Capital One Financial Stock

Okay. We're going to get started. Thank you, everyone, for joining. Very pleased to have Capital One here with me again this year. With me on stage, we have Richard Fairbank, CEO; and Jeff Norris, SVP of Finance. So welcome, gentlemen.

Thanks, Terry.

Thank you.

All right. So let's jump right into it. Maybe let's begin with the state of the consumer. There's been lots of headlines this year around inflation, energy prices and the health of lower income households. As you look across your customer base today, how would you characterize consumer health across income cohorts and credit segments?

So if we read the news every day, it's pretty alarming, the things we see out there. And I think it's natural for people to be pretty concerned about where the consumer is. But if we actually look at the numbers, some of the macroeconomic numbers and our own portfolio, we see really quite a striking strength. So let's just talk about the macro numbers for a second. Unemployment is low. The new job creation just rebounded very recently. Consumer spending is pretty strong. Bank balances, when we look at bank balances, they are up a little bit over last year on average per person. So the consumer -- I mean, there's a lot of indications that despite all the noise out there and despite the inflation and tariffs and wars that are going on, the consumer seems to be in a pretty good place. With respect to our own metrics, if we start with credit, our credit delinquencies continue to come in strong. We just posted our monthly numbers yesterday and delinquencies were coming in right consistent with seasonality. Charge-offs came in again better than seasonality, and that would be powered really by the high level of recoveries that we are enjoying, which came really from the higher level of charge-offs from the last few years. But really, over the course of the -- pretty much the whole 2026, consumer credit has been in a very generally -- slightly improving kind of place and most recently looks right there, steady with seasonality. The consumer spending on our portfolio continues to be strong. And the -- with respect to income levels, we see a similar spending strength across our credit spectrum, including some of our lowest income consumers. Now I do want to say that's not the same as a statement about what's happening across the whole economy because income is one of the things that we use in underwriting. So I don't think we have a window into the very lowest income consumers. But overall, the consumer continues to show a lot of strength even in the face of a lot of uncertainty out there. Obviously, we're monitoring it closely, but this would be one of the reasons we continue to lean into growth across our credit businesses.

Got it. That's helpful. You touched on credit. Maybe let's just double-click on auto credit. That's an area of focus. Auto credits really remain benign at Capital One and loan growth has been particularly strong at low double digits. What's your view on the auto market from both a pricing and underwriting perspective? And how sustainable is this double-digit growth?

The auto business is a very competitive business. And if I -- and it's sort of -- the swings are amplified relative to our Credit Card business. Let me compare the difference from our point of view. In the consumer credit card business, we are underwriting each customer, one customer at a time and have a direct relationship with each customer. In the auto business, there's a dealer right in the middle of the transaction, and the dealer is holding an auction across lenders, saying, "Who can give me the very best deal?" And included in that is if there's a lender out there who is undercutting and maybe cutting the corners from an underwriting point of view, the dealers can turn to other lenders and say, "You need to match this particular offer." So what we learned long ago in the auto business is we have to take what the market gives us and not lean in too hard for growth. We've got to always hold firm with respect to what is the credit profile and the margin and the overall resilience of the product that we are booking. And that has, over time, caused us to sometimes be the lowest in the league tables in growth, sometimes being the highest in the league table of growth. And we have often zigged while others zagged.

Let me turn to the credit story in auto. It's really interesting to look back and go back to the -- to pre-pandemic and look at what happened to credit since then. You -- of course you had the pandemic and credit performance became amazing all across all lending businesses. But we flagged that there was a dangerous downside in the form of artificial inflation of people's credit scores because their credit performance was sort of artificially improved by all the windfalls consumers were getting in the form of stimulus and forbearance during that period of time. So we flagged this to investors, and we intervened in our own underwriting to try to do the best we could to normalize for credit scores. That caused us to -- for a period of time to be at the bottom of the league tables in terms of growth. But over time, the industry started seeing some worsening credit performance that we did not observe. And so then Capital One has turned around and now powered to quite a bit of growth, and we're sort of at the top of the league tables these days. While I think the industry has had a lot of volatility with respect to credit, I'm pleased with the stability in credit performance we've had at Capital One, not only indicated by the charge-off rate that you can observe over the years. But if we look at the performance of individual vintages over the years, the -- for years now, the -- our origination vintages have come in pretty much on top of each other and consistent with pre-pandemic at a time when that would not be the case for the industry. So we -- this is a very competitive industry. We only take, we only take what it gives us, and it really helps not to have our divisions in the company feel that they are driven by growth targets. We do not have growth targets anywhere across our businesses. People give -- people have growth projections, but they all understand that Capital One, go out and build, create the business that you really -- that's a healthy business, and we'll let the numbers be what they are.

Great. Good color. So maybe we'll switch gears. I wanted to touch on the Discover migration. New Discover originations were scheduled to move on to Capital One's platform this quarter. How has the transition gone? And do you still expect the Discover back book migration to be complete by early 2027? And what are the biggest lessons learned so far?

Yes. So the Discover migration, let me start with one of the most important lessons. This was not a surprise to us, but I'm still struck as it plays out. The tremendous value of the modern tech stack that Capital One has built because we are -- this would be -- this is a very complex integration, but it really would be tough if we were taking a legacy platform and converting it on to another kind of old-school set of capabilities. So the modern tech stack that we have is very helpful in terms of the ability to do this and the time frame and the cost involved. There are some legacy vendor connections that we're still making that have quite a bit of complexity to it. But anyway, the timing is very much consistent with what you said, Terry. So new originations. So originations of Discover credit card, as of the beginning of this month, are now entirely on Capital One's technology. And the conversion of the back book is being done in waves and starting from the first wave was in July, and the final wave will be in January of next year. So it's a big effort, but we're -- things are moving along and very consistent with the time frames that we had projected.

Got it. And you've also indicated that Capital One should begin growing out of the Discover-related brownout in the second half of this year. Is that still the expectation?

So let me -- I want to clarify your -- what -- how you characterized it. Let me pull way up. The brownout, that's a term that we coined to describe the shrinking of Discover's credit card loan portfolio that was going on over the -- has been going on for quite some time. And our point when we coined the phrase many months ago was for people to understand this would continue for a while. So what we're talking about, therefore, is a shrinking in the Discover loan portfolio. Why would this be happening? The first big driver of this is Discover ran into some credit challenges in 2023 and 2024, they started dialing back very dramatically. And so you had several years of origination vintages that were just a lot smaller than the ones before that and piling smaller vintages on top of each other tends to lead to a shrinking portfolio. Secondly, not at all surprising to us because it's the thing we had observed from the outside. When we went into really look deeply at the Discover business, we found that some of -- that we wanted to dial back around the edges of some of their lending to more indebted consumers. And we have philosophically had more of a lean toward spend-first portfolios than Discover has. So not surprising to us, we dialed back from some of the more indebted lending. That also contributed to the brownout. Now what will turn the brownout around is bringing Discover on to Capital One. And we just talked about the timing of the front book and the back book with respect to bringing them on. Now when we bring the -- we've been looking forward to getting -- to originating Discover cards on the Capital One platform because there are a number of growth-related opportunities that we have. We have a wider credit box than Discover has. So we underwrite both lower in the credit for a given flow. So imagine all the flow of applications is coming in for Discover. We can underwrite lower than they did successfully with years of experience sort of on the subprime side, and we have a way to lean in and create more opportunity on the upper end as well. Additionally, we have found that compared with Discover, we mine more marketing channels more deeply than they traditionally did. So all of this gives us an opportunity to create growth that otherwise wasn't there for Discover, helping to offset those dynamics that will continue such as our more conservative approach toward more indebted customers.

Let's talk about the timing. While I gave you the timing of when the conversions are happening, I don't want people to think that, that instantly creates growth out the other side because, for example, on the originations, now that we're originating on the platform, some things we were already starting to roll out and some things we are testing before rolling out. So there's the kind of testing period that we have to account for. And then even when we originate new accounts, it takes a while for the balances to build. So therefore, this effect is very real, but it takes a while to manifest on the overall size of the portfolio and a similar set of observations on the back book. So what we look forward to is -- the way we will measure progress comes from sort of the second derivative turning in the sense that the rate of shrinking kind of stabilizes, then the shrinking becomes less, but it's still shrinking and finally, growth happens on the other side. So these are milestones along the way that we will look forward to.

And on a related note, the opportunity to sort of get the growth -- address the brownout and get the growth going probably comes with, all else equal, some incremental marketing.

Yes. Great point, Jeff.

Got it. Okay. I wanted to touch on Brex. It's been about 5 months after closing the acquisition. Maybe just talk to us about how the integration has progressed relative to expectations? And just more broadly, can you remind investors how Brex fits into Capital One's strategy to expand across commercial payments?

Yes. So let me start with the strategy side. So think about Capital One, well, so often we talk about we're a credit card company or a consumer lending company or a bank, we really should think in terms of Capital One also is a payments company. And we have, from the founding days of the company, been very focused on payments is the tip of the spear that -- through which financial services is going to change. And so we, along the way, have been very much working backwards from being a payments company. So we built, of course, a very strong consumer credit card and payments business. We built a small business card business. We are the third largest in purchase volume in terms of small business cards that are underwritten by the owner of the business personally underwrites these. And that's called the personal liability business. Next on the spectrum is credit cards still, but it's corporate liability. In other words, the owner of the business is not personally accountable. And then continuing from there, you get into treasury management. So across the spectrum, we have looked to fill out that whole thing. We have a small corporate card business or often called commercial card, corporate card, that's the corporate liability business. That's the business that Brex is in. And we, again, had a small presence there. But we saw that the size of that market was as big, like $1 trillion, as the personal liability business. And we were always struck that Brex, of course, created a great growth play in that marketplace. But their growth play is not just an ordinary growth play where someone reinvents one aspect of the business and brings modern technology, Brex has actually looked at 3 different marketplaces and said those are really one, but the industry doesn't treat it as one. They looked at it and said, these are 3 markets, and they are being served by more traditional technology, and they're being served individually. What are those 3 markets? One is the corporate card itself. One is the accounts payables business and one is spend management of all the employees in a business. And from a business manager's point of view, those are all different parts of the same challenge. So Brex looked at it and said, these are really -- this is really one business, and it's a modern reinvention of how the payment side of the business works. They created their product and have had a lot of success with that. So we were very excited to buy this high-growth company with a great product. We knew down the road. But by the way, that would not only reinvent how the corporate card market is, but that's the very same reinvention we knew that we had to drive on the personal liability side of the business. So again, we get a bit of a twofer there. Since the acquisition has happened, now that we're 5 months in, I am struck at how we feel the very same as we did at the outset. We are very struck by the management team, very struck by how much the management team is leaning in and all in on this quest, very struck by how good the technology stack of Brex is, very struck by the killer app that this trilogy of capabilities has. And what we are focusing on is so far a light integration of the things that absolutely need to be integrated. But what we're also doing is putting a lot of energy toward adding capabilities that they can really benefit from Capital One, and that includes our marketing -- well, it includes our brand, our marketing machine, the -- all the marketing channels that we access at Capital One, the huge customer base of small businesses, some of whom are graduating into a need for commercial cards, lower cost of funds. And so that's what we're focusing on right now, and there's some promising green shoots that we're seeing along the way. In the longer run, we also look forward to bringing Brex into our Small Business, our own existing Small Business side of the house and also integrating it with our travel business, which is a fast-growing part of Capital One and would have a very big opportunity on the commercial side. So we're just as excited as we were before. There's a lot of work and a lot of investment going on, but we like our chances.

Got it. That's helpful. So I want to turn the discussion back to Discover synergies. Capital One has achieved the targeted revenue synergy this year. And the focus is now on the expenses, expense synergies of $1.5 billion. You've mentioned around 1/3 of the operating expense synergies were realized in the second quarter. How should investors think about the cadence of the realization going forward?

So that was very well described, Terry. The operating -- the remaining operating expense synergies are dominated by benefits that come on the other side of the technology conversion. And you don't get those benefits until the full conversion of a particular piece of technology happens. And so that just turns out to be mostly backloaded in the integration timing. There will be some operating cost savings that happen along the way, but a bigger portion of them of the rest will come toward the end. And what is the end that we're talking about sort of middle of next year.

Got it. Just to be clear, middle of next year is what you just said?

Middle of next year is -- well, that's when the integration is essentially done. There will be a few loose ends that need to take a little longer. But essentially, the integration will be done by the middle of next year, and that's when what would be the operating synergies will reach a run rate at that time.

Got it. That's helpful. Maybe we should move to earnings power. So you've consistently said that you remain confident in the earnings power of the combined company outlined when the Discover deal was announced. However, Capital One today looks somewhat different than at the time of announcement. Discover has evolved and Brex and Hopper are now under the same roof. So how should investors think about the earnings power of the combined company?

