Capital One Financial Corporation — 2013 Form 10-K
Business context and reporting period. Capital One is a diversified financial services holding company focused on credit cards, consumer banking and commercial banking. This annual report covers the fiscal year ended December 31, 2013; selected fourth-quarter results are also noted below. The company acquired Beech Street Capital in November and sold its Best Buy credit-card portfolio in September for $6.4 billion. The filing reports audited U.S. GAAP financial statements; the auditor issued an unqualified opinion, and management reported effective internal control over financial reporting with no material weaknesses.
Key financial metrics
| Metric | 2013 | 2012 |
|---|---|---|
| Total net revenue | $22.384 billion | $21.396 billion |
| Net income | $4.159 billion | $3.517 billion |
| Income from continuing operations, net of tax | $4.392 billion | $3.734 billion |
| Net income available to common shareholders | $4.089 billion | $3.487 billion |
| Diluted EPS | $6.96 | $6.16 |
| Net interest income / net interest margin | $18.106 billion / 6.80% | $16.589 billion / 6.50% |
| Provision for credit losses | $3.453 billion | $4.415 billion |
| Net charge-offs / rate | $3.934 billion / 2.04% | $3.555 billion / 1.89% |
| Non-interest expense / efficiency ratio | $12.514 billion / 55.91% | $11.946 billion / 55.83% |
Fourth quarter: Net income was $859 million and diluted EPS was $1.45. Net interest income was $4.423 billion, provision for credit losses $957 million, and non-interest income $1.121 billion.
- Cash flow: Operating cash flow was $9.984 billion. Financing activities used $18.472 billion; investing activities were reported at $3.721 billion. Cash and cash equivalents decreased $4.767 billion to $6.291 billion. The cash-flow statement’s investing subtotal presentation should be checked against the filed statement.
- Balance sheet and funding: Total assets were $297.048 billion, down 5% year over year; loans held for investment were $197.199 billion, down 4%. Deposits were $204.523 billion, down 4%. Securitized debt was $10.289 billion and other debt $30.365 billion, for $40.654 billion combined. Stockholders’ equity was $41.744 billion.
- Liquidity and capital: Liquidity reserves were $69.683 billion, down from $78.097 billion. Basel I Tier 1 common, Tier 1 risk-based, total risk-based and leverage ratios were 12.23%, 12.61%, 14.73% and 10.10%, respectively. Both banks were classified as well capitalized under applicable requirements.
- Credit quality: The allowance for loan and lease losses declined to $4.315 billion from $5.156 billion; allowance coverage was 2.19% of loans versus 2.50%. The 30+ day delinquency rate improved to 2.96% from 3.09%, while the net charge-off rate rose to 2.04% from 1.89%.
Material changes versus 2012
- Revenue increased 5% and net income increased 18%. Higher interest income reflected acquired and growing earning assets; lower funding costs also contributed. Earnings benefited from the absence of the $1.2 billion credit-card acquisition allowance provision recorded in 2012, partly offset by higher operating expenses and the absence of a $594 million ING Direct bargain-purchase gain recognized in 2012.
- Credit Card segment net income rose to $2.615 billion from $1.530 billion, aided by the absence of the prior-year acquisition-related provision and higher revenue. Consumer Banking income increased to $1.451 billion from $1.363 billion. Commercial Banking income declined to $769 million from $835 million, primarily due to lower allowance releases and higher credit-loss provision expense.
- Credit-card purchase volume rose 11% to $201.074 billion. Commercial loans grew 16% to $45.011 billion, while consumer banking loans fell 6% to $70.762 billion. The Best Buy portfolio sale and run-off in acquired card and home-loan portfolios contributed to lower total loans.
- Common dividends were $0.95 per share, versus $0.20 in 2012. The company completed its $1 billion share repurchase program in 2013.
Outlook, risks and unusual items
- Management expected 2014 pre-provision net revenue of approximately $9.8 billion and operating expenses of approximately $10.5 billion, both excluding non-recurring items. It forecast very modest revenue growth after adjusting for the portfolio sale, higher marketing expense, and portfolio run-off of approximately $1 billion in card loans and $4 billion in home loans.
- Management expected muted Domestic Card loan growth near term, with growth potentially resuming in the second half of 2014. It anticipated rising auto credit losses and continued pressure on auto returns and retail-deposit economics from low interest rates. Commercial Banking loan, credit and profitability trends were described as healthy, with competition a potential constraint.
- The 2014 capital plan sought share repurchases that would produce a payout ratio above the 2013 industry norm, subject to Federal Reserve review. Estimated Basel III Standardized common equity Tier 1 ratios were 12.2% for 2014 phase-in, 11.6% for 2015 phase-in and 10.9% fully phased in; these were company estimates, not regulatory determinations.
- Mortgage representation-and-warranty reserves were $1.172 billion, up from $899 million; management estimated approximately $2.6 billion of reasonably possible additional losses beyond the reserve. Management cautioned that actual losses could exceed both amounts. Separately, reasonably possible losses for other disclosed litigation matters were estimated at approximately $250 million, excluding specified mortgage litigation.
- Key risks include credit deterioration, interest-rate and market changes, regulatory and capital/liquidity requirements, mortgage repurchase claims and litigation, acquisition integration, competition, and operational or cybersecurity disruption. Capital One also disclosed 2012 consent orders concerning vendor sales practices and Servicemembers Civil Relief Act compliance, with heightened regulatory oversight expected to continue.
Most important facts for investors to verify
- Whether the improvement in earnings persists after excluding 2012’s acquisition-related credit provision and ING Direct bargain-purchase gain, and accounting for the 2013 portfolio sale.
- How credit losses develop as acquired loans run off and auto losses rise, and whether the lower allowance remains adequate.
- The assumptions, reserve adequacy and potential cash-flow impact of mortgage representation-and-warranty claims and litigation.
- Actual liquidity and capital effects of Basel III, enhanced prudential standards and the outcome of the 2014 CCAR review, including any permitted capital distributions.
- Progress against the 2014 revenue, expense and portfolio run-off outlook, and whether deposit funding and margins withstand competition and low interest rates.