CAPITAL ONE FINANCIAL CORPORATION This discussion contains forward-looking statements that are based upon
management's current expectations and are subject to significant uncertainties
and changes in circumstances. Please review "MD&A-Forward-Looking Statements"
for more information on the forward-looking statements in this Quarterly Report
on Form 10-Q ("this Report"). All statements that address operating performance,
events or developments that we expect or anticipate will occur in the future,
including those relating to operating results and the Cybersecurity Incident
described in "MD&A-Introduction-Cybersecurity Incident" and "Note
13-Commitments, Contingencies, Guarantees and Others" as well as the potential
impacts of the COVID-19 pandemic described in "MD&A-Introduction-Coronavirus
Disease 2019 (COVID-19) Pandemic" are forward-looking statements. Our actual
results may differ materially from those included in these forward-looking
statements due to a variety of factors including, but not limited to, those
described in "Part I-Item 1A. Risk Factors" in our 2019 Annual Report on Form
10-K ("2019 Form 10-K") and "Part II-Item 1A. Risk Factors" in our Quarterly
Report on Form 10-Q for the period ended
Management monitors a variety of key indicators to evaluate our business results and financial condition. The following MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and related notes in this Report and the more detailed information contained in our 2019 Form 10-K.
INTRODUCTION
We are a diversified financial services holding company with banking and
non-banking subsidiaries.
and debit card products, other lending products and deposit products; and
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banking products and financial services to consumers, small businesses and
commercial clients.
The Company is hereafter collectively referred to as "we," "us" or "our." COBNA
and CONA are collectively referred to as the "Banks." Certain business terms
used in this document are defined in the "MD&A-Glossary and Acronyms" and should
be read in conjunction with the consolidated financial statements included in
this Report.
Our consolidated total net revenues are derived primarily from lending to
consumer, small business and commercial customers net of funding costs
associated with interest on deposits, short-term borrowings and long-term debt.
We also earn non-interest income which primarily consists of interchange income
net of reward expenses, and service charges and other customer-related fees. Our
expenses primarily consist of the provision for credit losses, operating
expenses, marketing expenses and income taxes.
Our principal operations are organized for management reporting purposes into
three major business segments, which are defined primarily based on the products
and services provided or the types of customer served: Credit Card, Consumer
Banking and Commercial Banking. The operations of acquired businesses have been
integrated into our existing business segments. Certain activities that are not
part of a segment, such as management of our corporate investment portfolio,
asset/liability management by our centralized Corporate Treasury group and
residual tax expense or benefit to arrive at the consolidated effective tax rate
that is not assessed to our primary business segments, are included in the Other
category.
• Credit Card: Consists of our domestic consumer and small business card
lending, and international card businesses in Canada and the United Kingdom
("U.K.").
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• 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 .
Business Developments
We regularly explore and evaluate opportunities to acquire financial services
and products as well as financial assets, including credit card and other loan
portfolios, and enter into strategic partnerships as part of our growth
strategy. We also explore opportunities to acquire technology companies and
related assets to improve our information technology infrastructure and to
deliver on our digital strategy. We may issue equity or debt to fund our
acquisitions. In addition, we regularly consider the potential disposition of
certain of our assets, branches, partnership agreements or lines of business.
On September 24, 2019 , we launched a new credit card issuance program with
Walmart Inc. ("Walmart") and are now the exclusive issuer of Walmart's cobrand
and private label credit card program in the U.S. On October 11, 2019 , we
completed the acquisition of the existing portfolio of Walmart's cobrand and
private label credit card receivables, which added approximately $8.1 billion to
our domestic credit card loans held for investment portfolio as of the
acquisition date.
In the second quarter of 2019, we made the decision to exit several small
partnership portfolios in our Credit Card business. We sold approximately $900
million of receivables and transferred approximately $100 million to loans held
for sale as of June 30, 2019 , which resulted in a gain on sale of $49 million
recognized in other non-interest income and an allowance release of $68 million .
Coronavirus Disease 2019 (COVID-19) Pandemic
The COVID-19 pandemic has resulted in a global public-health crisis, disrupting
economies and introducing significant volatility into financial markets and
uncertainty as to when economic and operating conditions will return to
normalcy. This crisis continues to impact individuals, households and businesses
in a multitude of ways. Companies in the U.S. and abroad have experienced
unprecedented disruptions to normal business operations, including
customer-facing interactions, supply chains, office closures, changes in demand
for products and services, and others. Financial institutions, including us,
have been deemed an essential service and exempted from the myriad of shutdowns
across the country. We have transformed how we work in order to protect the
well-being of our associates and our customers, serve our customers, support our
communities, and position ourselves to navigate the challenges ahead.
Since the start of the pandemic, a significant majority of our associates across
our workforce have transitioned to working remotely, relying on our technology
infrastructure and systems that we have designed for resilience and security.
The majority of our associates will continue to work remotely throughout 2020,
as we continue to prioritize the safety of our associates while planning our
return to the office. We have been able to continue serving customers,
successfully managing critical functions and keeping our lines of business
operating. During the second quarter of 2020, we maintained the additional paid
benefits and flexible attendance policies that are intended to enable our
associates to care for their families and loved ones. This included the
increased pay implemented in the first quarter of 2020 for branch associates
working in open locations and associates that perform essential and
time-sensitive banking activities that cannot be performed remotely, as well as
a pay increase for other U.S. -based associates in roles instrumental to
maintaining essential customer support, such as our call center agents and
branch associates. We continue to monitor and revise our safety precautions and
policies at banking locations as government authorities continue to implement
and modify measures to contain the further spread of COVID-19. In our Retail
Banking business, over 90% of our branches were open at the end of the second
quarter with increased safety precautions as we continue to provide critical
banking services. We will continue to monitor local conditions and may open the
remaining branches and Cafés where conditions warrant.