So one of the real benefits of the Discover deal, in addition to bringing scale, in addition to bringing a network and all the opportunities there is the potential to really pull together and have very strong earnings power out the other side of this combination. So at the time that we announced the deal, we had a whole -- did our very best to estimate what we thought would be the earnings power as measured in ROTCE coming out the other side of integration. And since then, we -- many things have sort of changed along the way, including -- and they've changed in sort of both sides of the ledger. But in terms of -- one of the challenges has been the Discover brownout, which was a bigger effect than we had originally estimated. Obviously, that brings along with it less earnings growth, a little less loan growth than we had anticipated. On the plus side, margins at Discover and at Capital One have had quite a bit of strength over this period of time. Credit has come in really quite strong. And then the other big factor that sort of happened along the way is just the -- a continual leaning into the investment agenda at Capital One, where -- which really comprises 2 primary pieces. One is continued investment in capabilities themselves, technology capabilities, swapping out legacy vendor technology, for example, to modern internal capabilities, investing in AI and things like that. And the other part of it has been just the pursuit of future growth opportunities. So with a lot of things on both sides of the ledger, our guidance has been that despite all the moving pieces -- and by the way, other moving pieces was the acquisition of Brex and the acquisition of the technology of a copy essentially of the technology platform from Hopper along with a bunch of their people. So with all of the moving pieces, our point has been that the earnings power coming out the other side of this integration is strikingly sort of right around the same level as we anticipated at the beginning.

Okay. So I think almost equally as important is the rate at which that earnings power compounds over time. If Discover and Brex integrations proceed as expected and Capital One returns to normalized growth, how should investors think about the long-term earnings growth profile of the combined company? And also, what gives you confidence in Capital One's ability to grow earnings over the next 3 to 5 years?

So we have been, since our founding, constructed to be an organic growth company. I think a lot of banks are built or certainly over the last number of decades to have their primary growth focus is just buying other banks. We've really been built for organic growth, ironic that I'm saying it given that we've had a couple of notable acquisitions here recently. But to your point, Terry, these investments that I'm talking about that have led to a large investment agenda, and I think a bigger investment agenda than maybe the next bank down the street might have. They are -- they work backwards from being able to have growth and value creation opportunities as the world evolves. And so I think Capital One is well positioned in terms of earnings power and the prospects for earnings power because we sit on a modern technology stack. We have invested in a number of growth vectors like going after heavy spenders at the top of the credit card market, building a national retail bank organically, something no other major bank is doing. Businesses like Capital One Shopping and our Auto Navigator financing platform, and then Brex and our travel business and things like this. I think collectively, when you see us talking so much about we have a lot of things to invest in, it is in service of being able to continue to grow the business and grow the earnings of the company. So in a world where there are no guarantees, I like how we're positioned to do that.

Got it. Okay. So the pace of investments and expenses has remained a focus for investors. How should we think about the balance between operating leverage and investment spending? And when you're evaluating incremental marketing or tech investments, what return thresholds matter most?

When we look at incremental business investments, we are very much focused on what is the long-term value that can be created for them. So pretty much any new business growth opportunity before the investment, during the investment and afterward, we measure what is the value that can be created from these investments. And from an IRR point of view on a risk-adjusted basis. So that is the most important metric that we use for all of our business investments. And at the same time, we also very much keep an eye on the vertical, what I call the vertical current period financial performance of the company because I know investors care a lot about that. And it's also an indicator of progress along the way. But I want to say that the -- while I think a lot of companies come in with their primary focus is sort of the vertical financial performance of the company. Our primary focus is in a business that's all about creating annuities, is to create very valuable annuities that we rigorously measure. So in the context of that, Terry, if you look at the history of Capital One, we've tended to -- well, sort of the recent history over the last decade is quite a bit of improvement in operating leverage along the way even as we have invested so heavily. And that's because of the growth that has been created as well as the savings that come from modern tech replacing legacy technology. Not all the investments -- some of the investments we're investing in at Capital One actually are in business areas that have higher inherent operating efficiency ratios than the lending business. So we'll keep an eye on a little bit of a mix change there that could move things in the other direction. But pulling way up, the investments of the company work backwards specifically from creating value over the long term. And I think the long track record of Capital One indicates the benefit of that approach.

There's another thing that I think is less talked about that in addition to all the rigor and the infrastructure we've built around measurement of the horizontals and the investments themselves, another way you could think about our total expense base is comprised of a bucket called investments and a bucket called everything else. And there's not a day that goes by where we're not highly focused on managing both of those buckets as efficiently as possible. And we don't often talk about the one-minus investments and all the efforts to harvest the digital productivity gains and drive efficiencies in that part of the thing. And that's an important part of balancing efficiency and investments along the way as well.

Got it. That's helpful, Jeff. So maybe we'll just turn to capital. You have a CET1 ratio of 13.7%. That remains well above the stated capital needed or at least the target capital level. How do you think about the balance between growth investments and shareholder returns moving forward?

I want to pull way up on that kind of strategically since the founding of the company, we have been very focused on -- unlike most banks that do everything, since we started by not -- we weren't in anything. We very carefully chose the businesses that we're in because I don't believe all businesses are attractive in banking, and we have focused very much on entering and building a lot of scale in inherently attractive businesses with good growth and earnings power prospects. And along the way, we've built a business model, leveraging technology and analytics and measurement, the things that we've talked about to be able to have high octane businesses. So we're in a position where the inherent earnings power of Capital One is very strong. Now in that -- and we, therefore, have believed that an important -- so how -- an important way that we create value for investors is through investing for future growth, but also the ability to return capital to shareholders and that we have the earnings power to do both. So we've said all along that return of capital to shareholders is an important part of the value equation. At the same time, we also very much believe that we have a very conservative approach to capital because we believe the benefits and costs associated with capital can be very asymmetrical. And we, of course, know that during downturns and when the time gets to times get tough, the value of extra capital is just tremendously high, both from -- if you had to raise it, it would be very expensive, but also the opportunity to play offense and lean into growth at a time when others are pulling back. So capital is sort of asymmetrical with respect to its value. That's why we [indiscernible] conservative view there. But again, because of the inherent earnings power of the company, we believe we can simultaneously take the conservative capital approach. We can be a company that's investing very much in our future to position ourselves to continue to win and still be able to deliver significant capital to shareholders. And that has been a very important part of the collective value-creating equation in the past, and we expect that very much to continue.

Great. I think that takes us the time. So thank you very much.

Thank you.

Good day, and thank you for standing by. Welcome to the Capital One Q2 2026 Earnings Call. Please be advised that today's conference is being recorded. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Jeff Norris, Senior Vice President of Finance. Please go ahead.

Thanks very much, Josh, and welcome, everyone. To access the live webcast of this call, please go to the Investors section of Capital One's website, capitalone.com. A copy of the earnings presentation, press release and financial supplement can also be found in the Investors section of Capital One's website by selecting financials and then quarterly earnings release.

With me this evening 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 this presentation, summarizing our second quarter results for 2026.

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 Statements in the earnings release presentation and the Risk Factors section of our annual and quarterly reports accessible at Capital One's website and filed with the SEC.

Now I'll turn the call over to Mr. Young. Andrew?

Thanks, Jeff, and good afternoon, everyone. I will start on Slide 3 of tonight's presentation. In the second quarter, Capital One earned $3 billion or $4.73 per diluted common share. As a reminder, the Brex acquisition closed in early April, and we have provided additional details related to the purchase accounting in the appendix of tonight's presentation. The results for the quarter included several adjusting items related to the Discover and Brex acquisitions, which are outlined on Slide 3. Net of these adjusting items, second quarter earnings per share were $5.81.

Relative to the first quarter, revenue increased 4% and noninterest expense grew 7%, resulting in pre-provision earnings growth of 1%. On an adjusted basis, pre-provision earnings were flat quarter-over-quarter. Our provision for credit losses decreased $1.1 billion or 27% to $3 billion in the quarter. The provision reflects $3.7 billion of net charge-offs of $662 million.

Turning to Slide 4. I'll cover the allowance in greater detail. The $662 million allowance release in the quarter brought the allowance balance to $23 billion. Our total portfolio coverage ratio decreased 26 basis points and now stands at 5.02%. I'll cover the drivers of the changes in allowance and coverage ratio by segment on Slide 5.

In our Domestic Card segment, we released $705 million of allowance. The coverage ratio decreased by 41 basis points and now stands at 6.99%. The decline in the coverage ratio was driven by continued favorable observed credit in the quarter and a modest decrease in the consideration given to economic uncertainties.

In our Consumer Banking segment, we built [ $150 ] million of allowance. The allowance build was primarily driven by strong growth in the auto business. The coverage ratio ended the quarter at 2.39%, 3 basis points higher than the first quarter. And finally, in our Commercial Banking segment, we released $59 million of allowance. The allowance release was primarily driven by specific reserves on loans that were charged off in the quarter. The commercial banking coverage ratio decreased 8 basis points quarter-over-quarter to 1.62%.

Turning to Page 6. I'll now discuss liquidity. Liquidity reserves ended the second quarter at about $144 billion, down $21 billion from the prior quarter. Our ending cash position decreased by about $22 billion to approximately $55 billion. The decrease in cash was primarily driven by growth in our loan portfolio, wholesale funding maturities late in the quarter and the impacts from Brex. Our preliminary average liquidity coverage ratio was 165%, and our preliminary average net stable funding ratio was 136%.

Turning to Page 7, I'll cover our net interest margin. Our second quarter net interest margin was 8.01%, 14 basis points higher than the prior quarter. The increase was largely driven by a 9 basis point impact from 1 additional day in the quarter. The remaining increase was driven by a lower rate paid on retail deposits and a $5 billion decline in average cash balances.

Turning to Slide 8. I will end by discussing our capital position. Our common equity Tier 1 capital ratio ended the quarter at 13.7%, 70 basis points lower than the first quarter. The combination of $2.7 billion of share repurchases, approximately 40 basis point impact from the Brex transaction and an increase in risk-weighted assets more than offset net income in the quarter.

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

Thanks, Andrew, and good evening, everyone. Slide 10 shows second 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. The Domestic Card business posted another quarter of top line growth and strong credit results. As a reminder, we closed the Discover acquisition on May 18, 2025. So period-end balances for the prior year quarter now include the addition of the Discover portfolio. for items like purchase volume and revenue, we'll still need to discuss the partial quarter impacts of adding Discover.

In the second quarter, we also added Brex to the Domestic Card business and moved our small legacy Corporate Credit Card business from the commercial bank to domestic card. Second quarter purchase volume grew 26% year-over-year, primarily driven by the addition of a partial quarter of discovery purchase volume. We also posted a modest acceleration in legacy Capital One purchase volume growth and benefited from modest tailwinds from the addition of Brex and the Corporate Card business. Legacy Discover purchase volume grew just under 2% year-over-year. Purchase volume for legacy Capital One businesses, inclusive of adding Brex and corporate card grew about 14% year-over-year with the significant majority of the increase coming from the acceleration of underlying organic growth before the addition of Brex and Corporate Card.

Ending loan balances increased 2.6% year-over-year. The legacy Discover card loans shrunk 1.5% from the prior year, in line with our expectations for the temporary brownout of discovered loan growth. Excluding Discover, ending loans grew about 5.3% year-over-year, driven predominantly by a modest acceleration in the organic growth of legacy Capital One loans and aided by the addition of Brex on Corporate Card. We continue to see good opportunities to grow the Discover Card business on the other side of our tech integration, where we can implement growth expansions powered by our unique technology and underwriting.

Revenue was up 30% from the second quarter of 2025, largely driven by the addition of a partial quarter of Discover revenue. Excluding Discover, year-over-year revenue growth was 9.5%, driven predominantly by underlying organic growth in legacy Capital One purchase volume and loans. Revenue margin for the quarter was 17.4%. The domestic card charge-off rate for the second quarter was 4.71%, down 39 basis points from the prior quarter and down 54 basis points year-over-year. The delinquency rate was 3.39% at quarter end, down 31 basis points from the linked quarter and down 21 basis points from a year ago. We are seeing similar credit trends in both the legacy Capital One and legacy Discover portfolios.

Domestic Card noninterest expense was up 38% compared to the second quarter of 2025, driven by the addition of a partial quarter of Discover as well as continuing technology investments. Operating expense and marketing both increased year-over-year. Our choices in domestic card are the biggest driver of total company marketing, but choices in our consumer banking business have an increasing impact as well.

Total company marketing expense in the quarter was about $1.7 billion, up 23% year-over-year, driven by the addition of Discover as well as higher legacy Capital One direct marketing in our Domestic Card and Consumer Banking businesses, increased media spend and continuing investments in premium benefits.

Pulling up, our marketing continues to deliver strong new account originations to build an enduring franchise with heavy spenders at the top of the domestic credit card market and to grow checking accounts on a national scale in our consumer banking business. We continue to lean into marketing to take advantage of these compelling market opportunities.

Slide 12 shows second quarter results in our Consumer Banking business. Global Payment Network transaction volume for the quarter was approximately $190 billion. Network transaction volume increased 156% compared to the partial quarter of transaction volume in the second quarter of 2025. And the successful completion of Capital One debit customers -- the conversion of Capital One debit customers to the Discover network. The sequential quarter increase was about 9%. Auto originations were up 19% from the prior year quarter. We continue to be in a strong position to pursue resilient growth in the current marketplace.

