CAPITAL ONE FINANCIAL CORP - Annual Report: 2019 (Form 10-K)

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•	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.

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•	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.

•	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.

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•	10% or more of total assets; or

•	$1 billion or more.

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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.

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•	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.”

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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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•	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.”

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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.

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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.

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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.

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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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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.

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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.

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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.

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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.

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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.

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(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.”

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(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.

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(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.

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•	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.

◦	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.

•	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.

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•	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.

•	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.

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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.

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

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(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.

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•	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.

(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.

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

•	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.

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(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.

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

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

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(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.

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(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.

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•	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.

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(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.

•	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.

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

(2)	Average yield on loans held for investment is calculated by 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.

•	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.

•	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.

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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.

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(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.

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(3)

The provision for losses on unfunded lending commitments is included in the provision for credit losses in our consolidated statements of income and the related reserve for unfunded lending commitments is included in other liabilities on our consolidated balance sheets. Our reserve for unfunded lending commitments totaled $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.

•	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.

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

•	offsets related to certain line-item reclassifications;

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

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

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(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.

•	Loan loss reserves

•	Asset impairment

•	Fair value of financial instruments

•	Customer rewards reserve

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

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

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

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

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

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

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

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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.

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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.

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(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.

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(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.

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(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.

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(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.

(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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(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.

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(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.

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

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

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(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.

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(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.

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(1)	Includes negotiable order of withdrawal accounts.

(2)	Includes money market deposit accounts.

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

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(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.

•	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.

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•	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.

•	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.

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(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.

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(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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(1)	Includes impact of related deferred taxes.

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

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(1)	We declared dividend per share on our common stock of $0.40 in each quarter of 2019, 2018 and 2017.

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•	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.

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Credit card loans: As permitted by regulatory guidance issued by the Federal Financial Institutions Examination Council (“FFIEC”), our policy is generally to exempt credit card loans from being classified as nonperforming, as these loans are generally charged off in the period the account becomes 180 days past due. Consistent with industry conventions, we generally continue to accrue interest and fees on delinquent credit card loans until the loans are charged-off.

•	Consumer banking loans: We classify consumer banking loans as nonperforming when we determine that the collectability of all interest and principal on the loan is not reasonably assured, generally when the loan becomes 90 days past due.

•	Commercial banking loans: We classify commercial banking loans as nonperforming as of the date we determine that the collectability of all interest and principal on the loan is not reasonably assured.

•	Modified loans and troubled debt restructurings: Modified loans, including TDRs, that are current at the time of the restructuring remain on accrual status if there is demonstrated performance prior to the restructuring and continued performance under the modified terms is expected. Otherwise, the modified loan is classified as nonperforming.

•	PCI loans: PCI loans are not classified as delinquent or nonperforming.

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•	Credit card loans: Credit card loans that have been modified in a troubled debt restructuring are identified and accounted for as individually impaired.

•	Consumer banking loans: Consumer loans that have been modified in a troubled debt restructuring are identified and accounted for as individually impaired.

•	Commercial banking loans: Commercial loans classified as nonperforming and commercial loans that have been modified in a troubled debt restructuring are reported as individually impaired.

•

Credit card loans: We generally charge off credit card loans in the period the account becomes 180 days past due. We charge off delinquent credit card loans for which revolving privileges have been revoked as part of loan workouts when the account becomes 120 days past due. Credit card loans in bankruptcy are generally charged-off by the end of the month following 30 days after the receipt of a complete bankruptcy notification from the bankruptcy court. Credit card loans of deceased account holders are generally charged off 5 days after receipt of notification.

•

Consumer banking loans: We generally charge off consumer banking loans at the earlier of the date when the account is a specified number of days past due or upon repossession of the underlying collateral. Our charge-off period for auto loans is 120 days past due. Small business banking loans generally charge off at 120 days past due based on the date unpaid principal loan amounts are deemed uncollectible. Auto loans that have not been previously charged off where the borrower has filed for bankruptcy and the loan has not been reaffirmed charge off in the period that the loan is 60 days from the bankruptcy notification date, regardless of delinquency status. Auto loans that have not been previously charged off and have been discharged under Chapter 7 bankruptcy are charged off at the end of the month in which the bankruptcy discharge occurs. Remaining consumer loans generally are charged off within 40 days of receipt of notification from the bankruptcy court. Consumer loans of deceased account holders are charged off by the end of the month following 60 days of receipt of notification.

