Capital One Financial Corporation (NYSE: COF) — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; the filing also reports fourth-quarter results. Filed February 25, 2021. Capital One is a diversified financial services company operating in Credit Card, Consumer Banking and Commercial Banking.
Financial performance and position
| Metric | 2020 | 2019 |
|---|---|---|
| Total net revenue | $28.5 billion | $28.6 billion |
| Net income | $2.7 billion | $5.5 billion |
| Diluted earnings per common share | $5.18 | $11.05 |
| Net interest income / net interest margin | $22.9 billion / 6.06% | $23.3 billion / 6.83% |
| Provision for credit losses | $10.3 billion | $6.2 billion |
| Net charge-offs / net charge-off rate | $5.2 billion / 2.06% | $6.3 billion / 2.53% |
| Total non-interest expense | $15.1 billion | $15.5 billion |
| Return on average assets | 0.66% | 1.48% |
Revenue was nearly flat, but earnings fell 51%, mainly because of larger credit-loss provisions, lower asset yields and lower Domestic Card balances. Lower marketing expense and a $535 million unrealized gain on Capital One’s Snowflake investment partly offset these pressures. The effective income tax rate was 15.2%, compared with 19.5% in 2019.
Fourth quarter: Net income was $2.566 billion and diluted EPS was $5.35, versus $1.176 billion and $2.25 in fourth-quarter 2019. Net revenue was approximately $7.34 billion. Provision for credit losses was $264 million, following substantial allowance builds earlier in 2020.
Cash flow: Reported operating cash flow was $16.7 billion, investing cash flow was negative $14.8 billion and financing cash flow was $25.2 billion. Cash, cash equivalents and restricted cash rose $27.0 billion to $40.8 billion. These bank cash-flow figures should be interpreted alongside balance-sheet and liquidity disclosures.
Balance sheet, liquidity and capital
- Total assets were $421.6 billion, up $31.2 billion year over year. Period-end loans held for investment declined 5% to $251.6 billion; deposits increased 16% to $305.4 billion.
- Cash and cash equivalents totaled $40.5 billion; available-for-sale securities were $100.4 billion. Liquidity reserves were $144.0 billion, up from $90.6 billion. Fourth-quarter average liquidity coverage ratio was 145%, above the 100% regulatory requirement.
- Borrowings, including securitized debt obligations, totaled $40.5 billion, down from $55.7 billion. Stockholders’ equity was $60.2 billion.
- Year-end allowance for credit losses was $15.6 billion, or 6.19% of loans, versus $7.2 billion and 2.71% a year earlier. The increase reflected CECL adoption and pandemic-related reserve builds; the filing reports approximately $5.0 billion of allowance builds in the first two quarters.
- Company CET1 capital ratio was 13.7%, up from 12.2%; the stress capital buffer was 5.6% through September 2021. The company and banks exceeded applicable regulatory capital requirements at year-end.
Material changes and business trends
- COVID-19 reduced demand and altered customer payment behavior. Domestic Card year-end loans fell 17% to $107.0 billion, while purchase volume declined 2%. Consumer Banking loans rose 9% to $68.9 billion, led by auto lending; Commercial Banking loans rose 2% to $75.8 billion.
- Consumer Banking deposits grew 17% to $249.8 billion, supported by increased savings and government stimulus; Commercial Banking deposits grew 23% to $39.6 billion.
- Reported delinquency and charge-off measures improved during the year, supported by customer payment behavior, stimulus and payment accommodations. These metrics may not reflect underlying credit risk fully while assistance programs and temporary accommodations remain in effect.
- Commercial Banking net income declined to $65 million from $621 million, reflecting an $875 million increase in credit-loss provision, including energy-portfolio deterioration. Its nonperforming loan rate rose to 0.86% from 0.60%.
- Capital One adopted CECL on January 1, 2020, recording a $2.9 billion increase in credit-loss reserves and a $2.2 billion reduction in retained earnings. The filing also describes regulatory transition relief for capital treatment.
Outlook, risks and unusual items
- Management did not provide a broad numerical consolidated earnings or revenue forecast in the supplied filing text. It expects Auto delinquency and charge-off rates to rise as used-car auction prices ease from elevated levels and temporary benefits from customer assistance diminish.
- Capital One offered payment deferrals, extensions and fee waivers to customers affected by COVID-19 and participated in the Paycheck Protection Program. Management emphasized that the pandemic’s effects remain uncertain and depend on economic conditions, stimulus and the pace of recovery.
- In January 2021, the board authorized up to $7.5 billion in common-stock repurchases and approved a $0.40 quarterly common dividend for first-quarter 2021. Regulatory capital-distribution restrictions applied through at least the first quarter of 2021; execution remains subject to limits and other conditions.
- A $2.1 billion partnership card portfolio was transferred to held for sale; the transfer generated a $327 million allowance release. Capital One also reported a $535 million unrealized gain on its Snowflake investment.
- The 2019 cybersecurity incident remains subject to litigation and inquiries. In 2020, related expenses were $66 million, partly offset by $39 million of insurance recoveries; cumulative expenses were $138 million against $73 million of recoveries. The company entered Federal Reserve and OCC consent orders in 2020 and paid an $80 million OCC penalty.
- In January 2021, FinCEN assessed a $390 million AML penalty; Capital One paid $290 million after a credit for the prior $100 million OCC penalty. Litigation disclosures estimate approximately $200 million of reasonably possible future losses beyond reserves for matters where an estimate was possible; actual losses could exceed that estimate.
- Other significant exposures include credit losses and the uncertainty of CECL forecasts, commercial real estate and industry concentrations, interest-rate and LIBOR transition risks, intense competition, third-party technology and cybersecurity risks, and regulatory and legal scrutiny. Moody’s, S&P and Fitch had negative outlooks on the company’s ratings as of February 18, 2021.
Most important facts for investors to verify
- Whether the large allowance and reserve assumptions remain appropriate as economic forecasts, stimulus, payment accommodations and customer performance change.
- How quickly card balances, purchase volumes and margins recover, and whether Auto credit performance worsens as management expects.
- Commercial loan quality, especially energy, commercial real estate, and geographic and industry concentrations.
- The continuing costs and potential outcomes of cybersecurity, AML, interchange and other legal or regulatory matters.
- Capital and liquidity after regulatory restrictions, the effective capital requirements and any share repurchases or dividend changes.
- Effects of low interest rates, deposit competition and the LIBOR transition on net interest income, funding costs and contract remediation.
The auditor issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting; management reported no material weakness as of December 31, 2020.