Consumer banking ending loan balances increased $9.2 billion or about 11% year-over-year. Average loans were also up 11%. Compared to the year ago quarter, ending consumer deposits grew about 5%. Average deposits were up 19%. Our digital-first national consumer banking business continues to grow and gain traction. Consumer Banking revenue for the quarter was up about 26% year-over-year, driven predominantly by the addition of a partial quarter of Discover operations as well as discover revenue synergies and growth in auto loans. Noninterest expense was up about 24% compared to the second quarter of 2025, driven largely by the addition of a partial quarter of Discover as well as higher marketing to drive growth in our National Consumer Banking business, increased auto originations and continued technology investments. The auto charge-off rate for the quarter was 1.43%, up 18 basis points year-over-year and down 21 basis points from the sequential quarter. The year-over-year increase is the result of a gradual mix shift in new originations and loans as our subprime mix is returning to pre-pandemic levels. The auto delinquency rate was up 11 basis points from the linked quarter and down 52 basis points from the prior year.

Slide 13 shows second quarter results for our Commercial Banking business. Compared to the linked quarter, both ending and average loan balances were up about 1%. Ending deposits were down about 1% from the linked quarter. Average deposits were essentially flat. The Commercial Banking net charge-off rate for the second quarter increased 24 basis points from the sequential quarter to 0.53%. The commercial criticized performing loan rate was 4.4%, down 55 basis points compared to the linked quarter. The criticized nonperforming loan rate was down 8 basis points to 1.32%.

In closing, second quarter results continued to reflect solid top line growth and strong credit performance. We're now 14 months into our planned 24-month integration of Discover and integration is going well with the successful completion of converting Capital One's debit customers to the Discover network. Second quarter results include the full quarterly run rate debit revenue synergies. Our results also include about 1/3 of the quarterly run rate of the announced operating expense synergies. We remain on track to deliver the full $2.5 billion of announced synergies.

For years, we have been working backwards from the dramatic transformation of the business marketplace with modern technology, data and AI. We are in the 14th year of our technology transformation from the bottom of the tech stack up. We're way down that path, and we continue to invest in some very powerful foundational capabilities as well as AI infrastructure and specific AI experiences. We also continue to invest in growing our heavy spender franchise at the top of the market, including rewards, lounges, unique access to experiences and breakthrough digital capabilities. And we continue to lean into our unique quest to organically build a digital-first full-service national bank.

Many of our opportunities are enhanced by the Discover acquisition, which, of course, also brings the new opportunity to grow and scale our own global payments network. We continue to invest in network acceptance and technology. As we've discussed, these investments will continue to be reflected in the efficiency ratio. They are also the engine that powers long-term growth and returns. Pulling way up, we continue to build momentum from the game-changing acquisition of Discover. Even though some individual variables in our deal model have moved since the announcement, and we have acquired Brex and brought in-house the technology that supports Capital One travel, we still expect our earnings power on the other side of the Discover integration to be consistent with what we expected at the time we announced the deal.

And now we'll be happy to answer your questions. Jeff?

Thanks, Rich. We'll now start the Q&A session. [Operator Instructions] Josh, please start the Q&A.

[Operator Instructions] Our first question comes from Terry Ma with Barclays.

I wanted to start off with Brex. Rich, you had previously indicated that you could accelerate Brex's growth almost from day 1 through stepped-up marketing and tech spend. So I'm just curious to what extent have those investments already been absorbed into the current expense run rate. And then when should investors see more tangible benefit become more visible. And I have a follow-up.

Thank you, Terry. Just to comment on Brex for a second. I don't believe we said this from the second we get it, we we'll be able to accelerate their growth. What we said is from -- pretty much from the second that we do this acquisition, we're going to be able to start mobilizing the solutions that many of which don't require full integration and those solutions are -- can be very beneficial and help us lean in and really accelerate Brex's growth. So it's been over 100 days since we closed the deal, and we are as excited as ever about Brex. We acquired Brex because of its success in the attractive corporate card market and for its bottom of the tech stack infrastructure and its world-class talent. And we just continue to be impressed with all of those striking capabilities.

And together, we're making good progress in building our foundational capabilities that will support the business going forward. So Brex is already experiencing some of the early tailwinds that will come with our brand, and we expect these to only grow stronger over the next few months. They are also benefiting from the cost of funds impact of moving to our balance sheet. We have already stood up a program to share high potential leads from across our businesses with and we are seeing very promising early results at the outset. We will scale into this approach more aggressively over time. Now some other benefits that we bring are going to take a little bit longer. Over the coming months as we test and learn, we will start leaning in with marketing dollars. Fully leveraging the marketing machine of Capital One requires a little more tackle integration.

We'll have to set up data pipelines and calibrate our models for Brex's customer base. So that will come a little further down the road. For our travel business, we will be focused on the hopper build-out through the balance of this year. So bringing our travel portal to Brex will likely follow that work. We expect that Brex will also bring many benefits to Capital One, especially bringing Brex capabilities to our small business card business. These benefits will require integration and will be unlocked over time. So are already moving to bring benefits to them. Most of that is not yet reflected in our investment dollars because really most of the work has been sort of working to put capabilities in place.

Got it. That's helpful. And then for my follow-up, regarding loan growth, that continues to improve each month in the card business even in spite of the Discover brown out. So as we kind of look ahead to Discover originations being fully on Capital One's platform, should we think about growth in the card business after that? And then also the associated marketing spend required to kickstart Discovery growth again?

Thanks very much, Terry. So maybe what I'll do with your question is I think it's really getting at this thing that I proverbially call the Discover brown out. So let me just comment on that, and then I'll come back and talk about marketing spend. So as we mentioned previously, the Discover card portfolio is going through a bit of a loan growth brown out as several factors combined to pressure loan growth in the near term. following Discover's credit expansion in their card business in '22 and '23, they dialed back their origination programs and credit line management by a fair amount toward the end of 2023 and largely sustained those dial backs.

Since we took over, we have been trimming on the margins of Discover's credit policy in areas where we are less comfortable with the resiliency of the underlying customers more really on the -- with respect to high balance revolvers. As a result of these collective pullbacks, the portfolio has been contracting and continues to face some headwinds to growth as these more recent smaller vintages mature. As we mentioned Discover card outstandings were down 1.5% year-over-year. Now it's worth noting that the flip side of these pullbacks and the brown out has been strong credit performance, and we're glad to see that playing through the system.

So let's talk about returning to growth and getting on the other side of this brown out of Discover volume. The brown out is temporary since -- over time, we will bring to bear a number of capabilities as we move Discover originations and existing customers to Capital One's technology. Getting discover on to Capital One's technology will allow us to unleash our models, full spectrum underwriting and lean into spender capabilities to power more originations, higher spend volume and ultimately, higher loan volume over time. And so we remain excited about the longer to potential.

And let me just talk a little bit about where we are on that journey. On the Discover front book, Discover originations are now on Capital One's tech platform, and we expect to be fully on our tech stack for new originations by the end of the third quarter. And we're now leaning into a combination of testing and rolling out capabilities that have powered our card growth at Capital One and that we believe will be enhancing to the Discover book and the Discover new flow of applicants. We are already seeing several positive green shoots, but it's early, but the -- our early read is confirmatory of our hopes there.

On Discover's back book, we will begin the major conversion waves later this month, but we will not be fully on Capital One's tech stack until the first quarter of next year. And so we'll have to wait a bit longer to see these benefits fully manifest. Basically, we're migrating the remainder of the back book in waves. A wave in July, a wave in October, a wave in January. So these are -- will go in phases.

With respect to the brown out, we expect continued contraction in the near term, but as we can unleash more of Capital One's tech and capabilities with Discover on the other side of our conversions, we're looking forward to returning to growth. I do want to also mention in parallel to Discover's dial back of card loans. They also dialed back on personal loans, and we have also sort of mechanically during the integration, dial back on -- a little bit on the personal loans as well. So that brown out will continue and, in fact, increase. And the bottom, sort of the bottom of the brown out will will be somewhere around the fourth quarter of this year. But then we look forward to leaning into that growth over time.

So pulling up on the brown out, they are natural and temporary part of the deal. None of them are reflective of any concerns we have long term. And in fact, all of it is really just part of an integration and integrating of credit policies and look forward to stepping on the gas a little bit more gradually in the coming months.

You asked Terry about marketing spend. We will lean into marketing more on the Discover side as we -- really marketing is really mostly a front book thing. So we are, as we speak, leaning more into the marketing so that we can now generate some very good flow of applicants to Capital One. So that will be one of the numerous things that we're leaning into over the course of the next year.

Our next question comes from Sanjay Sakhrani with KBW.

I guess my first question is for Andrew. If I look at the NIM and sort of you alluded to this in your prepared remarks, seems like the liquidity portfolio came down over the course of the quarter, ended lower but was still high on average. So I estimate there was at least a 10 basis point plus drag on the NIM as a result. Is that a safe assumption to make? So as we enter into the next quarter, you should have a higher NIM going into the third quarter?

Thanks for the question, Sanjay. Yes, as you said, in the first quarter, we did have elevated cash levels from the Discover Home loan sale at the end of '25. And then we had really strong deposit growth in Q1 that was aided by tax refunds. And at that point, we ended the quarter with around $75 billion of cash. And so in the second quarter, it came down quite a bit from growth and from the maturities that I had referenced in the Q1 call as well as the cash impact related to Brex, which all of those things drove the ending balance down $20 billion, but average only came down about [ 5. ] So as you suggest, looking ahead, there should be a bit of a NIM catch-up that happens in the third quarter as the average cash catches up to the end cash. And then also, as a reminder, in the back half of the year, we have one more day in each of the quarters. So that adds a 9 basis point tailwind to NIM.

And so if I just pull up on all of those things, I'd be remiss if I didn't just highlight clearly, any significant changes in our balance sheet could impact NIM over time. And our NII is almost perfectly neutral to rates over time, but if and when the Fed moves, there could be an impact to NIM at least in the short term, given the timing of the repricing of deposits and assets. But that effect should level itself out over time. So last quarter, I pointed you to the back half of last year as a pretty decent proxy for a NIM level after we closed on discover. And so there will, of course, be quarterly variability from day count and other seasonal factors, but I continue to point you to that as a pretty good indicator of where our structural NIM is going to be likely in at least the near term.

Okay. Perfect. I guess that main question from last quarter. Rich, maybe just to go back to Harry's question on expenses. I guess as we think about the incremental expenses for the investments in Brex and marketing and such. Should we think about the impact to adjusted operating efficiency ratio is more marginal on a go-forward basis versus what we've seen with Brex and hopper now in the run rate? Just trying to get a sense of the margin because you do also have the remaining 2/3 of the OpEx synergies coming as we move into next year as well. So I would appreciate some color there.

Yes. Thanks, Sanjay. The efficiency ratio will continue to reflect our revenue and expense trends, our investment imperatives and the realization of synergies. And as we've discussed, the debit revenue synergies are essentially in the numbers. The operating expense synergies are more back loaded. And as we mentioned earlier, we've realized about 1/3 of the operating expense synergies to date, and we're on track to achieve the remaining operating expense synergies by the second half of 2027. And then, of course, we continue to lean into our investment imperative, including foundational technology, AI, and the longer-term growth opportunities created by our technology transformation, and of course, Discover and Brex.

So these investments are very important to the sustained growth in terms of the company over time. So the efficiency ratio is one of many drivers of the returns of the company. With all the moving pieces, we've chosen to focus our conversation on earnings power, but -- and as we've said, we expect the earnings power of the combined company and the other side of the Discover integration to be consistent with what we expected at the time we announced the Discover acquisition, inclusive of Brex and the in-sourcing of technology that supports Capital One travel and inclusive of all these investments we've been leaning into.

So implicit in that there needs to be an efficiency ratio that makes the numbers work. But we're not specifically guiding on that. But I think that the combined financial performance of the company continues to track with this guidance we've given on earning power come out the other side of the integration.

Our next question comes from Ryan Nash with Goldman Sachs.

Rich, maybe to build a little bit on Sanjay's question. If you look back to when the deal was announced and you put the companies together, and you lay on synergies, it got to a return that was 20% plus or minus. Given everything that you've shared with us today, it sounds like there's some more investments that you want to make, and I understand you want to preserve optionality, but -- is the right way to think about it, this should be at least a 20% return business? And what are some of the investments that could push it higher or lower in this environment?

So Ryan, we -- there clearly was -- Discover brings strong earnings power, and we bring a lot of synergies to this deal. So earnings power has been a very important part of the conversation and a really important part of the value equation with respect to this deal. The -- a number have -- I just want to say there are a number of variables that have moved and are moving as we go along here. The brown out on Discover loan growth, which will continue for some time, and we talked about that mitigating in coming quarters, but it is still an important factor. The flip side to loan pullbacks has been better credit performance. Generally, credit has been performing quite well.