•	Commercial banking loans: We charge off commercial loans in the period we determine that the unpaid principal loan amounts are uncollectible.

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•	PCI loans: We do not record charge-offs on PCI loans that are meeting or exceeding our performance expectations as of the date of acquisition, as the fair values of these loans already reflect a discount for expected future credit losses. We record charge-offs on PCI loans only if actual losses exceed estimated credit losses incorporated into the fair value recorded at acquisition.

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

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(1)	As of December 31, 2019, the weighted-average expected maturities of RMBS and Agency CMBS is 5.4 years for each portfolio.

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(1)	Loans, other than PCI loans, include unamortized premiums and discounts, and unamortized deferred fees and costs totaling $1.1 billion and $818 million as of December 31, 2019 and 2018, respectively.

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

•	Noncriticized: Loans that have not been designated as criticized, frequently referred to as “pass” loans.

•	Criticized performing: Loans in which the financial condition of the obligor is stressed, affecting earnings, cash flows or collateral values. The borrower currently has adequate capacity to meet near-term obligations; however, the stress, left unabated, may result in deterioration of the repayment prospects at some future date.

•	Criticized nonperforming: Loans that are not adequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, if any. Loans classified as criticized nonperforming have a well-defined weakness, or

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(1)	Criticized exposures correspond to the “Special Mention,” “Substandard” and “Doubtful” asset categories defined by bank regulatory authorities.

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(1)	The period-end and average recorded investments of credit card loans include finance charges and fees.

(2)	2018 and 2017 amounts include certain TDRs that were recorded as other assets on our consolidated balance sheets.

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(1)	Represents the recorded investment of total loans modified in TDRs at the end of the period in which they were modified. As not every modification type is included in the table above, the total percentage of TDR activity may not add up to 100%. Some loans may receive more than one type of concession as part of the modification.

(2)	Due to multiple concessions granted to some troubled borrowers, percentages may total more than 100% for certain loan types.

(3)	Includes certain TDRs that are recorded as other assets on our consolidated balance sheets.

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(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.

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(1)	Allowance coverage ratio is calculated by dividing the period-end allowance for loan and lease losses by period-end loans held for investment within the specified loan category.

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(1)	Represents the carrying amount of assets and liabilities owned by the VIE, which includes the seller’s interest and repurchased notes held by other related parties.

(2)

In certain investment structures, we consolidate a VIE which in turn holds as its primary asset an investment in an unconsolidated VIE. In these instances, we disclose the carrying amount of assets and liabilities on our consolidated balance sheets as unconsolidated VIEs to avoid duplicating our exposure, as the unconsolidated VIEs are generally the operating entities generating the exposure. The carrying amount of assets and liabilities included in the unconsolidated VIE columns above related to these investment structures were $2.3 billion of assets and $741 million of liabilities as of December 31, 2019, and $2.3 billion of assets and $811 million of liabilities as of December 31, 2018.

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(1)	We previously retained servicing on a portion of our remaining mortgage loans in mortgage securitizations. During 2019, we sold our entire portfolio of retained mortgage servicing rights.

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(1)	Primarily consists of intangibles for sponsorship, customer and merchant relationships, partnership and other contract intangibles and trade name intangibles.

(2)	Commercial MSRs are accounted for under the amortization method on our consolidated balance sheets. We recorded $70 million and $59 million of amortization expense for the years ended December 31, 2019 and 2018, respectively.

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(1)	Represents foreign currency translation adjustments.

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(1)	Includes $6.5 billion and $4.0 billion of time deposits in denominations in excess of the $250,000 federal insurance limit as of December 31, 2019 and 2018, respectively.

(2)	Includes $1.4 billion of EUR-denominated unsecured notes as of December 31, 2019.

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Fair Value Hedges: We designate derivatives as fair value hedges when they are used to manage our exposure to changes in the fair value of certain financial assets and liabilities, which fluctuate in value as a result of movements in interest rates. Changes in the fair value of derivatives designated as fair value hedges are presented in the same line item on our consolidated statements of income as the earnings effect of the hedged items. Our fair value hedges primarily consist of interest rate swaps that are intended to modify our exposure to interest rate risk on various fixed-rate financial assets and liabilities.

