial Corporation and its subsidiaries (the “Company” or “Capital One”) offer a broad array of financial products and services to consumers, small businesses and commercial clients through digital channels, branches, Cafés and other distribution channels.

As of December 31, 2019, our principal subsidiaries included:

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

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

The Company is hereafter collectively referred to as “we,” “us” or “our.” COBNA and CONA are collectively referred to as the “Banks.” References to “this Report” or our “2019 Form 10-K” or “2019 Annual Report” are to our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. All references to 2019, 2018, 2017, 2016 and 2015, refer to our fiscal years ended, or the dates, as the context requires, December 31, 2019, December 31, 2018, December 31, 2017, December 31, 2016 and December 31, 2015, respectively. Certain business terms used in this document are defined in the “MD&A—Glossary and Acronyms” and should be read in conjunction with the Consolidated Financial Statements included in this Report.

As one of the nation’s ten largest banks based on deposits as of December 31, 2019, we service banking customer accounts through digital channels, as well as through branch locations, ATMs and Cafés. We also operate as one of the largest online direct banks in the United States (“U.S.”) by deposits. In addition to bank lending, treasury management and depository services, we offer credit and debit card products, auto loans and other consumer lending products in markets across the U.S. We were the third largest issuer of Visa^® (“Visa”) and MasterCard^® (“MasterCard”) credit cards in the U.S. based on the outstanding balance of credit card loans as of December 31, 2019.

We also offer products outside of the U.S. principally through Capital One (Europe) plc (“COEP”), an indirect subsidiary of COBNA organized and located in the United Kingdom (“U.K.”), and through a branch of COBNA in Canada. Both COEP and our branch of COBNA in Canada have the authority to provide credit card loans.

Business Developments

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

On September 24, 2019, we launched a new credit card issuance program with Walmart Inc. (“Walmart”) and are now the exclusive issuer of Walmart’s cobrand and private label credit card program in the U.S. On October 11, 2019, we completed the acquisition of the existing portfolio of Walmart’s cobrand and private label credit card receivables (“Walmart acquisition”). As of the acquisition date, we added approximately $8.1 billion to our domestic credit card loans held for investment portfolio.

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

4 Capital One Financial Corporation (COF)

Cybersecurity Incident

On July 29, 2019, we announced there was unauthorized access by an outside individual who obtained certain types of personal information relating to people who had applied for our credit card products and to our credit card customers (the “Cybersecurity Incident”). The Cybersecurity Incident occurred on March 22 and 23, 2019. We believe the individual was able to exploit a specific configuration vulnerability in our infrastructure. We immediately fixed the configuration vulnerability that this individual exploited and verified there are no other instances in our environment. The person responsible was arrested by the Federal Bureau of Investigation on July 29, 2019 and federal prosecution of the responsible person has commenced. The U.S. Attorney’s Office has stated they believe the data has been recovered and that there is no evidence the data was used for fraud or shared by this individual.

This event affected approximately 100 million individuals in the United States and approximately 6 million in Canada. We believe no credit card account numbers or log-in credentials were compromised. The largest category of information accessed was information on consumers and small businesses as of the time they applied for one of our credit card products from 2005 through early 2019. This information included personal information that we routinely collect at the time we receive credit card applications, including names, addresses, zip codes/postal codes, phone numbers, email addresses, dates of birth, and self-reported income. In addition to credit card application data, the individual also obtained portions of credit card customer data, including customer status data (e.g., credit scores, credit limits, balances, payment history, contact information) and fragments of transaction data from a total of 23 days during 2016, 2017 and 2018. Approximately 120,000 Social Security numbers of our credit card customers and approximately 80,000 linked bank account numbers of our secured credit card customers were compromised in this incident. For our Canadian credit card customers, approximately 1 million Social Insurance Numbers were compromised in this incident.

We provided required notification to affected individuals and made free credit monitoring and identity protection available. We retained a leading independent cybersecurity firm that confirmed we correctly identified and fixed the specific configuration vulnerability exploited in the Cybersecurity Incident.

During the year, we incurred $72 million of incremental expenses related to the remediation of and response to the Cybersecurity Incident, largely driven by customer notifications, credit monitoring, technology costs, and professional support, offset by $34 million of insurance recoveries pursuant to our insurance coverage described below. These amounts were treated as adjusting items as it relates to our financial results (“Cyber Adjusting Items”). We expect to be at the low end of the $100 million to $150 million range previously disclosed for the total amount of Cyber Adjusting Items and expect that some of these costs will extend beyond 2019.

We carry insurance to cover certain costs associated with a cyber risk event. This insurance has a total coverage limit of $400 million and is subject to a $10 million deductible, which was met in the third quarter of 2019, as well as standard exclusions. We continue to expect that a significant portion of the Cyber Adjusting Items will be covered by insurance. Insurance reimbursements will also be treated as adjusting items, and the timing of recognizing insurance reimbursements may differ from the timing of recognizing the associated expenses.

We continue to invest significantly in cybersecurity and expect to make additional investments as we continue to assess our cybersecurity program. These estimated investments are in addition to the estimated Cyber Adjusting Items and we expect to absorb them within our existing operating efficiency ratio guidance.

Although the ultimate magnitude and timing of expenses or other impacts to our business or reputation related to the Cybersecurity Incident are uncertain, they may be significant, and some of the costs may not be covered by insurance. However, we do not believe that this incident will negatively impact our strategy or our long-term financial health. For more information, see “Note 18—Commitments, Contingencies, Guarantees and Others.”

Our reported results excluding adjusting items, including the Cyber Adjusting Items, and our existing operating efficiency ratio guidance represent non-GAAP measures which we believe help users of our financial information understand the impact of these adjusting items on our reported results as well as provide an alternate measurement of our operating performance.

5 Capital One Financial Corporation (COF)

Additional Information

Our common stock trades on the New York Stock Exchange (“NYSE”) under the symbol “COF” and is included in the Standard & Poor’s (“S&P”) 100 Index. We maintain a website at www.capitalone.com. Documents available under Corporate Governance in the Investor Relations section of our website include:

• our Code of Conduct;

• our Corporate Governance Guidelines; and

• charters for the Audit, Compensation, Governance and Nominating, and Risk Committees of the Board of Directors.

These documents also are available in print to any stockholder who requests a copy. We intend to disclose future amendments to certain provisions of our Code of Conduct, and waivers of our Code of Conduct granted to executive officers and directors, on the website within four business days following the date of the amendment or waiver.

In addition, we make available free of charge through our website all of our U.S. Securities and Exchange Commission (“SEC”) filings, including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports, as soon as reasonably practicable after electronically filing or furnishing such material to the SEC at www.sec.gov.

OPERATIONS AND BUSINESS SEGMENTS

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

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

• Credit Card: Consists of our domestic consumer and small business card lending, and international card businesses in Canada and the United Kingdom.

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

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

Customer usage and payment patterns, credit quality, levels of marketing expense and operating efficiency all affect our profitability. In our Credit Card business, we experience fluctuations in purchase volume and the level of outstanding loan receivables due to seasonal variances in consumer spending and payment patterns which, for example, are highest around the winter holiday season. Net charge-off rates for our credit card loan portfolio also have historically exhibited seasonal patterns as well and generally tend to be the highest in the first quarter of the year. No individual quarter in 2019, 2018 or 2017 accounted for more than 30% of our total revenues in any of these fiscal years.

For additional information on our business segments, including the financial performance of each business, see “Part II—Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)—Executive Summary and Business Outlook,” “MD&A—Business Segment Financial Performance” and “Note 17—Business Segments and Revenue from Contracts with Customers” of this Report.

6 Capital One Financial Corporation (COF)

COMPETITION

Each of our business segments operates in a highly competitive environment, and we face competition in all aspects of our business from numerous bank and non-bank providers of financial services.

Our Credit Card business competes with international, national, regional and local issuers of Visa and MasterCard credit cards, as well as with American Express^®, Discover Card^®, private-label card brands, and, to a certain extent, issuers of debit cards. In general, customers are attracted to credit card issuers largely on the basis of price, credit limit, reward programs and other product features.

Our Consumer Banking and Commercial Banking businesses compete with national, state and direct banks for deposits, commercial and auto loans, as well as with savings and loan associations and credit unions for loans and deposits. Our competitors also include automotive finance companies, commercial mortgage banking companies and other financial services providers that provide loans, deposits, and other similar services and products. In addition, we compete against non-depository institutions that are able to offer these products and services. Securities firms and insurance companies that elect to become financial holding companies may acquire banks and other financial institutions. Combinations of this type could significantly change the competitive environment in which we conduct business. The financial services industry is also likely to become more competitive as further technological advances enable more companies to provide financial services. These technological advances may diminish the importance of depository institutions and other financial intermediaries in the transfer of funds between parties. In addition, competition among direct banks is intense because online banking provides customers the ability to rapidly deposit and withdraw funds and open and close accounts in favor of products and services offered by competitors.

Our businesses generally compete on the basis of the quality and range of their products and services, transaction execution, innovation and price. Competition varies based on the types of clients, customers, industries and geographies served. Our ability to compete depends, in part, on our ability to attract and retain our associates and on our reputation. There can be no assurance, however, that our ability to market products and services successfully or to obtain adequate returns on our products and services will not be impacted by the nature of the competition that now exists or may later develop, or by the broader economic environment. For a discussion of the risks related to our competitive environment, see “Part I—Item 1A. Risk Factors.”

SUPERVISION AND REGULATION

General

Capital One Financial Corporation is a bank holding company (“BHC”) and a financial holding company (“FHC”) under the Bank Holding Company Act of 1956, as amended (“BHC Act”), and is subject to the requirements of the BHC Act, including approval requirements for investments in or acquisitions of banking organizations, capital adequacy standards and limitations on nonbanking activities. As a BHC and FHC, we are subject to supervision, examination and regulation by the Board of Governors of the Federal Reserve System (“Federal Reserve”). Permissible activities for a BHC include those activities that are so closely related to banking as to be a proper incident thereto. In addition, an FHC is permitted to engage in activities considered to be financial in nature (including, for example, securities underwriting and dealing and merchant banking activities), incidental to financial activities or, if the Federal Reserve determines that they pose no risk to the safety or soundness of depository institutions or the financial system in general, activities complementary to financial activities.

To become and remain eligible for FHC status, a BHC and its subsidiary depository institutions must meet certain criteria, including capital, management and Community Reinvestment Act (“CRA”) requirements. Failure to meet such criteria could result, depending on which requirements were not met, in restrictions on new financial activities or acquisitions or being required to discontinue existing activities that are not generally permissible for BHCs.

The Banks are national associations chartered under the laws of the United States and the deposits of which are insured by the Deposit Insurance Fund (“DIF”) of the Federal Deposit Insurance Corporation (“FDIC”) up to applicable limits. The Banks are subject to comprehensive regulation and periodic examination by the Office of the Comptroller of the Currency (“OCC”), the FDIC and the Consumer Financial Protection Bureau (“CFPB”).

We are also registered as a financial institution holding company under the laws of the Commonwealth of Virginia and, as such, we are subject to periodic examination by the Virginia Bureau of Financial Institutions. We also face regulation in the international

7 Capital One Financial Corporation (COF)

jurisdictions in which we conduct business. See “Regulation of Businesses by Authorities Outside the United States” below for additional details.

Regulation of Business Activities

The business activities of the Company and the Banks are also subject to regulation and supervision under various laws and regulations.

Regulations of Consumer Lending Activities

The activities of the Banks as consumer lenders are subject to regulation under various federal laws, including, for example, the Truth in Lending Act (“TILA”), the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the CRA, the Servicemembers Civil Relief Act and the Military Lending Act, as well as under various state laws. TILA, as amended, imposes a number of restrictions on credit card practices impacting rates and fees, requires that a consumer’s ability to pay be taken into account before issuing credit or increasing credit limits, and imposes revised disclosures required for open-end credit.

Depending on the underlying issue and applicable law, regulators may be authorized to impose penalties for violations of these statutes and, in certain cases, to order banks to compensate customers. Borrowers may also have a private right of action for certain violations. Federal bankruptcy and state debtor relief and collection laws may also affect the ability of a bank, including the Banks, to collect outstanding balances owed by borrowers.

Debit Interchange Fees

The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) requires that the amount of any interchange fee received by a debit card issuer with respect to debit card transactions be reasonable and proportional to the cost incurred by the issuer with respect to the transaction. Rules adopted by the Federal Reserve to implement these requirements limit interchange fees per debit card transaction to $0.21 plus five basis points of the transaction amount and provide for an additional $0.01 fraud prevention adjustment to the interchange fee for issuers that meet certain fraud prevention requirements.

Privacy

We are subject to multiple federal and state laws concerning data privacy, such as the Gramm-Leach Bliley Act. This area has seen increasing legislative and regulatory activity. For example, in 2018, the State of California passed the California Consumer Privacy Act (“CCPA”), which creates obligations on covered companies to, among other things, share certain information they have collected about individuals who are California residents with those individuals, subject to some exceptions. The California Attorney General has received public comment on the proposed regulations and is expected to issue final CCPA regulations in the first half of 2020. We have analyzed the CCPA and determined its initial applicability to our business. We will review the final CCPA regulations and determine their impact to our business while we continue to monitor data privacy legal developments in other jurisdictions.

Bank Secrecy Act and USA PATRIOT Act of 2001

The Bank Secrecy Act and the USA PATRIOT Act of 2001 (“Patriot Act”) require financial institutions, among other things, to implement a risk-based program reasonably designed to prevent money laundering and to combat the financing of terrorism, including through suspicious activity and currency transaction reporting, compliance, record-keeping and customer due diligence.

The Patriot Act also contains financial transparency laws and provides enhanced information collection tools and enforcement mechanisms to the U.S. government, including due diligence and record-keeping requirements for private banking and correspondent accounts; standards for verifying customer identification at account opening; rules to produce certain records upon request of a regulator or law enforcement agency; and rules to promote cooperation among financial institutions, regulators and law enforcement agencies in identifying parties that may be involved in terrorism, money laundering and other crimes.

Funding

Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), as discussed in “MD&A—Liquidity Risk Profile,” only well capitalized and adequately capitalized institutions may accept brokered deposits. Adequately capitalized institutions, however, must obtain a waiver from the FDIC before accepting brokered deposits, and such institutions may not pay rates that significantly exceed the rates paid on deposits of similar maturity obtained from the institution’s normal market area or, for deposits obtained from outside the institution’s normal market area, the national rate on deposits of comparable maturity. The

8 Capital One Financial Corporation (COF)

FDIC is authorized to terminate a bank’s deposit insurance upon a finding by the FDIC that the bank’s financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices or has violated any applicable rule, regulation, order or condition enacted or imposed by the bank’s regulatory agency. The termination of deposit insurance would likely have a material adverse effect on a bank’s liquidity and earnings.

Nonbank Activities

Certain of our nonbank subsidiaries are subject to supervision and regulation by various other federal and state authorities. United Income, Inc. is an investment adviser registered with the SEC and regulated under the Investment Advisers Act of 1940. Capital One Securities, Inc. and KippsDeSanto & Company are registered broker-dealers regulated by the SEC and the Financial Industry Regulatory Authority. Our broker-dealer subsidiaries are subject, among other things, to net capital rules designed to measure the general financial condition and liquidity of a broker-dealer. Under these rules, broker-dealers are required to maintain the minimum net capital deemed necessary to meet their continuing commitments to customers and others, and to keep a substantial portion of their assets in relatively liquid form. These rules also limit the ability of a broker-dealer to transfer capital to its parent companies and other affiliates. Broker-dealers are also subject to regulations covering their business operations, including sales and trading practices, public offerings, publication of research reports, use and safekeeping of client funds and securities, capital structure, record-keeping and the conduct of directors, officers and employees.

Derivatives Activities

The Commodity Futures Trading Commission (“CFTC”) and the SEC have jointly issued final rules further defining the Dodd-Frank Act’s “swap dealer” definitions. Based on these rules, no Capital One entity is currently required to register with the CFTC or SEC as a swap dealer. The Dodd-Frank Act also requires all swap market participants to keep certain swap transaction records and report pertinent information to swap data repositories on a real-time and on-going basis. Further, each swap, group, category, type or class of swap that the CFTC or SEC determines must be cleared through a derivatives clearinghouse (unless the swap is eligible for a clearing exemption) must also be executed on a designated contract market (“DCM”), exchange or swap execution facility (“SEF”), unless no DCM, exchange or SEF has made the swap available for trading.

Volcker Rule

We and each of our subsidiaries, including the Banks, are subject to the “Volcker Rule,” a provision of the Dodd-Frank Act that contains prohibitions on proprietary trading and certain investments in, and relationships with, covered funds (hedge funds, private equity funds and similar funds), subject to certain exemptions, in each case as the applicable terms are defined in the Volcker Rule and the implementing regulations. The implementing regulations also require that we establish and maintain a compliance program designed to ensure adherence with the requirements of the regulations.

Capital and Liquidity Regulation

The Company and the Banks are subject to capital adequacy guidelines adopted by the Federal Reserve and OCC. For a further discussion of the capital adequacy guidelines, see “MD&A—Capital Management,” “MD&A—Liquidity Risk Profile” and “Note 11—Regulatory and Capital Adequacy.”

Basel III and United States Capital Rules

The Federal Reserve, OCC and FDIC (collectively, the “Federal Banking Agencies”) have issued regulations (“Basel III Capital Rule”) that implement certain capital and liquidity requirements published by the Basel Committee on Banking Supervision (“Basel Committee”), along with certain Dodd-Frank Act and other capital provisions. The Basel III Capital Rule includes the “Basel III Standardized Approach” and the “Basel III Advanced Approaches.” Prior to January 1, 2020, the Basel III Advanced Approaches were mandatory for institutions with total consolidated assets of $250 billion or more or total consolidated on-balance sheet foreign exposure of $10 billion or more. The Basel III Capital Rule revised the definition of regulatory capital, established a new common equity Tier 1 capital requirement, set higher minimum capital ratio requirements, and introduced a capital conservation buffer of 2.5%, a supplementary leverage ratio of 3.0%, and a countercyclical capital buffer (currently set at 0.0%). Compliance with the Basel III Capital Rule went into effect for Capital One beginning on January 1, 2014, with certain provisions becoming effective later according to various start dates and phase-in periods that ended January 1, 2019.

In October 2019, the Federal Banking Agencies amended the Basel III Capital Rule to provide for tailored application of certain capital requirements across different categories of banking institutions (“Tailoring Rules”). These categories are determined primarily by an institution’s asset size, with adjustments to a more stringent category possible if the institution exceeds certain

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other risk-based thresholds. As a BHC with total consolidated assets of at least $250 billion that does not exceed any of the applicable risk-based thresholds, we are a Category III institution under the Tailoring Rules. Therefore, we are no longer subject to the Basel III Advanced Approaches and certain associated capital requirements, such as the requirement to include in regulatory capital certain elements of Accumulated other comprehensive income (“AOCI”), although we will remain subject to the countercyclical capital buffer and supplementary leverage ratio, which were previously required only for Basel III Advanced Approaches institutions.

In July 2019, the Federal Banking Agencies finalized certain changes to the Basel III Capital Rule for institutions not subject to the Basel III Advanced Approaches, including Capital One (“Capital Simplification Rule”). These changes, effective January 1, 2020, generally raise the threshold above which covered institutions must deduct certain assets from their common equity Tier 1 capital, including certain deferred tax assets, mortgage servicing assets, and investments in unconsolidated financial institutions. We anticipate that the Tailoring Rules and Capital Simplification Rule will, taken together, decrease our capital requirements.

Global systemically important banks (“G-SIBs”) that are based in the U.S. are subject to an additional common equity Tier 1 capital requirement (“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.

In December 2018, the Federal Banking Agencies issued a final rule to address regulatory capital treatment of credit loss allowances under the current expected credit loss (“CECL”) model. The CECL model became applicable to Capital One as of January 1, 2020. The rule (“CECL Capital Rule”) revises the Federal Banking Agencies’ regulatory capital rules to identify which credit loss allowances under the CECL model are eligible for inclusion in regulatory capital and to provide banking organizations the option to phase in over a three-year transition period ending January 1, 2023 the day-one adverse effects on regulatory capital that may result from the adoption of the CECL model (“CECL Transition Election”). We intend to make the CECL Transition Election beginning in the first quarter of 2020.

Market Risk Rule

The “Market Risk Rule” supplements the Basel III Capital Rule by requiring institutions subject to the Market Risk Rule to adjust their risk-based capital ratios to reflect the market risk in their trading portfolios. The Market Risk Rule generally applies to institutions with aggregate trading assets and liabilities equal to the lesser of:

• 10% or more of total assets; or

• $1 billion or more.

As of December 31, 2019, the Company and CONA are subject to the Market Risk Rule. See “MD&A—Market Risk Profile” below for additional information.

Basel III and United States Liquidity Rules

The Basel Committee has published a liquidity framework that includes two standards for liquidity risk supervision. One standard, the liquidity coverage ratio (“LCR”), seeks to promote short-term resilience by requiring organizations to hold sufficient high-quality liquid assets to survive a stress scenario lasting for 30 days. The other standard, the net stable funding ratio (“NSFR”), seeks to promote longer-term resilience by requiring sufficient stable funding over a one-year period based on the liquidity characteristics of its assets and activities.

The Company and the Banks are subject to the LCR as implemented by the Federal Reserve and OCC (“LCR Rule”). The LCR Rule requires the Company and each of the Banks to hold an amount of eligible high-quality liquid assets (“HQLA”) that equals or exceeds 100% of their respective projected adjusted net cash outflows over a 30-day period, each as calculated in accordance with the LCR Rule. The LCR Rule requires us to calculate the LCR daily. In addition, the Company is required to make quarterly public disclosures of its LCR and certain related quantitative liquidity metrics, along with a qualitative discussion of its LCR.

Under the Tailoring Rules, as a Category III institution with less than $75 billion in weighted average short-term wholesale funding, the Company’s and the Banks’ total net cash outflows are multiplied by an outflow adjustment percentage of 85%. We expect this outflow adjustment to materially increase the LCR for the Banks but not for the Company. The LCR Rule restricts the amount of HQLA held at the Banks in excess of the Banks’ total net cash outflow amount that can be included in the Company’s HQLA amount (referred to as “Trapped Liquidity”). Therefore, although we typically manage Bank-level LCRs at a level well above the regulatory minimum of 100%, the amount of Trapped Liquidity will also increase as the Banks’ total net cash outflows are reduced

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by the 85% factor. That increase in Trapped Liquidity will prevent the Company’s LCR from materially changing as a result of the Tailoring Rules. 

In April 2016, the Federal Banking Agencies issued an interagency notice of proposed rulemaking regarding the U.S. implementation of the Basel III NSFR (“Proposed NSFR”), which would apply to the same institutions subject to the LCR Rule. The Proposed NSFR would require us to maintain a sufficient amount of stable funding in relation to our assets, derivatives exposures and commitments over a one-year horizon period. Although the Proposed NSFR is generally consistent with the Basel NSFR standard, it is more stringent in certain areas. The financial and operational impact on us of a final NSFR rule remains uncertain until a final rule is published. There is uncertainty regarding the timing and form of any such final rule.

FDICIA and Prompt Corrective Action

The FDICIA requires the Federal Banking Agencies to take “prompt corrective action” for banks that do not meet minimum capital requirements. The FDICIA establishes five capital ratio levels: well capitalized; adequately capitalized; undercapitalized; significantly undercapitalized; and critically undercapitalized. The three undercapitalized categories are based upon the amount by which a bank falls below the ratios applicable to an adequately capitalized institution. The capital categories are determined solely for purposes of applying the FDICIA’s prompt corrective action (“PCA”) provisions, and such capital categories may not constitute an accurate representation of the Banks’ overall financial condition or prospects.

The Basel III Capital Rule updated the PCA framework to reflect new, higher regulatory capital minimums. For an insured depository institution to be well capitalized, it must maintain a total risk-based capital ratio of 10% or more; a Tier 1 capital ratio of 8% or more; a common equity Tier 1 capital ratio of 6.5% or more; and a leverage ratio of 5% or more. An adequately capitalized depository institution must maintain a total risk-based capital ratio of 8% or more; a Tier 1 capital ratio of 6% or more; a common equity Tier 1 capital ratio of 4.5% or more; a leverage ratio of 4% or more; and, for Category III and certain other institutions under the Tailoring Rules, a supplementary leverage ratio of 3% or more. The PCA provisions also authorize the Federal Banking Agencies to reclassify a bank’s capital category or take other action against banks that are determined to be in an unsafe or unsound condition or to have engaged in unsafe or unsound banking practices.

As an additional means to identify problems in the financial management of depository institutions, the FDICIA required the Federal Banking Agencies to establish certain non-capital safety and soundness standards. The standards adopted by the Federal Banking Agencies relate generally to operations and management, asset quality, interest rate exposure and executive compensation. The Federal Banking Agencies are authorized to take action against institutions that fail to meet such standards.

Enhanced Prudential Standards and Other Requirements Under the Dodd-Frank Act

We are a “covered company” subject under the Dodd-Frank Act to certain enhanced prudential standards, including requirements that may be recommended by the Financial Stability Oversight Council (“FSOC”) and implemented by the Federal Reserve and other regulators. We remain a covered company under the amendments to the Dodd-Frank Act made by the Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRCPA”), which provided reduced enhanced prudential standards for institutions with less than $250 billion in assets. As a result, we are subject to more stringent standards and requirements than those applicable to institutions that are not covered companies. The FSOC may also issue recommendations to the Federal Reserve or other primary financial regulatory agencies to apply new or enhanced standards to certain financial activities or practices.

The Federal Reserve and FDIC have issued rules requiring the Company to implement resolution planning for orderly resolution in the event the covered company faces material financial distress or failure. The FDIC issued similar rules regarding resolution planning applicable to the Banks. In addition, the OCC has issued rules requiring banks with assets of $250 billion or more to develop recovery plans detailing the actions they would take to remain a going concern when they experience considerable financial or operational stress, but have not deteriorated to the point that resolution is imminent.

The Federal Reserve established a rule that implements the requirement in the Dodd-Frank Act that the Federal Reserve conduct annual stress tests on the capacity of our capital to absorb losses as a result of adverse economic conditions. This rule also requires the Company to conduct its own stress tests and publish the results of the stress tests on our website or other public forum. As a Category III institution under the Tailoring Rules, the Company must disclose the results of its company-run stress test in 2020 and every two years thereafter. The OCC has adopted a similar stress test rule requiring banks with at least $250 billion in assets, including CONA, to conduct their own company-run stress tests. Under that OCC rule, CONA must disclose the results of this stress test in 2020 and every two years thereafter.

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The Federal Reserve also established rules implementing other aspects of the enhanced prudential standards under the Dodd-Frank Act (“Enhanced Standards Rule”). Under the Enhanced Standards Rule, the Company must meet liquidity risk management standards, conduct internal liquidity stress tests, and maintain a 30-day buffer of highly liquid assets, in each case, consistent with the requirements of the Enhanced Standards Rule. These requirements are in addition to the LCR, discussed above in “Basel III and United States Liquidity Rules.” The Enhanced Standards Rule also requires that the Company comply with, and hold capital commensurate with, the requirements of, any regulations adopted by the Federal Reserve relating to capital planning and stress tests. Stress testing and capital planning regulations are discussed further below under “Dividends, Stock Repurchases and Transfers of Funds.” The Enhanced Standards Rule also requires that the Company establish and maintain an enterprise-wide risk management framework that includes a risk committee and a chief risk officer.

Although not a requirement of the Dodd-Frank Act, the OCC established regulatory guidelines (“Heightened Standards Guidelines”) that apply heightened standards for risk management to large institutions subject to its supervision, including the Banks. The Heightened Standards Guidelines establish standards for the development and implementation by the Banks of a risk governance framework.

Investment in the Company and the Banks

Certain acquisitions of our capital stock may be subject to regulatory approval or notice under federal or state law. Investors are responsible for ensuring that they do not, directly or indirectly, acquire shares of our capital stock in excess of the amount that can be acquired without regulatory approval, including under the BHC Act and the Change in Bank Control Act (“CIBC Act”).