Capital One margins have had a strength as there's been accelerating retail deposit growth, the full Walmart P&L as part of these things. And then we've had this investment imperative, which in a sense, really as two big categories to it. One category is really the investments in technology and AI to capture the moment to capitalize over time on the -- and the extraordinary transformation that's happening out there, and we are way down the path of our technology transformation, but there's still important investments that we are making, and we continue to lean in to that. And then on the other side, we have many of the emerging growth opportunities that are going to be a very important part of the growth and value equation over time.

So the -- but the striking thing in some ways, back to the phrase, the more things change, the more they stay the same. It is striking that out the other side of this, we expect an earnings power very consistent to what we talked about at the outset. We're not branding a precise number because there are a lot of things about Capital One performance they don't lend themselves to precise settling out with precise numbers. But when we look at the earnings power as reflected in ROTCE, we feel we're headed for a performance very consistent with what we expected along the way. As part of that we are -- when I talk about the investments that we're making, and we are really leaning into that long list of investments that we talked about with an equal energy we are driving efficiency in 1 minus all of that across the company.

And a bunch of that comes from the flip side of our tech transformation, the ability to save tech costs even as we invest in other tech costs, the savings of legacy tech costs, the efficiencies that we're driving in the operations across the business. But I just want to say that we are kind of living two lives at once here, really leaning into opportunities and really, really so carefully managing the expenses to be able to simultaneously deliver the earnings power that we expected at the outset of this deal and to be positioning ourselves to create value for our investors in the extraordinary years that are unfolding in front of us.

Got it. Maybe as my follow-up, Rich. When I look at the capital in the slides, obviously, capital came down almost 70 basis points this quarter. But if you remove the impact of Brex, you bought back a little more stock this quarter yet, capital ratios were sort of largely unchanged. And I guess now that the deal is closed, do you think we could see a further step-up in the buyback from here? And how do you think about a path towards the slated capital targets?

Yes. Ryan, I'll take that one. And let me just start by focusing on the words you ended with, which is the 11% we define as a long-term capital need as opposed to a target. And we continue to think that need is 11%. We just got the recent CCAR results. But every year, when that comes out, we've just seen quite a bit of volatility looking back over the last few years that going from -- in the low 10s to 7%. And so our need is derived by our internal modeling. It's just far more stable. And as we've had for a number of years now, we continue to believe that 11% is that need, where we manage our capital at any given moment in time, factors in a variety of planning assumptions, including expectations for growth and forecasted capital accretion from earnings, regulatory environment, AOCI, stock price, the macroeconomic environment.

But I'd also say that beyond that laundry list of specific considerations, there's also a philosophic point that we view capital as having asymmetric value, particularly in times of stress providing a ton of both offensive and defensive value in those periods. And so this multipronged approach has enabled us to maintain a strong combination of returning capital, but also strong returns and the flexibility to take advantage of growth opportunities over time. So we are not in a race to drive it down as quickly as possible to any specific number. But hopefully, that gives you a sense of how we're thinking about capital.

Our next question comes from Darrin Peller with Wolfe Research.

Look, it looks like you included a partial quarter of Brex as well as legacy corporate card in the domestic purchase volume. So I'm just trying to triangulate if you can give us a sense what would the pro forma domestic card purchase volume growth looked like in the quarter just given the acceleration we've been seeing across the industry. I think we can calculate some of it, but a little help on some of the details would be great.

Yes, we didn't provide the breakdown of the specific we did provide from a purchase accounting perspective, the closing balance sheet and all the associated amortization schedules, but given the relatively small percentage of capital on to our current relatively small percentage of Brex within the context of Capital One, the P&L and balance sheet on a run rate basis, just aren't that material. And that said, we're incredibly excited about the long-term prospects of adding Brex and think that the growth that this platform provides will drive significant accretion, but we don't intend to break out any of the specifics of the P&L.

I'll just -- Darrin, let me just remind you of exactly what we said in the call, right? We did say that if you just look at the legacy Capital One domestic card business, there was a modest acceleration and that the combination of that plus the addition of Brex and corporate card was about 14% with a significant majority of that driven by the legacy piece.

Okay. That's helpful. Just one quick follow-up would be, I know last quarter, you had mentioned, and there were some comments earlier about expenses, but more specifically, you mentioned marketing pushed back from first quarter into the remainder of the year. So just with this still a play in this quarter, if we could just revisit the marketing expense expected more broadly when considering [indiscernible] Discover of Brex in recent quarters. We took the recent quarters, and we average them out given some of the timing. Is that a good way to think about run rate marketing levels for the company going forward?

Yes, there is seasonality in that, Darrin. And if you look back at history, no one year is perfectly the same as others, but there tends to be that upward slope and particularly in the back half of the year relative to the first half, what we were highlighting in the first quarter. was just that some of the spend that we had initially anticipated happening in the first quarter was getting pushed into the second. So we just wanted to make sure that, that point was well known. But obviously, the actual levels of marketing spend are just going to be depend on the opportunities that we see in the moment. So I don't want to give you a perfect schedule of the percentage of the annual spend in any one quarter. But if you look back at history, there's some pretty clear trends in terms of the back half relative to the front half.

Our next question comes from Richard Shane with JPMorgan.

I want to pull the thread a little bit more on Brex. Rich, you talked about this pretty clearly on the call that when you -- when we think about -- and the questions have sort of lined up with this, the optimal outcome for Capital One as a stand-alone business is optimizing RTC and margin. Brex has existed in a world for most of its life, where it was benchmarked exclusively on growth. You sort of now have to balance that within Capital One. How do you optimize the real outcome of Brex with still sort of keeping an eye on what investors really care about or seem to care about in terms of maximizing ROTCE and margin in the near term?

Well, I hope the overall objective function of Capital One isn't the maximization of ROTCE in the near term. We all have our eyes on it, and we are heading to a very good exit rate on the other side of this integration. But I want to just talk about Brex and value creation there. We all know that tech start-ups have power metrics that are not vertical earnings based. And sometimes they can feel a far, far cry from how life works in a mature public company. But we feel that Brex's approach to creating value is very consistent with Capital One's founding approach when we created the company all the way to today. And that relates to taking a horizontal economic view. So the in the founding of Capital One, I looked at business that it's really striking that financial big banks and everything are just so focused on vertical earnings, but really banking is an annuity business.

One, invest quite a bit of money to create annuities that last for a long period of time. And so what we did was build a massive horizontal we called it horizontal accounting, basically, where as we thought about investments or originating a cohort of accounts, we estimated the the lifetime economics of that, the cost to create those, et cetera. And before the investment during as it played out, and then at the end of it all, we measured it to see if indeed value is created. And this approach to rigorous financial decision-making horizontally. The investing in annuities and creating long-term value is the financial basis of how Capital One works and how we create value.

So when we looked at Brex, obviously, Brex -- the world was looking at their power metrics, but we rolled up our sleeves and looked at how Brex was creating valuable annuities over time that they don't have as deep and rigorous horizontal accounting system, I wouldn't expect them to. But even as recently as today, I was in a conversation talking about the continuing work we're doing on the Capital One side, looking at Brex investments and how each tranche of investment is -- looks like it's paying off over time. And our observation was these are very value creating. So not every tech company's investments are value creating. But from everything we've seen, the approach Brex has especially when we onboard them to a more kind of systematic horizontal accounting system, it will fit right into the value creation philosophy of Capital One.

And what we have found in building Capital One when we have these growth opportunities, is that actually, the more you really go in and measure the value creation opportunity. Very often, the more we invest because we can validate that these things really create value over time. Brex is in an amazing window of opportunity. They've got a tiger by the tail. They are going after 3 markets at once. The commercial card market the payables marketplace and the expense management business. They're going after it with an integrated solution, strikingly that solution is something that is needed from small companies all the way to large corporations. It's an amazingly large market.

So we are going to lean in and provide the resources and capabilities to help Brex get even -- create even more value. But along the way, we're going to very rigorously measure to be sure that what we're investing in generates the value on the other side. But what we see continues to validate our acquisition thesis. And I want to say, too, having seen and hung around a lot of young companies over the years, I continue to be amazed at the sophistication of how this business is run. And the and the opportunity to create value here.

Our next question comes from Robert Wildhack with Autonomous Research.

I wanted to ask about domestic card loan growth over the last several periods, just core Capital One. That's bounced around, I think, the low 3s, and you said 2.6% in the second quarter. So those have all been below the longer-term trend. Can you just remind us what's behind the slowdown there? And then like bigger picture, anything structural besides law of large numbers as to why Capital One domestic card loan growth wouldn't eventually come back to the longer-term average.

So Robert, when you're talking about domestic card, you're talking overall, including Discover in our performance. So we've talked about Discover is going through a shrinking right now. So that certainly is holding back the loan growth of Capital One. The -- when we -- if I separate out the Discover brownout effect. Capital One continues to deliver very consistently solid loan growth. It's not -- there's things when I look at the various growth metrics and compare them with the industry, looking at legacy Capital One versus a number of the leading players in the industry. On all the growth metrics, Capital One is delivering a very strong performance. There is one thing on the loan growth side that I would highlight, and it's the flip side of very good news here. Payment rates have come in -- continue to come in pretty high which we always cheer for because it pays off typically in terms of stronger credit, but it does hold loan growth back a little bit.

But so if we look at the metrics here, not all of which I understand we share with you, we've got -- Discover is going through a brownout and shrinking. The legacy Capital One is growing strongly on all dimensions and particularly account origination, purchase volume, a lot of the very important metrics. And then when we look -- another thing that we do, it's not something we publish, but we take the originated upmarket part of Capital One. So we effectively proxy what the other players in the industry do who just don't go out and intentionally originate in subprime.

So when we separate and look at the originated upmarket part of Capital One, this thing is absolutely humming and is right up there at the top of the league tables in the key growth metrics. So -- and that, by the way, is powered by the continued quest to win at the top of the market to win with heavy spenders. And is the flip side of our investment agenda that we have on the heavy spender side. So -- but Robert, I understand that Discover is going to hold us back for a little bit.

And even on the other side, even on the other side of the integration, I think it's reasonable that that Capital One -- legacy Capital One will be a faster-growing institution than Discover. Why would that be? Just the Discover is a is a much narrower play in the credit card business is focused on the prime side of the marketplace, and it's been a really great stable play Capital One is legacy Capital One has got so many other growth vectors growing in card. It's probably going to continue to lead the way. But for right now, we're living with a little bit of a brown out holding our business back.

Our next question comes from Don Fandetti with Wells Fargo.

Rich, can you talk a little bit about the credit card migration. I know there's been some testing moving it over to the Discover network. Where are you on that? Is it encouraging? And then -- do you see a scenario where maybe you could move a little more volume over than you initially thought when you struck the Discover deal?

So we're talking about Don, you're talking about moving Capital One cards to the Discover network. It always gets confusing because we're also, of course, moving Discover cards on the Capital One on platforms and things. But yes, just to clarify what we're talking about here. Earlier this year, we completed the conversion of our debit card business to the Discover Network, and we're very pleased with how that went. I mean I think that thing has just been I would call it a smashing success as we look at this. So now as we think about building credit card volume on the Discover network. There's two ways to do that with the front book and the back book.

And -- so what we are leaning hard into right now is testing, originating legacy Capital One branded accounts on the Discover Network as well as testing the conversion of existing Capital One accounts to the Discover network. So as we lean into that and on the other side of those tests, we will then make our final choices about how -- what credit card volume that we're going to move over what timing. In parallel, an important companion of course, is scaling up the volume that the volume of investment in the network as we increase international acceptance and further build the brand. And what we're doing, the way to think about -- I mean, the quest to build international acceptance will be an always thing.

So for us, the key is what we want to do is to slope the work. So we're going to slope our quest on both sides of this exercise -- with respect to acceptance, international acceptance. Well, let me, in fact, start with domestic acceptance. So Discover has -- it just blows my mind how great their domestic acceptance is. There are a few scattered gaps and we are just leaning all in to literally close them all. So that's a thing that's going with great progress, and we're so pleased on the domestic side. Internationally, again, it will be a long quest. But what we're doing is sloping the -- while we're working to lift everywhere, we're particularly leaning in to lift acceptance to a higher level in the places our customers go the most.

And not surprisingly, we find that where do they travel the most, they travel to Mexico, the Caribbean Canada, the U.K., and those are the top 4 destinations. We're particularly leaning in there to really move the needle and enhance acceptance there. The other sloping that we're working on combined with our testing is sloping what we move and focusing more on moving things that customers or products, things that don't involve as much international travel. And so that our -- strategically, we're just working so hard to get as much volume as we can on the network. And we're going to slope the acceptance work and slope the migrations to be able to create great customer experiences and maximize the volume that we move over time.

And do you think you need international issuing ultimately, some suggest that you do? Or is that something you'll solve down the road?