•

Cash Flow Hedges: We designate derivatives as cash flow hedges when they are used to manage our exposure to variability in cash flows related to forecasted transactions. Changes in the fair value of derivatives designated as cash flow hedges are recorded as a component of AOCI. Those amounts are reclassified into earnings in the same period during which the forecasted transactions impact earnings and presented in the same line item on our consolidated statements of income as the earnings effect of the hedged items. Our cash flow hedges use interest rate swaps and floors that are intended to hedge the variability in interest receipts or interest payments on some of our variable-rate financial assets or liabilities. We also enter into foreign currency forward contracts to hedge our exposure to variability in cash flows related to intercompany borrowings denominated in foreign currencies.

•

Net Investment Hedges: We use net investment hedges to manage the foreign currency exposure related to our net investments in foreign operations that have functional currencies other than the U.S. dollar. Changes in the fair value of net investment hedges are recorded in the translation adjustment component of AOCI, offsetting the translation gain or loss from those foreign operations. We execute net investment hedges using foreign currency forward contracts to hedge the translation exposure of the net investment in our foreign operations under the forward method.

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Free-Standing Derivatives: Our free-standing derivatives primarily consist of our customer accommodation derivatives and other economic hedges. The customer accommodation derivatives and the related offsetting contracts are mainly interest rate, commodity and foreign currency contracts. The other free-standing derivatives are primarily used to economically hedge the risk of changes in the fair value of our commercial mortgage loan origination and purchase commitments as well as other interests held. Changes in the fair value of free-standing derivatives are recorded in earnings as a component of other non-interest income.

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CCPs: We clear eligible OTC derivatives with CCPs as part of our regulatory requirements. Futures commission merchants (“FCMs”) serve as the intermediary between CCPs and us. CCPs require that we post initial and variation margin through our FCMs to mitigate the risk of non-payment or default. Initial margin is required upfront by CCPs as collateral against potential losses on our cleared derivative contracts and variation margin is exchanged on a daily basis to account for mark-to-market changes in those derivative contracts. For CME and LCH-cleared OTC derivatives, we characterize variation margin cash payments as settlements. Our FCM agreements governing these derivative transactions include provisions that may require us to post additional collateral under certain circumstances.

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Bilateral Counterparties: We enter into legally enforceable master netting agreements and collateral agreements, where possible, with bilateral derivative counterparties to mitigate the risk of default. We review our collateral positions on a daily basis and exchange collateral with our counterparties in accordance with these agreements. These bilateral agreements typically provide the right to offset exposure with the same counterparty and require the party in a net liability position to post collateral. Agreements with certain bilateral counterparties require both parties to maintain collateral in the event the fair values of derivative instruments exceed established exposure thresholds. Certain of these bilateral agreements include provisions requiring that our debt maintain a credit rating of investment grade or above by each of the major credit rating agencies. In the event of a downgrade of our debt credit rating below investment grade, some of our counterparties would have the right to terminate their derivative contract and close out existing positions.

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(1)

Does not reflect $12 million and $2 million recognized as a net valuation allowance on derivative assets and liabilities for non-performance risk as of December 31, 2019 and 2018, respectively. Non-performance risk is included in derivative assets and liabilities, which are part of other assets and liabilities on the consolidated balance sheets, and is offset through non-interest income in the consolidated statements of income.

(2)	Other interest rate exposures include commercial mortgage-related derivatives and interest rate swaps.

(3)	Represents balance sheet netting of derivative assets and liabilities, and related payables and receivables for cash collateral held or placed with the same counterparty.

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(1)

These amounts include the amortized cost basis of our investment securities designated in hedging relationships for which the hedged item is the last layer expected to be remaining at the end of the hedging relationship. The amortized cost basis of this portfolio was $5.9 billion and $8.3 billion, the amount of the designated hedged items was $3.1 billion and $4.0 billion, and the cumulative basis adjustment associated with these hedges was $75 million and $26 million as of December 31, 2019 and 2018, respectively.

(2)	Carrying value represents amortized cost.

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(1)

We received cash collateral from derivative counterparties totaling $347 million and $925 million as of December 31, 2019 and 2018, respectively. We also received securities from derivative counterparties with a fair value of $1 million as of both December 31, 2019 and 2018, which we have the ability to re-pledge. We posted $954 million and $633 million of cash collateral as of December 31, 2019 and 2018, respectively.