Federal law and regulations prohibit any person or company from acquiring control of the Company or the Banks without, in most cases, prior written approval of the Federal Reserve or the OCC, as applicable. Control exists if, among other things, a person or company acquires more than 25% of any class of our voting stock or otherwise has a controlling influence over us. For a publicly traded BHC such as ourselves, a rebuttable presumption of control arises under the CIBC Act if a person or company acquires more than 10% of any class of our voting stock.

Additionally, COBNA and CONA are “banks” within the meaning of Chapter 13 of Title 6.1 of the Code of Virginia governing the acquisition of interests in Virginia financial institutions (“Financial Institution Holding Company Act”). The Financial Institution Holding Company Act prohibits any person or entity from acquiring, or making any public offer to acquire, control of a Virginia financial institution or its holding company without making application to, and receiving prior approval from, the Virginia Bureau of Financial Institutions.

Dividends, Stock Repurchases and Transfers of Funds

Under the Federal Reserve’s capital planning rules (commonly referred to as Comprehensive Capital Analysis and Review or “CCAR”), “covered BHCs,” including ourselves, must submit a capital plan to the Federal Reserve on an annual basis that contains a description of all planned capital actions, including dividends or stock repurchases, over a nine-quarter planning horizon beginning with the first quarter of the calendar year the capital plan is submitted (“CCAR cycle”). A covered BHC may take the proposed capital actions if the Federal Reserve does not object to the plan.

Dodd-Frank Act stress testing, described above in “Enhanced Prudential Standards and Other Requirements under the Dodd-Frank Act,” is a complementary exercise to CCAR. It is a forward-looking exercise conducted by the Federal Reserve and covered financial companies to help assess whether a company has sufficient capital to absorb losses and support operations during adverse economic conditions. The supervisory stress test, after incorporating a firm’s planned capital actions, is used for quantitative assessment in CCAR.

The Company must file its capital plan and stress testing results with the Federal Reserve by April 5 of each year (unless the Federal Reserve designates a later date), using data as of the end of the prior calendar year. The Federal Reserve is expected to provide its objection or non-objection to that capital plan in June of that year. The Federal Reserve’s objection or non-objection applies to planned capital actions from the third quarter of the year the capital plan is submitted through the end of the second quarter of the following year. The Company, along with other BHCs subject to the supplementary leverage ratio, must incorporate an estimate of its supplementary leverage ratio into its capital plan and stress tests.

The current capital planning and stress testing rules place supervisory focus on quarterly capital issuances and distributions by establishing a cumulative net distribution requirement. Under a “de minimis” exception, if a company does not receive an objection to its capital plan, it may in certain cases distribute up to 0.25% of its Tier 1 capital above the distributions in its capital plan. With certain limited exceptions, to the extent a BHC does not issue the amount of a given class of regulatory capital instrument that it

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projected in its capital plan, as measured on an aggregate basis beginning in the third quarter of the planning horizon, the BHC must reduce its capital distributions.

In December 2018, the Federal Reserve announced that it will maintain its pre-CECL framework for calculating allowances on loans in the supervisory stress test for the 2020 and 2021 supervisory stress testing cycles until the impact of CECL is better known and understood. The Federal Reserve stated further that although bank holding companies required to perform company-run stress tests will be required to incorporate CECL into those stress tests starting in the 2020 cycle, it will not issue supervisory findings on those firms’ allowance estimations in the CCAR exercise through 2021.

In April 2018, the Federal Reserve issued a proposed rule (“Stress Capital Buffer Proposed Rule”) that would implement a firm-specific “stress capital buffer” requirement and a “stress leverage buffer” requirement. The Federal Reserve described the Stress Capital Buffer Proposed Rule as designed to simplify the agency’s regulatory regime by integrating the supervisory stress tests with its non-stress capital rules. Under the Stress Capital Buffer Proposed Rule, a firm’s stress capital buffer would have a floor of 2.5% of total risk-weighted assets, replacing the existing 2.5% capital conservation buffer, and would equal, as a percentage of total risk-weighted assets, the sum of (i) the difference between a firm’s starting common equity Tier 1 capital ratio and the low point under the severely adverse scenario of the Federal Reserve’s supervisory stress test plus (ii) the ratio of the firm’s projected four quarters of common stock dividends to risk-weighted assets as projected under CCAR (for the fourth to seventh quarters of the planning horizon). A firm’s new “Standardized Approach capital conservation buffer” would include its stress capital buffer, any G-SIB surcharge (not applicable to us), and any applicable countercyclical capital buffer (currently set at zero). The consequences of breaching the stress capital buffer requirement would be consistent with the current capital conservation buffer framework and would result in increasingly strict limitations on capital distributions and discretionary bonus payments. The Stress Capital Buffer Proposed Rule would replace the current CCAR post-stress leverage ratio requirement with a stress leverage buffer requirement. Additionally, the proposal would modify certain CCAR assumptions relating to balance sheet growth, prefunding of dividends, and capital distributions. It is not clear which of these changes, if any, will be finalized and when they would go into effect.

Historically, dividends from the Company’s direct and indirect subsidiaries have represented a major source of the funds we have used to pay dividends on our stock, make payments on corporate debt securities and meet our other obligations. There are various federal law limitations on the extent to which the Banks can finance or otherwise supply funds to us through dividends and loans. These limitations include minimum regulatory capital requirements, federal banking law requirements concerning the payment of dividends out of net profits or surplus, provisions of 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. In general, federal and applicable state banking laws prohibit insured depository institutions, such as the Banks, from making dividend distributions without first obtaining regulatory approval if such distributions are not paid out of available earnings or would cause the institution to fail to meet applicable capital adequacy standards.

Deposit Insurance Assessments

Each of CONA and COBNA, as an insured depository institution, is a member of the DIF maintained by the FDIC. Through the DIF, the FDIC insures the deposits of insured depository institutions up to prescribed limits for each depositor. The FDIC sets a Designated Reserve Ratio (“DRR”) for the DIF. To maintain the DIF, member institutions may be assessed an insurance premium, and the FDIC may take action to increase insurance premiums if the DRR falls below its required level.

Source of Strength and Liability for Commonly Controlled Institutions

Under regulations issued by the Federal Reserve, a BHC must serve as a source of financial and managerial strength to its subsidiary banks (the so-called “source of strength doctrine”). The Dodd-Frank Act codified this doctrine.

Under the “cross-guarantee” provision of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”), insured depository institutions such as the Banks may be liable to the FDIC with respect to any loss incurred, or reasonably anticipated to be incurred, by the FDIC in connection with the default of, or FDIC assistance to, any commonly controlled insured depository institution. The Banks are commonly controlled within the meaning of the FIRREA cross-guarantee provision.

FDIC Orderly Liquidation Authority

The Dodd-Frank Act provides the FDIC with liquidation authority that may be used to liquidate nonbank financial companies and BHCs if the Treasury Secretary, in consultation with the President and based on the recommendation of the Federal Reserve and other appropriate Federal Banking Agencies, determines that doing so is necessary, among other criteria, to mitigate serious adverse

13 Capital One Financial Corporation (COF)

effects on U.S. financial stability. Upon such a determination, the FDIC would be appointed receiver and must liquidate the company in a way that mitigates significant risks to financial stability and minimizes moral hazard. The costs of a liquidation of the company would be borne by shareholders and unsecured creditors and then, if necessary, by risk-based assessments on large financial companies. The FDIC has issued rules implementing certain provisions of its liquidation authority and may issue additional rules in the future.

Regulation of Businesses by Authorities Outside the United States

COBNA is subject to regulation in foreign jurisdictions where it operates, currently in the United Kingdom and Canada.

United Kingdom

In the United Kingdom, COBNA operates through COEP, which was established in 2000 and is an authorized payment institution regulated by the Financial Conduct Authority (“FCA”) under the Payment Services Regulations 2017 and the Financial Services and Markets Act 2000. COEP’s indirect parent, Capital One Global Corporation, is wholly-owned by COBNA and is subject to regulation by the Federal Reserve as an “agreement corporation” under the Federal Reserve’s Regulation K.

The FCA set a deadline of August 29, 2019 (“the Deadline”) for the submission of complaints to firms (including COEP) about Payment Protection Insurance (“PPI”). In order to ensure complainants were treated fairly and in anticipation of the increase in complaint volumes that the Deadline would create, the FCA closely supervised all large lenders (including COEP) throughout 2019. COEP received a significant volume of complaints, particularly in the weeks immediately preceding the Deadline, and expects to be handling those complaints through the second quarter of 2020. Escalations to the Financial Ombudsman Service (“FOS”) may then take place until the end of 2020. During that time, the FCA will continue to closely supervise firms that handle PPI complaints and the supporting processes, people and systems.

Canada

In Canada, COBNA operates as an authorized foreign bank pursuant to the Bank Act (Canada) (“Bank Act”) and is permitted to conduct its credit card business in Canada through its Canadian branch, Capital One Bank (Canada Branch) (“Capital One Canada”). The primary regulator of Capital One Canada is the Office of the Superintendent of Financial Institutions. Other regulators include the Financial Consumer Agency of Canada (“FCAC”), the Office of the Privacy Commissioner of Canada, and the Financial Transactions and Reports Analysis Centre of Canada. Capital One Canada is subject to regulation under various Canadian federal laws, including the Bank Act and its regulations, the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and the Personal Information Protection and Electronic Documents Act.

On December 13, 2018, Bill C-86, Budget Implementation Act, 2018, No. 2 was passed by Parliament. Among other things, Bill C-86 amends the Bank Act (Canada) to consolidate and strengthen provisions that apply to banks and authorized foreign banks in the areas of consumer protection, corporate governance, business practices, public reporting, disclosure of information and access to basic banking services. Bill C-86 also amends the FCAC Act to enhance the role and powers of the FCAC by, among other things, increasing the maximum penalty for a violation of the consumer protection provisions of the Bank Act from 50,000 Canadian dollars (“CAD”) for natural persons and 500,000 CAD in the case of financial institutions or a payment card network to 1 million CAD and 10 million CAD, respectively. We are continuing to analyze the impacts of Bill C-86 in order to determine its applicability and impact to our business.

In August 2018, the Government of Canada announced new voluntary commitments from Visa Canada and MasterCard Canada, which will take effect when the original commitments end in 2020. As part of their new commitments, Visa and Mastercard will further reduce interchange fees for consumer credit cards by approximately 10 basis points to an annual average effective rate of 1.4% for a period of five years. Visa and Mastercard will also narrow the range of interchange rates (lowest vs. highest fee) charged to businesses.

EMPLOYEES

A central part of our philosophy is to attract and retain highly capable staff. We had approximately 51,900 employees, whom we refer to as “associates,” as of December 31, 2019. None of our associates are covered under a collective bargaining agreement, and management considers our associate relations to be satisfactory.

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ADDITIONAL INFORMATION

Technology/Systems

We leverage information and technology to achieve our business objectives and to develop and deliver products and services that satisfy our customers’ needs. A key part of our strategic focus is the development and use of efficient, flexible computer and operational systems, such as cloud technology, to support complex marketing and account management strategies, the servicing of our customers, and the development of new and diversified products. We believe that the continued development and integration of these systems is an important part of our efforts to reduce costs, improve quality and security and provide faster, more flexible technology services. Consequently, we continuously review capabilities and develop or acquire systems, processes and competencies to meet our unique business requirements.

As part of our continuous efforts to review and improve our technologies, we may either develop such capabilities internally or rely on third-party outsourcers who have the ability to deliver technology that is of higher quality, lower cost, or both. We continue to rely on third-party outsourcers to help us deliver systems and operational infrastructure. These relationships include (but are not limited to): Amazon Web Services, Inc. (“AWS”) for our cloud infrastructure, Total System Services LLC (“TSYS”) for consumer and commercial credit card processing services for our North American and U.K. portfolios, Fidelity Information Services (“FIS”) for certain of our banking systems and International Business Machines Corporation for mainframe managed services.

We are committed to safeguarding our customers’ and our own information and technology, implement backup and recovery systems, and generally require the same of our third-party service providers. We take measures that mitigate against known attacks and use internal and external resources to scan for vulnerabilities in platforms, systems, and applications necessary for delivering Capital One products and services. For a discussion of the risks associated with our use of technology systems, see “Part I—Item 1A. Risk Factors” under the headings “We face risks related to our operational, technological and organizational infrastructure” and “Increased costs, reductions in revenue, reputational damage and business disruptions can result from the theft, loss or misuse of information, including as a result of a cyber-attack.”

Intellectual Property

As part of our overall and ongoing strategy to protect and enhance our intellectual property, we rely on a variety of protections, including copyrights, trademarks, trade secrets, patents and certain restrictions on disclosure, solicitation and competition. We also undertake other measures to control access to, or distribution of, our other proprietary information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use certain intellectual property or proprietary information without authorization. Our precautions may not prevent misappropriation or infringement of our intellectual property or proprietary information. In addition, our competitors and other third parties also file patent applications for innovations that are used in our industry. The ability of our competitors and other third parties to obtain patents may adversely affect our ability to compete and our financial results. Conversely, our ability to obtain patents may increase our competitive advantage, preserve our freedom to operate, and allow us to enter into licensing (e.g., cross-licenses) or other arrangements with third parties. There can be no assurance that we will be successful in such efforts, or that the ability of our competitors to obtain such patents may not adversely impact our financial results. For a discussion of risks associated with intellectual property, see “Part I—Item 1A. Risk Factors” under the heading “If we are not able to protect our intellectual property, our revenue and profitability could be negatively affected.”

FORWARD-LOOKING STATEMENTS

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

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

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

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

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

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

• our ability to manage effectively our capital and liquidity;

• developments, changes or actions relating to any litigation, governmental investigation or regulatory enforcement action or matter involving us, including those relating to U.K. PPI;

• the inability to sustain revenue and earnings growth;

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

• uncertainty regarding, and transition away from, the London Interbank Offering Rate;

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

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

• the amount and rate of deposit growth;

• changes in deposit costs;

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

• restructuring activities or other charges;

• our response to competitive pressures;

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

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

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

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

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

• the potential impact to our business, operations and reputation from, and expenses and uncertainties associated with, the Cybersecurity Incident we announced on July 29, 2019 and associated legal proceedings and other inquiries or investigations, as discussed in “Part I—Item 1. Business—Overview—Cybersecurity Incident” and “Note 18—Commitments, Contingencies, Guarantees and Others”;

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

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

• the effectiveness of our risk management strategies;

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

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

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

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

• changes in the labor and employment markets;

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

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

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

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

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Item 1A. Risk Factors

This section highlights significant factors, events, and uncertainties that make an investment in our securities risky. 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 amplifies many of these risks.

General Economic and Market Risks

Changes and instability in the macroeconomic environment, consumer confidence and customer behavior may adversely affect our business.

We offer a broad array of financial products and services to consumers, small businesses and commercial clients. A prolonged period of economic volatility, slow growth, or a significant deterioration in economic conditions, in the United States, Canada or the United Kingdom, could have a material adverse effect on our financial condition and results of operations as customers 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 risks we face in connection with adverse changes and instability in the macroeconomic environment, including changes in consumer confidence levels and behavior, include the following:

• Changes in payment patterns, increases in delinquencies and default rates, decreased consumer spending, lower demand for credit and shifts in consumer payment behavior towards avoiding late fees, finance charges and other fees;

• Increases in our charge-off rate caused by bankruptcies and reduced ability to recover debt that we have previously charged-off;

• Decreased reliability of the process and models we use to estimate our allowance for loan and lease 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 and data.”

In the United Kingdom, changes in consumer behavior or an economic slowdown arising from the U.K.’s exit from the European Union (“Brexit”) could adversely affect our U.K. operations. The impact of Brexit and its full effects on us are uncertain and will depend on the post-Brexit relationships that the U.K. implements with the European Union (“EU”) and countries that are not a part of the EU. While Capital One does not have operations in any other EU jurisdictions, increased market volatility and global economic deterioration resulting from an uncontrolled Brexit could have a negative impact on credit conditions in the U.K. and negatively affect our business and financial condition.

Financial market instability and volatility could adversely affect 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 in the capital markets or other events, including actions by rating agencies and deteriorating investor expectations, which could limit our access to funding. In addition, fluctuations in interest rates, credit spreads and other market factors could negatively impact our results of operations. Both shorter-term and longer-term interest rates remain below long-term historical averages and the yield curve has been relatively flat compared to past periods. A flat yield curve combined with low interest rates generally leads to lower revenue and reduced margins because it tends to limit our ability to increase the spread between asset yields and funding costs. Sustained periods of time with a flat yield curve coupled with low interest rates, or an inversion of the yield curve, could have a material adverse effect on our net interest margin and earnings.

Regulatory Risk

Compliance with new and existing laws, regulations and regulatory expectations is costly and complex.

We are subject to extensive regulatory oversight by the federal banking regulators to ensure that we build systems and processes that are commensurate with the nature of our business and that meet the risk management and prudential standards issued by our regulators. A wide array of banking and consumer lending laws apply to almost every aspect of our business. Failure to comply

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with these laws and regulations could result in financial, structural and operational penalties, including significant fines and criminal sanctions, 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 compliance-related systems, infrastructure and processes, is difficult and these efforts could limit our ability to invest in other business opportunities. Furthermore, applicable rules and regulations may affect us in an unforeseen manner, or may have a disproportionate impact on us as compared to our competitors. For example, over the last several years, state and federal regulators have focused on compliance with the Bank Secrecy Act and anti-money laundering laws, data integrity and security, use of service providers, fair lending and other consumer protection issues. In July 2015, Capital One entered into a consent order with the OCC to address concerns about our anti-money laundering (“AML”) program and in October 2018, Capital One paid a civil monetary penalty assessed by the OCC relating to our AML program. The OCC lifted the AML consent order in November 2019. Failure to maintain compliance with AML laws and regulations could result in significant additional governmental fines or penalties.

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 customers. 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 activities are subject to enhanced legal and regulatory scrutiny from regulators, courts and legislators. Any future changes to our business practices in these areas, including our debt collection practices, whether mandated by regulators, courts, legislators or otherwise, or any legal liabilities resulting from our business practices, including our debt collection practices, 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. In addition, some rules and regulations may be subject to litigation or other challenges that delay or modify their implementation and impact on us. Adoption of new technologies, such as distributed ledger technologies, artificial intelligence and machine learning technologies, can present unforeseen challenges in applying and relying on existing compliance systems.

Certain laws and regulations, and any interpretations and applications with respect thereto, may benefit consumers, borrowers and depositors, 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 to which we are subject, see “Part I—Item 1. Business—Supervision and Regulation.”

Credit Risk

We may experience increased delinquencies, credit losses, inaccurate estimates and 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 increases in their payment obligations to other lenders, whether as a result of higher debt levels or rising interest rates, by restricted availability of credit generally, or by the revenue and income of the borrower. 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 losses or leading indicators of rising 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 loan and lease losses, which may degrade our profitability if we are unable to raise revenue or reduce costs to compensate for higher losses. In particular, we face the following risks in this area:

• Missed Payments: Our customers may miss payments. Loan charge-offs (including from bankruptcies) are generally preceded by missed payments or other indications of worsening financial condition for our customers. Historically, customers are more likely to miss payments during an economic downturn or prolonged periods of slow economic growth. In addition, we face the risk that consumer and commercial customer behavior may change (for example, an increase in the unwillingness or inability of customers to repay debt, which may be heightened by increasing interest rates or levels of consumer debt), causing a long-term rise in delinquencies and charge-offs.

• Incorrect Estimates of Inherent Losses: The credit quality of our portfolio can have a significant impact on our earnings. We allow for and reserve against credit risks based on our assessment of credit losses inherent in our loan portfolios. This

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process, which is critical to our financial condition and results of operations, requires complex judgments, including forecasts of economic conditions. We may underestimate our inherent losses and fail to hold an allowance for loan and lease losses sufficient to account for these losses. Incorrect assumptions could lead to material underestimations of inherent losses and inadequate allowance for loan and lease losses. In cases where we modify a loan, if the modifications do not perform as anticipated we may be required to build additional allowance on these loans. The build or release of allowances impacts our financial results.

• 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 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 portfolio.

• Increasing Charge-off Recognition / Allowance for Loan and Lease Losses: We account for the allowance for loan and lease 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. Effective as of January 1, 2020, we are required to use the CECL model based on expected rather than incurred losses. Adoption of the CECL model will result in an increase to our reserves for credit losses on financial instruments with a resulting negative adjustment to retained earnings. The impact of CECL on our future results will depend on the characteristics of our financial instruments, economic conditions, and our economic and loss forecasts. The application of the CECL model may require us to increase reserves faster and to a higher level in an economic downturn, resulting in greater impact to our results and our capital ratios than we would have experienced in similar circumstances prior to the adoption of CECL. In addition, because credit cards represent a significant portion of our product mix, we could be disproportionately affected by use of the CECL model, as compared to other large bank peers with a different product mix. See “MD&A—Accounting Changes and Developments” for additional information.

• Insufficient Asset Values: The collateral we have on secured loans could be insufficient to compensate us for loan 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, housing prices and consumer behavior, as well as technological advances that make older cars obsolete faster, could decrease (i) the demand for new and 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 27% of our commercial loan portfolio is concentrated in the tri-state area of New York, New Jersey and Connecticut. The regional economic conditions in the tri-state area affect the demand for our commercial products and services as well as the ability of our customers to repay their commercial 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 that disproportionately affects, the tri-state area could have a material adverse effect on the performance of our commercial 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. For example, as of December 31, 2019, healthcare and healthcare-related real estate loans represented approximately 18% of our total commercial loan portfolio. If healthcare-related industries or any of the other industries that we focus on experience adverse changes, we may experience increased credit losses and our results of operations could be adversely impacted.

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Capital and Liquidity Risk

We may not be able to maintain adequate capital or liquidity levels, 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. These requirements affect our ability to lend, grow deposit balances, make acquisitions and make most capital distributions. 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 enforcement remedies available to our regulators. These include limitations on the ability to pay dividends and repurchase shares and the issuance of a capital directive to increase capital. Such limitations could have a material adverse effect on our business and results of operations.

We consider various factors in the management of capital, including the impact of stress on our capital levels, as determined by both our internal modeling and the Federal Reserve’s modeling of our capital position in supervisory stress tests and CCAR. There can be significant differences between our modeling and the Federal Reserve’s estimates for a given scenario and between the capital needs suggested by our internal bank holding company scenarios relative to the supervisory scenarios. Therefore, although our estimated capital levels under stress disclosed as part of the CCAR or DFAST processes may suggest that we have substantial 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 result in a materially lower capacity to return capital to stockholders than that indicated by the projections released in the CCAR or DFAST processes. This in turn could lead to restrictions on our ability to pay dividends and engage in share repurchase transactions. See “Part I—Item 1. Business—Supervision and Regulation” for additional information.

In addition, the current capital and liquidity requirements are subject to change. The Federal Banking Agencies finalized the Tailoring Rule in the fourth quarter of 2019. Under the Tailoring Rule, we are a Category III institution, and are no longer subject to the Basel III Advanced Approaches and associated capital requirements, but we continue to be subject to the countercyclical capital buffer and supplementary leverage ratio. In addition, the Federal Reserve is currently considering a proposed rule (the “Stress Capital Buffer Proposed Rule”) that would modify our current Basel III capital requirements and implement firm-specific stress capital requirements. If the Stress Capital Buffer Proposed Rule is not adopted substantially as proposed, or there are other changes to applicable capital and liquidity requirements, we could face unexpected or new limitations on our ability to pay dividends and engage in share repurchases.

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, data and software development are deeply embedded into our business model and how we work.

Similar to other large corporations, 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, and fraud by employees or persons outside of our company. In addition, we are heavily dependent on the security, capability 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.

If we do not maintain the necessary operational, technological and organizational infrastructure to operate our business, including to maintain the security of that infrastructure, our business and reputation could be materially adversely affected. We also are subject to disruptions to our operating systems arising from events that are wholly or partially beyond our control, which may include computer viruses, electrical or telecommunications outages, design flaws in foundational components or platforms, availability and quality of vulnerability patches from key vendors, cyber-attacks (including Distributed Denial of Service (“DDOS”) and other attacks on our infrastructure as discussed below), natural disasters, other damage to property or physical assets, or events arising from local or larger scale politics, including terrorist acts. Any failure to maintain our infrastructure or disruption of our operating 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.

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We also rely on the business infrastructure and systems of third parties with which we do business and to whom we outsource the operation, maintenance and development of our information technology and communications systems. We have migrated substantially all, and intend to migrate all, of our core information technology systems and customer-facing applications to third-party cloud infrastructure platforms, principally AWS. If we do not complete the transition or fail to administer these new environments in a well-managed, secure and effective manner, or if AWS platforms become unavailable 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 results of operations. We must successfully develop and maintain information, financial reporting, disclosure, data-protection and other controls adapted to our reliance on outside platforms and providers. In addition, AWS, or other service providers, could experience system breakdowns or failures, outages, downtime, cyber-attacks, adverse changes to financial condition, bankruptcy, or other adverse conditions, which could have a material adverse effect on our business and reputation. Thus, the substantial amount of our infrastructure that we outsource to AWS or to other third parties may increase our risk exposure.

Any disruptions, failures or inaccuracies of our operational and technology systems and models, including those associated with improvements or modifications to such systems and models, 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, management of outsourced services, asset purchases or other acquisitions, structural reorganization, compliance with new laws or regulations, or the integration of newly acquired businesses, or the occurrence of incidents such as the Cybersecurity Incident. If we are unable to successfully manage our expenses, our financial results will be negatively affected.

Increased costs, reductions in revenue, reputational damage and business disruptions can result from the theft, loss or misuse of information, including as a result of a cyber-attack.

Our products and services involve the gathering, authenticating, managing, processing, and the storage and transmission of sensitive and confidential information regarding our customers and their accounts, our employees and third parties with which we do business. Our ability to provide such products and services, many of which are web-based, depends upon the management and safeguarding of information, software, methodologies and business secrets. To provide these products and services to, as well as communicate with, our customers, we rely on information systems and infrastructure, including software and data engineering, and information security personnel, digital technologies, computer and email systems, software, networks and other web-based technologies. We also have arrangements in place with third parties through which we share and receive information about their customers who are or may become our customers.

Technologies, systems, networks and devices of Capital One or our customers, employees, service providers or other third parties with whom we interact continue to be the subject of attempted unauthorized access, mishandling or misuse of information, denial-of-service attacks, computer viruses, website defacement, hacking, malware, ransomware, phishing or other forms of social engineering, and other forms of cyber-attacks designed to obtain confidential information, destroy data, disrupt or degrade service, sabotage systems or cause other damage, and other events. These threats, such as the Cybersecurity Incident, may derive from error, fraud or malice on the part of our employees, insiders or third parties or may result from accidental technological failure. Any of these parties may also attempt to fraudulently induce employees, customers, or other third-party users of our systems to disclose sensitive information in order to gain access to our data or that of our customers or third parties with whom we interact, or to unlawfully obtain monetary benefit through misdirected or otherwise improper payment. Further, cyber and information security risks for large financial institutions like us continue to increase due to the proliferation of new technologies, the use of the internet to conduct financial transactions, and the increased sophistication and activities of organized crime, perpetrators of fraud, hackers, terrorists, activists, formal and informal instrumentalities of foreign governments and other external parties. In addition, our customers access our products and services using computers, smartphones, tablets, and other mobile devices that are beyond our security control systems.

The methods and techniques employed by perpetrators of fraud and others to attack, disable, degrade or sabotage platforms, systems and applications change frequently, 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. For example, although we immediately fixed the configuration vulnerability that was exploited in the 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 third-party service providers and partners may be unable to anticipate or identify certain attack methods in order to implement effective preventative measures or mitigate or remediate the damages caused in a

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timely manner. We may also be unable to hire and develop talent capable of detecting, mitigating or remediating these risks. Although we seek to maintain a robust suite of authentication and layered information security controls, including our cyber threat analytics, data encryption and tokenization technologies, anti-malware defenses and vulnerability management program, any one or combination of these controls could fail to detect, mitigate or remediate these risks in a timely manner. 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 clients.

