Capital One(COF) - 2025 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") Capital One reported a $4.3 billion net loss in Q2 2025, driven by increased credit loss provisions and operating expenses from the Discover acquisition, despite revenue growth Introduction Capital One completed its acquisition of Discover Financial Services on May 18, 2025, expanding its offerings to include personal loans and the Global Payment Network across its three primary segments - On May 18, 2025, Capital One closed its acquisition of Discover Financial Services, merging Discover Bank into its principal operating subsidiary, Capital One, N.A. (CONA)[14][20] - The acquisition added new products like personal loans and the Global Payment Network, which includes the Discover Network, PULSE Network, and Diners Club International[14] - The fair value of the purchase consideration for Discover was $51.8 billion, with identifiable assets acquired valued at $168.6 billion, including $108.2 billion in loans[23] - Following the acquisition, Capital One's Board approved a plan to exit the Discover Home Loan business, which is now being marketed for sale and accounted for as a discontinued operation[24] Executive Summary Capital One reported a $4.3 billion net loss in Q2 2025, primarily due to increased credit loss provisions and non-interest expenses from the Discover acquisition, which also boosted loans and revenue Q2 2025 vs Q2 2024 Performance | Metric | Q2 2025 | Q2 2024 | Change | | :--- | :--- | :--- | :--- | | Net Income (Loss) | ($4.3B) | $597M | NM | | Diluted EPS | ($8.58) | $1.38 | NM | | Total Net Revenue | $12.5B | $9.5B | +31% | | Provision for Credit Losses | $11.4B | $3.9B | +192% | | Non-Interest Expense | $7.0B | $4.9B | +41% | - The net loss was primarily driven by a higher provision for credit losses due to the initial allowance for non-PCD loans from the Discover acquisition, and higher non-interest expense from integration costs and technology investments[34] - Loans held for investment increased by $111.5 billion to $439.3 billion as of June 30, 2025, compared to year-end 2024, with the Discover transaction contributing $108.2 billion[34] - The allowance for credit losses increased by $7.6 billion to $23.9 billion, primarily driven by the initial allowance for credit losses on loans acquired in the Transaction[37] Consolidated Results of Operations Q2 2025 saw net interest income rise to $10.0 billion and non-interest income to $2.5 billion due to the Discover acquisition, but a $7.5 billion surge in credit loss provision and higher expenses led to a pre-tax loss Q2 2025 Key Operating Metrics | Metric | Q2 2025 | Q2 2024 | Change | | :--- | :--- | :--- | :--- | | Net Interest Income | $10.0B | $7.5B | +32% | | Net Interest Margin | 7.62% | 6.70% | +92 bps | | Provision for Credit Losses | $11.4B | $3.9B | +192% | | Non-Interest Income | $2.5B | $2.0B | +27% | | Non-Interest Expense | $7.0B | $4.9B | +41% | - The provision for credit losses increased significantly, driven by the initial allowance of $8.8 billion for non-PCD loans acquired in the Discover Transaction[49] - Non-interest expense included $299 million of integration expenses related to the Discover acquisition in Q2 2025, primarily in salaries and professional services[54] - The company recorded a $14 million loss from discontinued operations related to the Discover Home Loan business, which is being exited[60] Consolidated Balance Sheets Analysis As of June 30, 2025, total assets surged by $168.8 billion to $659.0 billion, primarily driven by the Discover acquisition, which significantly increased loans, deposits, and stockholders' equity Balance Sheet Changes (vs. Dec 31, 2024) | Item | June 30, 2025 | Dec 31, 2024 | Change | | :--- | :--- | :--- | :--- | | Total Assets | $659.0B | $490.1B | +$168.8B | | Loans Held for Investment | $439.3B | $327.8B | +$111.5B | | Total Deposits | $468.1B | $362.7B | +$105.4B | | Total Liabilities | $548.0B | $429.4B | +$118.7B | | Stockholders' Equity | $111.0B | $60.8B | +$50.2B | - The Discover acquisition was the primary driver of balance sheet growth, contributing $168.6 billion in identifiable assets and $130.1 billion in identifiable liabilities as of the closing date[61][62] - The investment securities portfolio increased by $4.2 billion to $87.2 billion, reflecting the