International acceptance is there are multiple ways to build that. International issuing, by the way, is a is a great way to do it because -- and what we're talking about there is having a local player issue our cards. And in that way, they sort of they can help really drive the acceptance in their own local geography. So that is 1 of 4 ways to build acceptance internationally. In fact, again, I'm amazed at how Discover with their relatively small scale built the impressive international [indiscernible], but it's still not yet where we would love it to be as a destination. So the ways to get there from here. And Discover has used all four of these. One is partnering with other networks. And this has been a really important part of Discover's strategy. They have partnered with networks in Japan, China, India, I mean there is massive acceptance in some of the biggest countries in the world coming from network partnerships.

A second way to do it is with card-issuing financial institutions, American Express has particularly leaned into this approach. It's a great approach. We have some cases of that with Discover. It's been less of a lever for Discover than for MX, but that's another one. And by the way, just a small point as an issuer ourselves in Canada and in the U.K. We look forward to getting our own issuer boost there on acceptance.

A third lever is partnering with Mergent acquirers. And finally, the fourth is going directly to merchants. So this is the playbook Discover is used. We will continue to invest in this lay book. And there's, of course, a flywheel benefit that comes with the more acceptance we get, the more volume we can get to how that flywheel works. But those will be the 4 levers that we lean into in this journey.[

Our next question comes from John Venker with Evercore.

Back to the investments that you're making. I understand you're unable to provide for the efficiency ratio or expense growth expectations regarding your investments into the network. But any way you can help us with what inning you're in, in terms of the investments? I know, Rich, you've said in the past that these would be sustained investments for a number of years. Any additional color on where you stand now, now that you've been down the path, you've seen debit migration. You've talked about the testing now, and you've just walked us through in that previous answer of some of the approaches. What inning are you in with how you look at the investment required here?

Well, the first thing I want to say is, when I give the big list of investments, and I know for the last sort of our whole lives at Capital One. We've always, in some ways, has been the company that's investing in our future, but there's certainly been a lot discussion, as you all have noticed about the long list of investments that we're leaning into. The first thing I want to say is, I wouldn't want anyone to draw the perception that like massively moving the needle of Capital One investments is investing in the network or international acceptance. It is an important sustained investment we will do for as far out as we can see. But I wouldn't want to leave the impression that's like at the top of the list of what we -- we're spending a lot more money than that on Capital One technology, AI and maybe the biggest single item is -- well, I don't know, there's several, but investing to win with heavy spenders at the top of the market.

So I want to say this is just one of the many things on the list. That said, the -- to your point, I believe that the -- for as far out as we can see, we'll be investing in international acceptance. But here's the key thing. We're not -- our strategy is not hinging on we have to invest so much to get to a point where then finally, we can have this big bang moment and move a whole bunch of customers. This is why I went back to the power of the sloping. We take our customers and cards and just analyze what customers are international travelers, we can empirically see that. Some customers have never traveled outside of the country for 20 years. I mean we can see and really understand where they're coming from.

We have good ways to understand on the front book what is happening. And it's partly a customer point and a product that they're choosing point. And then -- when we look at where customers travel, that also is so sloped. So again, I think that while we will be investing as far out as we can see in the network, by sloping the investment, we can get a lot of progress in a focused way and continue to create the ability to move more customers as soon as we can. And in that way, we don't have to wait for some day to try to monetize the power of this network. We're already living it on the debit side, and we can lean into it on the credit card side and the benefits accrue right along the way with the investments.

Okay. And then just separately, regarding the migration comments that you answered in the previous question. What of the back book cards that you would ultimately move over, how would you approach the testing and then ultimately moving over migrating capital on back book over to the Discover network. Would it start with the basic non-premium cards? And would you only focus on those that are expiring in a given year, and that's how you would focus on the migration of that back book eventually?

So well, that's a very astute question that you asked there. So let's talk about this. First of all, like we always do in testing, we do a lot of testing just so that we understand what customer reactions to various things are going to be. So our testing is pretty broad. So that we can then not find out later, we were too narrow because we didn't think expansively enough from a testing point of view. Then if you look at the the factors to consider in migration. So you -- first of all, the front book is -- it's a much easier thing -- well, it's a much more straightforward thing to talk about the front book because we can just put certain cards, certain customers on the Discover network, and there isn't a migration event. And so that's a very attractive way to build business.

When we're talking about migrating the existing book, which also is attractive, the key levers there -- the key factors to consider is international travel, that's at the top of the list. How extensively our cards are on file because the more cards that the customer has on file, the more friction there is in changing card numbers and a natural -- and one thing we're looking at, in some cases, is moving at exploration time because one would already some of those frictional elements would already be there at that time. So all of these things are part of our test agenda and our strategic considerations.

Our next question comes from Mihir Bhatia with Bank of America.

I wanted to ask about -- touch on credit for a second. And I'll just ask both the parts of my question upfront. Just firstly, on the June loss rate, it was down quite a bit, month-over-month, I think by 25 basis points. Anything to call out there? Was there a sale or something, or was that just how much better credit got there? And then just the second part was just pulling up, Rich, if you could just talk about how the consumer is caring, but more importantly, how the Capital One customer is faring? Like you've been investing a lot in marketing, growing it, are recent vintages performing in line to what you expected? Just any comments on that.

So here, let's start with the June performance. I don't have the June loss rate number right in front of me. But here is a comment about the quarter and about June. So obviously, credit continues to come in very strong. Probably the single indicator we look at the most is delinquencies. And in our card business, the -- well, the June loss rate was particularly strikingly strong. The June delinquencies for the month, moved in line with seasonality. And by the way, in pretty much every month prior over the course of 2026. The delinquencies have moved a little bit better than our calculated seasonality. So June, again, a very strong month, but I just want to point out it's the first month that didn't actually beat seasonality. But it's still -- there's great strength there and the charge-offs were amazing and all of that. so again, we just see a very positive credit picture, but I just wanted to make those comments about June.

And Rich, I could just interject, there's nothing to call out in the June domestic card charge-off rate.

Okay. Yes. So the -- let's talk about the consumer and then let's turn to Capital One customers. So the U.S. consumer and the overall economy remained resilient despite the high energy prices and everything when you pick up the news every day, one would think the world is falling apart. But actually, the portfolio -- that the consumer continues to perform remarkably well. The unemployment rate in June was lower than in February before the year-round conflict began. Jobless claims remain low. Job creation has rebounded over the past few months. Consumer spending, that remains strong. Now as a result of inflation, real wage growth turned negative in April and May on a year-over-year basis, but it was back in positive territory ever so slightly in June as inflation ticked back down.

When we look at bank balances and debt servicing burdens of our customers, these look a bit stronger than a year ago across income levels. In our Domestic Card business, our credit metrics continued to improve on a year-over-year basis in the quarter. And the -- I've chatted a little bit about that, but the strong credit performance also -- the strong credit performance we also saw on the auto side. Auto credit metrics are strong as well. And so what I want to do now is turn to leading indicators when we look at our own customers. So we talked about delinquencies. We talked about how strong delinquency performance has been pretty much every quarter this year. Other metrics that we look at, payment rates, I talked about that earlier. They are meaningfully above pre-pandemic levels across all of our customer segments, and that is a -- slows down growth a little bit, but it's a healthy sign of customer credit quality.

Spend levels. We continue to see healthy fee spend growth driven both by account growth and by steady growth in spend per customer. When we look at revolve rates, revolve rates have stabilized over the past year at close to pre-pandemic levels for our major products and segments. Now none of these observations are conclusive on their own, but I think collectively, they paint a picture of strength of the consumer and certainly strength within our own portfolio.

Let me turn now to the front book of new originations in our Card business. Our front book of new originations continues to perform strikingly well. We're seeing our '24 and '25 originations, frankly, in both legacy Capital One and Discover. Well, let me separate it out. In legacy Capital One, we're seeing our 2024 and 2025 originations coming in better than 2022 and '23 and a bit below pre-pandemic levels, which is pretty striking given -- and that is not a thing that I think is being universally observed in the Card business, but it's a thing that we have seen strength in our originations for really throughout this whole post pandemic period.

And it's one of the things that gives us the confidence to lean into our originations, spend that money on marketing that we talked about, et cetera. One of the [indiscernible] from a credit is recoveries. Coming out of the pandemic, our recoveries inventory was unusually low, but that inventory has increased rapidly over the past couple of years and has contributed to the improvement in our overall loss rate over that time. Discover's losses peaked later than legacy Capital Ones, and they're now seeing the same dynamic be a tailwind to their losses. But looking ahead, our recoveries inventory should taper off a bit from -- in the next year or so because the inventory of recent charge-offs will itself be going down. So that's -- Mihir, that's a look at leading indicators. But if I pull way up, we see real strength in the consumer and strength across our business performance in card and in auto. And that's why while we keep a very weary eye on the economy and an international development, we are leaning in with a lot of positivity into our growth strategies.

Our next question comes from Erika Najarian with UBS.

I wouldn't prolong this call if this question wasn't important. But I think investors really want clarity on this. And Rich and Andrew, you keep mentioning that your earnings power is expected to be the same as you anticipated when you first announced a Discover deal. So I was hoping to unpack that a bit. So I was looking through your disclosures, I wasn't sure what you were using for the baseline. But in 2027, consensus EPS -- sorry, at the deal announcement, consensus EPS for Capital One stand-alone is about $21. You mentioned over 15% accretion to [ 27 ] EPS at the announcement that rounds up to, let's call it, like [ $24.50 ] if we use 16%, 17% accretion. Last quarter, you mentioned that when you were thinking of ROTCE, you weren't thinking of CET1 all the way down to 11%, so if you use 12.5% on the current share count, you can get to a mid-20s ROTCE pro forma. What is wrong with that line of logic?

Well, Erika, let me just unpack a couple of the assumptions that you made that don't actually tie to things that we've said, and I just want to be really clear here. First of all, our assumptions that we laid out, and I'd encourage you to go back when we announced the deal in February of '24. But what we said was we were taking consensus estimates for both Capital One and Discover, and we made the adjustment to Discover's loss forecast just based on the things that we had seen during diligence. Then with respect to ROTCE at the time, the weighted average consensus for CET1 was 12.5%. And so when Rich last quarter highlighted that we're defining earnings power as ROTCE, we just wanted to remain consistent with that nominator of 12.5% for the sake of doing the math that is not saying that, that is our target.

As I answered before, in terms of what we believe our capital need is, we believe our capital need is 11%, but we are just doing the math on ROTCE at 12.5% for the sake of comparability. And so with respect to EPS, of course, share price assumptions have moved. There's just a number of things that have moved in terms of those assumptions, particularly as they relate to individual line items, and that is why we keep coming back to like the ROTCE as our definition of earnings power.

And our final question comes from Moshe Orenbuch with TD Cowen.

Rich, you talked about growth in the non-prime oil and in the high-end card business. Could you talk a little bit about the non-prime card business because that's been a business when you've grown it. It hasn't required as much upfront investment as the high end, just -- and you've also talked about the consumer doing relatively well. So are there prospects for acceleration there? And I've got a follow-up.

Moshe, thank you. I know that you are on over the many decades, we have worked together that has such a such an interest in this, and it's a very, very appropriate interest because it is a very important part of Capital One, even though you saw that the percentage is down to what 26% did we see it because it dropped down a bit because of the Discover portfolio. Just in terms of the portfolio, subprime percentage. But Moshe, across -- well, in both card and auto, we continue to our strategy has remained very much the same. We continue to get a lot of traction in the business. Performance continues to be strong. When I point at the higher growth at the top of the market, that is really just pointing out the traction that Capital One is getting in our investments at that part of the market, but we continue to be very pleased with how things are going at the lower end of the market.

The growth rates are a little lower these days than -- they're lower than what we see at the higher end of the market, but we always give -- take what the market has to give us. But performance is stable. Credit performance in that part of the marketplace, I should have mentioned this earlier, is very consistent really across the credit spectrum. We don't, in our own numbers, see this K-shaped economy that a lot of people talk about, although to be fair, we don't really participate in the lowest end of the marketplace where maybe those things are being experienced in the economy. So Moshe, things continue to go very well. We're leaning in the marketing efficiency of that part of the business is, it's a lot less costly to acquire accounts there, and we continue to lean in really very hard there. And the growth is very solid. It's a little less than at the high end. It's less than at the high end, but the value creation continues to be high and everything about it seems quite stable.

And also one other thing this part of the marketplace is so benefited by continued investments in technology, data and the power of machine learning and overtime AI because this is all this part of the marketplace is all about data, analytics, modeling, and that is a power alley of Capital One. So while you -- the marketing investment isn't maybe the highest in that part of the marketplace, there's a lot of focus in our tech and data and AI investments to be able to be even more successful in that underserved part of the market. Thank you for your question.

Sure. And maybe just as a quick follow-up. You talked earlier about the horizontal P&Ls that you kind of do for each of your products. And when you think about how Capital One as a company is viewed externally, I mean do you think you get recognition for the streams of earnings that you're creating and the value that, that's creating. And if not, would there be a way whether it's some degree of disclosure of examples of that? Like are there -- is there -- I mean, do you think that you're getting appropriate recognition in the stock for it? And what could you do about it?