A disruption or breach, including as a result of a cyber-attack such as the Cybersecurity Incident, or media reports of perceived security vulnerabilities at Capital One or at third-party service providers, could result in significant legal and financial exposure, regulatory intervention, litigation and 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. We and other U.S. financial services providers continue to be targeted with evolving and adaptive cybersecurity threats from sophisticated third parties. We are continuing to assess the impact of the Cybersecurity Incident and there can be no assurance that additional unauthorized access or cyber incidents will not occur or that we will not suffer material losses in the future. Unauthorized access or cybersecurity incidents could occur more frequently and on a more significant scale. If future attacks like these 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 third-party service providers or partners could harm our business even if we do not control the service that is attacked.

In addition, the increasing prevalence and the evolution of cyber-attacks and other efforts to breach or disrupt our systems or those of our partners, retailers or other market participants has led, and will likely continue to lead, to increased costs to us with respect to preventing, mitigating and remediating these risks, as well as any related attempted fraud. In order to address ongoing and future risks, including from the Cybersecurity Incident, 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. The Cybersecurity Incident, or successful cyber-attacks at other large financial institutions or other market participants (whether or not we are impacted), could 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 financial system in general which could result in reduced use of our financial products. We have insurance against some cyber-risks and attacks, including insurance that is expected to cover certain costs associated with the Cybersecurity Incident; nonetheless, our insurance coverage may not be sufficient to offset the impact of a material loss event, and such insurance may increase in cost or cease to be available on commercial terms in the future.

Potential data protection and privacy incidents, and our required compliance with regulations related to these areas, may increase our costs, reduce our revenue and limit our ability to pursue business opportunities.

A breach, failure or other disruption of our information systems or infrastructure or data management processes, or those of our customers, partners, service providers or other market participants, could lead, depending on the nature of the incident, to the unauthorized or unintended access to and release, gathering, monitoring, misuse, loss or destruction of personal or confidential data about our customers, employees or other third parties in our possession. Any party that obtains this personal or confidential data through a breach or disruption 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. Further, such disruption or breach could also result in unauthorized access to our proprietary information, intellectual property, software, methodologies and business secrets and in unauthorized transactions in Capital One accounts or unauthorized access to personal or confidential information maintained by those entities. There has 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. While we were not directly involved in these third-party breach events, the stolen information can create a vulnerability 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 sites. This vulnerability could include the risk of unauthorized account access, data loss and fraud. The use of artificial intelligence, “bots” or other automation software, can increase the velocity and efficacy of these types of attacks.

We are continuing to assess the impact of the Cybersecurity Incident. The Cybersecurity Incident, other data security incidents we may experience in the future, or media reports of perceived security vulnerabilities at Capital One or at third-party service providers, could result in significant legal and financial exposure, regulatory intervention, 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.

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We are subject to a variety of continuously evolving and developing laws and regulations in the United States and abroad regarding privacy, data protection and data security, including those related to the collection, storage, handling, use, disclosure, transfer and security of personal data. Significant uncertainty exists as privacy and data protection laws may be interpreted and applied differently from country to country and may create inconsistent or conflicting requirements. For example, in Canada we are subject to the Personal Information Protection and Electronic Documents Act (“PIPEDA”). In addition, the General Data Protection Regulation (“GDPR”) applies EU data protection law to all companies processing data of EU residents, regardless of the company’s location. More recently, on January 1, 2020, the CCPA went into effect for companies doing business in California. These laws impose strict requirements regarding the collection, storage, handling, use, disclosure, transfer and security of personal data, which may have adverse consequences, including severe monetary penalties. Our efforts to comply with PIPEDA, GDPR, CCPA and other privacy and data protection laws 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 violations continue to increase. The enactment of more restrictive laws, rules, regulations, or future enforcement actions or investigations could impact us through increased costs or restrictions on our business, and noncompliance could result in monetary or other penalties and significant legal liability.

We face risks resulting from the extensive use of models and data.

We rely on quantitative models, and our ability to manage data and aggregate data in an accurate and timely manner, assess and manage our various risk exposures, estimate certain financial values and manage compliance with required regulatory capital requirements. Models may be used in such processes as determining the pricing of various products, grading loans and extending credit, measuring interest rate and other market risks, predicting deposit levels or loan losses, assessing capital adequacy and calculating economic and regulatory capital levels, estimate the value of financial instruments and balance sheet items, and other operational functions. Our risk reporting and management, including business decisions based on information incorporating models, depend on the effectiveness of our models and our policies, programs, processes and practices governing how data is 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 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. While we continuously update our policies, programs, processes and practices, many of our data management, aggregation, and implementation processes are manual and subject to human error 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 risk management 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 poorly designed or implemented models 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 models used to generate the relevant information is insufficient.

Legal Risk

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. The Cybersecurity Incident has resulted in litigation, 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. We and our subsidiaries are subject to comprehensive regulation and periodic examination by the Federal Reserve, the SEC, OCC, FDIC 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, Financial Crimes Enforcement Network (“FinCEN”) and state Attorneys General.

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We expect that regulators and governmental enforcement bodies will continue taking formal enforcement actions against financial institutions in addition to addressing supervisory concerns through non-public supervisory actions or findings, which could involve restrictions on our activities, 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 involve restrictions on our activities, 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 that we are subject to, see “Note 18—Commitments, Contingencies, Guarantees and Others.”

Other Business Risks

We face intense competition in all of our markets.

We operate in a highly competitive environment, 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. 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 increasingly 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.

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 legislative 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 “crypto” currencies, 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.

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.

As of December 31, 2019, we operate as one of the largest online direct banks in the United States by deposits. 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. We have expanded the loan portfolio in our partnership business with the additions of a number of large partnerships. 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.

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We face the risk that we could lose partner relationships, even after we have invested significant resources, time and expense into acquiring and developing the relationships. The loss of any of our key business partners 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 cobrand 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 cobrand 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’ increasing focus on the fees charged by credit card networks and by regulation and legislation impacting such fees.

Credit card interchange fees are generally one of the largest components of the costs that merchants pay in connection with the acceptance of credit cards and are a meaningful source of revenue for our credit card businesses. Interchange fees are the subject of significant and intense global legal, regulatory and legislative focus, and the resulting decisions, regulations and legislation may have a material adverse impact on our overall business, financial condition and results of operations.

Regulators and legislative bodies in a number of countries are seeking to reduce credit card interchange fees through legislation, competition-related regulatory proceedings, central bank regulation and or litigation. 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 the EU, interchange fees and related practices are subject to regulatory activity that has limited the ability of certain networks to establish default rates, including in some cases imposing caps on permissible interchange fees. We have already experienced these impacts in our international card businesses. Legislators and regulators around the world are aware of each other’s approaches to the regulation of the payments industry. Consequently, a development in one country, state or region may influence regulatory approaches in another, such as our primary market, the United States.

In addition to this regulatory activity, merchants are also seeking avenues to reduce interchange fees. During the past few years, merchants and their trade groups have filed numerous lawsuits against Visa, MasterCard, American Express and their card-issuing banks, claiming that their practices toward merchants, including interchange and similar 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. In December 2013, the U.S. District Court for the Eastern District of New York granted final approval of the proposed class settlement. The settlement provided, among other things, that merchants would be entitled to join together to negotiate lower interchange fees. The settlement was appealed to the Second Circuit Court of Appeals, which rejected the settlement in June 2016; a revised settlement was reached in the second half of 2018, and the trial court issued its final approval of the settlement in December 2019. See “Note 18—Commitments, Contingencies, Guarantees and Others” for further details.

Some major retailers may have sufficient bargaining power to 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. In 2016, some of the largest merchants individually negotiated lower interchange rates with MasterCard and/or Visa. These and other merchants also continue to lobby aggressively for caps and restrictions on interchange fees and their efforts may be successful or they may in the future bring legal proceedings against us or other credit card and debit card issuers and networks.

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Beyond pursuing litigation, legislation and regulation, merchants may also promote forms of payment with lower fees, such as ACH-based payments, or seek to impose surcharges 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 card accounts as a payment method.

The heightened focus by merchants and regulatory and legislative 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 reduction of 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 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 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 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 capacity to invest in and build the technology platforms that can enable them, in a cost effective and timely manner. 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, we face intense competition from smaller companies which experience lower cost structures and different regulatory requirements and scrutiny than we do, and 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 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.

We may fail to realize all of the anticipated benefits of our mergers, acquisitions and strategic partnerships.

We have engaged in merger and acquisition activity and entered into strategic partnerships over the past several years. 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 acquisition targets, 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 within the anticipated time frame and achieving 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.

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Integration efforts also may divert management attention and resources. These integration matters may have an adverse effect on us during any transition period.

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 and new geographic areas or other markets which present risks resulting from our relative inexperience in these new businesses or markets. These new businesses or markets may change the overall character of our consolidated portfolio of businesses and alter our exposure to economic and other external factors. We face the risk that we will not be successful in these new businesses or in these new 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 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 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: Certain acquisitions may not be consummated without obtaining approvals from one or more of our regulators. We cannot be certain when or if, or on what terms and conditions, any required regulatory approvals will be granted. Consequently, we might be required to sell portions of acquired assets or our own assets as a condition to receiving regulatory approval or we may not obtain 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 the time and expenses invested 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. In addition, our brand is very important to us. 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 and maintaining accounts as well as in financing them. 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 consumer and commercial customers and potential customers choose to maintain with us or 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.

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, security breaches (including the use and protection of customer information, such as a result of the Cybersecurity Incident), 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 data, privacy and compliance practices, and could further harm our reputation. In addition, our cobrand and private label 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

28 Capital One Financial Corporation (COF)

industry. The proliferation of social media may increase the likelihood that negative public opinion from any of the events discussed above will impact our reputation and business.

In addition, a variety of 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 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 if consumption trends decline or if we fail to maintain and enhance our brand, or we incur significant expenses to do so, our business and financial results could be materially and negatively affected.

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 information. These measures may not prevent misappropriation of our proprietary information or infringement of our intellectual property rights and a resulting loss of competitive advantage. In addition, our competitors or other third parties may file patent applications for innovations that are used in our industry or allege that our systems, processes or technologies infringe on their intellectual property rights. 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 or technology development 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, operational and compliance risk requires, among other things, policies and procedures to properly record and verify a large number of transactions and events. See “MD&A—Risk Management” for further details. Even though we continue to devote significant resources to developing our risk management 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 and management’s judgment. These methods may not accurately predict future exposures, which could be significantly greater than the historical measures indicate and market conditions, particularly during a period of financial market stress can involve unprecedented dislocations. 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, including tariff rates and international trade relations.

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.

Changes in consumer behavior and adoption of digital technology may change retail distribution strategies and adversely impact our investments in our bank premises and equipment and other retail distribution assets, leading to increased costs and exposure to additional risks.

We have significant investments in bank premises and equipment for our branch network and other branch banking assets including our banking centers and our retail work force. Advances in technology such as digital and mobile banking, in-branch self-service technologies, proximity or remote payment technologies, as well as changing customer preferences for these other methods of banking, could decrease the value of our branch network or other retail distribution assets. As a result, we will continue to adapt our retail distribution strategy. For example, we may close, sell and/or renovate additional branches or parcels of land held for development and restructure or reduce our remaining branches and work force. These actions could lead to losses on these assets or could adversely impact the carrying value of other long-lived assets, reduce our revenues, increase our expenditures, dilute our brand and/or reduce customer demand for our products and services.

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Further, to the extent that we change our retail distribution strategy and as a result expand into new business areas, we may face more competitors with more experience in the new business areas and more established relationships with relevant customers, regulators and industry participants, which could adversely affect our ability to compete. Our competitors may also be subject to less burdensome regulations. See “We face intense competition in all of our markets.”

Fluctuations in market interest rates or volatility in the capital markets could adversely affect our income and expense, the value of assets and obligations, our regulatory capital, cost of capital or liquidity.

Like other financial institutions, our business is sensitive to market interest rate movements and the performance of the capital markets. Disruptions, uncertainty or volatility across the capital markets could negatively impact market liquidity and limit our access to the funding required to operate and grow our business. In addition, changes in interest rates or in valuations in the debt or equity markets could directly impact us. For example, we borrow money from other institutions and depositors, which we use to make loans to customers and invest in debt securities and other earning assets. We earn interest on these loans and assets and pay interest on the money we borrow from institutions and depositors. The interest rates that we pay on the securities we have issued are also influenced by, among other things, applicable credit ratings from recognized rating agencies. A downgrade to any of these credit ratings could affect our ability to access the capital markets, increase our borrowing costs and have a negative impact on our results of operations. Increased charge-offs, rising London Interbank Offering Rate (“LIBOR”) or other applicable reference rates and other events may cause our securitization transactions to amortize earlier than scheduled, which could accelerate our need for additional funding from other sources. Fluctuations in interest rates, including changes in the relationship between short-term rates and long-term rates and in the relationship between our funding basis rate and our lending basis rate, may have negative impacts on our net interest income and therefore our earnings.

In addition, interest rate fluctuations and competitor responses to those changes may affect the rate of customer prepayments for auto and other term loans and may affect the balances customers carry on their credit cards. 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 delinquencies or charge-offs and negatively impact our results of operations. These changes can reduce the overall yield on our earning asset portfolio. Changes in interest rates and competitor responses to these changes may also impact customer decisions to maintain balances in the deposit accounts they have with us. 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. 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.

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. See “MD&A—Market Risk Profile” for additional information.

Uncertainty regarding, and transition away from, LIBOR may adversely affect our business.

The U.K. Financial Conduct Authority, which regulates LIBOR, has announced that it will no longer compel banks to contribute data for the calculation of LIBOR after December 31, 2021. It is likely that banks will no longer continue to contribute submissions for the calculation of LIBOR after that date, which creates significant uncertainty around the publication of LIBOR beyond 2021 and whether LIBOR will continue to be viewed as a reliable market benchmark. It remains unclear what rate or rates may develop as accepted alternatives to LIBOR, or what the effect of such changes will be on the markets for LIBOR-based financial instruments. The Secured Overnight Financing Rate (“SOFR”) has been recommended by the Alternative Reference Rates Committee as an alternative for USD LIBOR, but issues and uncertainty remain with respect to its implementation.

Given LIBOR’s extensive use across financial markets, the transition away from LIBOR presents several risks and challenges to the financial markets and financial institutions, including Capital One. We have loans, derivative contracts, unsecured debt, securitizations, vendor agreements and other instruments with attributes that are either directly or indirectly dependent on LIBOR. Uncertainty as to the nature of potential changes, alternative reference rates such as SOFR, or other reforms may adversely affect market liquidity, the pricing of LIBOR-based instruments, and the availability and cost of associated hedging instruments and borrowings. If SOFR or another rate does not achieve wide acceptance as the alternative to LIBOR, there likely will be disruption

30 Capital One Financial Corporation (COF)

to the markets relying on the availability of a broadly accepted reference rate. In addition, uncertainty regarding LIBOR could result in loss of market share in certain products, adverse tax or accounting impacts, compliance, legal or operational costs and risks associated with client disclosures, as well as systems disruption, model disruption and other business continuity issues for us.

Even if SOFR or another reference rate becomes a widely acceptable replacement for LIBOR, risks will remain for us with respect to outstanding instruments which rely on LIBOR. Those risks arise in connection with transitioning such instruments to a new reference rate, the taking of discretionary actions or the negotiation of fallback provisions and final amendments to existing LIBOR based agreements. Payments under contracts referencing new reference rates may significantly differ from those referencing LIBOR. For some instruments, the method of transitioning to a new reference rate may be challenging, especially if parties to an instrument cannot agree as to how to effect that transition. If a contract is not transitioned to a new reference rate and LIBOR ceases to exist, the impact on our obligations is likely to vary by contract. In addition, prior to LIBOR cessation, instruments that continue to refer to LIBOR may be impacted if there is a change in the availability or calculation of LIBOR. The transition from LIBOR to an alternative reference rate may change our market risk profile and require changes to risk and pricing models, valuation tools, product design, information technology systems, reporting infrastructure, operational processes and controls, and hedging strategies. In many cases, we may be dependent on third parties to upgrade systems, software and other critical functions that could materially disrupt our readiness if they are not done on a timely basis or otherwise fail. Our assessment of the ultimate impact of, and our planning for, the transition from LIBOR remains ongoing. Failure to adequately manage the transition could have a material adverse effect on our reputation, business, financial condition and results of operations. See “MD&A—Market Risk Profile” for additional information.

Our business could be negatively affected if we are unable to attract, retain and motivate skilled employees.

Our success depends, in large part, on our ability to retain key senior leaders and to attract and retain skilled employees, particularly employees with advanced expertise in credit, risk and 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 and retaining them, is high. Our ability to attract and retain qualified employees also is affected by perceptions of our culture and management, 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 we therefore may face more restrictions than other institutions and companies with which we compete for talent. These laws and regulations 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 unpredictable catastrophic events.

Despite the business contingency plans we have in place, such plans do not fully mitigate all potential business continuity risks to us. Natural disasters and other catastrophic events could harm our 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, as well as Richmond, Virginia and Plano, Texas. This may include a disruption involving damage or loss of access to a physical site, cyber incidents, terrorist activities, disease pandemics, natural disasters, extreme weather events, electrical outage, environmental hazard, technological infrastructure, communications or other services we use, our employees or third parties with whom we conduct business. In addition, if a natural disaster or other catastrophic event occurs in certain regions where our business and customers are concentrated, such as the mid-Atlantic, New York or Texas metropolitan areas, we could be disproportionately impacted as compared to our competitors. The impact of such events and other catastrophes on the overall economy may also adversely affect our financial condition and results of operations.

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 loan and lease losses, the fair value of

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certain assets and liabilities, and asset 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. For example, as of January 1, 2020, we are required to apply the CECL model based on expected lifetime losses rather than incurred losses, which will increase the impact of estimates on our reported results. 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 “MD&A—Critical Accounting Policies and Estimates” and “Note 1—Summary of Significant Accounting Policies.”

Limitations on our ability to receive dividends from our subsidiaries could affect our liquidity and ability to pay dividends and repurchase common stock.

We are a separate and distinct legal entity from our subsidiaries, including the Banks. Dividends to us from our direct and indirect subsidiaries, including the Banks, have represented a major source of funds for us to pay dividends on our common and preferred stock, repurchase common stock, make payments on corporate debt securities and meet other obligations. There are various federal law limitations on the extent to which the Banks can finance or otherwise supply funds to us through dividends and loans. These limitations include minimum regulatory capital requirements, federal banking law requirements concerning the payment of dividends out of net profits or surplus, 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. 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, financial position or perception of financial health.

The soundness of other financial institutions and other third parties 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.

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 or sovereign debt 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.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

Our corporate and banking real estate portfolio consists of approximately 15.2 million square feet of owned or leased office and retail space, used to support our business. Of this overall portfolio, approximately 12.5 million square feet of space is dedicated for various corporate office uses and approximately 2.7 million square feet of space is for bank branches, Cafés and office space.

Our 12.5 million square feet of corporate office space consists of approximately 5.3 million square feet of leased space and 7.2 million square feet of owned space. Our headquarters is located in McLean, Virginia, and is included in our corporate office space. We maintain corporate office space primarily in Virginia, New York, Illinois, Texas, and Delaware.

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Our 2.7 million square feet of bank branches, Cafés and office space consists of approximately 1.5 million square feet of leased space and 1.2 million square feet of owned space, including branch locations primarily across New York, Louisiana, Texas, Maryland, Virginia, New Jersey and the District of Columbia. See “Note 7—Premises, Equipment and Leases” for information about our premises.

Item 3. Legal Proceedings

The information required by Item 103 of Regulation S-K is included in “Note 18—Commitments, Contingencies, Guarantees and Others.”

Item 4. Mine Safety Disclosures

Not applicable.

33 Capital One Financial Corporation (COF)

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Our common stock is listed on the NYSE and is traded under the symbol “COF.” As of January 31, 2020, there were 10,107 holders of record of our common stock.

Securities Authorized for Issuance Under Equity Compensation Plans

Information relating to compensation plans under which our equity securities are authorized for issuance is presented in this Report under “Part III—Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”

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Common Stock Performance Graph

The following graph shows the cumulative total stockholder return on our common stock compared to an overall stock market index, the S&P Composite 500 Stock Index (“S&P 500 Index”), and a published industry index, the S&P Financial Composite Index (“S&P Financial Index”), over the five-year period commencing December 31, 2014 and ended December 31, 2019. The stock performance graph assumes that $100 was invested in our common stock and each index and that all dividends were reinvested. The stock price performance on the graph below is not necessarily indicative of future performance.

	December 31,
	2014		2015		2016		2017		2018		2019
Capital One	$	100.00	$	87.44	$	105.68	$	120.63	$	91.57	$	124.66
S&P 500 Index	100.00		99.27		108.74		129.86		121.76		156.92
S&P Financial Index	100.00		96.52		115.96		139.19		118.78		153.43

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Recent Sales of Unregistered Securities

We did not have any sales of unregistered equity securities in 2019.

Issuer Purchases of Equity Securities

The following table presents information related to repurchases of shares of our common stock for each calendar month in the fourth quarter of 2019. Commission costs are excluded from the amounts presented below.

	Total Number of Shares Purchased(1)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans	Maximum Amount That May Yet be Purchased Under the Plan or Program (in millions)
October	4,505,190	$	89.59	4,505,190	$	1,330
November	4,182,958	96.72		4,143,700	929
December	1,355,828	100.70		1,355,800	793
Total	10,043,976	94.06		10,004,690

__________

⁽¹⁾  Comprises mainly repurchases of common stock under the 2019 Stock Repurchase Program. There were 39,258 and 28 shares withheld in November and December, respectively, to cover taxes on restricted stock awards whose restrictions have lapsed. For additional information including our 2019 Stock Repurchase Program, see “MD&A—Capital Management—Dividend Policy and Stock Purchases.”

36 Capital One Financial Corporation (COF)

Item 6. Selected Financial Data

The following table presents selected consolidated financial data and performance metrics for the five-year period ended December 31, 2019. 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. Certain prior period amounts have been recast to conform to the current period presentation. We prepare our consolidated financial statements based on U.S. GAAP. This data should be reviewed in conjunction with our audited consolidated financial statements and related notes and with the MD&A included in this Report. The historical financial information presented may not be indicative of our future performance.

Five-Year Summary of Selected Financial Data

	Year Ended December 31,															Change
(Dollars in millions, except per share data and as noted)	2019			2018			2017			2016			2015			2019 vs. 2018		2018 vs. 2017
Income statement
Interest income	$	28,513		$	27,176		$	25,222		$	22,891		$	20,459		5	%	8	%
Interest expense	5,173			4,301			2,762			2,018			1,625			20		56
Net interest income	23,340			22,875			22,460			20,873			18,834			2		2
Non-interest income	5,253			5,201			4,777			4,628			4,579			1		9
Total net revenue	28,593			28,076			27,237			25,501			23,413			2		3
Provision for credit losses	6,236			5,856			7,551			6,459			4,536			6		(22	)
Non-interest expense:
Marketing	2,274			2,174			1,670			1,811			1,744			5		30
Operating expense	13,209			12,728			12,524			11,747			11,252			4		2
Total non-interest expense	15,483			14,902			14,194			13,558			12,996			4		5
Income from continuing operations before income taxes	6,874			7,318			5,492			5,484			5,881			(6	)	33
Income tax provision	1,341			1,293			3,375			1,714			1,869			4		(62	)
Income from continuing operations, net of tax	5,533			6,025			2,117			3,770			4,012			(8	)	185
Income (loss) from discontinued operations, net of tax	13			(10		)	(135		)	(19		)	38			**		(93	)
Net income	5,546			6,015			1,982			3,751			4,050			(8	)	**
Dividends and undistributed earnings allocated to participating securities	(41		)	(40		)	(13		)	(24		)	(20		)	3		**
Preferred stock dividends	(282		)	(265		)	(265		)	(214		)	(158		)	6		—
Issuance cost for redeemed preferred stock	(31		)	—			—			—			—			**		**
Net income available to common stockholders	$	5,192		$	5,710		$	1,704		$	3,513		$	3,872		(9	)	**
Common share statistics
Basic earnings per common share:
Net income from continuing operations	$	11.07		$	11.92		$	3.80		$	7.00		$	7.08		(7	)%	**
Income (loss) from discontinued operations	0.03			(0.02		)	(0.28		)	(0.04		)	0.07			**		(93	)%
Net income per basic common share	$	11.10		$	11.90		$	3.52		$	6.96		$	7.15		(7	)	**
Diluted earnings per common share:
Net income from continuing operations	$	11.02		$	11.84		$	3.76		$	6.93		$	7.00		(7	)%	**
Income (loss) from discontinued operations	0.03			(0.02		)	(0.27		)	(0.04		)	0.07			**		(93	)%
Net income per diluted common share	$	11.05		$	11.82		$	3.49		$	6.89		$	7.07		(7	)	**
Common shares outstanding (period-end, in millions)	456.6			467.7			485.5			480.2			527.3			(2	)	(4	)
Dividends declared and paid per common share	$	1.60		$	1.60		$	1.60		$	1.60		$	1.50		—		—
Book value per common share (period-end)	127.05			110.47			100.37			98.95			89.67			15		10
Tangible book value per common share (period-end)(1)	83.72			69.20			60.28			57.76			53.65			21		15
Common dividend payout ratio(2)	14.41		%	13.45		%	45.45		%	22.99		%	20.98		%	1		(32	)
Stock price per common share (period end)	$	102.91		$	75.59		$	99.58		$	87.24		$	72.18		36		(24	)
Total market capitalization (period-end)	46,989			35,353			48,346			41,893			38,061			33		(27	)
Balance sheet (average balances)
Loans held for investment	$	247,450		$	242,118		$	245,565		$	233,272		$	210,745		2	%	(1	)%
Interest-earning assets	341,510			332,738			322,330			307,796			282,581			3		3
Total assets	374,924			363,036			354,924			339,974			313,474			3		2
Interest-bearing deposits	231,609			221,760			213,949			198,304			185,677			4		4
Total deposits	255,065			247,117			239,882			223,714			210,989			3		3
Borrowings	50,965			53,144			53,659			56,878			45,420			(4	)	(1	)
Common equity	50,960			45,831			45,170			45,162			45,072			11		1
Total stockholders’ equity	55,690			50,192			49,530			48,753			47,713			11		1

37 Capital One Financial Corporation (COF)

	Year Ended December 31,															Change
(Dollars in millions, except per share data and as noted)	2019			2018			2017			2016			2015			2019 vs. 2018		2018 vs. 2017
Selected performance metrics
Purchase volume	$	424,765		$	387,102		$	336,440		$	307,138		$	271,167		10	%	15	%
Total net revenue margin(3)	8.37		%	8.44		%	8.45		%	8.29		%	8.29		%	(7	)bps	(1	)bps
Net interest margin	6.83			6.87			6.97			6.78			6.66			(4	)	(10	)
Return on average assets(4)	1.48			1.66			0.60			1.11			1.28			(18	)	106
Return on average tangible assets(5)	1.54			1.73			0.62			1.16			1.35			(19	)	111
Return on average common equity(6)	10.16			12.48			4.07			7.82			8.51			(232	)	8	%
Return on average tangible common equity(7)	14.37			18.56			6.16			11.93			12.87			(419	)	12
Equity-to-assets ratio(8)	14.85			13.83			13.96			14.34			15.22			102		(13	)bps
Non-interest expense as a percentage of average loans held for investment	6.26			6.15			5.78			5.81			6.17			11		37
Efficiency ratio(9)	54.15			53.08			52.11			53.17			55.51			107		97
Operating efficiency ratio(10)	46.20			45.33			45.98			46.06			48.06			87		(65	)
Effective income tax rate from continuing operations	19.5			17.7			61.5			31.3			31.8			180		(44	)%
Net charge-offs	$	6,252		$	6,112		$	6,562		$	5,062		$	3,695		2	%	(7	)
Net charge-off rate	2.53		%	2.52		%	2.67		%	2.17		%	1.75		%	1	bps	(15	)bps

	December 31,															Change
(Dollars in millions, except as noted)	2019			2018			2017			2016			2015			2019 vs. 2018		2018 vs. 2017
Balance sheet (period-end)
Loans held for investment	$	265,809		$	245,899		$	254,473		$	245,586		$	229,851		8	%	(3	)%
Interest-earning assets	355,202			341,293			334,124			321,807			302,007			4		2
Total assets	390,365			372,538			365,693			357,033			334,048			5		2
Interest-bearing deposits	239,209			226,281			217,298			211,266			191,874			6		4
Total deposits	262,697			249,764			243,702			236,768			217,721			5		2
Borrowings	55,697			58,905			60,281			60,460			59,115			(5	)	(2	)
Common equity	53,157			47,307			44,370			43,154			43,990			12		7
Total stockholders’ equity	58,011			51,668			48,730			47,514			47,284			12		6
Credit quality metrics
Allowance for loan and lease losses	$	7,208		$	7,220		$	7,502		$	6,503		$	5,130		—		(4	)%
Allowance as a percentage of loans held for investment (“allowance coverage ratio”)	2.71		%	2.94		%	2.95		%	2.65		%	2.23		%	(23	)bps	(1	)bps
30+ day performing delinquency rate	3.51			3.62			3.23			2.93			2.69			(11	)	39
30+ day delinquency rate	3.74			3.84			3.48			3.27			3.00			(10	)	36
Capital ratios
Common equity Tier 1 capital(11)	12.2		%	11.2		%	10.3		%	10.1		%	11.1		%	100	bps	90	bps
Tier 1 capital(11)	13.7			12.7			11.8			11.6			12.4			100		90
Total capital(11)	16.1			15.1			14.4			14.3			14.6			100		70
Tier 1 leverage(11)	11.7			10.7			9.9			9.9			10.6			100		80
Tangible common equity(12)	10.2			9.1			8.3			8.1			8.9			110		80
Supplementary leverage(11)	9.9			9.0			8.4			8.6			9.2			90		60
Other
Employees (period end, in thousands)	51.9			47.6			49.3			47.3			45.4			9	%	(3	)%

__________

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

38 Capital One Financial Corporation (COF)

⁽⁶⁾  Return on average common equity is calculated based on net income available to common stockholders less income (loss) from discontinued operations, net of tax, for the period, divided by average common equity. Our calculation of return on average common equity may not be comparable to similarly-titled measures reported by other companies.