(2)	Represents customer repurchase agreements that mature the next business day. As of December 31, 2019 and 2018, we pledged collateral with a fair value of $320 million and $359 million, respectively, under these customer repurchase agreements, which were primarily agency RMBS securities.

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(1)	Includes amortization expense of $171 million and $75 million for the years ended December 31, 2019 and 2018, respectively, related to basis adjustments on discontinued hedges.

(2)	Changes in fair values of cross-currency swaps attributable to changes in cross-currency basis spreads are excluded from the assessment of hedge effectiveness and recorded in other comprehensive income. The initial value of the excluded component is recognized in earnings over the life of the swap under the amortization approach.

(3)	See “Note 10—Stockholders’ Equity” for the effects of cash flow and net investment hedges on AOCI and amounts reclassified to net income, net of tax.

(4)	We recognized a loss of $341 million and gain of $191 million for the years ended December 31, 2019 and 2018 respectively, on foreign exchange contracts reclassified from AOCI. These amounts were largely offset by the foreign currency transaction gains (losses) on our foreign currency denominated intercompany funding included other non-interest income.

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(1)	Except for Series E, ownership is held in the form of depositary shares, each representing a 1/40th interest in a share of fixed-rate non-cumulative perpetual preferred stock.

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

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(1)	Includes amounts related to cash flow hedges as well as the excluded component of cross-currency swaps designated as fair value hedges.

(2)	Includes other comprehensive loss of $49 million, gain of $150 million and loss of $143 million for the years ended December 31, 2019, 2018 and 2017 respectively, from hedging instruments designated as net investment hedges.

(3)	In the first quarter of 2018, we made a one-time transfer of held to maturity securities with a carrying value of $9.0 billion to available for sale as a result of our adoption of ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This transfer resulted in an after-tax gain of $82 million ($107 million pre-tax) to AOCI.

(4)	On December 31, 2019, we transferred our entire portfolio of held to maturity securities to available for sale in consideration of changes to regulatory capital requirements under the Tailoring Rules.

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(1)

The amortization of unrealized holding gains or losses reported in AOCI for securities held to maturity was largely offset by the amortization of the premium or discount created from the prior transfer of securities from available for sale to held to maturity, which occurred at fair value. On December 31, 2019, we transferred our entire portfolio of held to maturity securities to available for sale.

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(1)	Includes the impact of hedging instruments designated as net investment hedges.

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

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

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

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

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

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

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(1)	Represents warrants issued as part of the U.S. Department of Treasury’s Troubled Assets Relief Program which were either exercised or expired on November 14, 2018.

(2)

Excluded from the computation of diluted earnings per share were 69 thousand shares related to options with exercise price of $86.34, 56 thousand shares related to options with an exercise price of $86.34 and 233 thousand shares related to options with exercise prices ranging from $82.08 to $86.34 for the years ended December 31, 2019, 2018 and 2017, respectively, because their inclusion would be anti-dilutive.

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(1)	Granted and vested include adjustments for achievement of specific performance goals for performance share units granted in prior periods.

(2)	The weighted-average grant date fair value of RSUs was $100.73 and $86.20 in 2018 and 2017, respectively. The weighted-average grant date fair value of PSUs was $100.65 and $82.48 in 2018 and 2017, respectively.

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(1)	Amount includes the tax impact of our December 31, 2019 transfer of our entire portfolio of held to maturity securities to available for sale.

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(1)	Represents balance sheet netting of derivative assets and liabilities, and related payables and receivables for cash collateral held or placed with the same counterparty. See “Note 9—Derivative Instruments and Hedging Activities” for additional information.

(2)

Does not reflect $12 million and $2 million recognized as a net valuation allowance on derivative assets and liabilities for non-performance risk as of December 31, 2019 and 2018, respectively. Non-performance risk is included in derivative assets and liabilities, which are part of other assets and liabilities on the consolidated balance sheets, and is offset through non-interest income in the consolidated statements of income.

(3)	As of December 31, 2019 and 2018, other includes retained interests in securitizations of $66 million and $158 million, deferred compensation plan assets of $343 million and $264 million, and equity securities of $1 million and $1 million, respectively.

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(1)	Realized gains (losses) on securities available for sale are included in net securities gains (losses), and retained interests in securitizations are reported as a component of non-interest income in our consolidated statements of income. Gains (losses) on derivatives are included as a component of net interest income or non-interest income in our consolidated statements of income.