Moshe, it's a great question. I believe that we probably don't get appropriate recognition in the stock. But I think the -- and I think it would -- I don't think there's an easy way for us to sort of publish the aspects of our horizontal accounting, but I would say this. When you look at the -- I guess, we have -- I'm in my -- what is it, 32nd year of running this company. Well, since we had our IPO in 40th year overall in building this franchise and one of the very, very first things we did was put in horizontal accounting and an NPV-based methodology for everything that we do. And I think it's hard to to prove that -- the power of that to investors, but I think maybe the power manifest in the 3.5-decade history of Capital One and the ability to grow the company so significantly and to generate strong earnings power along the way.

And the cornerstones of that approach have been starting with strategy, making sure that the businesses that we're in lend themselves to above -- they are structurally attractive and give the opportunity to generate above-hurdle returns, which is why we don't do half the things other banks do. And then secondly, the whole investment philosophy that we have that the strategic philosophy that we focus on long-term value. The financial horizontal P&L investment approach that we use. And the way that over time, we have a whole methodology of retrospective measurement of how our various programs are performing relative to expectation, relative to hurdle rate and all of these kind of things in a way that I think has really demonstrated the power of this. And so when I then say to investors, we are at a time where we have exceptional opportunity going forward. That opportunity, there's sort of two different buckets of investment related to what I'm describing as just extraordinary opportunity we see going forward. One is on the business side, the the horizontal P&L measurement of our investments across these emerging businesses and so on.

And the other thing is a choice that we do at Capital One, which doesn't lend itself to such precise horizontal P&L, Moshe, as you know, which is building the technology foundation of the company. I don't know a way to create a horizontal P&L for a data ecosystem or the move to the cloud. So there are some things that we do that we work backwards from what is the bone structure that we need to win and we go out and build that. And we are seeing that while it's going to be impossible to measure the return on some of these things. I think if there were a way to do it over time, it would turn out to be the most high-yielding investment that we've ever made.

So it's a bit of a tough way to make a living for Capital One and for our investors. But I think it's a key reason. This approach, Moshe, is a key reason we're here today. and a central reason that we have the opportunity set that we have, and I look forward to our investors enjoying the returns from patient commitment to this approach.

That concludes our Q&A session and our call for this evening. Thank you very much for joining us on this call. Thank you for your interest in Capital One. Have a great evening.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.

Next with us today is Capital One. With us is Chairman and CEO, Rich Fairbank. Along with him is his Head of Finance, Jeff Norris. Rich and Jeff, welcome.

I've been promoted.

So Rich, maybe we can start with the tech transformation story here at Capital One. I believe you began that in 2013. How has that transformation unfolded? Where are we today? And how is it positioning Capital One for competitive advantages across your enterprise?

Great. Thank you, Jeff. Thanks, everybody, for being here in person and also on the webcast. I don't know how many years I've been doing this Morgan Stanley conference, but I'm not sure I've ever missed. So it's great to see everybody.

Thanks for the question on the technology transformation. So I think back to the founding idea of Capital One back when I was 36 years old was the belief that technology and data and statistical modeling, scientific testing, we're going to transform an industry based on judgmental decision-making. So we built the battle cry that we had back then was build a tech and data company that does banking, competing against banks who use technology and data, but it's not who they are. So it dialed the clock forward, we built a company on this strategy.

And then in 2013, we realized that we were on the wrong side of history that while the strategy still made a lot of sense, the world had changed so much from a technology point of view and where AI was going that we needed to rebuild the entire company from -- and importantly, from the bottom of the tech stack up. And our battle cry then was build a technology and data company that does banking, same battle cry, but we needed an all-new infrastructure. And so what this transformation has entailed, and it has been all in from 2013 on. So we're in the, what, the 14th year of this journey, and I literally mean all in.

The key elements of that have been massive bringing in of the most modern technology talent, competing head-to-head with the world's leading tech companies for talent. Additionally, going 100% into the cloud, we got out of data centers in 2020, transforming our data ecosystem. This is the biggest and hardest piece of a journey and -- but transforming the data ecosystem where data can be infinitely scalable and able to be managed with the data management built into the technology and also then data easy to consume on the other side. So a huge effort there.

We have rebuilt the company in modern -- not just in modern technology, but in enterprise platforms so that we are able to invest very heavily in platforms that for the critical functions that we have in the company. And so we have invested heavily there. It's been a journey of transforming how we build software to collaborating very closely with the world's leading tech companies and how they build software, very much building the same kind of capabilities with automation.

Capital One is now -- vast majority of all of our application components are serverless and continuing to drive toward the destination of continuous deployment. And then also a big investment in AI. And I want to say that AI is the buzzword of the day. But when we did our tech transformation, we were working backwards from the -- where we said the world was going is to leveraging massive data and AI in real time to create instant solutions one customer at a time. And that was what we worked backwards from. So now as the AI revolution has continued to unfold, it has played, I think, very well into the technology infrastructure we have at Capital One.

Now where do we see the benefits? One thing I want to say about a tech transformation is I want to contrast it to almost everything else in business, where when a company is saying, it is strategically figuring out where they can be -- build something great in the long term. Typically, you have to choose what it is that we want to be down the road and go invest to that goal.

What I find the thing that's so different in this case, depending on whether a company says, we want to be the lowest cost and we want to have the best customer experience or to have the best risk management or the best growth opportunities, my belief is any of those objectives, it's the same path to get there. And that path is the path of rebuilding a modern technology stack driven by modern talent. And so we have done that journey, and we see benefits across all of those objectives.

So just on the cost side, while I wave my arms a lot and talk about all the things that we're investing in, in a sense, my right hand is investing very heavily in a lot of things. But on the other hand, I want to talk about the left hand and what's the financial benefits that we're getting along the way. So going all in on the cloud has been tremendous economic savings. Along the way, we have moved away from many legacy technology vendors and saved a lot of money along the way.

The operating cost of our retail bank is dramatic reduction in operating costs. The per account servicing costs in our card business, we've had a dramatic reduction there. When we look at our technology costs overall, the run-the-engine costs are only very growing very, very modestly, while the overall real tech costs are growing quite a bit. Therefore, the -- one of the holy grails and the economics of technology is you want to be able to have a maximum amount of technology investment in new capabilities and not running the engine. The running the engine cost at Capital One as a percentage of tech costs have declined dramatically over time.

Fraud costs -- in an industry sort of being eaten alive by fraud, fraud cost per account at Capital One are significantly down over time. And these are just some of the examples of -- on the left hand, there's so much economic saving coming out of the tech investments. And of course, on the right hand, we are leaning in and investing in going further down the path of tech modernization and pursuing great opportunities on the shoulders of this tech investment.

All right. Great. Thanks, Rich. And I guess related to the tech investments you're making, it's been a little over a year since the Discover deal closed. You've talked about the debit conversion benefits already showing up with some more of the expense synergies weighted towards 2027. As you think about that integration, all the tech spend you put into the model, what's gone better than expected? What's proven more complex? And maybe you could just give us a quick view on how you see the trajectory of your expenses and efficiency ratio going from here.

So the integration is going very well and strikingly consistent with, I think, what we anticipated upfront. So we projected synergies sum total of revenue and cost synergies to be $2.5 billion. And now way down the path of this deal, that is still our current estimate as well. On the revenue synergy side, we are mostly there because we have completed the 100% conversion of our debit portfolio over to the Discover network. The cost synergies are mostly still to come because most of it is tied to technology conversions, and that is more of a 2027 thing. So we look forward to that. But all of that is going quite well in terms of the timing of the whole integration. We projected getting the vast majority of it done sort of by midyear 2027, and that still is what our plan is.

So I think we feel very good about the integration, and we're very appreciative that we have the tech stack that we have to be able to bring the -- bring Discover on, just as an example, for example, and it links back to your earlier question about the benefits that -- the many different types of benefits that come from having a modern tech stack. But just as an example, first of all, just the ability to pull off the Discover integration in the kind of 2-year time frame is massively assisted by having a modern tech stack on which to put Discover's business on there, but also along the way from a customer experience point of view, there will be no requirement to reissue cards, have a new card number or even new login credentials. This is kind of unheard of in integrations of -- in the purchase of card companies, but that comes compliments of the tech transformation at Capital One.

And then with respect to the -- how we felt about the economics, the earnings power coming out of the other side of the Discover integration because we knew in buying Discover that we had just raised the earnings power of Capital One significantly. And the -- what we felt -- the earnings power defined by ROTCE that we estimated at the time of our announcement, we feel -- now -- even now, even though so many variables have changed along the way, we feel is -- our current projections are very similar to the original estimations.

And that's pretty striking because along the way, we have had a significant sort of increase in the investment agenda of Capital One to pursue the many opportunities we've talked about and build capabilities. But along the way, the earnings power is still intact.

All right. Great. And you brought up a point around not the transition to Discover being rather seamless given your tech investment. You're testing out new originations. You fully -- you're planning to fully transition by the end of September. How do you -- how quickly do you think you can re-ramp that platform once it's up to speed or on your platform?

When you say, can you go back to the fully transition by the end of September...

I think you had mentioned originations being on your platform by the third quarter.

Okay. Yes. So we're talking about -- right. Just when we talk about -- we're talking about Discover coming on to our platform because there are all these things also, of course, Capital One is going on to the Discover network.

Not the network [indiscernible].

But with respect to Discover coming on to our platform -- sorry, yes, the originations will be -- the originations will be fully there by September and the back book by January.

Okay. Maybe just switching to the consumer health. I mean, this has been a pretty big topic on investors' minds of late with higher gas prices and the like. I think you've been known as someone who's been able to kind of identify early turning points in cycle. So against this backdrop, what are you seeing from your consumer today? And what are some of the leading indicators you're watching the most closely right now?

So if we just sort of read the news every day, we would have a very negative outlook for the consumer. But I would say if we didn't read any news and all we did was just really look at the data that we see in the economy and the data that we see on our portfolio, we would have a -- we have a really quite positive view. So let me elaborate on that.

First of all, with respect to the consumer and the economy. I think the consumer is that the -- really the strong shoulders the economy stands on. But unemployment continues to be very strong. New job creation, I think, really surprised economists over the last few months. New unemployment claims are lower than they were a year ago. The debt servicing burden of the consumer is consistent with pre-pandemic. Consumer continues to spend at pretty high levels. So I think in that sense, things are strong. The obvious elephant in the room is the -- is oil prices and ultimately inflation. And if we think about inflation for a minute, everybody knows that a credit card company is a bellwether with respect to how the economy is going. And so often, the conversations are about unemployment. And unemployment, you can see just directly links to charge-offs on credit cards and other financial products.

The unemployment is experienced by a small number of people in a very extreme way. Inflation is experienced by everyone, each in a more modest way, but yet it's a thing that impacts the whole portfolio. So we believe inflation is an important driver of ultimately the credit health of the consumer. So we are certainly watching with a wary eye toward what happens from an inflation point of view.

Let me turn and talk about credit performance. So I'm going to start with the industry and then talk about Capital One. The industry -- and I'll just really speak about credit cards. The industry is, I think, doing quite well with respect to consumer credit.

In the 20 -- if we compare to pre-pandemic as a baseline, the credit card industry in the originations in 2021, 2022 and 2023, those originations, it turns out, ended up being significantly -- having significantly higher charge-offs than equivalent vintages pre-pandemic, speaking of the industry. It turns out Capital One -- over those same vintages, Capital One is -- was basically at -- our originations were consistent with pre-pandemic. So there were choices that Capital One made at the time, particularly looking with alarm at the credit score inflation that was going on and intervened on our business to adjust for what we thought were unsustainable credit scores, and that allowed us to end up with results that stayed pretty consistent. So the industry, I think, learned a few things the hard way.

But if you look at what's happened recently, I think for the whole industry, credit has kind of settled out and maybe coming in a little bit at least consistent with seasonality, if not slightly better recently. If we look at -- come back to Capital One during this period, the last couple of years, our vintages originated in -- yes, in 2024 and 2025 origination vintages they're actually coming in a little better than pre-pandemic and therefore, a little bit better than the '21, '22 and '23 vintages. So the data that we see shows certainly a consumer, I think, that's in a strong place, but then there's a Capital One effect for choices that we've made and probably the some of the technology and modeling innovations that we've had that have allowed us to have particularly strong performance over this period of time.

The final thing that I would say is when we look at delinquencies in 2026, what we're all -- we're looking -- because the credit business and the credit metrics are very seasonal, we look at seasonally adjusted delinquencies. And our combined Capital One and Discover portfolio has pretty consistently through April performed a little bit better than seasonality, which is very good news.

Now what's the cause of that? Is that an indication that things are getting better? Or is that a tax refund effect? It's hard to tell. We have pulled out our magnifying glass to look at tax for the tax refund effect. And there are a few things that we see that suggest to us that the beneficial credit that we're all observing is probably not -- it's probably transcends a little bit the tax refund effect.