⁽⁷⁾  Return on average tangible common equity is a non-GAAP measure calculated based on net income available to common stockholders less income (loss) from discontinued operations, net of tax, for the period, divided by average tangible common equity (“TCE”). Our calculation of return on average TCE may not be comparable to similarly-titled measures reported by other companies. See “MD&A—Table F—Reconciliation of Non-GAAP Measures” for additional information on non-GAAP measures.

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

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

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

⁽¹¹⁾  Capital ratios are calculated based on the Basel III Standardized Approach framework, subject to applicable transition provisions. See “MD&A—Capital Management” for additional information.

⁽¹²⁾  Tangible common equity ratio is a non-GAAP measure calculated based on TCE divided by tangible assets. See “MD&A—Table F—Reconciliation of Non-GAAP Measures” for the calculation of this measure and reconciliation to the comparative U.S. GAAP measure.

** Change is not meaningful.

39 Capital One Financial Corporation (COF)

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 2019 Annual Report on Form 10-K (“this Report”). All statements that address operating performance, events or developments that we expect or anticipate will occur in the future, including those relating to operating results and the Cybersecurity Incident described in “Part I—Item 1. Business—Overview—Cybersecurity Incident” and “Note 18—Commitments, Contingencies, Guarantees and Others” are forward-looking statements. Our actual results may differ materially from those included in these forward-looking statements due to a variety of factors including, but not limited to, those described in “Part I—Item 1A. Risk Factors” in this Report. Unless otherwise specified, references to notes to our consolidated financial statements refer to the notes to our consolidated financial statements as of December 31, 2019 included in this Report.

Management monitors a variety of key indicators to evaluate our business results and financial condition. The following MD&A is intended to provide the reader with an understanding of our results of operations, financial condition and liquidity by focusing on changes from year to year in certain key measures used by management to evaluate performance, such as profitability, growth and credit quality metrics. MD&A is provided as a supplement to, and should be read in conjunction with, our audited consolidated financial statements as of and for the year ended December 31, 2019 and accompanying notes. MD&A is organized in the following sections:

•   Executive Summary and Business Outlook	•   Capital Management
•   Consolidated Results of Operations	•   Risk Management
•   Consolidated Balance Sheets Analysis	•   Credit Risk Profile
•   Off-Balance Sheet Arrangements	•   Liquidity Risk Profile
•   Business Segment Financial Performance	•   Market Risk Profile
•   Critical Accounting Policies and Estimates	•   Supplemental Tables
•   Accounting Changes and Developments	•   Glossary and Acronyms

EXECUTIVE SUMMARY AND BUSINESS OUTLOOK

Financial Highlights

We reported net income of $5.5 billion ($11.05 per diluted common share) on total net revenue of $28.6 billion for 2019. In comparison, we reported net income of $6.0 billion ($11.82 per diluted common share) on total net revenue of $28.1 billion for 2018, and $2.0 billion ($3.49 per diluted common share) on total net revenue of $27.2 billion for 2017.

Our common equity Tier 1 capital ratio as calculated under the Basel III Standardized Approach was 12.2% and 11.2% as of December 31, 2019 and 2018, respectively. See “MD&A—Capital Management” below for additional information.

On June 27, 2019, we announced that our Board of Directors authorized the repurchase of up to $2.2 billion of shares of our common stock (“2019 Stock Repurchase Program”) beginning in the third quarter of 2019 through the end of the second quarter of 2020. Through the end of 2019, we repurchased approximately $1.4 billion of shares of our common stock under the 2019 Stock Repurchase Program. See “MD&A—Capital Management—Dividend Policy and Stock Purchases” for additional information.

On July 29, 2019, we announced the Cybersecurity Incident. For more information, see “Part I—Item 1. Business—Overview—Cybersecurity Incident” and “Note 18—Commitments, Contingencies, Guarantees and Others.”

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

40 Capital One Financial Corporation (COF)

Discussions of our performance in 2017 and comparisons between 2018 and 2017 can be found in “Part II—Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

Total Company Performance

• Earnings: Our net income decreased by $469 million to $5.5 billion in 2019 compared to 2018 primarily driven by:

◦ higher non-interest expense due to continued investments in technology and infrastructure, expenses related to the Walmart partnership, and increased marketing expense;

◦ higher provision for credit losses largely due to credit deterioration in our commercial energy loan portfolio and an allowance release in our auto loan portfolio in 2018; and

◦ the net impact of the absence of significant activities that occurred in 2018, including gains from the sales of our exited businesses, a benefit related to a tax methodology change on rewards costs, an impairment charge as a result of repositioning our investment securities portfolio, and a legal reserve build.

These drivers were partially offset by:

◦ higher net interest income due to higher yields on interest-earnings assets and growth in our loan portfolio, including the acquired Walmart portfolio, partially offset by higher interest expense from higher rates paid and growth in our deposit products; and

◦ an increase in net interchange fees driven by higher purchase volume.

• Loans Held for Investment:

◦ Period-end loans held for investment increased by $19.9 billion to $265.8 billion as of December 31, 2019 from December 31, 2018 primarily driven by growth in our domestic credit card loan portfolio, including the acquired Walmart portfolio, as well as growth in our commercial and auto loan portfolios.

◦ Average loans held for investment increased by $5.3 billion to $247.5 billion in 2019 compared to 2018 primarily driven by growth in our commercial, domestic credit card including the acquired Walmart portfolio, and auto loan portfolios, partially offset by the impact of lower loan balances from the sale of our consumer home loan portfolio.

• Net Charge-Off and Delinquency Metrics: Our net charge-off rate remained substantially flat at 2.53% in 2019 as the impact of lower loan balances from the sale of our consumer home loan portfolio was largely offset by growth in our domestic credit card loan portfolios, including the acquired Walmart portfolio.

Our 30+ day delinquency rate decreased by 10 basis points to 3.74% as of December 31, 2019 from December 31, 2018 primarily driven by the strong economy and stable underlying credit performance in our domestic credit card loan portfolio, partially offset by the impact of the acquired Walmart portfolio.

• Allowance for Loan and Lease Losses: Our allowance for loan and lease losses remained substantially flat at $7.2 billion as of December 31, 2019 as an allowance release in our domestic credit card loan portfolio largely due to the strong economy and stable underlying credit performance was offset by an allowance build due to credit deterioration in our commercial energy loan portfolio.

Our allowance coverage ratio decreased by 23 basis points to 2.71% as of December 31, 2019 from December 31, 2018 primarily driven by the strong economy and stable underlying credit performance in our domestic credit card loan portfolio and the impacts from partner loss sharing arrangements, offset by higher reserves in our commercial banking business.

41 Capital One Financial Corporation (COF)

Business Outlook

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

• any change in current dividend or repurchase strategies;

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

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

• the potential impact on our business, operations and reputation from, and expenses and uncertainties associated with, the Cybersecurity Incident, other than the incremental costs related to the incident we expect to incur in 2020 which will be separately reported as an adjusting item as it relates to the Company’s financial results.

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

Total Company Expectations

Marketing and Efficiency:

• We expect to achieve modest improvements in full-year operating efficiency ratio, net of adjustments, in 2020, with a bigger move down to 42% in 2021.

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

• We expect marketing expense for full-year 2020 to be moderately higher than marketing expense for full-year 2019.

Capital/Current Expected Credit Loss (“CECL”):

• We estimate that the adoption of the CECL model will increase our reserves for credit losses by approximately $2.9 billion and expect that the phased-in impact of adopting CECL will reduce our common equity Tier 1 capital ratio by 16 basis points in the first quarter of 2020. See “MD&A—Accounting Changes and Developments” in this Report for additional information related to the CECL adoption impact.

• We expect the recently finalized Tailoring Rules will provide a tailwind to our capital reduction under stress and that we believe there is an opportunity for capital relief under the Stress Capital Buffer Proposed Rule.

• We expect when we opt-out of the requirement to include in regulatory capital certain elements of Accumulated other comprehensive income (“AOCI”) under the Tailoring Rules, our common equity Tier 1 ratio will decrease about 30 basis points.

Business Segment Expectations

Consumer Banking:

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

42 Capital One Financial Corporation (COF)

CONSOLIDATED RESULTS OF OPERATIONS

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

Net Interest Income

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

43 Capital One Financial Corporation (COF)

Table 1 below presents the average outstanding balance, interest income earned, interest expense incurred and average yield for 2019, 2018 and 2017 for each major category of our interest-earning assets and interest-bearing liabilities. Nonperforming loans are included in the average loan balances below.

Table 1: Average Balances, Net Interest Income and Net Interest Margin

	Year Ended December 31,
	2019								2018								2017
(Dollars in millions)	Average Balance			Interest Income/ Expense			Average Yield/ Rate		Average Balance			Interest Income/ Expense			Average Yield/ Rate		Average Balance			Interest Income/ Expense		Average Yield/ Rate
Assets:
Interest-earning assets:
Loans:(1)
Credit card	$	114,256		$	17,688		15.48	%	$	109,820		$	16,948		15.43	%	$	103,468		$	15,735	15.21	%
Consumer banking	60,708			5,082			8.37		65,146			4,904			7.53		74,865			4,984		6.66
Commercial banking(2)	73,572			3,306			4.49		68,221			3,033			4.45		68,150			2,630		3.86
Other(3)	16			(214		)	**		184			(157		)	**		130			39		30.00
Total loans, including loans held for sale	248,552			25,862			10.41		243,371			24,728			10.16		246,613			23,388		9.48
Investment securities	81,467			2,411			2.96		79,224			2,211			2.79		68,896			1,711		2.48
Cash equivalents and other interest-earning assets	11,491			240			2.08		10,143			237			2.33		6,821			123		1.80
Total interest-earning assets	341,510			28,513			8.35		332,738			27,176			8.17		322,330			25,222		7.82
Cash and due from banks	4,300								3,877								3,457
Allowance for loan and lease losses	(7,176		)						(7,404		)						(7,025		)
Premises and equipment, net	4,289								4,163								3,931
Other assets	32,001								29,662								32,231
Total assets	$	374,924							$	363,036							$	354,924
Liabilities and stockholders’ equity:
Interest-bearing liabilities:
Interest-bearing deposits	$	231,609		$	3,420		1.48	%	$	221,760		$	2,598		1.17	%	$	213,949		$	1,602	0.75	%
Securitized debt obligations	18,020			523			2.90		19,014			496			2.61		18,237			327		1.79
Senior and subordinated notes	30,821			1,159			3.76		31,295			1,125			3.60		27,866			731		2.62
Other borrowings and liabilities	3,369			71			2.12		4,028			82			2.04		8,917			102		1.14
Total interest-bearing liabilities	283,819			5,173			1.82		276,097			4,301			1.56		268,969			2,762		1.03
Non-interest-bearing deposits	23,456								25,357								25,933
Other liabilities	11,959								11,390								10,492
Total liabilities	319,234								312,844								305,394
Stockholders’ equity	55,690								50,192								49,530
Total liabilities and stockholders’ equity	$	374,924							$	363,036							$	354,924
Net interest income/spread				$	23,340		6.53					$	22,875		6.61					$	22,460	6.79
Impact of non-interest-bearing funding							0.30								0.26							0.18
Net interest margin							6.83	%							6.87	%						6.97	%

__________

⁽¹⁾  Past due fees included in interest income totaled approximately $1.7 billion for 2019 and 2018 and $1.6 billion for 2017.

⁽²⁾  Some of our commercial loans generate tax-exempt income. Accordingly, we present our Commercial Banking interest income and yields on a taxable- equivalent basis, calculated using the federal statutory rate (21% for 2019 and 2018 and 35% for 2017) and state taxes where applicable, with offsetting reductions to the Other category. Taxable-equivalent adjustments included in the interest income and yield computations for our commercial loans totaled approximately $82 million for 2019 and 2018 and $129 million in 2017, with corresponding reductions to the Other category.

⁽³⁾  Interest income/expense of Other represents the impact of hedge accounting of our loan portfolios and the offsetting reduction of the taxable-equivalent adjustments of our commercial loans as described above.

** Not meaningful.

44 Capital One Financial Corporation (COF)

Net interest income increased by $465 million to $23.3 billion in 2019 compared to 2018, primarily driven by higher yields on interest-earnings assets and growth in our loan portfolio, including the acquired Walmart portfolio, partially offset by higher interest expense from higher rates paid and growth in our deposit products.

Net interest margin decreased by 4 basis points to 6.83% in 2019 compared to 2018 as higher rates on our retail deposits were largely offset by higher yields on interest-earning assets and growth in our loan portfolio.

Table 2 displays the change in our net interest income between periods and the extent to which the variance is attributable to:

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

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

Table 2: Rate/Volume Analysis of Net Interest Income⁽¹⁾

	2019 vs. 2018									2018 vs. 2017
(Dollars in millions)	Total Variance			Volume			Rate			Total Variance			Volume			Rate
Interest income:
Loans:
Credit card	$	740		$	687		$	53		$	1,213		$	977		$	236
Consumer banking	178			(334		)	512			(80		)	(647		)	567
Commercial banking(2)	273			240			33			403			3			400
Other(3)	(57		)	50			(107		)	(196		)	(46		)	(150		)
Total loans, including loans held for sale	1,134			643			491			1,340			287			1,053
Investment securities	200			64			136			500			273			227
Cash equivalents and other interest-earning assets	3			28			(25		)	114			69			45
Total interest income	1,337			735			602			1,954			629			1,325
Interest expense:
Interest-bearing deposits	822			120			702			996			61			935
Securitized debt obligations	27			(26		)	53			169			14			155
Senior and subordinated notes	34			(17		)	51			394			98			296
Other borrowings and liabilities	(11		)	(14		)	3			(20		)	(56		)	36
Total interest expense	872			63			809			1,539			117			1,422
Net interest income	$	465		$	672		$	(207	)	$	415		$	512		$	(97	)

__________

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

⁽²⁾  Some of our commercial loans generate tax-exempt income. Accordingly, we present our Commercial Banking interest income and yields on a taxable- equivalent basis, calculated using the federal statutory rate (21% for 2019 and 2018 and 35% for 2017) and state taxes where applicable, with offsetting reductions to the Other category.

⁽³⁾  Interest income/expense of Other represents the impact of hedge accounting of our loan portfolios and the offsetting reduction of the taxable-equivalent adjustments of our commercial loans as described above.

45 Capital One Financial Corporation (COF)

Non-Interest Income

Table 3 displays the components of non-interest income for 2019, 2018 and 2017.

Table 3: Non-Interest Income

	Year Ended December 31,
(Dollars in millions)	2019		2018			2017
Interchange fees, net	$	3,179	$	2,823		$	2,573
Service charges and other customer-related fees	1,330		1,585			1,597
Net securities gains (losses)	26		(209		)	65
Other non-interest income:(1)
Mortgage banking revenue	165		661			201
Treasury and other investment income	193		49			126
Other	360		292			215
Total other non-interest income	718		1,002			542
Total non-interest income	$	5,253	$	5,201		$	4,777

________

⁽¹⁾  Includes gains of $61 million and losses of $15 million on deferred compensation plan investments in 2019 and 2018, respectively.

Non-interest income remained relatively flat at $5.3 billion in 2019 as the increase in net interchange fees, driven by higher purchase volume, was largely offset by:

• the absence of the significant activities that occurred in 2018, including the gains from the sales of our exited businesses and the impairment charge as a result of repositioning our investment securities portfolio; and

• lower service charges and other customer-related fees.

Provision for Credit Losses

Our provision for credit losses in each period is driven by net charge-offs, changes to the allowance for loan and lease losses, and changes to the reserve for unfunded lending commitments. We recorded a provision for credit losses of $6.2 billion, $5.9 billion and $7.6 billion in 2019, 2018 and 2017, respectively. The provision for credit losses as a percentage of net interest income was 26.7%, 25.6% and 33.6% in 2019, 2018 and 2017, respectively.

Our provision for credit losses increased by $380 million to $6.2 billion in 2019 compared to 2018 primarily driven by credit deterioration in our commercial energy loan portfolio and an allowance release in our auto loan portfolio in 2018 .

We provide additional information on the provision for credit losses and changes in the allowance for loan and lease losses within “MD&A—Credit Risk Profile,” and “Note 4—Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments.” For information on the allowance methodology for each of our loan categories, see “Note 1—Summary of Significant Accounting Policies.”

46 Capital One Financial Corporation (COF)

Non-Interest Expense

Table 4 displays the components of non-interest expense for 2019, 2018 and 2017.

Table 4: Non-Interest Expense

	Year Ended December 31,
(Dollars in millions)	2019		2018		2017
Salaries and associate benefits(1)	$	6,388	$	5,727	$	5,899
Occupancy and equipment	2,098		2,118		1,939
Marketing	2,274		2,174		1,670
Professional services	1,237		1,145		1,097
Communications and data processing	1,290		1,260		1,177
Amortization of intangibles	112		174		245
Other non-interest expense:
Bankcard, regulatory and other fee assessments	362		490		626
Collections	400		413		364
Fraud losses	383		364		334
Other(2)	939		1,037		843
Total other non-interest expense	2,084		2,304		2,167
Total non-interest expense	$	15,483	$	14,902	$	14,194

_________

⁽¹⁾  Includes expenses of $61 million and benefits of $15 million related to our deferred compensation plan in 2019 and 2018, respectively. These amounts have corresponding offsets in other non-interest income.

⁽²⁾  Includes $38 million of net Cybersecurity Incident expenses in 2019, consisting of $72 million of expenses and $34 million of insurance recoveries.

Non-interest expense increased by $581 million to $15.5 billion in 2019 compared to 2018 primarily due to continued investments in technology and infrastructure, expenses related to the Walmart partnership, and increased marketing expenses, partially offset by the absence of a legal reserve build.

Income Taxes

We recorded income tax provisions of $1.3 billion (19.5% effective income tax rate), $1.3 billion (17.7% effective income tax rate) and $3.4 billion (61.5% effective income tax rate) in 2019, 2018 and 2017, respectively. Our effective tax rate on income from continuing operations varies between periods due, in part, to the impact of the changes in tax credits, tax-exempt income, and non-deductible expenses relative to our pre-tax earnings.

We recorded discrete tax benefits of $19 million in 2019, discrete tax benefits of $318 million in 2018 primarily driven by a benefit of $284 million related to a tax methodology change on rewards costs and discrete tax expenses of $1.7 billion in 2017 primarily consisting of the charges of $1.8 billion for the estimated impacts of the Tax Act.

The increase in our effective tax rate in 2019 compared to 2018 was primarily due to a decrease in recorded discrete tax benefit, partially offset by higher tax credits and lower non-deductible expenses relative to our income.

We provide additional information on items affecting our income taxes and effective tax rate in “Note 15—Income Taxes”.

47 Capital One Financial Corporation (COF)

CONSOLIDATED BALANCE SHEETS ANALYSIS

Total assets increased by $17.8 billion to $390.4 billion as of December 31, 2019 from December 31, 2018 primarily driven by growth in our domestic credit card loan portfolio, including the acquired Walmart portfolio, as well as growth in our commercial and auto loan portfolios.

Total liabilities increased by $11.5 billion to $332.4 billion as of December 31, 2019 from December 31, 2018 primarily driven by deposit growth, partially offset by maturities of our short-term Federal Home Loan Banks (“FHLB”) advances.

Stockholders’ equity increased by $6.3 billion to $58.0 billion as of December 31, 2019 from December 31, 2018 primarily due to our net income of $5.5 billion, changes in accumulated other comprehensive income of $2.4 billion and the net issuance of preferred stock, partially offset by repurchases of common stock under the 2019 Stock Repurchase Program and dividend payments to our stockholders.

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

Investment Securities

Our investment securities portfolio consists primarily of the following: U.S. Treasury securities; U.S. government-sponsored enterprise or agency (“Agency”) and non-agency residential mortgage-backed securities (“RMBS”); Agency commercial mortgage-backed securities (“CMBS”); and other securities. Agency securities 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 U.S. Treasury and Agency securities generally have high credit ratings and low credit risks, and our investments in U.S. Treasury and Agency securities represented 96% of our total investment securities portfolio, as of both December 31, 2019 and 2018.

On December 31, 2019, we transferred our entire portfolio of held to maturity securities to available for sale in consideration of changes to regulatory capital requirements under the Tailoring Rules. As a Category III institution, we are no longer required to include in regulatory capital certain elements of AOCI, including unrealized gains and losses from available for sale securities. The impact of this transfer and changes in interest rates increased the fair value of our available for sale securities portfolio by $33.1 billion to $79.2 billion as of December 31, 2019 from December 31, 2018. See “MD&A—Capital Management” and “Note 2—Investment Securities” for more information.

Table 5 presents the amortized cost and fair value for the major categories of our available for sale securities portfolio as of December 31, 2019, 2018 and 2017.

Table 5: Investment Securities

	December 31,
	2019				2018				2017
(Dollars in millions)	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Investment securities available for sale:
U.S. Treasury securities	$	4,122	$	4,124	$	6,146	$	6,144	$	5,168	$	5,171
RMBS:
Agency	62,003		62,839		32,710		31,903		26,013		25,678
Non-agency	1,235		1,499		1,440		1,742		1,722		2,114
Total RMBS	63,238		64,338		34,150		33,645		27,735		27,792
Agency CMBS	9,303		9,426		4,806		4,739		3,209		3,175
Other securities(1)	1,321		1,325		1,626		1,622		1,516		1,517
Total investment securities available for sale	$	77,984	$	79,213	$	46,728	$	46,150	$	37,628	$	37,655

__________

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

48 Capital One Financial Corporation (COF)

Loans Held for Investment

Total loans held for investment consist of both unsecuritized loans and loans held in our consolidated trusts. Table 6 summarizes the carrying value of our loans held for investment by portfolio segment, the allowance for loan and lease losses, and net loan balance as of December 31, 2019 and 2018.

Table 6: Loans Held for Investment

	December 31, 2019						December 31, 2018
(Dollars in millions)	Loans		Allowance		Net Loans		Loans		Allowance		Net Loans
Credit Card	$	128,236	$	5,395	$	122,841	$	116,361	$	5,535	$	110,826
Consumer Banking	63,065		1,038		62,027		59,205		1,048		58,157
Commercial Banking	74,508		775		73,733		70,333		637		69,696
Total	$	265,809	$	7,208	$	258,601	$	245,899	$	7,220	$	238,679

Loans held for investment increased by $19.9 billion to $265.8 billion as of December 31, 2019 from December 31, 2018 primarily driven by growth in our domestic credit card loan portfolio, including the acquired Walmart portfolio, as well as growth in our commercial and auto loan portfolios.

We provide additional information on the composition of our loan portfolio and credit quality below in “MD&A—Credit Risk Profile,” “MD&A—Consolidated Results of Operations” and “Note 3—Loans.”

Funding Sources

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

Table 7 provides the composition of our primary sources of funding as of December 31, 2019 and 2018.

Table 7: Funding Sources Composition

	December 31, 2019				December 31, 2018
(Dollars in millions)	Amount		% of Total		Amount		% of Total
Deposits:
Consumer Banking	$	213,099	67	%	$	198,607	64	%
Commercial Banking	32,134		10		29,480		10
Other(1)	17,464		5		21,677		7
Total deposits	262,697		82		249,764		81
Securitized debt obligations	17,808		6		18,307		6
Other debt	37,889		12		40,598		13
Total funding sources	$	318,394	100	%	$	308,669	100	%

__________

⁽¹⁾  Includes brokered deposits of $16.7 billion and $21.2 billion as of December 31, 2019 and 2018, respectively.

Total deposits increased by $12.9 billion to $262.7 billion as of December 31, 2019 from December 31, 2018 primarily driven by strong growth as a result of our national banking strategy in our Consumer Banking business.

Securitized debt obligations decreased by $499 million to $17.8 billion as of December 31, 2019 from December 31, 2018 primarily driven by net maturities in our credit card securitizations, partially offset by issuances in our auto securitizations.

Other debt decreased by $2.7 billion to $37.9 billion as of December 31, 2019 from December 31, 2018 primarily driven by maturities of our short-term FHLB advances.

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

49 Capital One Financial Corporation (COF)

Deferred Tax Assets and Liabilities

Deferred tax assets and liabilities represent decreases or increases in taxes expected to be paid in the future because of future reversals of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as from net operating loss and tax credit carryforwards. Deferred tax assets are recognized subject to management’s judgment that these future deductions are more likely than not to be realized. We evaluate the recoverability of these future tax deductions by assessing the adequacy of expected taxable income from all sources, including taxable income in carryback years, reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. These sources of income rely heavily on estimates. We use our historical experience and our short and long-range business forecasts to provide insight.

Deferred tax assets, net of deferred tax liabilities and valuation allowances, were approximately $1.7 billion as of December 31, 2019, a decrease of $425 million from December 31, 2018. The decrease in our net deferred tax assets was primarily driven by the increase in the fair value of our investment securities portfolio.

We recorded valuation allowances of $223 million and $245 million as of December 31, 2019 and 2018, respectively. We expect to fully realize the 2019 net deferred tax assets in future periods. If changes in circumstances lead us to change our judgment about our ability to realize deferred tax assets in future years, we will adjust our valuation allowances in the period that our change in judgment occurs and record a corresponding increase or charge to income.

We provide additional information on income taxes in “MD&A—Consolidated Results of Operations” and “Note 15 — Income Taxes.”

OFF-BALANCE SHEET ARRANGEMENTS

In the ordinary course of business, we engage in certain activities that are not reflected on our consolidated balance sheets, generally referred to as off-balance sheet arrangements. These activities typically involve transactions with unconsolidated variable interest entities (“VIEs”) as well as other arrangements, such as letters of credit, loan commitments and guarantees, to meet the financing needs of our customers and support their ongoing operations. We provide additional information regarding these types of activities in “Note 5—Variable Interest Entities and Securitizations” and “Note 18—Commitments, Contingencies, Guarantees and Others.”

BUSINESS SEGMENT FINANCIAL PERFORMANCE

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

The results of our individual businesses, which we report on a continuing operations basis, reflect the manner in which management evaluates performance and makes decisions about funding our operations and allocating resources. We may periodically change our business segments or reclassify business segment results based on modifications to our management reporting methodologies and changes in organizational alignment. Our business segment results are intended to reflect each segment as if it were a stand-alone business. We use an internal management and reporting process to derive our business segment results. Our internal management and reporting process employs various allocation methodologies, including funds transfer pricing, to assign certain balance sheet assets, deposits and other liabilities and their related revenue and expenses directly or indirectly attributable to each business segment. Total interest income and non-interest income are directly attributable to the segment in which they are reported. The net interest income of each segment reflects the results of our funds transfer pricing process, which is primarily based on a matched funding concept that takes into consideration market interest rates. Our funds transfer pricing process provides a funds credit for sources of funds, such as deposits generated by our Consumer Banking and Commercial Banking businesses, and a charge for the use of funds by each segment. The allocation process is unique to each business segment and acquired businesses. We regularly assess the assumptions, methodologies and reporting classifications used for segment reporting, which may result in the implementation of refinements or changes in future periods.