net impact of acquiring $14.1 billion in securities from Discover and subsequently selling approximately $9.7 billion to optimize liquidity[66][67] Business Segment Financial Performance The Discover acquisition significantly impacted segment results, leading to a $4.9 billion net loss in Credit Card due to credit loss provisions, while Consumer Banking income was $450 million and Commercial Banking remained stable Q2 2025 Net Income (Loss) by Segment | Segment | Q2 2025 Net Income (Loss) | Q2 2024 Net Income | | :--- | :--- | :--- | | Credit Card | ($4,917 M) | $91 M | | Consumer Banking | $450 M | $471 M | | Commercial Banking | $280 M | $278 M | | Other | ($76 M) | ($243 M) | - The Credit Card segment's substantial loss was primarily due to the initial allowance for credit losses for non-PCD loans acquired in the Discover Transaction[92] - Consumer Banking non-interest income grew significantly, driven by higher net discount and interchange fees from the newly acquired Global Payment Network[105] - The Other category includes unallocated corporate expenses, such as $299 million in integration expenses for the Discover acquisition in Q2 2025[78][117] Capital Management Capital One maintained a strong capital position with a CET1 ratio of 14.0% as of June 30, 2025, exceeding regulatory minimums, and expects a lower stress capital buffer requirement from October 2025 Regulatory Capital Ratios (Capital One Financial Corp) | Ratio | June 30, 2025 | Dec 31, 2024 | Minimum Adequacy | | :--- | :--- | :--- | :--- | | Common Equity Tier 1 (CET1) | 14.0% | 13.5% | 4.5% | | Tier 1 Capital | 15.1% | 14.8% | 6.0% | | Total Capital | 17.1% | 16.4% | 8.0% | | Tier 1 Leverage | 14.2% | 11.6% | 4.0% | - Based on 2025 supervisory stress test results, the company's preliminary stress capital buffer requirement is set to decrease to 4.5% for the period beginning October 1, 2025, down from the current 5.5%[139][151] - In Q2 2025, the company repurchased $150 million of common stock and paid common stock dividends of $624 million in the first six months of 2025[150][158] - As part of the Discover acquisition, the company issued new Series O and Series P preferred stock, with the Series P preferred stock, valued at $508 million, subsequently redeemed on June 30, 2025[154][155][156] Risk Management Capital One employs a "Three Lines of Defense" Risk Management Framework, addressing seven major risk categories, and is actively integrating Discover's operations into its existing risk policies - The company's Risk Management Framework is built on a "Three Lines of Defense" model: First Line (business areas owning risk), Second Line (Independent Risk Management), and Third Line (Internal Audit)[164] - The company is in the process of integrating Discover into its existing risk management practices, policies, and processes[163] - Major risk categories managed under the framework include compliance, credit, liquidity, market, operational, reputation, and strategic risk[167] Financial Statements The unaudited Q2 2025 financial statements reflect the Discover acquisition's significant impact, showing a $4.3 billion net loss, a surge in total assets to $659.0 billion, and substantial increases in goodwill and intangible assets Consolidated Statements of Income Capital One reported a $4.28 billion net loss for Q2 2025, primarily due to an $11.43 billion provision for credit losses, despite a 32% increase in net interest income to $9.99 billion Q2 2025 Income Statement Highlights (Amounts in millions) | Metric | Q2 2025 | Q2 2024 | | :--- | :--- | :--- | | Net Interest Income | $9,995 | $7,546 | | Provision for Credit Losses | $11,430 | $3,909 | | Total Non-Interest Income | $2,497 | $1,960 | | Total Non-Interest Expense | $6,991 | $4,946 | | Net Income (Loss) | ($4,277) | $597 | Consolidated Balance Sheets As of June 30, 2025, Capital One's total assets increased by 34% to $659.0 billion, primarily due to the Discover acquisition, which significantly boosted loans, goodwill, and deposits Key Balance Sheet Items (Amounts in billions) | Item | June 30, 2025 | Dec 31, 2024 | | :--- | :--- | :--- | | Total Assets | $659.0 | $490.1 | | Net Loans Held for Investment | $415.4 | $311.5 | | Goodwill | $28.3 | $15.1 | | Total Deposits | $468.1 | $362.7 | | Total Stockholders' Equity | $111.0 | $60.8 | Notes to Consolidated