But one thing is when you look at who's getting the tax refund, that's very sloped by income, and it's mostly coming to the higher income folks. So secondly, when we see tax refunds typically, in the past, when we've seen a surge in tax refunds, we've seen people who are delinquent, a higher proportion of them actually make larger payments because they now have an influx of new money, and we're not seeing an outsized effect of that. And the delinquencies we have seen in January and February, which were better than seasonality, happened before most of the tax refund effect was even coming anyway.

So if I pull way up, I think at the margin, there may be just slightly good news emerging on the credit front, but all that in the context of a consumer that we think is in a pretty stable place and performance across all of our metrics that indicates the combination of the consumer and the choices that we're making in a good place. And therefore, we're leaning into growing the business.

You've also had Brex now for a full 2 months since closing that deal. Last quarter, you mentioned you'd start leaning in with some marketing dollars as you test and learn with an ability to grow almost immediately. So any early learnings from that experience so far and where -- how you think that supports your long-term vision to compete in the SME market?

Yes. Let's pull up and talk about Brex for a minute. Let me go back to the business card marketplace. Business card marketplace has 2 big segments in it. One is the personal liability card, what we also call the small business card, but that's where the business owner is personally liable. So it's just like, in a sense, a consumer card. And then you have the corporate card, which is a corporate liability product and the business owner is not personally liable there.

Brex is in the corporate liability business. Capital One is a small player, but we are a player in the corporate liability business. In the personal liability business, Capital One is one of the top 3 players in that business. Both are trillion-dollar industries, both have very nice growth rates. They're great businesses to be in.

Years ago, we watched with great admiration at what Brex had created. And we looked at it and said, this is obviously the strategic -- what their insight and what they created is the strategic destination for businesses, small all the way up to large corporations like ours. And that is -- that an industry that had heretofore and still for most of the industry to this day, a single need of a consumer to manage their -- of a business owner to manage their -- how they spend their money has evolved into 3 different markets.

So the current marketplace has an expense management solution. It has an accounts payable solution, and there are other players in that marketplace. And then you have the credit card marketplace as the third, still with the different providers there. The beautiful Brex insight was that this is all part of one solution. And not only are the current players bringing unintegrated solutions, they're also bringing old tech along the way. So Brex brought modern tech, put it into one incredibly easy integrated way to manage your spending in a company. And so that's the killer app.

We looked at it years ago, said that that's coming to businesses large and small. We were down a path of building these capabilities ourselves, then the Brex opportunity came. We did the acquisition. As we've gotten to know Brex before we announced the deal and now, of course, afterward, we continue to be just electrified by what an amazing business. They built amazing talent on the team, including Co-Founder, Pedro Franceschi, just an amazing team.

And -- but -- and also the tech stack that they built, Brex did a thing that you almost never see a start-up do, and that is they built a vertically integrated tech stack instead of cobbling together various vendor solutions. It's a tough way to make a living for a start-up. I'm amazed they pulled it off, but it is a great thing to now be part of -- for us to connect companies because we spent all our time building a vertically integrated tech stack. They built that.

And so what is very clear to us is -- and why Brex came to us is because they saw they had a tiger by the tail, an amazing growth opportunity, but they didn't collect -- they didn't feel they collectively had the resources and the scale and the brand and the market position to fully capitalize on this. So that drew them to us. When we looked at the opportunity, what excited us not only was their company and the -- what we could do together, but the fact that much of what we could bring to the table would not require an integration. It would just require us to bring resources or I sometimes use the phrase, we can add water to their ecosystem.

So what are we talking about here? And I'll name them in the order with which we can bring them over time. So right off the bat, they get a big brand benefit. Almost -- most businesses have no idea who Brex is. Obviously, they know Capital One is. So there's a brand benefit. There's immediate funding benefit. They had a high cost of funds, we have a low cost of funds.

Then a few months down the road, you then get to the ability to lean in and add marketing dollars because they were spending way less than they wish they could have on marketing dollars. So Capital One is going to be able to do that. Go a few more months down the road and now we can harness the Capital One marketing machine. So it's not just marketing dollars, but the massive 30-some year investment in a tech-based and databased customized marketing machine that we have built, including for our small business card franchise, so we can harness that. But that takes -- you have to connect a few more wires there to do that.

And then over time, we also can provide them with a lot of leads from our customers who have really graduated -- our small business customers graduated to the need for their product. And then way down the road, this is more after more integration, the ability to take the Brex capabilities and bring them right into our small business card business. Also along the way, we also see the benefit to take our rapidly growing travel business and connect that with Brex where there's a huge volume potential in business travel. So we're very excited by the opportunity, but we know there's been a wake-up call to all the players across these 3 different marketplaces. And so time is of the essence.

We look forward to see what you guys do there. But maybe just to wrap up with the last question here. I think one of the more interesting dynamics today is your capital position. It appears to be strengthening to levels that are meaningfully above your long-term targets, and you've got a boost coming here from a more favorable regulatory outlook on capital rules. So at the same time, I think your stock trades at a level that some investors would view as a meaningful discount to your normalized earnings power. So with that backdrop, how are you thinking about your capital allocation strategy?

Thank you, Jeff. Let me make 2 big points to give you a view of our capital philosophy and how it applies to your specific question.

The first thing I would say is that we bring a very conservative view with respect to capital and believe that it is very asymmetrical what the risk and rewards are associated with capital. It's a terrible thing as everybody here knows, if you end up in a -- during a downturn to be short of capital. Also, if during the bad times, a company is in a very strong capital position, the -- not only the ability to weather the storm and have a lot of credibility and with regulators and with the marketplace, but also very much to lean in and play offense during the very, very best times one will ever have in terms of not only acquisitions, but also organic growth.

If you look back at the global financial crisis and look at Capital One's auto finance business, while a number of the competitors were pulling back massively, Capital One really leaned into the business and had some of the really best returns and opportunities we've had in the history of that business. So we believe capital is a very asymmetric thing. So we bring a conservative philosophy to the marketplace.

The second big point that I would make is that Capital One and particularly in combination with Discover now, it has a high level of earnings power, and that's a wonderful thing to do. And it's not our intent to just keep taking the earnings and pile up an ever-increasing pile of capital. It is an important part of the -- how we will create value for our investors to, in fact, deploy that capital. And so even though I think it's caught everyone's attention that with the amount of capital that we have, I just want everybody to know that we certainly know share buybacks and capital return are an important part of the equation. And even though, yes, we're maybe famously conservative about capital, we can simultaneously have that conservatism and still lean into capital return, and that's what we intend to do.

All right. Great. Well, unless you have any closing remarks, Rich, Jeff, thanks for joining us today. Appreciate you joining us.

Thank you.

Thanks.

Thanks, everybody.

Good day, and thank you for standing by. Welcome to the Capital One Q1 2026 Earnings Call. Please be advised that today's conference is being recorded. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Jeff Norris, Senior Vice President of Finance. Please go ahead.

Thanks very much, Josh, and welcome, everyone. To access the webcast of this call, please go to the Investors section of Capital One's website at capitalone.com. A copy of the earnings presentation, press release and financial supplement can also be found in the Investors section of Capital One's website at capitalone.com by selecting financials and then quarterly earnings release.

With me this evening 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 will walk you through the presentation summarizing our first quarter results for 2026.

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 those factors, please see the section titled Forward-Looking Statements in the earnings release presentation and the Risk Factors section of our annual and quarterly reports, which are accessible at Capital One's website and filed with the SEC.

With that, I'll turn the call over to Andrew.

Thanks, Jeff, and good afternoon, everyone. I will start on Slide 3 of tonight's presentation. In the first quarter, Capital One earned $2.2 billion or $3.34 per diluted common share. Included in the results for the quarter were adjusting items related to the ongoing Discover integration and purchase accounting impacts, which are outlined on the slide. Net of these adjusting items, first quarter earnings per share or $4.42. Relative to the fourth quarter, revenue declined 2%, while noninterest expense declined 9%. Pre-provision earnings in the quarter increased sequentially by about $530 million or 8%. On an adjusted basis, pre-provision earnings increased about $430 million or 6%.

Our provision for credit losses was roughly flat at $4.1 billion in the quarter. Included in the provision costs is about $3.8 billion of net charge-offs and an allowance build of $230 million.

Turning to Slide 4. I'll cover the allowance in greater detail. The $230 million allowance build in the quarter brought the allowance balance to $23.6 billion. Our total portfolio coverage ratio increased 12 basis points and now stands at 5.28%. I'll cover the drivers of the changes in allowance and coverage ratio by segment on Slide 5.

In our Domestic Card segment, the allowance balance was flat at $18.8 billion. Favorable observed credit in the quarter was offset by greater consideration to downside economic scenarios related to heightened geopolitical uncertainty. The coverage ratio increased 23 basis points to 7.4%, largely driven by the paydown of fourth quarter seasonal balances.

In our Consumer Banking segment, we built $155 million of allowance. The allowance build was primarily driven by strong growth in the auto business, a slightly higher subprime mix in that growth. and a modestly lower outlook for vehicle values. The coverage ratio ended the quarter at 2.36%, 13 basis points higher in the fourth quarter.

And finally, in our Commercial Banking segment, we built $83 million of allowance. The allowance build was primarily driven by a very small number of specific reserves in our real estate portfolio as well as a modest increase in our criticized rate. The commercial banking coverage ratio increased 7 basis points quarter-over-quarter to 1.7%.

Turning to Page 6. I'll now discuss liquidity. Total liquidity reserves ended the first quarter at about $165 billion, up about $21 million from the prior quarter. Our cash position increased by $19 billion and ended the quarter at approximately $76 billion. The increase was driven by continued strong deposit growth in our retail banking business and the paydown of seasonal card balances. Our preliminary average liquidity coverage ratio was 166%.

Turning to Page 7. I'll cover our net interest margin. Our first quarter net interest margin was 7.87%, 39 basis points lower than the prior quarter. The decline was driven by several factors. First, 2 fewer days in the quarter drove 18 basis points of the decline. Second, we had the normal seasonal effect of lower average card balances. And third, average cash levels were elevated due to a combination of the typical seasonal increase, strong deposit growth in the quarter and the full quarter impact of last quarter's sale of the Discover Home Loans portfolio.

Turning to Slide 8. I will end by discussing our capital position. Our common equity Tier 1 capital ratio ended the quarter at 14.4%, 10 basis points higher than the fourth quarter. Income in the quarter and the seasonal decline in risk-weighted assets were partially offset by $2.5 billion in share repurchases.

Before I pass the call over to Rich, I also want to highlight that we closed our acquisition of Brex shortly after the quarter closed. The consideration paid to shareholders was approximately $4.5 billion. As a reminder, the Brex transaction is expected to decrease the CET1 ratio by a little over 40 basis points in the second quarter. Given the recency of the close, we are still working through the purchase accounting marks and will provide a breakout of those impacts in the second quarter earnings call.

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

Thanks, Andrew, and good evening, everyone. Slide 10 shows first 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. In the first quarter, the domestic card business posted another quarter of top line growth and strong credit results. Year-over-year purchase volume growth for the quarter was 40% driven primarily by the addition of Discover purchase as well as continued strong growth in our heavy spender franchise. Excluding Discover year-over-year purchase volume growth was about 8%. Ending loan balances increased 69% year-over-year, also largely as a result of adding Discover card loans. Excluding Discover, ending loans grew about 3.9% year-over-year. .

The legacy Discover card loans continued to contract slightly and will likely continue to face a temporary growth headwind in the near term due to Discovery's prior credit policy cutbacks and some additional credit policy changes we've made since closing the acquisition. We continue to see good opportunities to grow the Discover Card business on the other side of our tech integration, where we can implement growth expansions powered by our unique technology and underwriting.

Revenue was up about from the first quarter of 2025, largely driven by the addition of Discover revenue. Excluding Discover, year-over-year revenue growth was about 6.8% driven by underlying growth in purchase volume and loans. Revenue margin for the quarter was 16.9%. The domestic card charge-off rate for the first quarter was 5.1%, up 17 basis points from the prior quarter, in line with normal seasonality. The charge-off rate improved by 109 basis points year-over-year. About half of this improvement is the result of incorporating Discover's card portfolio into our domestic card business. The rest is driven by the steady improvement of charge-offs we've seen over the past year for both the legacy Capital One and legacy Discover portfolios.

Our domestic card delinquency rate was 3.7%, down 29 basis points from the prior quarter and down 55 basis points from a year ago. On a sequential quarter basis, the delinquency rate trend was a bit better than normal seasonality. Domestic Card noninterest events was up 51% compared to the first quarter of 2025, driven by the addition of Discover. Operating expense and marketing both increased year-over-year. Our choices in domestic card are the biggest driver of total company marketing, but choices in our consumer banking business have an increasing impact as well. Total company marketing expense in the quarter was about $1.5 billion, up 25% year-over-year driven by the addition of Discover as well as higher legacy Capital One direct marketing in our Domestic Card and Consumer Banking businesses, increased media spend and continuing investments in premium benefits.