We refer to the business segment results derived from our internal management accounting and reporting process as our “managed” presentation, which differs in some cases from our reported results prepared based on U.S. GAAP. There is no comprehensive

50 Capital One Financial Corporation (COF)

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, 2019, 2018 and 2017 and provide a comparative discussion of the results of 2019 and 2018, as well as changes in our financial condition and credit performance metrics as of December 31, 2019 compared to December 31, 2018. We provide a reconciliation of our total business segment results to our reported consolidated results in “Note 17—Business Segments and Revenue from Contracts with Customers.”

Business Segment Financial Performance

Table 8 summarizes our business segment results, which we report based on revenue and income from continuing operations, for the years ended December 31, 2019, 2018 and 2017. We provide information on the allocation methodologies used to derive our business segment results in “Note 17—Business Segments and Revenue from Contracts with Customers.”

Table 8: Business Segment Results

	Year Ended December 31,
	2019									2018								2017
	Total Net Revenue(1)				Net Income (Loss)(2)					Total Net Revenue(1)				Net Income(2)				Total Net Revenue(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 Total
Credit Card	$	18,349	64	%	$	3,127		57	%	$	17,687	63	%	$	3,191	53	%	$	16,973	62	%	$	1,920		91	%
Consumer Banking	7,375		26		1,799			32		7,212		26		1,800		30		7,129		26		1,090			51
Commercial Banking(3)(4)	2,814		10		621			11		2,788		10		806		13		2,969		11		676			32
Other(3)(4)	55		—		(14		)	—		389		1		228		4		166		1		(1,569		)	(74	)
Total	$	28,593	100	%	$	5,533		100	%	$	28,076	100	%	$	6,025	100	%	$	27,237	100	%	$	2,117		100	%

__________

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

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

⁽³⁾  Some of our commercial investments generate tax-exempt income, tax credits or other tax benefits. Accordingly, we present our Commercial Banking revenue and yields on a taxable-equivalent basis, calculated using the federal statutory tax rate (21% for 2019 and 2018 and 35% for 2017) and state taxes where applicable, with offsetting reductions to the Other category.  

⁽⁴⁾  In the first quarter of 2019, we made a change in how revenue is measured in our Commercial Banking business by revising the allocation of tax benefits on certain tax-advantaged investments. As such, prior period results have been recast to conform with the current period presentation. The result of this measurement change reduced the previously reported total net revenue in our Commercial Banking business by $108 million for the year ended December 31, 2018, with an offsetting increase in the Other category.

51 Capital One Financial Corporation (COF)

Credit Card Business

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

Our Credit Card business generated net income from continuing operations of $3.1 billion, $3.2 billion and $1.9 billion in 2019, 2018 and 2017, respectively.

Table 9 summarizes the financial results of our Credit Card business and displays selected key metrics for the periods indicated.

Table 9: Credit Card Business Results

	Year Ended December 31,									Change
(Dollars in millions, except as noted)	2019			2018			2017			2019 vs. 2018		2018 vs. 2017
Selected income statement data:
Net interest income	$	14,461		$	14,167		$	13,648		2	%	4	%
Non-interest income	3,888			3,520			3,325			10		6
Total net revenue(1)	18,349			17,687			16,973			4		4
Provision for credit losses	4,992			4,984			6,066			—		(18	)
Non-interest expense	9,271			8,542			7,916			9		8
Income from continuing operations before income taxes	4,086			4,161			2,991			(2	)	39
Income tax provision	959			970			1,071			(1	)	(9	)
Income from continuing operations, net of tax	$	3,127		$	3,191		$	1,920		(2	)	66
Selected performance metrics:
Average loans held for investment(2)	$	114,202		$	109,820		$	103,468		4		6
Average yield on loans held for investment(3)	15.49		%	15.43		%	15.21		%	6	bps	22	bps
Total net revenue margin(4)	16.07			16.11			16.40			(4	)	(29	)
Net charge-offs	$	5,149		$	5,069		$	5,054		2	%	—
Net charge-off rate	4.51		%	4.62		%	4.88		%	(11	)bps	(26	)bps
Purchase volume	$	424,765		$	387,102		$	336,440		10	%	15	%
(Dollars in millions, except as noted)	December 31, 2019			December 31, 2018			Change
Selected period-end data:
Loans held for investment(2)	$	128,236		$	116,361		10		%
30+ day performing delinquency rate	3.89		%	4.00		%	(11		)bps
30+ day delinquency rate	3.91			4.01			(10		)
Nonperforming loan rate(5)	0.02			0.02			—
Allowance for loan and lease losses	$	5,395		$	5,535		(3		)%
Allowance coverage ratio	4.21		%	4.76		%	(55		)bps

__________

⁽¹⁾  We recognize billed finance charges and fee income on open-ended loans in accordance with the contractual provisions of the credit arrangements and estimate the uncollectible amount on a quarterly basis. The estimated uncollectible amount of billed finance charges and fees is reflected as a reduction in revenue and is not included in our provision for credit losses. Total net revenue was reduced by $1.4 billion, $1.3 billion and $1.4 billion in 2019, 2018 and 2017, respectively, for the estimated uncollectible amount of billed finance charges and fees, and related losses. The finance charge and fee reserve totaled $462 million and $468 million as of December 31, 2019 and 2018, respectively.

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

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

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

⁽⁵⁾  Within our credit card loan portfolio, only certain loans in our international card businesses are classified as nonperforming. See “MD&A—Nonperforming Loans and Other Nonperforming Assets” for additional information.

52 Capital One Financial Corporation (COF)

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

• Net Interest Income: Net interest income increased by $294 million to $14.5 billion in 2019 primarily driven by growth in our domestic credit card loan portfolio, including the acquired Walmart portfolio.

• Non-Interest Income: Non-interest income increased by $368 million to $3.9 billion in 2019 primarily due to an increase in net interchange fees driven by higher purchase volume.

• Provision for Credit Losses: The provision for credit losses remained substantially flat at $5.0 billion in 2019 as the allowance releases due to the strong economy and stable underlying credit performance and the sale of certain partnership receivables were largely offset by the allowance build related to the acquired Walmart portfolio.

• Non-Interest Expense: Non-interest expense increased by $729 million to $9.3 billion in 2019 primarily driven by continued investments in technology and infrastructure as well as expenses related to the Walmart partnership.

• Loans Held for Investment: Period-end loans held for investment increased by $11.9 billion to $128.2 billion as of December 31, 2019 from December 31, 2018 and average loans held for investment increased by $4.4 billion to $114.2 billion in 2019 compared to 2018 primarily due to growth in our domestic credit card loan portfolio, including the acquired Walmart portfolio.

• Net Charge-Off and Delinquency Metrics: The net charge-off rate decreased by 11 basis points to 4.51% in 2019 compared to 2018 primarily driven by the impacts of the acquired Walmart portfolio, the strong economy and stable underlying credit performance in our domestic credit card loan portfolio.

The 30+ day delinquency rate decreased by 10 basis points to 3.91% as of December 31, 2019 from December 31, 2018 primarily due to the strong economy and stable underlying credit performance in our domestic credit card loan portfolio, partially offset by the impacts of the acquired Walmart portfolio.

53 Capital One Financial Corporation (COF)

Domestic Card Business

The Domestic Card business generated net income from continuing operations of $3.0 billion in both 2019 and 2018 and $1.7 billion in 2017. In 2019, 2018 and 2017, the Domestic Card business accounted for greater than 90% of total net revenue of our Credit Card business.

Table 9.1 summarizes the financial results for Domestic Card business and displays selected key metrics for the periods indicated.

Table 9.1: Domestic Card Business Results

	Year Ended December 31,									Change
(Dollars in millions, except as noted)	2019			2018			2017			2019 vs. 2018		2018 vs. 2017
Selected income statement data:
Net interest income	$	13,265		$	12,926		$	12,504		3	%	3	%
Non-interest income	3,684			3,239			3,069			14		6
Total net revenue(1)	16,949			16,165			15,573			5		4
Provision for credit losses	4,671			4,653			5,783			—		(20	)
Non-interest expense	8,308			7,621			7,078			9		8
Income from continuing operations before income taxes	3,970			3,891			2,712			2		43
Income tax provision	925			907			990			2		(8	)
Income from continuing operations, net of tax	$	3,045		$	2,984		$	1,722		2		73
Selected performance metrics:
Average loans held for investment(2)	$	105,270		$	100,832		$	94,923		4		6
Average yield on loans held for investment(3)	15.47		%	15.36		%	15.16		%	11	bps	20	bps
Total net revenue margin(4)	16.10			16.03			16.41			7		(38	)
Net charge-offs	$	4,818		$	4,782		$	4,739		1	%	1	%
Net charge-off rate	4.58		%	4.74		%	4.99		%	(16	)bps	(25	)bps
Purchase volume	$	390,032		$	354,158		$	306,824		10	%	15	%
(Dollars in millions, except as noted)	December 31, 2019			December 31, 2018			Change
Selected period-end data:
Loans held for investment(2)	$	118,606		$	107,350		10		%
30+ day performing delinquency rate	3.93		%	4.04		%	(11		)bps
Allowance for loan and lease losses	$	4,997		$	5,144		(3		)%
Allowance coverage ratio	4.21		%	4.79		%	(58		)bps

__________

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

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

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

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

Because our Domestic Card business accounts for the substantial majority of our Credit Card business, the key factors driving the results are similar to the key factors affecting our total Credit Card business. Net income for our Domestic Card business increased in 2019 compared to 2018 primarily driven by:

• an increase in net interchange fees due to higher purchase volume; and

• higher net interest income due to growth in our loan portfolio, including the acquired Walmart portfolio.

These drivers were partially offset by continued investments in technology and infrastructure and expenses related to the Walmart partnership.

54 Capital One Financial Corporation (COF)

Consumer Banking Business

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

Our Consumer Banking business generated net income from continuing operations of $1.8 billion in both 2019 and 2018 and $1.1 billion in 2017.

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

Table 10: Consumer Banking Business Results

	Year Ended December 31,									Change
(Dollars in millions, except as noted)	2019			2018			2017			2019 vs. 2018		2018 vs. 2017
Selected income statement data:
Net interest income	$	6,732		$	6,549		$	6,380		3	%	3	%
Non-interest income	643			663			749			(3	)	(11	)
Total net revenue	7,375			7,212			7,129			2		1
Provision for credit losses	938			838			1,180			12		(29	)
Non-interest expense	4,091			4,027			4,233			2		(5	)
Income from continuing operations before income taxes	2,346			2,347			1,716			—		37
Income tax provision	547			547			626			—		(13	)
Income from continuing operations, net of tax	$	1,799		$	1,800		$	1,090		—		65
Selected performance metrics:
Average loans held for investment:
Auto	$	57,938		$	55,610		$	51,477		4		8
Home loan(1)	—			6,266			19,681			**		(68	)
Retail banking	2,770			3,075			3,463			(10	)	(11	)
Total consumer banking	$	60,708		$	64,951		$	74,621		(7	)	(13	)
Average yield on loans held for investment(2)	8.37		%	7.54		%	6.67		%	83	bps	87	bps
Average deposits	$	205,012		$	193,053		$	185,201		6	%	4	%
Average deposits interest rate	1.24		%	0.95		%	0.62		%	29	bps	33	bps
Net charge-offs	$	947		$	981		$	1,038		(3	)%	(5	)%
Net charge-off rate	1.56		%	1.51		%	1.39		%	5	bps	12	bps
Auto loan originations	$	29,251		$	26,276		$	27,737		11	%	(5	)%
(Dollars in millions, except as noted)	December 31, 2019			December 31, 2018			Change
Selected period-end data:
Loans held for investment:
Auto	$	60,362		$	56,341		7		%
Retail banking	2,703			2,864			(6		)
Total consumer banking	$	63,065		$	59,205		7
30+ day performing delinquency rate	6.63		%	6.67		%	(4		)bps
30+ day delinquency rate	7.34			7.36			(2		)
Nonperforming loan rate	0.81			0.81			—
Nonperforming asset rate(3)	0.91			0.90			1
Allowance for loan and lease losses	$	1,038		$	1,048		(1		)%
Allowance coverage ratio	1.65		%	1.77		%	(12		)bps
Deposits	$	213,099		$	198,607		7		%

__________

55 Capital One Financial Corporation (COF)

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

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

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

** Not meaningful.

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

• Net Interest Income: Net interest income increased by $183 million to $6.7 billion in 2019 primarily driven by higher yields and growth in our auto loan portfolio as well as higher deposit volumes in our Retail Banking business, partially offset by the reduction in net interest income from the sale of our consumer home loan portfolio.

Consumer Banking loan yields increased by 83 basis points to 8.37% in 2019 compared to 2018. The increase was primarily driven by changes in product mix due to the sale of our consumer home loan portfolio as well as originated yield improvements in our auto loan portfolio.

• Non-Interest Income: Non-interest income remained substantially flat at $643 million in 2019.

• Provision for Credit Losses: The provision for credit losses increased by $100 million to $938 million in 2019 primarily driven by the allowance release in 2018 largely due to improvements in credit trends in our auto loan portfolio.

• Non-Interest Expense: Non-interest expense increased by $64 million to $4.1 billion in 2019 primarily driven by higher operating expenses due to growth in our auto loan portfolio and increased marketing expense associated with our national banking strategy, partially offset by lower operating expense due to the sale of our consumer home loan portfolio.

• Loans Held for Investment: Period-end loans held for investment increased by $3.9 billion to $63.1 billion as of December 31, 2019 from December 31, 2018 due to growth in our auto loan portfolio. Average loans held for investment decreased by $4.2 billion to $60.7 billion in 2019 compared to 2018 primarily due to the sale of our consumer home loan portfolio, partially offset by growth in our auto loan portfolio.

• Deposits: Period-end deposits increased by $14.5 billion to $213.1 billion as of December 31, 2019 from December 31, 2018 driven by strong growth as a result of our national banking strategy.

• Net Charge-Off and Delinquency Metrics: The net charge-off rate increased by 5 basis points to 1.56% in 2019 compared to 2018 primarily driven by lower loan balances due to the sale of our consumer home loan portfolio, partially offset by lower net charge-offs and growth in our auto loan portfolio.

The 30+ day delinquency rate remained substantially flat at 7.34% as of December 31, 2019 from December 31, 2018 as the impact of growth in our auto loan portfolio was largely offset by higher auto delinquency inventories.

Commercial Banking Business

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

Our Commercial Banking business generated net income from continuing operations of $621 million, $806 million and $676 million in 2019, 2018 and 2017, respectively.

56 Capital One Financial Corporation (COF)

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

Table 11: Commercial Banking Business Results

	Year Ended December 31,									Change
(Dollars in millions, except as noted)	2019			2018			2017			2019 vs. 2018		2018 vs. 2017
Selected income statement data:
Net interest income	$	1,983		$	2,044		$	2,261		(3	)%	(10	)%
Non-interest income	831			744			708			12		5
Total net revenue(1)(2)	2,814			2,788			2,969			1		(6	)
Provision for credit losses(3)	306			83			301			**		(72	)
Non-interest expense	1,699			1,654			1,603			3		3
Income from continuing operations before income taxes	809			1,051			1,065			(23	)	(1	)
Income tax provision	188			245			389			(23	)	(37	)
Income from continuing operations, net of tax	$	621		$	806		$	676		(23	)	19
Selected performance metrics:
Average loans held for investment:
Commercial and multifamily real estate	$	29,608		$	27,771		$	27,370		7		1
Commercial and industrial	42,863			39,188			39,606			9		(1	)
Total commercial lending	72,471			66,959			66,976			8		—
Small-ticket commercial real estate	69			371			442			(81	)	(16	)
Total commercial banking	$	72,540		$	67,330		$	67,418		8		—
Average yield on loans held for investment(1)(4)	4.51		%	4.46		%	3.87		%	5	bps	59	bps
Average deposits	$	31,229		$	32,175		$	33,947		(3	)%	(5	)%
Average deposits interest rate	1.18		%	0.72		%	0.39		%	46	bps	33	bps
Net charge-offs	$	156		$	56		$	465		179	%	(88	)%
Net charge-off rate	0.22		%	0.08		%	0.69		%	14	bps	(61	)bps
(Dollars in millions, except as noted)	December 31, 2019			December 31, 2018			Change
Selected period-end data:
Loans held for investment:
Commercial and multifamily real estate	$	30,245		$	28,899		5		%
Commercial and industrial	44,263			41,091			8
Total commercial lending	74,508			69,990			6
Small-ticket commercial real estate	—			343			**
Total commercial banking	$	74,508		$	70,333		6
Nonperforming loan rate	0.60		%	0.44		%	16		bps
Nonperforming asset rate(5)	0.60			0.45			15
Allowance for loan and lease losses(3)	$	775		$	637		22		%
Allowance coverage ratio	1.04		%	0.91		%	13		bps
Deposits	$	32,134		$	29,480		9		%
Loans serviced for others	38,481			32,588			18

__________

⁽¹⁾  Some of our commercial investments generate tax-exempt income, tax credits or other tax benefits. Accordingly, we present our Commercial Banking revenue and yields on a taxable-equivalent basis, calculated using the federal statutory tax rate (21% for 2019 and 2018 and 35% for 2017) and state taxes where applicable, with offsetting reductions to the Other category.

⁽²⁾  In the first quarter of 2019, we made a change in how revenue is measured in our Commercial Banking business by revising the allocation of tax benefits on certain tax-advantaged investments. As such, prior period results have been recast to conform with the current period presentation. The result of this measurement change reduced the previously reported total net revenue in our Commercial Banking business by $108 million for the year ended December 31, 2018, with an offsetting increase in the Other category.  

57 Capital One Financial Corporation (COF)

⁽³⁾  The provision for losses on unfunded lending commitments is included in the provision for credit losses in our consolidated statements of income and the related reserve for unfunded lending commitments is included in other liabilities on our consolidated balance sheets. Our reserve for unfunded lending commitments totaled $130 million, $118 million and $117 million as of December 31, 2019, 2018 and 2017, respectively.

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

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

** Not meaningful.

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

• Net Interest Income: Net interest income decreased by $61 million to $2.0 billion in 2019 primarily driven by lower margin on loans and deposits, partially offset by growth across our commercial loan portfolios.

• Non-Interest Income: Non-interest income increased by $87 million to $831 million in 2019 primarily driven by higher revenue from our capital markets, treasury management products, and agency businesses.

• Provision for Credit Losses: Provision for credit losses increased by $223 million to $306 million in 2019 primarily driven by credit deterioration in our commercial energy loan portfolio.

• Non-Interest Expense: Non-interest expense increased by $45 million to $1.7 billion in 2019 primarily driven by higher operating expenses associated with continued investments in technology and other business initiatives.

• Loans Held for Investment: Period-end loans held for investment increased by $4.2 billion to $74.5 billion as of December 31, 2019 from December 31, 2018, and average loans held for investment increased by $5.2 billion to $72.5 billion in 2019 compared to 2018 primarily driven by growth across our commercial loan portfolios.

• Deposits: Period-end deposits increased by $2.7 billion to $32.1 billion as of December 31, 2019 from December 31, 2018 primarily driven by new business growth.

• Net Charge-Off and Nonperforming Metrics: The net charge-off rate increased by 14 basis points to 0.22% in 2019 primarily driven by charge-offs in our commercial energy loan portfolio.

The nonperforming loan rate increased by 16 basis points to 0.60% as of December 31, 2019 from December 31, 2018 primarily driven by downgrades in our commercial energy loan portfolio.

Other Category

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

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

• offsets related to certain line-item reclassifications;

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

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

58 Capital One Financial Corporation (COF)

Table 12 summarizes the financial results of our Other category for the periods indicated.

Table 12: Other Category Results

	Year Ended December 31,									Change
(Dollars in millions)	2019			2018			2017			2019 vs. 2018		2018 vs. 2017
Selected income statement data:
Net interest income	$	164		$	115		$	171		43	%	(33	)%
Non-interest income (loss)	(109		)	274			(5		)	**		**
Total net revenue(1)(2)	55			389			166			(86	)	134
Provision (benefit) for credit losses	—			(49		)	4			**		**
Non-interest expense(3)	422			679			442			(38	)	54
Loss from continuing operations before income taxes	(367		)	(241		)	(280		)	52		(14	)
Income tax provision (benefit)	(353		)	(469		)	1,289			(25	)	**
Income (loss) from continuing operations, net of tax	$	(14	)	$	228		$	(1,569	)	**		**

__________

⁽¹⁾  Some of our commercial investments generate tax-exempt income, tax credits or other tax benefits. Accordingly, we present our Commercial Banking revenue and yields on a taxable-equivalent basis, calculated using the federal statutory tax rate (21% for 2019 and 2018 and 35% for 2017) and state taxes where applicable, with offsetting reductions to the Other category.

⁽²⁾  In the first quarter of 2019, we made a change in how revenue is measured in our Commercial Banking business by revising the allocation of tax benefits on certain tax-advantaged investments. As such, prior period results have been recast to conform with the current period presentation. The result of this measurement change reduced the previously reported total net revenue in our Commercial Banking business by $108 million for the year ended December 31, 2018, with an offsetting increase in the Other category.

⁽³⁾  Includes $38 million of net Cybersecurity Incident expenses in 2019, consisting of $72 million of expenses and $34 million of insurance recoveries.

** Not meaningful.

Net loss from continuing operations recorded in the Other category was $14 million in 2019 compared to net income of $228 million in 2018, primarily driven by the net impact of the absence of significant activities that occurred in 2018, including gains from the sales of our exited businesses, a benefit related to a tax methodology change on rewards costs, an impairment charge as a result of repositioning our investment securities portfolio, and a legal reserve build.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

• Loan loss reserves

• Asset impairment

• Fair value of financial instruments

• Customer rewards reserve

We evaluate our critical accounting estimates and judgments on an ongoing basis and update them as necessary, based on changing conditions. Management has discussed our critical accounting policies and estimates with the Audit Committee of the Board of Directors.

59 Capital One Financial Corporation (COF)

Loan Loss Reserves

We maintain an allowance for loan and lease losses that represents management’s estimate of incurred loan and lease losses inherent in our credit card, consumer banking and commercial banking loans held for investment as of each balance sheet date. We also separately reserve for contractually binding unfunded lending commitments. We build our allowance for loan and lease losses and reserve for unfunded lending commitments through the provision for credit losses, which is driven by charge-offs, changes in the allowance for loan and lease losses and changes in the reserve for unfunded lending commitments. The allowance for loan and lease losses was $7.2 billion as of December 31, 2019 and December 31, 2018.

We have an established process, using analytical tools and management judgment, to determine our allowance for loan and lease losses. Establishing the allowance each quarter involves evaluating many factors including, but not limited to, historical loss and recovery experience, recent trends in delinquencies and charge-offs, risk ratings, the impact of bankruptcy filings, the value of collateral underlying secured loans, account seasoning, changes in our credit evaluation, underwriting and collection management policies, seasonality, credit bureau scores, general economic conditions, changes in the legal and regulatory environment and uncertainties in forecasting and modeling techniques used in estimating our allowance for loan and lease losses. Key factors that have a significant impact on our allowance for loan and lease losses include assumptions about employment levels, home prices and the valuation of commercial properties, automobiles and other collateral.

We have a governance framework intended to ensure that our estimate of the allowance for loan and lease losses is appropriate. Our governance framework provides for oversight of methods, models, qualitative adjustments, process controls and results. At least quarterly, representatives from the Finance and Risk Management organizations review and assess our allowance methodologies, key assumptions and the appropriateness of the allowance for loan and lease losses.

Groups independent of our estimation functions participate in the review and validation process. Tasks performed by these groups include periodic review of the rationale for and quantification of judgmental inputs and adjustments to results.

We have a model policy, established by an independent Model Risk Office, which governs the validation of models and related supporting documentation to ensure the appropriate use of models for estimating credit losses. The Model Risk Office validates all models and requires ongoing monitoring of their performance.

In addition to the allowance for loan and lease losses, we review and assess our estimate of probable losses related to contractually binding unfunded lending commitments on a quarterly basis. The factors impacting our assessment generally align with those considered in our evaluation of the allowance for loan and lease losses for the Commercial Banking business. Changes to the reserve for losses on unfunded lending commitments are recorded through the provision for credit losses in the consolidated statements of income and to other liabilities on the consolidated balance sheets.

Although we examine a variety of externally available data, as well as our internal loan performance data, to determine our allowance for loan and lease losses and reserve for unfunded lending commitments, our estimation process is subject to risks and uncertainties, including a reliance on historical loss and trend information that may not be representative of current conditions and indicative of future performance. Accordingly, our actual credit loss experience may not be in line with our expectations. We provide additional information on the methodologies and key assumptions used in determining our allowance for loan and lease losses for each of our loan portfolio segments in “Note 1—Summary of Significant Accounting Policies.” We provide information on the components of our allowance, disaggregated by impairment methodology, and changes in our allowance in “Note 4—Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments.”

Finance Charge and Fee Reserves

Finance charges and fees on credit card loans are recorded in revenue when earned. Billed finance charges and fees on credit card loans are included in loans held for investment net of amounts that we consider uncollectible. Unbilled finance charges and fees on credit card loans are included in interest receivable. We continue to accrue finance charges and fees on credit card loans until the account is charged-off. When we do not expect full payment of billed finance charges and fees, we reduce the balance of our credit card loan receivables and revenue by the amount of finance charges and fees billed but not expected to be collected. Total net revenue was reduced by $1.4 billion, $1.3 billion and $1.4 billion in 2019, 2018 and 2017, respectively, for the estimated uncollectible amount of billed finance charges and fees. The finance charge and fee reserve totaled $462 million and $468 million as of December 31, 2019 and 2018, respectively.

60 Capital One Financial Corporation (COF)

We review and assess the adequacy of the uncollectible finance charge and fee reserve on a quarterly basis. Our methodology for estimating the uncollectible portion of billed finance charges and fees is consistent with the methodology we use to estimate the allowance for incurred losses on the principal portion of our credit card loan receivables.

Asset Impairment

In addition to our loan portfolio, we review other assets for impairment on a regular basis in accordance with applicable accounting guidance. This process requires significant management judgment and involves various estimates and assumptions. Below we describe our process for assessing impairment of goodwill and the key estimates and assumptions involved in this process.

Goodwill

Goodwill represents the excess of the fair value of the consideration transferred in a business combination, plus the fair value of any non-controlling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date.

Goodwill totaled $14.7 billion and $14.5 billion as of December 31, 2019 and 2018, respectively. We did not recognize any goodwill impairment in 2019 and 2018. See “Note 6—Goodwill and Intangible Assets” for additional information.

We perform our goodwill impairment test annually on October 1 at a reporting unit level. We also are required to test goodwill for impairment whenever events or circumstances indicate it is more-likely-than-not that an impairment may have occurred. We have four reporting units: Credit Card, Auto, Other Consumer Banking and Commercial Banking.

The goodwill impairment test is a two-step process. The first step involves a comparison of the estimated fair value of a reporting unit to its carrying amount, including goodwill. If the estimated fair value exceeds its carrying amount, goodwill of the reporting unit is not impaired. If the estimated fair value of a reporting unit is below its carrying amount, management must estimate the fair value of the assets and liabilities of that reporting unit’s balance sheet based on applicable accounting guidance in order to measure the impairment.

For the purpose of our goodwill impairment testing, we calculate the carrying amount of a reporting unit using an allocated capital approach based on each reporting unit’s specific regulatory capital requirements, economic capital requirements, and underlying risks. The carrying amount for a reporting unit is the sum of its respective capital requirements, goodwill and intangibles balances. We then compare the carrying amount to our total consolidated stockholders’ equity to assess the reasonableness of our methodology. The total carrying amount of our four reporting units was $50.5 billion, as compared to consolidated stockholder’s equity of $58.2 billion as of October 1, 2019. The $7.7 billion excess in consolidated stockholder’s equity was primarily attributable to capital allocated to our Other category and other future capital needs such as dividends, share buybacks or other strategic initiatives.