We continue to offer a range of policies and programs to accommodate customer
hardship across our lines of business. In our Credit Card and Auto Finance
businesses, our customers can seek forbearance primarily in the form of
short-term payment deferrals or extensions and fee waivers. In our Domestic Card
business, excluding certain retail partnership portfolios, enrollments were
approximately 50,000 accounts per week at the end of the second quarter, down
from around 150,000 accounts per week at the end of first quarter, and
approximately two-thirds of the recent weekly enrollments were renewals. Through
June 30, 2020 , we have enrolled a total of 2% of active accounts representing 3%
of loans outstanding, and approximately 92% of these customers
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were current at the time of their first enrollment. In our Auto business, enrollments were approximately 30,000 accounts per week at the end of second quarter, down from around 100,000 accounts per week at end of the first quarter, and approximately 60% of the recent weekly enrollments were renewals. ThroughJune 30, 2020 , we have enrolled a total of 14% of accounts representing 16% of loans outstanding, and approximately 75% of these customers were current at the time of their first enrollment. In our Retail Banking business, we are waiving select fees for impacted customers and offering short-term payment deferrals for our small business banking customers. We are also working with our Commercial Banking customers on a more customized basis. In addition, we have also participated in the Paycheck Protection Program ("PPP"), established by the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") enacted inMarch 2020 and implemented by theSmall Business Administration . As ofJune 30, 2020 , we funded$1.2 billion of PPP loans. See "MD&A-Credit Risk Profile" for more information about our customer assistance programs. Our results for the second quarter and the first six months of 2020 were a net loss of$918 million , or$2.21 per share, and a net loss of$2.2 billion , or$5.31 per share, respectively, primarily driven by allowance builds due to the expectations of economic worsening and uncertainty as a result of the COVID-19 pandemic. In addition, the combination of these allowance builds and the adoption impact of the Current Expected Credit Loss ("CECL") standard more than doubled our allowance coverage ratio to 6.7% as ofJune 30, 2020 from 2.7% as ofDecember 31, 2019 . For more information, see "MD&A-Executive Summary and Business Outlook" and "MD&A-Credit Risk Profile." We have evaluated the potential impact on our goodwill as well as considered and incorporated recent market events and volatility into our fair value measurements, including our investment securities portfolio and derivative positions. See more details in "MD&A-Critical Accounting Policies and Estimates," "MD&A-Market Risk Profile" and "Note 8-Derivative Instruments and Hedging Activities." See "MD&A-Liquidity Risk Profile" for information relating to our liquidity reserves as ofJune 30, 2020 . In the second quarter of 2020, the COVID-19 pandemic continued to impact the demand for our products and services. In our Domestic Card business, purchase volumes and loan balances declined from consumers reducing spending and paying down their balances. In our Auto business, we saw an increase in origination volumes and loan growth from the sharp decline at the end of the first quarter, with the rebound stronger in the market segments where we are focused. Our loan growth was largely driven by increased originations from our dealer business as a result of our relationship strategy and digital capabilities as well as our direct-to-consumer business enabled by our digital products and services. In our Retail Banking business, we saw strong deposit growth from increased consumer savings including the impact of the government stimulus. There is still great uncertainty surrounding the course of this pandemic and the magnitude and duration of the disruption to economic activity and how this disruption will continue to impact demand for our products and services across all of our offerings. We are actively monitoring and responding to developments across the myriad of landscapes affected by the COVID-19 pandemic, including social, financial, legal, regulatory and governmental. We continue to evaluate the impacts of the CARES Act on us and our customers. As other guidance is issued by our regulators, we continue to assess the impacts to us. As government authorities continue to implement and modify social distancing and reopening plans and other measures to contain the further spread of COVID-19, we will continue to adjust our business operations, policies and practices, keeping the best interests of our associates, customers and business partners at the forefront. See "Part II-Item 1A. Risk Factors" in our Quarterly Report on Form 10-Q for the period endedMarch 31, 2020 for additional information regarding risks and the significant uncertainties relating to the COVID-19 pandemic. Cybersecurity Incident OnJuly 29, 2019 , we announced that onMarch 22 and 23, 2019 an outside individual gained unauthorized access to our systems. This individual obtained certain types of personal information relating to people who had applied for our credit card products and to our credit card customers (the "Cybersecurity Incident"). We retained a leading independent cybersecurity firm that confirmed we correctly identified and fixed the specific configuration vulnerability exploited in the Cybersecurity Incident. We continue to invest significantly in cybersecurity and related risk management activities and expect to make additional investments as we continue to assess our cybersecurity program. During the second quarter of 2020, we incurred$27 million of incremental expenses related to the remediation of and response to the Cybersecurity Incident, offset by$16 million of insurance recoveries. To date, we have incurred$113 million of incremental expenses, offset by$60 million of insurance recoveries pursuant to the cyber risk insurance coverage we carry. These expenses mainly consist of customer notifications, credit monitoring, technology costs, and professional support. We expect total incremental costs through the end of 2020 will be at the high end of the$100 million to$150 million range previously disclosed. As the timing
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of recognizing insurance reimbursements may differ from the timing of
recognizing the associated expenses, any such reimbursements are not considered
in this range, though we continue to expect that a significant portion of these
expenses will be covered by insurance. We carry insurance to cover certain costs
associated with a cyber risk event. This insurance has a total coverage limit of
7Capital One Financial Corporation (COF)
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Table of Contents SELECTED FINANCIAL DATA
The following table presents selected consolidated financial data and
performance from our results of operations for the second quarter and first six
months of 2020 and 2019 and selected comparative balance sheet data as of
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