(2)	Net unrealized losses included in other comprehensive income related to Level 3 securities available for sale still held as of December 31, 2019 were $4 million.

(3)	Includes derivative assets and liabilities of $77 million and $51 million, respectively, as of December 31, 2019, $38 million and $48 million, respectively, as of December 31, 2018, and $37 million and $24 million, respectively as of December 31, 2017.

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(1)	Weighted averages are calculated by using the product of the input multiplied by the relative fair value of the instruments.

(2)	Due to the nature of the various mortgage securitization structures in which we have retained interests, it is not meaningful to present a consolidated weighted average for the significant unobservable inputs.

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(1)

As of December 31, 2019, other assets included equity investments accounted for under the measurement alternative of $5 million, repossessed assets of $61 million and long-lived assets held for sale of $37 million. As of December 31, 2018, other assets included equity investments accounted for under the measurement alternative of $24 million, foreclosed property and repossessed assets of $57 million and long-lived assets held for sale of $19 million.

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(1)	Other assets include fair value adjustments related to repossessed assets, long-lived assets held for sale and equity investments accounted for under the measurement alternative. Other assets also included foreclosed property as of December 31, 2018.

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(1)	Other investments include FHLB and Federal Reserve stock. These investments are included in other assets on our consolidated balance sheets.

(2)	Other borrowings excludes finance lease liabilities.

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•	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.

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Other category: Includes the residual impact of the allocation of our centralized Corporate Treasury group activities, such as management of our corporate investment portfolio and asset/liability management, to our business segments. Accordingly, net gains and losses on our investment securities portfolio and certain trading activities are included in the Other category. Other category also includes foreign exchange-rate fluctuations on foreign currency-denominated transactions; unallocated corporate expenses that do not directly support the operations of the business segments or for which the business segments are not considered financially accountable in evaluating their performance, such as certain restructuring charges; certain material items that are non-recurring in nature; offsets related to certain line-item reclassifications; and residual tax expense or benefit to arrive at the consolidated effective tax rate that is not assessed to our primary business segments.

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Net interest income: Interest income from loans held for investment and interest expense from deposits and other interest-bearing liabilities are reflected within each applicable business segment. Because funding and asset/liability management are managed centrally by our Corporate Treasury group, net interest income for our business segments also includes the results of a funds transfer pricing process that is intended to allocate a cost of funds used or credit for funds provided to all business segment assets and liabilities, respectively, using a matched funding concept. The taxable-equivalent benefit of tax-exempt products is also allocated to each business unit with a corresponding increase in income tax expense.

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•	Non-interest income: Non-interest fees and other revenue associated with loans or customers managed by each business segment and other direct revenues are accounted for within each business segment.

•	Provision for credit losses: The provision for credit losses is directly attributable to the business segment in accordance with the loans each business segment manages.

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Non-interest expense: Non-interest expenses directly managed and incurred by a business segment are accounted for within each business segment. We allocate certain non-interest expenses indirectly incurred by business segments, such as corporate support functions, to each business segment based on various factors, including the actual cost of the services from the service providers, the utilization of the services, the number of employees or other relevant factors.

•	Goodwill and intangible assets: Goodwill and intangible assets that are not directly attributable to business segments are assigned to business segments based on the relative fair value of each segment. Intangible amortization is included in the results of the applicable segment.

•	Income taxes: Income taxes are assessed for each business segment based on a standard tax rate with the residual tax expense or benefit to arrive at the consolidated effective tax rate included in the Other category.

•	Loans held for investment: Loans are reported within each business segment based on product or customer type served by that business segment.

•	Deposits: Deposits are reported within each business segment based on product or customer type served by that business segment.

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

(2)

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

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

(2)	Interchange fees are presented net of customer reward expenses of $4.9 billion and $4.4 billion for the years ended December 31, 2019 and 2018, respectively.

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(1)	Includes $1.6 billion and $1.3 billion of advised lines of credit as of December 31, 2019 and 2018, respectively.

(2)	These financial guarantees have expiration dates ranging from 2020 to 2022 as of December 31, 2019.

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+	Represents a management contract or compensatory plan or arrangement.

*	Indicates a document being filed with this Form 10-K.

**

Indicates a document being furnished with this Form 10-K. Information in this Form 10-K furnished herewith shall not be deemed to be “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section. Such exhibit shall not be deemed incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.

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