Determining the fair value of a reporting unit is a subjective process that requires the use of estimates and the exercise of significant judgment. We calculated the fair value of our reporting units using a discounted cash flow (“DCF”) calculation, a form of the income approach. This income approach calculation used projected cash flows based on each reporting unit’s internal forecast and the perpetuity growth method to calculate terminal values. Our DCF analysis required management to make estimates about future loan, deposit and revenue growth, as well as credit losses and capital rates. These cash flows and terminal values were then discounted using discount rates based on our external cost of capital with adjustments for the risk inherent in each reporting unit. The reasonableness of the DCF approach was assessed by reference to a market-based approach using comparable market multiples and recent market transactions where available. The results of the 2019 annual impairment test for the Credit Card, Auto, Other Consumer Banking and Commercial Banking reporting units indicated that the estimated fair values of these four reporting units substantially exceeded their carrying amounts.

Assumptions used in estimating the fair value of a reporting unit are judgmental and inherently uncertain. A significant change in the economic conditions of a reporting unit, such as declines in business performance, increases in credit losses, increases in capital requirements, deterioration of market conditions, adverse impacts of regulatory or legislative changes or increases in the estimated cost of capital, could cause the estimated fair values of our reporting units to decline in the future, and increase the risk of a goodwill impairment in a future period.

Fair Value

Fair value, also referred to as an exit price, is defined as the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The fair value accounting guidance provides a

61 Capital One Financial Corporation (COF)

three-level fair value hierarchy for classifying financial instruments. This hierarchy is based on the markets in which the assets or liabilities trade and whether the inputs to the valuation techniques used to measure fair value are observable or unobservable. The fair value measurement of a financial asset or liability is assigned a level based on the lowest level of any input that is significant to the fair value measurement in its entirety. The three levels of the fair value hierarchy are described below:

Level 1: Valuation is based on quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2: Valuation is based on observable market-based inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3: Valuation is generated from techniques that use significant assumptions not observable in the market. Valuation techniques include pricing models, discounted cash flow methodologies or similar techniques.

The degree of management judgment involved in determining the fair value of a financial instrument is dependent upon the availability of quoted prices in active markets or observable market parameters. When quoted prices and observable data in active markets are not fully available, management judgment is necessary to estimate fair value. Changes in market conditions, such as reduced liquidity in the capital markets or changes in secondary market activities, may reduce the availability and reliability of quoted prices or observable data used to determine fair value.

We have developed policies and procedures to determine when markets for our financial assets and liabilities are inactive if the level and volume of activity has declined significantly relative to normal conditions. If markets are determined to be inactive, it may be appropriate to adjust price quotes received. When significant adjustments are required to price quotes or inputs, it may be appropriate to utilize an estimate based primarily on unobservable inputs.

Significant judgment may be required to determine whether certain financial instruments measured at fair value are classified as Level 2 or Level 3. In making this determination, we consider all available information that market participants use to measure the fair value of the financial instrument, including observable market data, indications of market liquidity and orderliness, and our understanding of the valuation techniques and significant inputs used. Based upon the specific facts and circumstances of each instrument or instrument category, judgments are made regarding the significance of the Level 3 inputs to the instruments’ fair value measurement in its entirety. If Level 3 inputs are considered significant, the instrument is classified as Level 3. The process for determining fair value using unobservable inputs is generally more subjective and involves a high degree of management judgment and assumptions. We discuss changes in the valuation inputs and assumptions used in determining the fair value of our financial instruments, including the extent to which we have relied on significant unobservable inputs to estimate fair value and our process for corroborating these inputs, in “Note 16—Fair Value Measurement.”

We have a governance framework and a number of key controls that are intended to ensure that our fair value measurements are appropriate and reliable. Our governance framework provides for independent oversight and segregation of duties. Our control processes include review and approval of new transaction types, price verification, and review of valuation judgments, methods, models, process controls and results.

Groups independent of our trading and investing functions participate in the review and validation process. Tasks performed by these groups include periodic verification of fair value measurements to determine if assigned fair values are reasonable, including comparing prices from vendor pricing services to other available market information.

Our Fair Value Committee (“FVC”), which includes representation from business areas, Risk Management and Finance, provides guidance and oversight to ensure an appropriate valuation control environment. The FVC regularly reviews and approves our fair valuations to ensure that our valuation practices are consistent with industry standards and adhere to regulatory and accounting guidance.

We have a model policy, established by an independent Model Risk Office, which governs the validation of models and related supporting documentation to ensure the appropriate use of models for pricing and fair value measurements. The Model Risk Office validates all models and requires ongoing monitoring of their performance.

The fair value governance process is set up in a manner that allows the Chairperson of the FVC to escalate valuation disputes that cannot be resolved by the FVC to a more senior committee called the Valuations Advisory Committee (“VAC”) for resolution. The VAC is chaired by the Chief Financial Officer and includes other members of senior management. The VAC convenes to review escalated valuation disputes.

62 Capital One Financial Corporation (COF)

Customer Rewards Reserve

We offer products, primarily credit cards, which include programs that allow members to earn rewards based on account activity that can be redeemed for cash (primarily in the form of statement credits), gift cards, travel, or coverage of eligible charges. The amount of rewards that a customer earns varies based on the terms and conditions of the rewards program and product. The majority of our rewards do not expire and there is no limit on the amount of rewards an eligible card member can earn. Customer rewards costs, which we generally record as an offset to interchange income, are driven by various factors such as card member purchase volume, the terms and conditions of the rewards program, and rewards redemption cost. We establish a customer rewards reserve that reflects management’s estimate of rewards earned that are expected to be redeemed and the estimated redemption cost.

We use financial models to estimate ultimate redemption rates of rewards earned to date by current card members based on historical redemption trends, current enrollee redemption behavior, card product type, year of program enrollment, enrollment tenure and card spend levels. Our current assumption is that the vast majority of all rewards earned will eventually be redeemed. We use a weighted-average redemption cost during the previous twelve months, adjusted as appropriate for recent changes in redemption costs, including the mix of rewards redeemed, to estimate future redemption costs. We continually evaluate our reserve and assumptions based on developments in redemption patterns, changes to the terms and conditions of the rewards program and other factors. We recognized customer rewards expense of $4.9 billion, $4.4 billion and $3.7 billion in 2019, 2018 and 2017, respectively. Our customer rewards reserve, which is included in other liabilities on our consolidated balance sheets, totaled $4.7 billion and $4.3 billion as of December 31, 2019 and 2018, respectively.

ACCOUNTING CHANGES AND DEVELOPMENTS

Accounting Standards Issued but Not Adopted as of December 31, 2019

Standard	Guidance	Adoption Timing and Financial Statements Impacts
Cloud Computing ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract Issued August 2018	Aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license).	We adopted this guidance in the first quarter of 2020 using the prospective method of adoption. Our adoption of this standard did not have a material impact on our consolidated financial statements.
Goodwill Impairment Test Simplification ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment Issued January 2017	Eliminates the second step from the current goodwill impairment test. Under the current guidance, the first step compares a reporting unit’s carrying value to its fair value. If the carrying value exceeds fair value, an entity performs the second step, which assigns the reporting unit’s fair value to its assets and liabilities, including unrecognized assets and liabilities, in the same manner as required in purchase accounting. Under the new guidance, any impairment of a reporting unit’s goodwill is determined based on the amount by which the reporting unit’s carrying value exceeds its fair value, limited to the amount of goodwill allocated to the reporting unit.	We adopted this guidance in the first quarter of 2020 using the prospective method of adoption. Our adoption of this standard did not have a material impact on our consolidated financial statements.

63 Capital One Financial Corporation (COF)

Standard	Guidance	Adoption Timing and Financial Statements Impacts
Current Expected Credit Loss (“CECL”) ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments Issued June 2016	Requires use of the current expected credit loss model that is based on expected losses (net of expected recoveries), rather than incurred losses, to determine our allowance for credit losses on financial assets measured at amortized cost, certain net investments in leases and certain off-balance sheet arrangements. Replaces current accounting for purchased credit-impaired (“PCI”) and impaired loans. Amends the other-than-temporary impairment model for available for sale debt securities to require that credit losses be recorded through an allowance approach, rather than through permanent write-downs for credit losses and subsequent accretion of positive changes through interest income over time.	We adopted this guidance in the first quarter of 2020, using the modified retrospective method of adoption. Prior to adopting this guidance, we completed evaluations of data requirements and necessary changes to our credit loss estimation methods, processes, systems and controls. We also completed model validations and multiple tests of our full end-to-end allowance processes. As a result of our adoption, we estimate an increase to our reserves for credit losses of $2.9 billion, an increase to our deferred tax assets of $698 million, and a decrease to our retained earnings of $2.2 billion. These amounts are subject to change as we finalize our adoption efforts.

See “Note 1—Summary of Significant Accounting Policies” for information on the accounting standards we adopted in 2019.

CAPITAL MANAGEMENT

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

Capital Standards and Prompt Corrective Action

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

The Basel III Capital Rule includes the “Basel III Standardized Approach” and the “Basel III Advanced Approaches.” We entered parallel run under Basel III Advanced Approaches on January 1, 2015, during which we were required to calculate capital ratios under both the Basel III Standardized Approach and the Basel III Advanced Approaches, though we used the Standardized Approach for purposes of meeting regulatory capital requirements.

In October 2019, the Federal Banking Agencies amended the Basel III Capital Rule to provide for tailored application of certain capital requirements across different categories of banking institutions (“Tailoring Rules”). As a bank holding company (“BHC”) with total consolidated assets of at least $250 billion that does not exceed any of the applicable risk-based thresholds, we are a Category III institution under the Tailoring Rules. As such, we are no longer subject to the Basel III Advanced Approaches and certain associated capital requirements, such as the requirement to include in regulatory capital certain elements of AOCI.

In July 2019, the Federal Banking Agencies finalized certain changes in the Basel III Capital Rule for institutions not subject to the Basel III Advanced Approaches, including Capital One (“Capital Simplification Rule”). These changes, effective January 1, 2020, generally raise the threshold above which institutions subject to the Capital Simplification Rule must deduct certain assets from their common equity Tier 1 capital, including certain deferred tax assets, mortgage servicing assets, and investments in unconsolidated financial institutions. While the higher thresholds will not impact our current capital levels, in stress scenarios they may provide a benefit by enabling us to include more deferred tax assets in our common equity Tier 1 capital. All else equal, we anticipate that the Tailoring Rules and Capital Simplification Rule will, taken together, decrease our capital requirements.

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The Basel III Capital Rule requires banking institutions to maintain a capital conservation buffer, composed of common equity Tier 1 capital, of 2.5% above the regulatory minimum ratios. In addition, Category III institutions, including the Company and the Banks, are subject to certain capital requirements formerly applicable only to Basel III Advanced Approaches banking organizations. Category III institutions are subject to a supplementary leverage ratio of 3.0% and their capital conservation buffer may be supplemented by an incremental countercyclical capital buffer of up to 2.5% composed of common equity Tier 1 capital and set at the discretion of the Federal Banking Agencies. As of December 31, 2019, the countercyclical capital buffer was zero percent in the United States. A determination to increase the countercyclical capital buffer generally would be effective twelve months after the announcement of such an increase, unless the Federal Banking Agencies set an earlier effective date.

The Market Risk Rule requires institutions subject to the rule to adjust their risk-based capital ratios to reflect the market risk in their trading portfolios. As of December 31, 2019, the Company and CONA are subject to the Market Risk Rule. See “MD&A—Market Risk Profile” below for additional information.

In December 2018, the Federal Banking Agencies revised the Basel III Capital Rule to identify which credit loss allowances under the CECL model are eligible for inclusion in regulatory capital and to provide banking organizations the option to phase in over a three-year transition period ending January 1, 2023 the day-one adverse effects on regulatory capital that may result from the adoption of the CECL model (“CECL Transition Election”). The CECL model became applicable to us as of January 1, 2020 and we intend to make the CECL Transition Election effective in the first quarter of 2020.

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

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

For the description of the regulatory capital rules we are subject to, see “Part I—Item 1. Business—Supervision and Regulation.”

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On December 31, 2019, we transferred our entire portfolio of held to maturity securities to available for sale in consideration of changes to regulatory capital requirements under the Tailoring Rules, which no longer require Category III institutions to include in regulatory capital certain elements of AOCI, including unrealized gains and losses from available for sale securities. On the date of transfer, these securities had a fair value of $33.2 billion, including pre-tax unrealized gains of $1.2 billion recognized in AOCI ($888 million after-tax). Inclusive of this transfer, the AOCI associated with our available for sale securities portfolio increased our common equity Tier 1 ratio by approximately 30 basis points as of December 31, 2019, see “MD&A—Executive Summary and Business Outlook” for more information.

Table 13 provides a comparison of our regulatory capital ratios under the Basel III Standardized Approach, the regulatory minimum capital adequacy ratios and the PCA well-capitalized level for each ratio, where applicable, as of December 31, 2019 and 2018.

Table 13: Capital Ratios under Basel III⁽¹⁾

	December 31, 2019						December 31, 2018
	Capital Ratio		Minimum Capital Adequacy		Well- Capitalized		Capital Ratio		Minimum Capital Adequacy		Well- Capitalized
Capital One Financial Corp:
Common equity Tier 1 capital(2)	12.2	%	4.5	%	N/A		11.2	%	4.5	%	N/A
Tier 1 capital(3)	13.7		6.0		6.0	%	12.7		6.0		6.0	%
Total capital(4)	16.1		8.0		10.0		15.1		8.0		10.0
Tier 1 leverage(5)	11.7		4.0		N/A		10.7		4.0		N/A
Supplementary leverage(6)	9.9		3.0		N/A		9.0		3.0		N/A
COBNA:
Common equity Tier 1 capital(2)	16.1		4.5		6.5		15.3		4.5		6.5
Tier 1 capital(3)	16.1		6.0		8.0		15.3		6.0		8.0
Total capital(4)	18.1		8.0		10.0		17.6		8.0		10.0
Tier 1 leverage(5)	14.8		4.0		5.0		14.0		4.0		5.0
Supplementary leverage(6)	12.1		3.0		N/A		11.5		3.0		N/A
CONA:
Common equity Tier 1 capital(2)	13.4		4.5		6.5		13.0		4.5		6.5
Tier 1 capital(3)	13.4		6.0		8.0		13.0		6.0		8.0
Total capital(4)	14.5		8.0		10.0		14.2		8.0		10.0
Tier 1 leverage(5)	9.2		4.0		5.0		9.1		4.0		5.0
Supplementary leverage(6)	8.2		3.0		N/A		8.0		3.0		N/A

__________

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

⁽²⁾  Common equity Tier 1 capital ratio is a regulatory capital measure calculated based on common equity Tier 1 capital divided by risk-weighted assets.

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

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

⁽⁵⁾  Tier 1 leverage ratio is a regulatory capital measure calculated based on Tier 1 capital divided by adjusted average assets.

⁽⁶⁾  Supplementary leverage ratio is a regulatory capital measure calculated based on Tier 1 capital divided by total leverage exposure.

66 Capital One Financial Corporation (COF)

Table 14 presents regulatory capital under the Basel III Standardized Approach and regulatory capital metrics as of December 31, 2019 and 2018.

Table 14: Regulatory Risk-Based Capital Components and Regulatory Capital Metrics

(Dollars in millions)	December 31, 2019			December 31, 2018
Regulatory Capital Under Basel III Standardized Approach
Common equity excluding AOCI	$	52,001		$	48,570
Adjustments:
AOCI, net of tax	1,156			(1,263		)
Goodwill, net of related deferred tax liabilities	(14,465		)	(14,373		)
Intangible assets, net of related deferred tax liabilities	(170		)	(254		)
Other	(360		)	391
Common equity Tier 1 capital	38,162			33,071
Tier 1 capital instruments	4,853			4,360
Tier 1 capital	43,015			37,431
Tier 2 capital instruments	3,377			3,483
Qualifying allowance for loan and lease losses	3,956			3,731
Tier 2 capital	7,333			7,214
Total capital	$	50,348		$	44,645
Regulatory Capital Metrics
Risk-weighted assets	$	313,155		$	294,950
Adjusted average assets	368,511			350,606
Total leverage exposure	435,976			414,701

Capital Planning and Regulatory Stress Testing

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

Equity Offerings and Transactions

On September 11, 2019, we issued 60,000,000 depositary shares, each representing a 1/40th interest in a share of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series I, $0.01 par value, with a liquidation preference of $25 per depositary share (“Series I Preferred Stock”). The net proceeds of the offering of Series I Preferred Stock were approximately $1.5 billion, after deducting underwriting commissions and offering expenses. Dividends on the Series I Preferred Stock are payable quarterly in arrears at a rate of 5.00% per annum.

On December 2, 2019, we redeemed all outstanding shares of our Fixed Rate 6.25% Non-Cumulative Perpetual Preferred Stock Series C and Fixed Rate 6.70% Non-Cumulative Perpetual Preferred Stock Series D. The redemption reduced our net income available to common shareholders by $31 million in the fourth quarter and full year of 2019.

On January 31, 2020, we issued 50,000,000 depositary shares, each representing a 1/40th interest in a share of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series J, $0.01 par value, with a liquidation preference of $25 per depositary share (“Series J Preferred Stock”). The net proceeds of the offering of Series J Preferred Stock were approximately $1.2 billion, after deducting underwriting commissions and offering expenses. Dividends on the Series J Preferred Stock are payable quarterly in arrears at a rate of 4.80% per annum.

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On January 31, 2020, we announced that we will redeem all outstanding shares of our Fixed Rate 6.00% Non-Cumulative Perpetual Preferred Stock Series B on March 2, 2020. The redemption will reduce our net income available to common stockholders by approximately $20 million in the first quarter of 2020.

Dividend Policy and Stock Purchases

For the year ended December 31, 2019, we declared and paid common stock dividends of $757 million, or $1.60 per share, and preferred stock dividends of $282 million. The following table summarizes the dividends paid per share on our various preferred stock series in each quarter of 2019.

Table 15: Preferred Stock Dividends Paid Per Share

Series	Description	Issuance Date	Per Annum Dividend Rate	Dividend Frequency	2019
					Q4	Q3	Q2	Q1
Series B	6.00% Non-Cumulative	August 20, 2012	6.00%	Quarterly	$15.00	$15.00	$15.00	$15.00
Series C(1)	6.25% Non-Cumulative	June 12, 2014	6.25	Quarterly	15.63	15.63	15.63	15.63
Series D(1)	6.70% Non-Cumulative	October 31, 2014	6.70	Quarterly	16.75	16.75	16.75	16.75
Series E	Fixed-to-Floating Rate Non-Cumulative	May 14, 2015	5.55% through 5/31/2020; 3-mo. LIBOR+ 380 bps thereafter	Semi-Annually through 5/31/2020; Quarterly thereafter	27.75	—	27.75	—
Series F	6.20% Non-Cumulative	August 24, 2015	6.20	Quarterly	15.50	15.50	15.50	15.50
Series G	5.20% Non-Cumulative	July 29, 2016	5.20	Quarterly	13.00	13.00	13.00	13.00
Series H	6.00% Non-Cumulative	November 29, 2016	6.00	Quarterly	15.00	15.00	15.00	15.00
Series I	5.00% Non-Cumulative	September 11, 2019	5.00	Quarterly	11.11	—	—	—

__________

⁽¹⁾  On December 2, 2019, we redeemed all outstanding shares of our Series C and Series D preferred stock.

The declaration and payment of dividends to our stockholders, as well as the amount thereof, are subject to the discretion of our Board of Directors and depend upon our results of operations, financial condition, capital levels, cash requirements, future prospects and other factors deemed relevant by the Board of Directors. As a BHC, our ability to pay dividends is largely dependent upon the receipt of dividends or other payments from our subsidiaries. Regulatory restrictions exist that limit the ability of the Banks to transfer funds to our BHC. As of December 31, 2019, funds available for dividend payments from COBNA and CONA were $3.3 billion and $4.7 billion, respectively. There can be no assurance that we will declare and pay any dividends to stockholders. Consistent with our 2019 Stock Repurchase Program which was announced on June 27, 2019, our Board of Directors authorized the repurchase of up to $2.2 billion of shares of common stock beginning in the third quarter of 2019 through the end of the second quarter of 2020. Through the end of 2019, we repurchased approximately $1.4 billion of shares of our common stock under the 2019 Stock Repurchase Program.

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

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RISK MANAGEMENT

Risk Management Framework

Our Risk Management Framework (the “Framework”) sets consistent expectations for risk management across the Company. It also sets expectations for our “Three Lines of Defense” model, which defines the roles, responsibilities and accountabilities for taking and managing risk across the Company. Accountability for overseeing an effective Framework resides with our Board of Directors either directly or through its committees.

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

Our Framework consists of the following nine elements:

Governance and Accountability
Strategy and Risk Alignment
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.

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Strategy and Risk Alignment

Our strategy is informed by and aligned with risk appetite, from development to execution. The Chief Executive Officer develops the strategy with input from the first, second, and third lines of defense, as well as the Board of Directors. The strategic planning process should consider relevant changes to the Company’s overall risk profile.

Our Board of Directors approves a Risk Appetite Statement for the Company to set forth the high-level principles that govern risk taking at the Company. The Risk Appetite Statement defines the Board of Directors’ tolerance for certain risk outcomes at an enterprise level and enables senior management to manage and report within these boundaries. This Risk Appetite Statement is also supported by risk category specific risk appetite statements as well as metrics and, where appropriate, Board Limits and Board Notification Thresholds.

Risk Identification

The first line of defense and certain Support Functions, where appropriate, are expected to identify new and emerging risks across the relevant risk categories associated with their business activities and objectives, in consultation with IRM. Risk identification also must be informed by major changes in infrastructure or organization, introduction of new products and services, acquisitions of businesses, or substantial changes in the internal or external environment.

IRM and certain Support Functions, where appropriate, provide effective challenge in the risk identification process. IRM is also responsible for identifying our material aggregate risks on an ongoing basis.

Assessment, Measurement and Response

Management is responsible for assessing risks associated with our activities. Risks identified should be assessed to understand the severity of each risk and likelihood of occurrence under both normal and stressful conditions, as appropriate. Risk severity is measured through modeling and other quantitative estimation approaches, as well as qualitative approaches, based on management judgment. As part of the risk assessment process, the first and second lines of defense also evaluate the effectiveness of the existing control environment and mitigation strategies.

Management is responsible for determining the appropriate risk response. Risks may be mitigated, accepted, transferred, or avoided. Actions taken to respond to the risk may include implementing new controls, enhancing existing controls, developing additional mitigation strategies to reduce the impact of the risk, and/or monitoring the risk.

Monitoring and Testing

Management periodically monitors risks to evaluate and measure how the risk is affecting our strategy and business objectives, in alignment with risk appetite. The scope and frequency of monitoring activities depends on the results of relevant risk assessments, as well as specific business risk operations and activities.

The first line of defense is responsible for evaluating the effectiveness of risk management practices and controls through testing and other activities. IRM and Support Functions, as appropriate, assess the first line of defense’s evaluation of risk management, which may include conducting effective challenge, performing independent monitoring, or conducting risk or control validations. The third line of defense provides independent assurance for first and second line risk management practices and controls to provide assurance.

Aggregation, Reporting and Escalation

Risk aggregation supports strategic decision making and risk management practices through collectively reporting risks across different levels of the Company and providing a comprehensive view of performance against risk appetite.

Material risks, emerging risks, aggregate risks, risk appetite metrics, and other measures across all risk categories are reported to the appropriate governance forum no less than quarterly. Material risks are reported to the Board of Directors and senior management committees no less than quarterly.

Capital and Liquidity Management (including Stress Testing)

Our capital management processes are linked to its risk management practices, including the enterprise-wide identification, assessment, and measurement of risks to ensure that all relevant risks are incorporated in the assessment of the Company's capital

70 Capital One Financial Corporation (COF)

adequacy. We use identified risks to inform key aspects of the Company’s capital planning, including the development of stress scenarios, the assessment of the adequacy of post-stress capital levels, and the appropriateness of potential capital actions considering the Company’s capital objectives. We quantify capital needs through stress testing, regulatory capital, economic capital, and assessments of market considerations. In assessing its capital adequacy, we identify how and where our material risks are accounted for within the capital planning process. Monitoring and escalation processes exist for key capital thresholds and metrics to continuously monitor capital adequacy.

Risk Data and Enabling Technology

Risk data and technology provides the basis for risk reporting and is used in decision making and to monitor and review changes to our risk profile. There is a core Governance, Risk Management and Compliance system which is used as the system of record for risks, controls, issues, and events for our risk categories and supports the analysis, aggregation, and reporting capabilities across the categories.

Culture and Talent Management

The Framework must be supported with the right culture, talent, and skills to enable effective risk management across the Company.

Every associate at the Company is responsible for risk management; however, associates with specific risk management skills and expertise within the first, second, and third lines of defense are critical to ensure appropriate risk management across the enterprise.

Risk Categories

We apply our Framework to protect the Company from the eight major categories of risk that we are exposed to through our business activities. Our eight major categories of risk are:

Major Categories of Risk
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
Legal	The risk of material adverse impact due to new and changed laws and regulations; interpretations of law; drafting, interpretation, and enforceability of contracts; adverse decisions or consequences arising from litigation or regulatory actions; the establishment, management, and governance of the legal entity structure; and the failure to seek or follow appropriate legal counsel when needed
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

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We provide an overview of how we manage our eight major categories of risk below.

Compliance Risk Management

We recognize that compliance requirements for financial institutions are increasingly complex and that there are heightened expectations from our regulators and our customers. In response, we continuously evaluate the regulatory environment and proactively adjust our compliance program to fully address these expectations.

Our Compliance Management Program establishes expectations for determining compliance requirements, assessing the risk of new product offerings, creating appropriate controls and training to address requirements, monitoring for control performance, and independently testing for adherence to compliance requirements. The program also establishes regular compliance reporting to senior business leaders, the executive committee and the Board of Directors.

The Chief Compliance Officer is responsible for establishing and overseeing our Compliance Management Program. Business areas incorporate compliance requirements and controls into their business policies, standards, processes and procedures. They regularly monitor and report on the efficacy of their compliance controls and our Corporate Compliance team periodically independently tests to validate the effectiveness of business controls.

Credit Risk Management

We recognize that we are exposed to cyclical changes in credit quality. Consequently, we try to ensure our credit portfolio is resilient to economic downturns. Our most important tool in this endeavor is sound underwriting. In unsecured consumer loan underwriting, we generally assume that loans will be subject to an environment in which losses are higher than those prevailing at the time of underwriting. In commercial underwriting, we generally require strong cash flow, collateral, covenants and guarantees. In addition to sound underwriting, we continually monitor our portfolio and take steps to collect or work out distressed loans.

The Chief Risk Officer, in conjunction with the Consumer and Commercial Chief Credit Officers, is responsible for establishing credit risk policies and procedures, including underwriting and hold guidelines and credit approval authority, and monitoring credit exposure and performance of our lending related transactions. Our Consumer and Commercial Chief Credit Officers are responsible for evaluating the risk implications of credit strategy and the oversight of credit for both the existing portfolio and any new credit investments. They also have formal approval authority for various types and levels of credit decisions, including individual commercial loan transactions. Division Presidents within each segment are responsible for managing the credit risk within their divisions and maintaining processes to control credit risk and comply with credit policies and guidelines. In addition, the Chief Risk Officer establishes policies, delegates approval authority and monitors performance for non-loan credit exposure entered into with financial counterparties or through the purchase of credit sensitive securities in our investment portfolio.

Our credit policies establish standards in five areas: customer selection, underwriting, monitoring, remediation and portfolio management. The standards in each area provide a framework comprising specific objectives and control processes. These standards are supported by detailed policies and procedures for each component of the credit process. Starting with customer selection, our goal is to generally provide credit on terms that generate above hurdle returns. We use a number of quantitative and qualitative factors to manage credit risk, including setting credit risk limits and guidelines for each of our lines of business. We monitor performance relative to these guidelines and report results and any required mitigating actions to appropriate senior management committees and our Board of Directors.

