Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day and thank you for standing by. Welcome to Capital One Q4 2023earnings call At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session.

[Operator instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Jeff Norris, senior vice president of finance. Please go ahead.

Jeff Norris — Senior Vice President, Global Finance

Thanks very much, Amy, and welcome everyone to Capital One’s fourth-quarter 2023earnings conference call As usual, we are webcasting live over the internet. To access the call on the internet, please log on to Capital One’s website at capitalone.com and follow the links from there. In addition to the press release and financials, we have included a presentation summarizing our fourth-quarter 2023 results.

With me today are Mr. Richard Fairbank, Capital One’s chairman and chief executive officer; and Mr. Andrew Young, Capital One’s chief financial officer. Rich and Andrew are going to walk you through the presentation.

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To access a copy of the presentation and the press release, please go to Capital One’s website, click on investors, then click on quarterly earnings release. Please note that this presentation may contain forward-looking statements. Information regarding Capital One’s financial performance and any forward-looking statements contained in today’s discussion and the materials speak only as of the particular date or dates indicated in the materials. Capital One does not undertake any obligation to update or revise any of this information, whether as a result of new information, future events, or otherwise. Numerous factors could cause our actual results to differ materially from those described in forward-looking statements.

And for more information on these factors, please see the section titled Forward-Looking Information in the earnings release presentation and the Risk Factors section of our annual and quarterly reports accessible at Capital One website and filed with the SEC. Now, I’ll turn the call over to Mr. Young. Andrew.

Andrew Young — Chief Financial Officer

Thanks, Jeff, and good afternoon, everybody. I’ll start on Slide 3 of today’s presentation. In the fourth quarter, Capital One earned $706 million, or $1.67 per diluted common share. For the full year, Capital One earned $4.9 billion, or $11.95 per share.

Included in the results for the fourth quarter was a $289 million accrual for our current estimate of the FDIC special assessment. Net of this adjusting item, fourth-quarter earnings per share were $2.24 and full-year earnings per share were $12.52. On a linked-quarter basis, growth in our domestic card business drove period-end loans up 2% and average loans up 1%. Period-end deposits increased 1% in the quarter and average deposits were flat.

Our percentage of FDIC-insured deposits grew to 82% of total deposits in the fourth quarter. Revenue in the linked quarter increased 1% driven by both higher net interest and non-interest income. Non-interest expense was up 18% in the quarter. Operating expense increased 15% with roughly half of that increase driven by the FDIC special assessment.

The full-year operating efficiency ratio net of adjustments improved 99 basis points to 43.54%. Provision expense was $2.9 billion, comprised of 2.5 billion of net charge-offs and an allowance build of 326 million. Turning to Slide 4, I will cover the allowance balance in greater detail. The $326 million increase in allowance brings our total company allowance balance up to approximately $15.3 billion as of December 31st. The total company coverage ratio is now 4.77%, up two basis points from the prior quarter, largely driven by a higher mix of card assets.

I’ll cover the drivers of the changes in allowance and coverage ratio by segment on Slide 5. Outside of interest rates, most of our economic assumptions are largely unchanged from the third quarter, and we continue to assume several key economic variables modestly worsened from today’s levels. In our domestic card business, the coverage ratio decreased by 16 basis points to 7.63%. The allowance balance increased by $336 million.

The predominant driver of the increased allowance was the loan growth in the quarter. In our consumer banking segment, the allowance was essentially flat at roughly $2 billion. Coverage increased by four basis points to 2.71% driven by a decline in auto loans in the quarter. And finally, in our commercial banking business, the coverage ratio declined by three basis points to 1.71%.

The allowance decreased by $37 million, primarily driven by the charge-offs of office real estate loans in the quarter. We have included additional details on the office portfolio on Slide 17 of tonight’s presentation. Turning to Page 6, I’ll now discuss liquidity. Total liquidity reserves in the quarter increased by $2.3 billion to about 121 billion. The increase was driven by a higher market value of our investment securities portfolio, partially offset by modestly lower cash balances.

Our cash position ended the quarter at approximately $43.3 billion, down 1.6 billion from the prior quarter. You can see our preliminary average liquidity coverage ratio during the fourth quarter was 167%, up from 155% in the third quarter. The increase in the LCR was driven by holding more of our cash balances at the parent company versus our banking subsidiary. Turning to Page 7, I’ll cover our net interest margin.

Our fourth-quarter net interest margin was 6.73%, four basis points higher than last quarter and 11 basis points lower than the year-ago quarter. The quarter-over-quarter increase in NIM was largely driven by a continued mix shift toward card loans and higher asset yields, partially offset by higher rate paid on deposits. Turning to Slide 8, I will end by discussing our capital position. Our common equity tier 1 capital ratio ended the quarter at 12.9%, approximately 10 basis points lower than the prior quarter. Asset growth, common and preferred dividends, and the share repurchases more than offset net income in the quarter.

And with that, I will turn the call over to Rich. Rich?

Rich Fairbank — Chief Executive Officer

Thanks, Andrew. Good evening, everyone. Slide 10 shows fourth-quarter results in our credit card business. Credit card segment results are largely a function of our domestic card results and trends which are shown on Slide 11.

Top-line growth trends in the domestic card business remain strong even with growth moderating somewhat in the fourth quarter. Purchase volume for the fourth quarter was up 4% from the fourth quarter of last year. Ending loan balances increased $16 billion, or about 12%, year over year. Average loans increased 14%.

And fourth-quarter revenue was also up 14% year over year driven by the growth in purchase volume and loans. The charge-off rate for the quarter was up 213 basis points year over year to 5.35%. The 30-plus delinquency rate at quarter end increased 118 basis points from the prior year to 4.61%. On a sequential-quarter basis, the charge-off rate was up 95 basis points and the 30-plus delinquency rate was up 30 basis points.

For the month of December the charge-off rate was 5.78% including a one-time impact of 15 basis points described in a footnote in the monthly credit 8-K. Adjusted for this impact, the monthly charge-off rate for December would have been 5.63%. Pulling up on domestic card credit. We believe that normalization has run its course and credit results have stabilized. The 30-plus delinquency rate has been stable on a seasonally adjusted basis for a number of months now.

Since August, our monthly delinquency rate has been moving in line with normal seasonality and at stable ratios relative to the same month in 2018 and 2019. And at this point, we have a pretty good window into January as delinquency entries in December indicate continuing delinquency rates stability in January. We’ve always said that delinquencies are the leading indicator of where charge-offs are going. Charge-off rate tends to follow delinquency rate by about three to six months.

Based on the stability we’ve seen in our delinquencies since August and extrapolating from our current delinquency inventories and flow rates, we believe the charge-off rate is stabilizing now and settling out to about 15% above 2019 levels., I give this window because investors have been asking for quite some time when will charge-offs level off. So, this is the point where we see that happening, meaning charge-offs should move more or less with seasonality in the coming months. This window comes from modeling the flows in our delinquency buckets, which have stabilized, and our recoveries which have also stabilized and started to rebuild. This isn’t designed to be longer-run guidance but rather to indicate that charge-offs are finally moving more or less with seasonality over the near term. In the longer run, there could be additional forces such as potential pressure from economic worsening and potential benefits from the depletion of deferred charge-offs from the pandemic and recoveries picking up over time from increased inventories.