Financial Statements The notes provide detailed disclosures, primarily focusing on the Discover acquisition, including the $51.8 billion purchase consideration, $13.2 billion in goodwill, and the significant increase in the allowance for credit losses to $23.9 billion - The Discover acquisition was accounted for as a business combination with a total purchase consideration of $51.8 billion, resulting in preliminary goodwill of $13.2 billion[370][372][376] - Acquired intangible assets with definite lives, such as purchased credit card relationships, were valued at $12.8 billion, while indefinite-lived intangibles like the Discover Network and brand names were valued at $5.4 billion[380] - The allowance for credit losses increased by $7.6 billion since year-end, primarily due to an $8.8 billion provision for newly acquired non-PCD loans and a $2.9 billion initial allowance for PCD loans from the Discover transaction[379][457][459] - Total unfunded lending commitments increased to $716.4 billion from $458.1 billion at year-end, largely due to the addition of Discover's credit card lines[575][579] Quantitative and Qualitative Disclosures about Market Risk This section refers to the detailed discussion of the company's market risk profile within the Management's Discussion and Analysis (MD&A) - The disclosures for market risk are located in the "Market Risk Profile" section of the MD&A[611] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2025, with the Discover acquisition currently being integrated into internal controls over financial reporting - Management concluded that disclosure controls and procedures were effective as of June 30, 2025[614] - The company is in the process of incorporating Discover into its internal control over financial reporting; as permitted by the SEC, the acquired business was excluded from the Q2 2025 evaluation of internal controls[615] PART II—OTHER INFORMATION Legal Proceedings This section refers to Note 14 for legal proceedings, including ongoing litigation and an estimated reasonably possible future loss of up to $300 million beyond current reserves - Information on legal proceedings is detailed in Note 14 of the Financial Statements[618] - Management estimates a reasonably possible future loss for legal and regulatory matters beyond existing reserves to be up to approximately $300 million as of June 30, 2025[593] Risk Factors The company identifies material risks, primarily the complex integration of Discover, alongside macroeconomic instability, credit losses, operational failures, cybersecurity threats, and intense competition - A primary risk is the complex and costly integration of Discover, with potential difficulties in combining operations, systems, and cultures, and the risk of not realizing all anticipated benefits[621][623][629] - Macroeconomic risks, including inflation, interest rate fluctuations, and potential recession, could adversely impact borrower ability to repay debt, funding costs, and overall financial results[634][637] - Operational and cybersecurity risks are significant, including reliance on third-party cloud platforms like AWS, the potential for security incidents, and risks associated with the increasing use of AI[658][663][666] - The company faces intense competition in all markets, including from traditional banks and new fintech providers, which could impact loan and deposit growth, pricing, and revenue from the newly acquired payment network[703][713] Unregistered Sales of Equity Securities and Use of Proceeds In Q2 2025, Capital One repurchased 759,618 common shares at an average price of $195.95, with approximately $3.73 billion remaining for future repurchases Q2 2025 Common Stock Repurchases | Month | Total Shares Purchased | Average Price per Share | | :--- | :--- | :--- | | April | — | $— | | May | 102,513 | $186.53 | | June | 657,105 | $198.50 | | Total | 759,618 | $195.95 | - As of June 30, 2025, approximately $3.73 billion remained available for repurchase under the company's stock repurchase program[768] Other Information In Q2 2025, CEO Richard D. Fairbank and CAO Timothy P. Golden adopted pre-arranged Rule 10b5-1 stock trading plans for potential share sales - CEO Richard D. Fairbank and CAO Timothy P. Golden each entered into pre-arranged Rule 10b5-1 stock trading plans on May 13, 2025[771][772]