Legal Risk Management

The General Counsel provides legal evaluation and advice to the Company and business areas and to risk management functions such as Compliance and Internal Audit. This evaluation and advice is based on an assessment of the internal business area practices and activities and of the controls the business has in place to mitigate risks.

Liquidity Risk Management

We manage liquidity risk by applying our Liquidity Adequacy Framework (the “Liquidity Framework”). The Liquidity Framework uses internal and regulatory stress testing and the evaluation of other balance sheet metrics to confirm that we maintain a fortified balance sheet that is resilient to uncertainties that may arise as a consequence of systemic, idiosyncratic, or combined liquidity events. We continuously monitor market and economic conditions to evaluate emerging stress conditions and to develop appropriate action plans in accordance with our Contingency Funding Plan and our Recovery Plan, which include the Company’s policies,

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procedures and action plans for managing liquidity stress events. The Liquidity Framework enables us to manage our liquidity risk in accordance with regulatory requirements.

Additionally, the Liquidity Framework establishes governing principles that apply to the management of liquidity risk. We use these principles to monitor, measure and report liquidity risk; to develop funding and investment strategies that enable us to maintain an adequate level of liquidity to support our businesses and satisfy regulatory requirements; and to protect us from a broad range of liquidity events should they arise.

The Chief Risk Officer, in conjunction with the Chief Market and Liquidity Risk Officer, is responsible for the establishment of liquidity risk management policies and standards for governance and monitoring of liquidity risk at a corporate level. We assess liquidity strength by evaluating several different balance sheet metrics under severe stress scenarios to ensure we can withstand significant funding degradation through idiosyncratic, systemic, and combined liquidity stress scenarios. Management reports liquidity metrics to appropriate senior management committees and our Board of Directors no less than quarterly.

We seek to mitigate liquidity risk strategically and tactically. From a strategic perspective, we have acquired and built deposit gathering businesses and actively monitor our funding concentration. From a tactical perspective, we have accumulated a sizable liquidity reserve comprised of cash and cash equivalents, high-quality, unencumbered securities and committed collateralized credit lines. We also continue to maintain access to secured and unsecured debt markets through regular issuance. This combination of stable and diversified funding sources and our stockpile of liquidity reserves enable us to maintain confidence in our liquidity position.

Market Risk Management

The Chief Financial Officer and the Chief Risk Officer are responsible for the establishment of market risk management policies and standards for the governance and monitoring of market risk at a corporate level. Market risk is inherent from the financial instruments associated with our business operations and activities including loans, deposits, securities, short-term borrowings, long-term debt and derivatives. We manage market risk exposure, which is principally driven by balance sheet interest rate risk, centrally and establish quantitative risk limits to monitor and control our exposure.

We recognize that interest rate and foreign exchange risk is present in our business due to the nature of our assets and liabilities. Banks typically manage the trade-off between near-term earnings volatility and market value volatility by targeting moderate levels of each. In addition to using industry accepted techniques to analyze and measure interest rate and foreign exchange risk, we perform sensitivity analysis to identify our risk exposures under a broad range of scenarios. Investment securities and derivatives are the main levers for the management of interest rate risk. In addition, we also use derivatives to manage our foreign exchange risk.

The market risk positions for the Company and each of the Banks are calculated separately and in aggregate, and analyzed against pre-established limits. Results are reported to the Asset Liability Committee monthly and to the Risk Committee of the Board of Directors no less than quarterly. Management is authorized to utilize financial instruments as outlined in our policy to actively manage market risk exposure.

Operational Risk Management

We recognize the criticality of managing operational risk on both a strategic and day-to-day basis and that there are heightened expectations from our regulators and our customers. We have implemented appropriate operational risk management policies, standards, processes and controls to enable the delivery of high quality and consistent customer experiences and to achieve business objectives in a controlled manner.

The Chief Operational Risk Officer is responsible for establishing and overseeing our Operational Risk Management Program. In accordance with Basel III Advanced Approaches requirements, the program establishes practices for assessing the operational risk profile and executing key control processes for operational risks. These risks include topics such as internal and external fraud, cyber and technology risk, data management, model risk, third party management, and business continuity. Operational Risk Management enforces these practices and delivers reporting of operational risk results to senior business leaders, the executive committee and the Board of Directors.

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Reputation Risk Management

We recognize that reputation risk is of particular concern for financial institutions and, increasingly, technology companies, in the current environment. Areas of concern have expanded to include company policies, practices and values and, with the growing use of social and digital platforms, public corporations face a new level of scrutiny and channels for activism and advocacy. The heightened expectations of internal and external stakeholders have made corporate culture, values and conduct pressure points for individuals and advocates voicing concerns or seeking change. We manage both strategic and tactical reputation issues and build our relationships with government officials, media, community and consumer advocates, customers and other constituencies to help strengthen the reputations of both our Company and industry. Our actions include implementing pro-customer practices in our business and serving low to moderate income communities in our market area consistent with a quality bank and an innovative technology leader. The Executive Vice President of External Affairs is responsible for managing our overall reputation risk program. Day-to-day activities are controlled by the frameworks set forth in our Reputation Risk Management Policy and other risk management policies.

Strategic Risk Management

We monitor external market and industry developments to identify potential areas of strategic opportunity or risk. These items provide input for development of the Company’s strategy led by the Chief Executive Officer and other senior executives. Through the ongoing development and vetting of the corporate strategy, the Chief Risk Officer identifies and assesses risks associated with the strategy across all risk categories and monitors them throughout the year.

CREDIT RISK PROFILE

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

We also engage in certain non-lending activities that may give rise to credit and counterparty settlement risk, including purchasing securities for our investment securities portfolio, entering into derivative transactions to manage our market risk exposure and to accommodate customers, extending short-term advances on syndication activity including bridge financing transactions we have underwritten, depositing certain operational cash balances in other financial institutions, executing certain foreign exchange transactions and extending customer overdrafts. We provide additional information related to our investment securities portfolio under “MD&A—Consolidated Balance Sheets Analysis—Investment Securities” and credit risk related to derivative transactions in “Note 9—Derivative Instruments and Hedging Activities.”

Primary Loan Products

We provide a variety of lending products. Our primary loan products include credit cards, auto loans and commercial lending products. We sold all of our consumer home loan portfolio and the related servicing during 2018.

• Credit cards: We originate both prime and subprime credit cards through a variety of channels. Our credit cards generally have variable interest rates. Credit card accounts are primarily underwritten using an automated underwriting system based on predictive models that we have developed. The underwriting criteria, which are customized for individual products 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 FICO scores, and on other factors, such as applicant income. We maintain a credit card securitization program and selectively sell charged-off credit card loans.

• Auto: We originate both prime and subprime auto loans through a network of auto dealers and direct marketing. Our auto loans generally have fixed interest rates and loan terms of 75 months or less, but can go up to 84 months. Loan size limits are customized by program and are generally less than $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, subject to maintaining resilience under a variety of stress conditions. Underwriting decisions are generally based on an applicant’s income, estimated net disposable income, and credit bureau information including FICO scores, along with collateral characteristics such as loan-to-value (“LTV”) ratio. We maintain an auto securitization program.

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• Commercial: We offer a range of commercial lending products, including loans secured by commercial real estate and loans to middle market commercial and industrial companies. Our commercial loans may have a fixed or variable interest rate; however, the majority of our commercial loans have variable rates. Our underwriting standards require an analysis of the borrower’s financial condition and prospects, as well as an assessment of the industry in which the borrower operates. Where relevant, we evaluate and appraise underlying collateral and guarantees. We maintain underwriting guidelines and limits for major types of borrowers and loan products that specify, where applicable, guidelines for debt service coverage, leverage, LTV ratio and standard covenants and conditions. We assign a risk rating and establish a monitoring schedule for loans based on the risk profile of the borrower, industry segment, source of repayment, the underlying collateral and guarantees, if any, and current market conditions. Although we generally retain the commercial loans we underwrite, we may syndicate positions for risk mitigation purposes, including bridge financing transactions we have underwritten. In addition, we originate and service multifamily commercial real estate loans which are sold to government-sponsored enterprises.

Portfolio Composition and Maturity Profile of Loans Held for Investment

Our loan portfolio consists of loans held for investment, including loans held in our consolidated trusts, and loans held for sale. Table 16 presents the composition of our portfolio of loans held for investment by portfolio segment as of December 31, 2019 and 2018. The information presented in this section exclude loans held for sale, which totaled $400 million and $1.2 billion as of December 31, 2019 and 2018, respectively.

Table 16: Portfolio Composition of Loans Held for Investment

	December 31, 2019				December 31, 2018
(Dollars in millions)	Loans		% of Total		Loans		% of Total
Credit Card:
Domestic credit card	$	118,606	44.6	%	$	107,350	43.6	%
International card businesses	9,630		3.6		9,011		3.7
Total credit card	128,236		48.2		116,361		47.3
Consumer Banking:
Auto	60,362		22.7		56,341		22.9
Retail banking	2,703		1.0		2,864		1.2
Total consumer banking	63,065		23.7		59,205		24.1
Commercial Banking:
Commercial and multifamily real estate	30,245		11.4		28,899		11.8
Commercial and industrial	44,263		16.7		41,091		16.7
Total commercial lending	74,508		28.1		69,990		28.5
Small-ticket commercial real estate	—		—		343		0.1
Total commercial banking	74,508		28.1		70,333		28.6
Total loans held for investment	$	265,809	100.0	%	$	245,899	100.0	%

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Table 17 presents the maturities of our loans held for investment portfolio as of December 31, 2019.

Table 17: Loan Maturity Schedule

	December 31, 2019
(Dollars in millions)	Due Up to 1 Year		> 1 Year to 5 Years		> 5 Years		Total
Fixed rate:
Credit card(1)	$	1,816	$	14,450	—		$	16,266
Consumer banking	740		38,127		$	23,179	62,046
Commercial banking	1,630		5,107		8,187		14,924
Total fixed-rate loans	4,186		57,684		31,366		93,236
Variable rate:
Credit card(1)	111,969		1		—		111,970
Consumer banking	1,010		8		1		1,019
Commercial banking	12,783		37,304		9,497		59,584
Total variable-rate loans	125,762		37,313		9,498		172,573
Total loans	$	129,948	$	94,997	$	40,864	$	265,809

__________

⁽¹⁾  Due to the revolving nature of credit card loans, we report the majority of our variable-rate credit card loans as due in one year or less. We report fixed-rate credit card loans with introductory rates that expire after a certain period of time as due in one year or less. We assume that the rest of our remaining fixed-rate credit card loans will mature within one to three years.

Geographic Composition

We market our credit card products throughout the United States, Canada and the United Kingdom. Our credit card loan portfolio is geographically diversified due to our product and marketing approach. The table below presents the geographic profile of our credit card loan portfolio as of December 31, 2019 and 2018.

Table 18: Credit Card Portfolio by Geographic Region

	December 31, 2019				December 31, 2018
(Dollars in millions)	Amount		% of Total		Amount		% of Total
Domestic credit card:
California	$	12,538	9.8	%	$	11,591	10.0	%
Texas	9,353		7.3		8,173		7.0
Florida	8,093		6.3		7,086		6.1
New York	7,941		6.2		7,400		6.4
Illinois	5,195		4.1		4,761		4.1
Pennsylvania	4,979		3.9		4,575		3.9
Ohio	4,388		3.4		3,967		3.4
New Jersey	3,915		3.1		3,641		3.1
Michigan	3,811		3.0		3,544		3.0
Other	58,393		45.4		52,612		45.3
Total domestic credit card	118,606		92.5		107,350		92.3
International card businesses:
Canada	6,493		5.1		6,023		5.1
United Kingdom	3,137		2.4		2,988		2.6
Total international card businesses	9,630		7.5		9,011		7.7
Total credit card	$	128,236	100.0	%	$	116,361	100.0	%

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Our auto loan portfolio is geographically diversified in the United States due to our product and marketing approach. Retail banking includes small business loans and other consumer lending products originated through our branch network. The table below presents the geographic profile of our auto loan and retail banking portfolios as of December 31, 2019 and 2018.

Table 19: Consumer Banking Portfolio by Geographic Region

	December 31, 2019				December 31, 2018
(Dollars in millions)	Amount		% of Total		Amount		% of Total
Auto:
Texas	$	7,675	12.2	%	$	7,264	12.3	%
California	6,918		11.0		6,352		10.7
Florida	5,013		7.9		4,623		7.8
Georgia	2,757		4.4		2,665		4.5
Ohio	2,652		4.2		2,502		4.2
Pennsylvania	2,334		3.7		2,167		3.7
Illinois	2,239		3.6		2,171		3.7
Louisiana	2,104		3.3		2,174		3.7
Other	28,670		45.4		26,423		44.6
Total auto	60,362		95.7		56,341		95.2
Retail banking:
New York	793		1.3		837		1.4
Louisiana	708		1.1		772		1.3
Texas	595		1.0		647		1.1
New Jersey	194		0.3		201		0.3
Maryland	155		0.2		161		0.3
Virginia	125		0.2		137		0.2
Other	133		0.2		109		0.2
Total retail banking	2,703		4.3		2,864		4.8
Total consumer banking	$	63,065	100.0	%	$	59,205	100.0	%

We originate commercial loans in most regions of the United States. The table below presents the geographic profile of our commercial loan portfolio by segment as of December 31, 2019 and 2018.

Table 20: Commercial Banking Portfolio by Geographic Region

	December 31, 2019
(Dollars in millions)	Commercial and Multifamily Real Estate		% of Total		Commercial and Industrial		% of Total		Total Commercial Banking		% of Total
Geographic concentration:(1)
Northeast	$	17,139	56.7	%	$	7,899	17.8	%	$	25,038	33.6	%
Mid-Atlantic	3,024		10.0		5,927		13.4		8,951		12.0
South	4,087		13.5		16,403		37.1		20,490		27.5
Other	5,995		19.8		14,034		31.7		20,029		26.9
Total	$	30,245	100.0	%	$	44,263	100.0	%	$	74,508	100.0	%

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	December 31, 2018
(Dollars in millions)	Commercial and Multifamily Real Estate		% of Total		Commercial and Industrial		% of Total		Small-Ticket Commercial Real Estate		% of Total		Total Commercial Banking		% of Total
Geographic concentration:(1)
Northeast	$	15,562	53.8	%	$	7,573	18.4	%	$	213	62.1	%	$	23,348	33.2	%
Mid-Atlantic	3,410		11.8		4,710		11.5		12		3.5		8,132		11.6
South	4,247		14.7		15,367		37.4		20		5.8		19,634		27.9
Other	5,680		19.7		13,441		32.7		98		28.6		19,219		27.3
Total	$	28,899	100.0	%	$	41,091	100.0	%	$	343	100.0	%	$	70,333	100.0	%

__________

⁽¹⁾  Geographic concentration is generally determined by the location of the borrower’s business or the location of the collateral associated with the loan. Northeast consists of CT, MA, ME, NH, NJ, NY, PA and VT. Mid-Atlantic consists of DC, DE, MD, VA and WV. South consists of AL, AR, FL, GA, KY, LA, MO, MS, NC, SC, TN and TX.

Commercial Loans by Industry

Table 21 summarizes our commercial loans held for investment portfolio by industry classification as of December 31, 2019 and 2018. Industry classifications below are based on our interpretation of the North American Industry Classification System codes as they pertain to each individual loan.

Table 21: Commercial Loans by Industry

(Percentage of portfolio)	December 31, 2019		December 31, 2018
Real estate	39	%	40	%
Finance	16		16
Healthcare	12		12
Business services	6		5
Oil and gas	5		5
Public administration	4		4
Educational services	4		4
Retail trade	4		3
Construction and land	2		2
Other	8		9
Total	100	%	100	%

Credit Risk Measurement

We closely monitor economic conditions and loan performance trends to assess and manage our exposure to credit risk. Trends in delinquency rates are the key credit quality indicator for our credit card and retail banking loan portfolios as changes in delinquency rates can provide an early warning of changes in potential future credit losses. The key indicator we monitor when assessing the credit quality and risk of our auto loan portfolio is borrower credit scores as they provide insight into the borrower risk profile, which is an indication of potential future credit losses. The key credit quality indicator for our commercial loan portfolios is our internal risk ratings as we generally classify loans that have been delinquent for an extended period of time and other loans with significant risk of loss as nonperforming. In addition to these credit quality indicators, we also manage and monitor other credit quality metrics such as level of nonperforming loans and net charge-offs rates.

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

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Table 22 provides details on the credit scores of our domestic credit card and auto loan portfolios as of December 31, 2019 and 2018.

Table 22: Credit Score Distribution

(Percentage of portfolio)	December 31, 2019		December 31, 2018
Domestic credit card—Refreshed FICO scores:(1)
Greater than 660	67	%	67	%
660 or below	33		33
Total	100	%	100	%
Auto—At origination FICO scores:(2)
Greater than 660	48	%	50	%
621 - 660	20		19
620 or below	32		31
Total	100	%	100	%

__________

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

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

We present information in the section below on the credit performance of our loan portfolio, including the key metrics we use in tracking changes in the credit quality of our loan portfolio. See “Note 3—Loans” in this Report for additional credit quality information, and see “Note 1—Summary of Significant Accounting Policies” for information on our accounting policies for delinquent and nonperforming loans, charge-offs and troubled debt restructurings (“TDRs”) for each of our loan categories.

Delinquency Rates

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

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Table 23 presents our 30+ day performing delinquency rates and 30+ day delinquency rates of our portfolio of loans held for investment, by portfolio segment, as of December 31, 2019 and 2018.

Table 23: 30+ Day Delinquencies

	December 31, 2019								December 31, 2018
	30+ Day Performing Delinquencies				30+ Day Delinquencies				30+ Day Performing Delinquencies				30+ Day Delinquencies
(Dollars in millions)	Amount		Rate(1)		Amount		Rate(1)		Amount		Rate(1)		Amount		Rate(1)
Credit Card:
Domestic credit card(2)	$	4,656	3.93	%	$	4,656	3.93	%	$	4,335	4.04	%	$	4,335	4.04	%
International card businesses	335		3.47		353		3.66		317		3.52		333		3.70
Total credit card	4,991		3.89		5,009		3.91		4,652		4.00		4,668		4.01
Consumer Banking:
Auto	4,154		6.88		4,584		7.59		3,918		6.95		4,309		7.65
Retail banking	28		1.02		43		1.59		29		1.01		51		1.77
Total consumer banking	4,182		6.63		4,627		7.34		3,947		6.67		4,360		7.36
Commercial Banking:
Commercial and multifamily real estate	63		0.21		67		0.22		119		0.41		140		0.49
Commercial and industrial	101		0.23		244		0.55		176		0.43		279		0.68
Total commercial lending	164		0.22		311		0.42		295		0.42		419		0.60
Small-ticket commercial real estate	—		—		—		—		1		0.39		7		1.84
Total commercial banking	164		0.22		311		0.42		296		0.42		426		0.61
Total	$	9,337	3.51		$	9,947	3.74		$	8,895	3.62		$	9,454	3.84

__________

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

⁽²⁾  The Walmart acquisition increased the domestic credit card 30+ day performing delinquency rate by 17 basis points as of December 31, 2019.

Table 24 presents our 30+ day delinquent loans, by aging and geography, as of December 31, 2019 and 2018.

Table 24: Aging and Geography of 30+ Day Delinquent Loans

	December 31, 2019				December 31, 2018
(Dollars in millions)	Amount		Rate(1)		Amount		Rate(1)
Delinquency status:
30 – 59 days	$	4,444	1.67	%	$	4,282	1.73	%
60 – 89 days	2,537		0.95		2,430		0.99
> 90 days	2,966		1.12		2,742		1.12
Total	$	9,947	3.74	%	$	9,454	3.84	%
Geographic region:
Domestic	$	9,594	3.61	%	$	9,121	3.70	%
International	353		0.13		333		0.14
Total	$	9,947	3.74	%	$	9,454	3.84	%

__________

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

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Table 25 summarizes loans that were 90+ days delinquent as to interest or principal, and still accruing interest as of December 31, 2019 and 2018. These loans consist primarily of credit card accounts between 90 days and 179 days past due. As permitted by regulatory guidance issued by the Federal Financial Institutions Examination Council, we continue to accrue interest and fees on domestic credit card loans through the date of charge-off, which is typically in the period the account becomes 180 days past due. While domestic credit card loans typically remain on accrual status until the loan is charged off, we reduce the balance of our credit card receivables by the amount of finance charges and fees billed but not expected to be collected and exclude this amount from revenue.

Table 25: 90+ Day Delinquent Loans Accruing Interest

	December 31, 2019				December 31, 2018
(Dollars in millions)	Amount		Rate(1)		Amount		Rate(1)
Loan category:
Credit card	$	2,407	1.88	%	$	2,233	1.92	%
Geographic region:
Domestic	$	2,277	0.89	%	$	2,111	0.89	%
International	130		1.34		122		1.35
Total	$	2,407	0.91		$	2,233	0.91

__________

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

Nonperforming Loans and Nonperforming Assets

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

Table 26 presents our nonperforming loans, by portfolio segment, and other nonperforming assets as of December 31, 2019 and 2018. We do not classify loans held for sale as nonperforming. We provide additional information on our credit quality metrics in “MD&A—Business Segment Financial Performance.”

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Table 26: Nonperforming Loans and Other Nonperforming Assets⁽¹⁾

	December 31, 2019				December 31, 2018
(Dollars in millions)	Amount		Rate		Amount		Rate
Nonperforming loans held for investment:(2)
Credit Card:
International card businesses	$	25	0.26	%	$	22	0.25	%
Total credit card	25		0.02		22		0.02
Consumer Banking:
Auto	487		0.81		449		0.80
Retail banking	23		0.87		30		1.04
Total consumer banking	510		0.81		479		0.81
Commercial Banking:
Commercial and multifamily real estate	38		0.12		83		0.29
Commercial and industrial	410		0.93		223		0.54
Total commercial lending	448		0.60		306		0.44
Small-ticket commercial real estate	—		—		6		1.80
Total commercial banking	448		0.60		312		0.44
Total nonperforming loans held for investment(3)	$	983	0.37		$	813	0.33
Other nonperforming assets(4)	63		0.02		59		0.02
Total nonperforming assets	$	1,046	0.39		$	872	0.35

__________

⁽¹⁾  We recognized interest income for loans classified as nonperforming of $63 million and $60 million in 2019 and 2018, respectively. Interest income foregone related to nonperforming loans was $60 million and $53 million in 2019 and 2018, respectively. Foregone interest income represents the amount of interest income in excess of recognized interest income that would have been recorded during the period for nonperforming loans as of the end of the period had the loans performed according to their contractual terms.

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

⁽³⁾  Excluding the impact of domestic credit card loans, nonperforming loans as a percentage of total loans held for investment was 0.67% and 0.59% as of December 31, 2019 and 2018, respectively.

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

82 Capital One Financial Corporation (COF)

Net Charge-Offs

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

Table 27 presents our net charge-off amounts and rates, by portfolio segment, in 2019, 2018 and 2017.

Table 27: Net Charge-Offs (Recoveries)

	Year Ended December 31,
	2019				2018					2017
(Dollars in millions)	Amount		Rate(1)		Amount			Rate(1)		Amount		Rate(1)
Credit Card:
Domestic credit card(2)	$	4,818	4.58	%	$	4,782		4.74	%	$	4,739	4.99	%
International card businesses	331		3.71		287			3.19		315		3.69
Total credit card	5,149		4.51		5,069			4.62		5,054		4.88
Consumer Banking:
Auto	876		1.51		912			1.64		957		1.86
Retail banking	71		2.57		70			2.26		66		1.92
Home loan	—		—		(1		)	(0.02	)	15		0.08
Total consumer banking	947		1.56		981			1.51		1,038		1.39
Commercial Banking:
Commercial and multifamily real estate	1		—		2			0.01		1		—
Commercial and industrial	155		0.36		54			0.14		463		1.17
Total commercial lending	156		0.22		56			0.08		464		0.69
Small-ticket commercial real estate	—		—		—			0.02		1		0.24
Total commercial banking	156		0.22		56			0.08		465		0.69
Other loans	—		—		6			34.09		5		9.70
Total net charge-offs	$	6,252	2.53		$	6,112		2.52		$	6,562	2.67
Average loans held for investment	$	247,450			$	242,118				$	245,565

__________

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

⁽²⁾  The Walmart acquisition reduced the domestic credit card net charge-off rate by 8 basis points for the year ended December 31, 2019.

83 Capital One Financial Corporation (COF)

Troubled Debt Restructurings

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

Table 28 presents our recorded investment of loans modified in TDRs as of December 31, 2019 and 2018, which excludes loan modifications that do not meet the definition of a TDR, and PCI loans, which we track and report separately.

Table 28: Troubled Debt Restructurings

	December 31, 2019				December 31, 2018
(Dollars in millions)	Amount		% of Total Modifications		Amount		% of Total Modifications
Credit card	$	831	50.3	%	$	855	53.2	%
Consumer banking:
Auto	346		20.9		339		21.1
Retail banking	24		1.5		33		2.1
Total consumer banking	370		22.4		372		23.2
Commercial banking	451		27.3		379		23.6
Total	$	1,652	100.0	%	$	1,606	100.0	%
Status of TDRs:
Performing	$	1,347	81.5	%	$	1,433	89.2	%
Nonperforming	305		18.5		173		10.8
Total	$	1,652	100.0	%	$	1,606	100.0	%

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

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

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

We provide additional information on modified loans accounted for as TDRs, including the performance of those loans subsequent to modification, in “Note 3—Loans.”

Impaired Loans

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

84 Capital One Financial Corporation (COF)

Impaired loans totaled $1.9 billion and $1.8 billion as of December 31, 2019 and 2018, respectively. These amounts include TDRs of $1.7 billion and $1.6 billion as of December 31, 2019 and 2018, respectively. We provide additional information on our impaired loans, including the allowance for loan and lease losses established for these loans, in “Note 3—Loans” and “Note 4—Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments.”

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

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

Table 29 presents changes in our allowance for loan and lease losses and reserve for unfunded lending commitments for 2019 and 2018, and details by portfolio segment for the provision for credit losses, charge-offs and recoveries.

85 Capital One Financial Corporation (COF)

Table 29: Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments Activity

	Credit Card									Consumer Banking
(Dollars in millions)	Domestic Card			International Card Businesses			Total Credit Card			Auto			Home Loan			Retail Banking			Total Consumer Banking			Commercial Banking			Other(1)			Total
Allowance for loan and lease losses:
Balance as of December 31, 2017	$	5,273		$	375		$	5,648		$	1,119		$	58		$	65		$	1,242		$	611		$	1		$	7,502
Charge-offs	(6,152		)	(505		)	(6,657		)	(1,746		)	—			(86		)	(1,832		)	(119		)	(7		)	(8,615		)
Recoveries(2)	1,370			218			1,588			834			1			16			851			63			1			2,503
Net charge-offs	(4,782		)	(287		)	(5,069		)	(912		)	1			(70		)	(981		)	(56		)	(6		)	(6,112		)
Provision (benefit) for loan and lease losses	4,653			331			4,984			783			(6		)	64			841			82			(49		)	5,858
Allowance build (release) for loan and lease losses	(129		)	44			(85		)	(129		)	(5		)	(6		)	(140		)	26			(55		)	(254		)
Other changes(1)(3)	—			(28		)	(28		)	—			(53		)	(1		)	(54		)	—			54			(28		)
Balance as of December 31, 2018	5,144			391			5,535			990			—			58			1,048			637			—			7,220
Reserve for unfunded lending commitments:
Balance as of December 31, 2017	—			—			—			—			—			7			7			117			—			124
Provision (benefit) for losses on unfunded lending commitments	—			—			—			—			—			(3		)	(3		)	1			—			(2		)
Balance as of December 31, 2018	—			—			—			—			—			4			4			118			—			122
Combined allowance and reserve as of December 31, 2018	$	5,144		$	391		$	5,535		$	990		$	—		$	62		$	1,052		$	755		$	—		$	7,342
Allowance for loan and lease losses:
Balance as of December 31, 2018	$	5,144		$	391		$	5,535		$	990		$	—		$	58		$	1,048		$	637		$	—		$	7,220
Charge-offs	(6,189		)	(522		)	(6,711		)	(1,829		)	—			(88		)	(1,917		)	(181		)	—			(8,809		)
Recoveries(2)	1,371			191			1,562			953			—			17			970			25			—			2,557
Net charge-offs	(4,818		)	(331		)	(5,149		)	(876		)	—			(71		)	(947		)	(156		)	—			(6,252		)
Provision for loan and lease losses	4,671			321			4,992			870			—			67			937			294			—			6,223
Allowance build (release) for loan and lease losses	(147		)	(10		)	(157		)	(6		)	—			(4		)	(10		)	138			—			(29		)
Other changes(3)	—			17			17			—			—			—			—			—			—			17
Balance as of December 31, 2019	4,997			398			5,395			984			—			54			1,038			775			—			7,208
Reserve for unfunded lending commitments:
Balance as of December 31, 2018	—			—			—			—			—			4			4			118			—			122
Provision for losses on unfunded lending commitments	—			—			—			—			—			1			1			12			—			13
Balance as of December 31, 2019	—			—			—			—			—			5			5			130			—			135
Combined allowance and reserve as of December 31, 2019	$	4,997		$	398		$	5,395		$	984		$	—		$	59		$	1,043		$	905		$	—		$	7,343

__________

⁽¹⁾  In 2018, we sold all of our consumer home loan portfolio and recognized a gain of approximately $499 million in the Other category, including a benefit for credit losses of $46 million.

⁽²⁾  The amount and timing of recoveries is impacted by our collection strategies, which are based on customer behavior and risk profile and include direct customer communications, repossession of collateral, the periodic sale of charged-off loans as well as additional strategies, such as litigation.

⁽³⁾  Represents foreign currency translation adjustments and the net impact of loan transfers and sales where applicable.

86 Capital One Financial Corporation (COF)

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

Table 30: Allowance Coverage Ratios

	December 31, 2019						December 31, 2018
(Dollars in millions)	Allowance for Loan and Lease Losses		Amount(1)		Allowance Coverage Ratio		Allowance for Loan and Lease Losses		Amount(1)		Allowance Coverage Ratio
Credit Card	$	5,395	$	5,009	107.70	%	$	5,535	$	4,668	118.56	%
Consumer banking	1,038		4,627		22.42		1,048		4,360		24.04
Commercial banking	775		448		173.20		637		312		204.25
Total	$	7,208	265,809		2.71		$	7,220	245,899		2.94

__________

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

Our allowance for loan and lease losses remains substantially flat at $7.2 billion as an allowance release in our domestic credit card loan portfolio largely due to the strong economy and stable underlying credit performance was offset by an allowance build due to credit deterioration in our commercial energy loan portfolio.

Our allowance coverage ratio decreased by 23 basis points to 2.71% as of December 31, 2019 from December 31, 2018 primarily driven by the strong economy and stable underlying credit performance in our domestic credit card loan portfolio and the impacts from partner loss sharing arrangements, offset by higher reserves in our commercial banking business.

LIQUIDITY RISK PROFILE

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

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

Table 31: Liquidity Reserves

(Dollars in millions)	December 31, 2019			December 31, 2018
Cash and cash equivalents	$	13,407		$	13,186
Investment securities portfolio:
Investment securities available for sale, at fair value	79,213			46,150
Investment securities held to maturity, at fair value	—			36,619
Total investment securities portfolio	79,213			82,769
FHLB borrowing capacity secured by loans	10,835			10,003
Outstanding FHLB advances and letters of credit secured by loans	(7,210		)	(9,726		)
Investment securities encumbered for Public Funds and others	(5,688		)	(6,631		)
Total liquidity reserves	$	90,557		$	89,601

Our liquidity reserves increased by $956 million to $90.6 billion as of December 31, 2019 from December 31, 2018 primarily driven by a decrease in our FHLB advances outstanding. See “MD&A—Risk Management” for additional information on our management of liquidity risk.

87 Capital One Financial Corporation (COF)

Liquidity Coverage Ratio

We are subject to the Liquidity Coverage Ratio Rule (“LCR Rule”) as implemented by the Federal Reserve and OCC. The LCR Rule requires us to calculate our LCR daily. It also requires the Company to publicly disclose, on a quarterly basis, its LCR, certain related quantitative liquidity metrics, and a qualitative discussion of its LCR. Our average LCR during the fourth quarter of 2019 exceeded the LCR Rule requirement of 100%. The calculation and the underlying components are based on our interpretations, expectations and assumptions of relevant regulations, as well as interpretations provided by our regulators, and are subject to change based on changes to future regulations and interpretations. Under the Tailoring Rules, we are subject to a reduced LCR requirement, which we do not expect will have a significant impact on the Company’s publicly disclosed LCR. See “Part I—Item 1. Business—Supervision and Regulation” for additional information.

Borrowing Capacity

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

In addition to our issuance capacity under the shelf registration statements, we also have access to FHLB advances and the Federal Reserve Discount Window. The ability to borrow utilizing these sources is based on membership status and the amount is dependent upon the Banks’ ability to post collateral. As of December 31, 2019, we pledged both loans and securities to FHLB to secure a maximum borrowing capacity of $18.7 billion, of which $11.5 billion was still available to us to borrow. Our FHLB membership is supported by our investment in FHLB stock of $328 million and $415 million as of December 31, 2019 and 2018, respectively, which was determined in part based on our outstanding advances. As of December 31, 2019, we pledged loans to secure a borrowing capacity of $5.3 billion under the Federal Reserve Discount Window. Our membership with the Federal Reserve is supported by our investment in Federal Reserve stock, which totaled $1.3 billion as of both December 31, 2019 and 2018.

Funding

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

88 Capital One Financial Corporation (COF)

Deposits

Table 32 provides a comparison of average balances, interest expense and average deposit interest rates for the years ended December 31, 2019, 2018 and 2017.

Table 32: Deposits Composition and Average Deposits Interest Rates

	Year Ended December 31,
	2019						2018						2017
(Dollars in millions)	Average Balance		Interest Expense		Average Deposits Interest Rate		Average Balance		Interest Expense		Average Deposits Interest Rate		Average Balance		Interest Expense		Average Deposits Interest Rate
Interest-bearing checking accounts(1)	$	34,343	$	289	0.84	%	$	38,843	$	245	0.63	%	$	44,537	$	227	0.51	%
Saving deposits(2)	154,910		2,048		1.32		149,443		1,603		1.07		144,273		982		0.68
Time deposits less than $100,000	27,202		746		2.74		25,535		606		2.37		21,030		337		1.60
Total interest-bearing core deposits	216,455		3,083		1.42		213,821		2,454		1.15		209,840		1,546		0.74
Time deposits of $100,000 or more	15,154		337		2.22		7,672		143		1.87		3,661		54		1.50
Foreign deposits	—		—		—		267		1		0.41		448		2		0.38
Total interest-bearing deposits	$	231,609	$	3,420	1.48		$	221,760	$	2,598	1.17		$	213,949	$	1,602	0.75

__________

⁽¹⁾  Includes negotiable order of withdrawal accounts.

⁽²⁾  Includes money market deposit accounts.

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

Table 33 presents the contractual maturities of large-denomination domestic time deposits of $100,000 or more as of December 31, 2019 and 2018. Our funding and liquidity management activities factor into the expected maturities of these deposits.

Table 33: Maturities of Large-Denomination Domestic Time Deposits—$100,000 or More

	December 31,
	2019				2018
(Dollars in millions)	Amount		% of Total		Amount		% of Total
Up to three months	$	3,801	21.8	%	$	1,494	13.2	%
> 3 months to 6 months	3,953		22.6		3,034		26.7
> 6 months to 12 months	6,139		35.2		4,328		38.1
> 12 months	3,564		20.4		2,493		22.0
Total	$	17,457	100.0	%	$	11,349	100.0	%

Short-Term Borrowings and Long-Term Debt

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

Our short-term borrowings include those borrowings with an original contractual maturity of one year or less and do not include the current portion of long-term debt. The short-term borrowings, which consist of short-term FHLB advances and federal funds purchased, securities loaned or sold under agreements to repurchase, decreased by $2.1 billion to $7.3 billion as of December 31, 2019 from December 31, 2018 driven by maturities of our short-term FHLB advances.

89 Capital One Financial Corporation (COF)

Our long-term debt, which primarily consists of securitized debt obligations, senior and subordinated notes, and long-term FHLB advances, decreased by $1.1 billion to $48.4 billion as of December 31, 2019 from December 31, 2018 driven by maturities exceeding issuances. We provide more information on our securitization activity in “Note 5—Variable Interest Entities and Securitizations.”

The following table summarizes issuances of securitized debt obligations, senior and subordinated notes, and FHLB advances and their respective maturities or redemptions for the years ended December 31, 2019, 2018 and 2017.

Table 34: Long-Term Funding

	Issuances						Maturities/Redemptions
	Year Ended December 31,						Year Ended December 31,
(Dollars in millions)	2019		2018		2017		2019		2018		2017
Securitized debt obligations(1)	$	6,673	$	1,000	$	8,474	$	7,285	$	2,673	$	7,233
Senior and subordinated notes	4,161		5,250		10,300		5,344		5,055		2,804
FHLB advances	—		750		25,180		251		9,108		33,750
Total	$	10,834	$	7,000	$	43,954	$	12,880	$	16,836	$	43,787

__________

⁽¹⁾  Includes $2.5 billion of securitized debt assumed in the Cabela’s acquisition for the year ended December 31, 2017.

Credit Ratings

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

Table 35 provides a summary of the credit ratings for the senior unsecured long-term debt of Capital One Financial Corporation, COBNA and CONA as of December 31, 2019 and 2018.

Table 35: Senior Unsecured Long-Term Debt Credit Ratings

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

As of February 14, 2020, Moody’s Investors Service (“Moody’s”), S&P and Fitch Ratings (“Fitch”) have us on a stable outlook.

Contractual Obligations

In the normal course of business, we enter into various contractual obligations that may require future cash payments that affect our short-term and long-term liquidity and capital resource needs. Our future cash outflows primarily relate to deposits, borrowings and operating leases. Table 36 summarizes, by remaining contractual maturity, our significant contractual cash obligations as of December 31, 2019. The actual timing and amounts of future cash payments may differ from the amounts presented below due to a number of factors, such as discretionary debt repurchases. Table 36 excludes short-term obligations such as trade payables, commitments to fund certain equity investments, obligations for pension and post-retirement benefit plans, and representation and warranty reserves, which are discussed in more detail in “Note 5—Variable Interest Entities and Securitizations,” “Note 14—Employee Benefit Plans” and “Note 18—Commitments, Contingencies, Guarantees and Others.”

90 Capital One Financial Corporation (COF)

Table 36: Contractual Obligations

	December 31, 2019
(Dollars in millions)	Up to 1 Year		> 1 Years to 3 Years		> 3 Years to 5 Years		> 5 Years		Total
Interest-bearing time deposits(1)(2)	$	28,186	$	12,887	$	3,775	$	110	$	44,958
Securitized debt obligations(2)	5,433		8,549		2,256		1,570		17,808
Other debt:
Federal funds purchased and securities loaned or sold under agreements to repurchase	314		—		—		—		314
Senior and subordinated notes	4,398		9,046		8,707		8,321		30,472
Other borrowings(3)	7,022		40		23		18		7,103
Total other debt(2)	11,734		9,086		8,730		8,339		37,889
Operating leases	310		535		437		782		2,064
Purchase obligations(4)	470		769		553		400		2,192
Total	$	46,133	$	31,826	$	15,751	$	11,201	$	104,911

__________

⁽¹⁾  Includes only those interest-bearing deposits which have a contractual maturity date.

⁽²⁾  These amounts represent the carrying value of the obligations and do not include amounts related to contractual interest obligations. Total contractual interest obligations were approximately $4.1 billion as of December 31, 2019, and represent forecasted net interest payments based on interest rates as of December 31, 2019. These forecasts use the contractual maturity date of each liability and include the impact of hedge accounting where applicable.

⁽³⁾  Other borrowings primarily consists of FHLB advances.

⁽⁴⁾  Represents substantial agreements to purchase goods or services that are enforceable and legally binding and specify all significant terms. Purchase obligations are included through the termination date of the agreements even if the contract is renewable.

MARKET RISK PROFILE

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

• Traditional banking activities of deposit gathering and lending;

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

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

• Customer accommodation activities within our Commercial Banking business.

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

Interest Rate Risk

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

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

91 Capital One Financial Corporation (COF)

Net Interest Income Sensitivity

Our net interest income sensitivity measure estimates the impact on our projected 12-month baseline interest rate-sensitive revenue resulting from movements in interest rates. Interest rate-sensitive revenue consists of net interest income and certain components of other non-interest income significantly impacted by movements in interest rates, including changes in the fair value of freestanding interest rate derivatives. In addition to our existing assets and liabilities, we incorporate expected future business growth assumptions, such as loan and deposit growth and pricing, and plans for projected changes in our funding mix in our baseline forecast. In measuring the sensitivity of interest rate movements on our projected interest rate-sensitive revenue, we assume a hypothetical instantaneous parallel shift in the level of interest rates detailed in Table 37 below. At the current level of interest rates, our interest rate sensitive revenue is expected to increase modestly in higher rate scenarios and decrease modestly in lower rate scenarios.

Economic Value of Equity

Our economic value of equity sensitivity measure estimates the impact on the net present value of our assets and liabilities, including derivative exposures, resulting from movements in interest rates. Our economic value of equity sensitivity measure is calculated based on our existing assets and liabilities, including derivatives, and does not incorporate business growth assumptions or projected balance sheet changes. Key assumptions used in the calculation include projecting rate sensitive prepayments for mortgage securities, loans and other assets, term structure modeling of interest rates, discount spreads, and deposit volume and pricing assumptions. In measuring the sensitivity of interest rate movements on our economic value of equity, we assume a hypothetical instantaneous parallel shift in the level of interest rates detailed in Table 37 below. Our current economic value of equity sensitivity profile demonstrates that our economic value of equity generally decreases as interest rates decrease from the current levels.

Table 37 shows the estimated percentage impact on our projected baseline net interest income and economic value of equity calculated under the methodology described above as of December 31, 2019 and 2018. In instances where a declining interest rate scenario would result in a rate less than 0%, we assume a rate of 0% for that scenario.

Table 37: Interest Rate Sensitivity Analysis

	December 31, 2019		December 31, 2018
Estimated impact on projected baseline net interest income:
+200 basis points	1.8	%	(0.8	)%
+100 basis points	1.3		(0.2	)
+50 basis points	1.1		0.0
–50 basis points	(0.5	)	(0.3	)
–100 basis points	(1.7	)	(1.0	)
Estimated impact on economic value of equity:
+200 basis points	(3.6	)	(7.1	)
+100 basis points	0.5		(2.9	)
+50 basis points	0.8		(1.2	)
–50 basis points	(2.4	)	0.2
–100 basis points	(6.6	)	(0.8	)

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

Limitations of Market Risk Measures

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

92 Capital One Financial Corporation (COF)

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

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

Foreign Exchange Risk

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

Our non-dollar denominated intercompany funding and EUR-denominated borrowings expose our earnings to foreign exchange transaction risk. We manage these transaction risks by using forward foreign currency derivatives and cross-currency swaps to hedge our exposures. We measure our foreign exchange transaction risk exposures by applying a 1% U.S. dollar appreciation shock against the value of the non-dollar denominated intercompany funding and EUR-denominated borrowings and their related hedges, which shows the impact to our earnings from foreign exchange risk. Our intercompany funding outstanding was 761 million GBP and 756 million GBP as of December 31, 2019 and 2018, respectively, and 6.6 billion CAD and 6.5 billion CAD as of December 31, 2019 and 2018, respectively. Our EUR-denominated borrowings outstanding were 1.2 billion EUR as of December 31, 2019.

Our non-dollar equity investments in foreign operations expose our balance sheet to translation risk in AOCI and our capital ratios. We manage our AOCI exposure by entering into foreign currency derivatives designated as net investment hedges. We measure these exposures by applying a 30% U.S. dollar appreciation shock, which we believe approximates a significant adverse shock over a one-year time horizon, against the value of the net equity invested in our foreign operations related net investment hedges where applicable. Our gross equity exposures in our U.K. and Canadian operations were 1.6 billion GBP as of both December 31, 2019 and 2018, and 1.4 billion CAD and 1.2 billion CAD as of December 31, 2019 and 2018, respectively.

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

Risk related to Customer Accommodation Derivatives

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

London Interbank Offered Rate (“LIBOR”) Transition

On July 27, 2017, the U.K. Financial Conduct Authority, the regulator for the administration of LIBOR, announced that LIBOR would be transitioned as an interest rate benchmark and that it will no longer compel banks to contribute LIBOR data beyond December 31, 2021. It is unclear what rate or rates may develop as accepted alternatives to LIBOR, or what the effect of any such changes may have on the markets for LIBOR-based financial instruments. In the U.S., the Federal Reserve Board and the Federal Reserve Bank of New York established the Alternative Reference Rates Committee (“ARRC”), a group of private market participants and ex-officio members representing banking and financial sector regulators. ARRC has recommended the Secured Overnight Financing Rate (“SOFR”) as the preferred alternative rate for certain U.S. dollar derivative and cash instruments. We have exposures to LIBOR, including loans, derivative contracts, unsecured debt, securitizations, vendor agreements and other instruments with attributes that are either directly or indirectly dependent on LIBOR. To facilitate an orderly transition from LIBOR,

93 Capital One Financial Corporation (COF)

we have established a company-wide, cross-functional initiative to oversee and manage our transition away from LIBOR and other Interbank Offered Rates (“IBORs”) to alternative reference rates. We have made progress on our transition efforts as we:

• implemented a robust governance framework and transition planning;

• completed initial assessment of exposures in products, legal contracts, systems, models and processes;

• included LIBOR transition language (“fallback language”) for new legal contracts/agreements; and

• issued our first debt security with a SOFR-based floating rate component in January 2020.

We also continue to focus our transition efforts on:

• reviewing existing legal contracts/agreements and assessing fallback language impacts;

• monitoring of our LIBOR exposure;

• assessing internal operational readiness and risk management;

• implementing necessary updates to our infrastructure including systems, models, valuation tools and processes;

• engaging with our clients, industry working groups, and regulators; and

• monitoring developments associated with LIBOR alternatives and industry practices related to LIBOR-indexed instruments.

For a further discussion of the various risks we face in connection with the expected replacement of LIBOR on our operations, see “Part I—Item 1A. Risk Factors—Uncertainty regarding, and transition away from, LIBOR may adversely affect our business”.

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SUPPLEMENTAL TABLES

Table A—Loans Held for Investment Portfolio Composition

	December 31,
(Dollars in millions)	2019		2018		2017		2016		2015
Credit Card:
Domestic credit card	$	118,606	$	107,350	$	105,293	$	97,120	$	87,939
International card businesses	9,630		9,011		9,469		8,432		8,186
Total credit card	128,236		116,361		114,762		105,552		96,125
Consumer Banking:
Auto	60,362		56,341		53,991		47,916		41,549
Home loan	—		—		17,633		21,584		25,227
Retail banking	2,703		2,864		3,454		3,554		3,596
Total consumer banking	63,065		59,205		75,078		73,054		70,372
Commercial Banking:
Commercial and multifamily real estate	30,245		28,899		26,150		26,609		25,518
Commercial and industrial	44,263		41,091		38,025		39,824		37,135
Total commercial lending	74,508		69,990		64,175		66,433		62,653
Small-ticket commercial real estate	—		343		400		483		613
Total commercial banking	74,508		70,333		64,575		66,916		63,266
Other loans	—		—		58		64		88
Total loans	$	265,809	$	245,899	$	254,473	$	245,586	$	229,851

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Table B—Performing Delinquencies

	December 31,
	2019				2018				2017				2016				2015
(Dollars in millions)	Loans(1)(2)		Rate(3)		Loans(1)(2)		Rate(3)		Loans(1)(2)		Rate(3)		Loans(1)(2)		Rate(3)		Loans(1)(2)		Rate(3)
Delinquent loans:
30 – 59 days	$	4,417	1.66	%	$	4,255	1.73	%	$	3,908	1.53	%	$	3,416	1.39	%	$	3,042	1.33	%
60 – 89 days	2,513		0.94		2,406		0.98		2,086		0.82		1,833		0.75		1,636		0.71
90 – 119 days	975		0.37		866		0.35		862		0.34		771		0.31		603		0.26
120 – 149 days	813		0.31		736		0.30		734		0.29		628		0.26		493		0.21
150 or more days	619		0.23		632		0.26		637		0.25		537		0.22		409		0.18
Total	$	9,337	3.51	%	$	8,895	3.62	%	$	8,227	3.23	%	$	7,185	2.93	%	$	6,183	2.69	%
By geographic area:
Domestic	$	9,002	3.38	%	$	8,578	3.49	%	$	7,883	3.10	%	$	6,902	2.81	%	$	5,939	2.58	%
International	335		0.13		317		0.13		344		0.13		283		0.12		244		0.11
Total	$	9,337	3.51	%	$	8,895	3.62	%	$	8,227	3.23	%	$	7,185	2.93	%	$	6,183	2.69	%
Total loans held for investment	$	265,809			$	245,899			$	254,473			$	245,586			$	229,851

__________

⁽¹⁾  Credit card loan balances are reported net of the finance charge and fee reserve, which totaled $462 million, $468 million, $491 million, $402 million and $262 million as of December 31, 2019, 2018, 2017, 2016 and 2015, respectively.

⁽²⁾  Performing TDRs totaled $1.3 billion, $1.4 billion, $1.9 billion, $1.6 billion and $1.4 billion as of December 31, 2019, 2018, 2017, 2016 and 2015, respectively.

⁽³⁾  Delinquency rates are calculated by dividing loans in each delinquency status category and geographic region as of the end of the period by the total loan portfolio.

96 Capital One Financial Corporation (COF)

Table C—Nonperforming Loans and Other Nonperforming Assets

	December 31,
(Dollars in millions)	2019			2018			2017			2016			2015
Nonperforming loans held for investment:
Credit Card:
International card businesses	$	25		$	22		$	24		$	42		$	53
Total credit card	25			22			24			42			53
Consumer Banking:
Auto	487			449			376			223			219
Home loan	—			—			176			273			311
Retail banking	23			30			35			31			28
Total consumer banking	510			479			587			527			558
Commercial Banking:
Commercial and multifamily real estate	38			83			38			30			7
Commercial and industrial	410			223			239			988			538
Total commercial lending	448			306			277			1,018			545
Small-ticket commercial real estate	—			6			7			4			5
Total commercial banking	448			312			284			1,022			550
Other loans	—			—			4			8			9
Total nonperforming loans held for investment	$	983		$	813		$	899		$	1,599		$	1,170
Other nonperforming assets	63			59			153			280			324
Total nonperforming assets	$	1,046		$	872		$	1,052		$	1,879		$	1,494
Total nonperforming loans(1)	0.37		%	0.33		%	0.35		%	0.65		%	0.51		%
Total nonperforming assets(2)	0.39			0.35			0.41			0.76			0.65

__________

⁽¹⁾  Nonperforming loan rate is calculated based on total nonperforming loans divided by period-end total loans held for investment.

⁽²⁾  The denominator used in calculating the total nonperforming assets ratio consists of total loans held for investment and total other nonperforming assets.

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Table D—Net Charge-Offs

	Year Ended December 31,
(Dollars in millions)	2019			2018			2017			2016			2015
Average loans held for investment	$	247,450		$	242,118		$	245,565		$	233,272		$	210,745
Net charge-offs	6,252			6,112			6,562			5,062			3,695
Net charge-off rate	2.53		%	2.52		%	2.67		%	2.17		%	1.75		%

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Table E—Summary of Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments

	December 31,
(Dollars in millions)	2019			2018			2017			2016			2015
Allowance for loan and lease losses:
Balance at beginning of period	$	7,220		$	7,502		$	6,503		$	5,130		$	4,383
Charge-offs:
Credit card	(6,711		)	(6,657		)	(6,321		)	(5,019		)	(4,028		)
Consumer banking	(1,917		)	(1,832		)	(1,677		)	(1,226		)	(1,082		)
Commercial banking	(181		)	(119		)	(481		)	(307		)	(76		)
Other	—			(7		)	(34		)	(3		)	(7		)
Total charge-offs	(8,809		)	(8,615		)	(8,513		)	(6,555		)	(5,193		)
Recoveries:
Credit card	1,562			1,588			1,267			1,066			1,110
Consumer banking	970			851			639			406			351
Commercial banking	25			63			16			15			29
Other	—			1			29			6			8
Total recoveries	2,557			2,503			1,951			1,493			1,498
Net charge-offs	(6,252		)	(6,112		)	(6,562		)	(5,062		)	(3,695		)
Provision for credit losses	6,223			5,858			7,563			6,491			4,490
Allowance build (release) for loan and lease losses	(29		)	(254		)	1,001			1,429			795
Other changes	17			(28		)	(2		)	(56		)	(48		)
Balance at end of period	$	7,208		$	7,220		$	7,502		$	6,503		$	5,130
Reserve for unfunded lending commitments:
Balance at beginning of period	$	122		$	124		$	136		$	168		$	113
Provision (benefit) for losses on unfunded lending commitments	13			(2		)	(12		)	(32		)	46
Other changes	—			—			—			—			9
Balance at end of period	135			122			124			136			168
Combined allowance and reserve at end of period	$	7,343		$	7,342		$	7,626		$	6,639		$	5,298
Allowance for loan and lease losses as a percentage of loans held for investment	2.71		%	2.94		%	2.95		%	2.65		%	2.23		%
Combined allowance and reserve by geographic distribution:
Domestic	$	6,945		$	6,951		$	7,251		$	6,262		$	4,999
International	398			391			375			377			299
Total	$	7,343		$	7,342		$	7,626		$	6,639		$	5,298
Combined allowance and reserve by portfolio segment:
Credit card	$	5,395		$	5,535		$	5,648		$	4,606		$	3,654
Consumer banking	1,043			1,052			1,249			1,109			875
Commercial banking	905			755			728			922			765
Other	—			—			1			2			4
Total	$	7,343		$	7,342		$	7,626		$	6,639		$	5,298

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Reconciliation of Non-GAAP Measures

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

Table F—Reconciliation of Non-GAAP Measures

	December 31,
(Dollars in millions, except as noted)	2019			2018			2017			2016			2015
Tangible Common Equity (Period-End)
Stockholders’ equity	$	58,011		$	51,668		$	48,730		$	47,514		$	47,284
Goodwill and intangible assets(1)	(14,932		)	(14,941		)	(15,106		)	(15,420		)	(15,701		)
Noncumulative perpetual preferred stock	(4,853		)	(4,360		)	(4,360		)	(4,360		)	(3,294		)
Tangible common equity	$	38,226		$	32,367		$	29,264		$	27,734		$	28,289
Tangible Common Equity (Average)
Stockholders’ equity	$	55,690		$	50,192		$	49,530		$	48,753		$	47,713
Goodwill and intangible assets(1)	(14,927		)	(15,017		)	(15,308		)	(15,550		)	(15,273		)
Noncumulative perpetual preferred stock	(4,729		)	(4,360		)	(4,360		)	(3,591		)	(2,641		)
Tangible common equity	$	36,034		$	30,815		$	29,862		$	29,612		$	29,799
Tangible Assets (Period-End)
Total assets	$	390,365		$	372,538		$	365,693		$	357,033		$	334,048
Goodwill and intangible assets(1)	(14,932		)	(14,941		)	(15,106		)	(15,420		)	(15,701		)
Tangible assets	$	375,433		$	357,597		$	350,587		$	341,613		$	318,347
Tangible Assets (Average)
Total assets	$	374,924		$	363,036		$	354,924		$	339,974		$	313,474
Goodwill and intangible assets(1)	(14,927		)	(15,017		)	(15,308		)	(15,550		)	(15,273		)
Tangible assets	$	359,997		$	348,019		$	339,616		$	324,424		$	298,201
Non-GAAP Ratio
Tangible common equity(2)	10.2		%	9.1		%	8.3		%	8.1		%	8.9		%

__________

⁽¹⁾  Includes impact of related deferred taxes.

⁽²⁾  Tangible common equity (“TCE”) ratio is a non-GAAP measure calculated based on TCE divided by tangible assets.