As is usually the case, first quarter marketing was seasonally low and that seasonal trend was amplified this year as the timing of some of our planned marketing investments for the year shifted out of the first quarter into the second quarter and subsequent quarters this year. Pulling up, our marketing continues to deliver strong new account originations to build an enduring franchise with heavy spenders at the top of the domestic credit card market and to grow checking accounts on a national scale in our consumer banking business. We expect to increasingly lean into marketing to take advantage of these compelling market opportunities.

Slide 12 shows first quarter results in our Consumer Banking business. Global payment network transaction volume for the quarter was steady at about $174 billion as the typical seasonal decline was mostly offset by transaction volume growth related to the completion of our conversion of Capital One debit customers to the Discover Network. Auto originations were up 21% from the prior year quarter. Competitor activity in the quarter remained high, but we continue to be in a strong position to pursue resilient growth in the current marketplace. Consumer banking ending loan balances increased $8 billion or about 10% year-over-year. Average loans were up 9%.

Compared to the year ago quarter, ending consumer deposits grew about 35%, driven largely by the addition of Discover deposits. Average deposits were up 34%. Looking through the Discover impact, our Digital First National Consumer Banking business continues to grow and gain traction. Consumer Banking revenue for the quarter was up about 37% year-over-year, driven predominantly by the addition of Discover operations as well as Discover revenue synergies and growth in auto loans. Noninterest expense was up about 26% compared to the first quarter of 2025, driven largely by the addition of Discover as well as by higher marketing to drive growth in our National Consumer Banking business, increased auto originations and continued technology investments.

The auto charge-off rate for the quarter was 1.64%, up 9 basis points year-over-year and down 18 basis points from the sequential quarter in line with expected seasonality. Auto charge-offs have been stable at near pre-pandemic levels for the past year. The auto delinquency rate decreased seasonally from the linked quarter, down 102 basis points to 4.21%. On a year-over-year basis, our auto delinquencies improved by 72 basis points.

Slide 13 shows first quarter results for our Commercial Banking business. Compared to the linked quarter, both ending and average loan balances were up about 1%. Ending and average deposits were both down about 1% from the linked quarter. The commercial banking annualized net charge-off rate for the first quarter decreased 14 basis points from the sequential quarter to 0.29%. The commercial criticized performing loan rate was 4.99%, up 31 basis points compared to the linked quarter. The criticized nonperforming loan rate was up 4 basis points to 1.4%.

In closing, first quarter results continued to reflect solid top line growth and strong credit performance. We made expected progress on the Discover integration and synergies in the quarter, including the successful conversion of Capital One's debit customers to the Discover Network. We remain on track to deliver the expected synergies. Following the quarter, we achieved 2 important strategic milestones in April. We closed the Brex acquisition on April 7. Acquiring Brex accelerates our quest to build a banking and payments company that's positioned to win where the world of business payments is going. As we mentioned at the announcement, we will be leveraging Capital One assets and increasing investment levels to drive enhanced growth at Brex.

And also in April, we brought the technology and capabilities that power Capital One travel in-house. We now fully own the technology that we have built in partnership with Hopper and the Hopper talent we've worked with will join Capital One. We also launched the new Capital One travel app and we're excited to bring our award-winning travel experience to more consumers and businesses as we continue to grow our travel business. Brex and Capital One travel are just two of the opportunities we are investing in. For years, we've been working backwards from the coming dramatic transformation of the business marketplace with modern technology, data and AI. We are in the 14th year of our technology transformation from the bottom of the tech stack up. This has involved going 100% into the cloud, building a modern data ecosystem and rebuilding the company in modern technology platforms that can handle big data and AI in real time.

We are way down that path, but we are still investing in some very powerful capabilities. All companies will be able to take advantage of AI, but the leverage is vastly greater when AI is embedded in the company's ecosystem. Our entire technology is architected to enable these capabilities at scale embedded in our modern ecosystem. We continue to invest in building AI infrastructure and specific AI experiences. We also continue to invest in growing our heavy spender franchise at the top of the market including rewards, lounges, unique access to experiences and breakthrough digital capabilities. And we also continue to lean in through our unique quest to organically build a digital-first full-service national bank.

Many of our opportunities are enhanced by the Discover acquisition, which, of course, also brings the new opportunity to grow and scale our own global payments network. We continue to invest in network acceptance brand and technology. As we've discussed, these investments will continue to be reflected in the efficiency ratio, but they are also the engine that powers long-term growth and returns. And of course, our numbers starting in the second quarter will include Brex and the in-sourcing of our travel business as well.

Pulling way up, we continue to build momentum from the game-changing acquisition of Discover. Even though some individual variables in our deal model have moved since the announcement and we have acquired Brex and the hopper travel infrastructure. We still expect our earnings power on the other side of the Discover integration to be consistent with what we expected at the time we announced the deal.

And now we will be happy to answer your questions. Jeff?

Thank you, Rich. We will now start the Q&A session. Remember, as a courtesy to other investors and analysts who may wish to ask a question, please limit yourself to one question plus a single follow-up. And if you have any follow-up questions after the Q&A session, the Investor Relations team will be available. Josh, please start the Q&A.

[Operator Instructions] Our first question comes from Terry Ma with Barclays. You may proceed.

Rich, I'm just curious to get your thoughts on the state of the consumer. There's obviously concern around the impact of higher energy prices of the consumer but your credit results are still very good across both card and auto. So maybe just talk about what you're seeing across your businesses?

Thank you, Terry. The U.S. consumer remained healthy, overall economy remained resilient through the first quarter. The unemployment rate improved slightly in the quarter despite some high-profile headlines about layoffs, the total volume of job losses and new jobless claims remains low and stable. Income growth continued to run ahead of inflation. Consumer spending remained robust. Because of last year's budget bill, tax withholdings are lower than a year ago and tax refunds are higher.

In our Domestic Card business, our credit metrics continue to improve on a year-over-year basis in the quarter. On a sequential quarter basis, our charge-off rate moved in line with the seasonality, while our delinquencies improved relative to what we would expect from normal seasonality. Our auto credit metro -- as well. Auto losses were slightly higher on a year-over-year basis in Q1, but this was consistent with a modest increase in the subprime mix of that portfolio over the past year. Our auto losses have been back near pre-pandemic levels for over a year and our auto credit is supported by strong performance of recent originations and generally stable vehicle prices.

Of course, the new conflict in the Persian Gulf represents a significant cloud on the horizon. We've already seen energy prices spike sharply over the past 6 weeks. Inflation moved higher in March, largely because of the higher gas prices. So if energy prices remain elevated for an extended period of time, that would be a real headwind for consumers and probably a drag on the overall macro economy. But so far, we've not seen any adverse effects on our portfolio even in our -- either in our credit or in our spend metrics. We've judgmentally incorporated elevated macroeconomic risk into our allowance through qualitative factors. But we continue to really feel very good about not only our portfolio performance, but good for the credit outlook of consumers and good for the opportunity to continue to lean in to origination and credit line growth in our business. So once again, it seems like every quarter, we're having a conversation just like this. There's a lot of noise in the external environment, but the consumer is showing quite a bit of resilience.

And I want to comment for just 1 second back to the credit card delinquencies moving just a little bit better than seasonality. I don't think we're ready to declare that it's diverging from where it is, but it's certainly good to see that. Of course, there's little a little uncertainty in reading things in a world of tax refunds and other things. But certainly, we think our recent credit number is just another indication of the strength of the consumer and particularly the strength of our portfolio and some of the choices that we've made in credit.

Our next question comes from Sanjay Sakhrani with KBW.

I wanted to start with a question on expenses. The adjusted efficiency ratio came in a little under 50%, understanding that marketing was a little bit lighter than it typically would be I guess, as we look ahead, I know, Rich, you mentioned Brex and Hopper will come into the expense run rate. How should we think about that expense ratio sort of -- or the efficiency ratio sort of migrating over the course of the year?

So thank you, Sanjay. So as you mentioned, Brex and Hopper. Those are 2 investments that are not in the current efficiency ratio and not all of our investments are in the first quarter, certainly those being the biggest highlights of those that are not in there. But we also continue to lean into our investment imperative. Our expenses, of course, will be impacted by the synergies that grow as we get closer to the end of integration next year. So we'll have to keep that one in mind. .

And as I mentioned in the opening remarks, marketing levels will be heavier over the course of the year as we lean in and the impacts of seasonality and marketing play through. But all of these investments are the engine that powers long-term growth and returns. So they will be reflected in the efficiency in multiple line items. Most importantly, we still expect our earnings power on the other side of the Discover integration to be consistent with what we expected at the time we announced the deal, inclusive of the Brex and Hopper travel infrastructure. .

Great. Just one follow-up on the NIM, Andrew. I know you mentioned the few items that sort of affected the NIM this quarter. I wanted to sort of 0 in on the liquidity, obviously, abnormally high understanding the paydowns and such. But as we think about how those liquidity levels trend into the second quarter and so forth, like does those come down to the fourth quarter level? It's not like how should we think about liquidity on a go-forward basis and its impact on NIM?

Sure, Sanjay. So let me just frame it in a broader NIM story and then I'll double-click into your point about the cash. If we take a step back and look at what happened to NIM over the last number of years, coming out of the pandemic growth in our card business significantly outpaced the rest of the balance sheet, and that pushed are gradually higher. We then closed Discover in the second quarter of last year, and that alone drove up our NIM by about 85 basis points. So when we got to the back half of last year, the card outpaced the rest of the balance sheet, at least at that moment in time, had largely played through and Discover was in our numbers.

And so I would say what you saw in the back half of last year is what I would consider to be a new kind of structural level but there are always a seasonality that impacts NIM in any given quarter. So in Q1, as I said in my remarks, the first thing is we had 2 fewer days bringing down NIM by just under 20 basis points. We typically see higher fewer higher yield card loans in Q1 just as people pay down holiday spend. And then third, we typically see higher the low-yielding cash driven both by the same seasonal card paydown plus the tax refund and first quarter bonus dynamics even though the average effect of cash tends to be a bit more muted because it tends to be more back-loaded in the quarter.

But this year, in the first quarter, we saw not only those seasonal effects, we did see a particularly elevated level of cash. We sold the home loan portfolio in late November, so we had the full quarter of that. We saw strong growth in our retail deposit franchise beyond what we normally see in tax season as we're getting great traction in the market. And then third, the net flows from taxes this year are a bit more favorable as you've seen publicly highlighted People are getting average refunds that are a bit higher and more people are getting refunds. And so as we look ahead, specifically in the second quarter, there's going to be one more day that's 9 basis points and the same 9 basis point jump as we head to Q3 and Q4.

Specifically to your cash point, I do expect that, that cash position will trend down over time, given that it is particularly elevated this quarter. We have about $8 billion of debt maturities in Q2, we typically see a bit of tax payments in the second quarter. So the direction of travel for cash should be down from here. But if I just take a step back and look more broadly, absent any meaningful change in the balance sheet mix beyond the cash trending down, the structural level for NIM that we saw after we closed the Discover transaction, should persist. But of course, each calendar quarter is just going to be impacted by seasonal impacts. But if you look at the back half of the year, that on a seasonally adjusted basis is a pretty good indication of where you should expect NIM to kind of structurally be.

Our next question comes from Ryan Nash with Goldman Sachs.

I have 2 questions. I'll start with the first 1 and then I have a follow-up. Maybe the first 1 just a follow-up to Sanjay's question. I know, look, the discussion about efficiency and where it's headed has been the big talking point over the course of the last several months. Rich, you mentioned Brex and Hopper will enter the run rate. So that I think that will increase the pool of investments. But can you maybe just talk about sizing the magnitude of future investments? And -- what is really holding you back from putting out some efficiency parameters out in the future, kind of like what you did in 2019 when you gave us 42 in '21? And I have a follow-up.

Thank you, Ryan. So as I've been talking about for a number of quarters now, we have a significant investment agenda at Capital One. And in many ways, from the founding of this company. We built a company in a banking industry that is sort of the growth strategy involves buying other companies. Now it's ironic. I'm saying this in the wake of 2 acquisitions. But we build a company designed to be an organic growth company. All the financial -- the horizontal accounting we put in place, the information-based strategy, the investment in talent, really everything we've done is to build a company that creates value patiently and rigorously by a combination of really identifying strategic opportunities and then leveraging information-based strategy and testing and so on to enable ourselves to create unique growth opportunities. So that's kind of who we are.

Along the way, we haven't really been the company that's been in the guidance business. I know that many companies -- most companies do that probably more than we do. And I know that there's a lot of benefit to investors. We're not trying to be difficult about that. But what I've really run to reinforce since the founding of this company, we really focus on identifying opportunities, validating the value creation and really leaning into those when the opportunity is there. As I've been saying recently, we have a really striking number of opportunities down the road, longer-term opportunities, some of them closer in opportunities. But the striking thing is the number of them and the striking thing is they all require investment. Now it's not an accident. We're in this position because we have patiently been working our way through our technology transformation. And as we get up to the top of the tech stack, the opportunities really start expanding.

And also, by the way, the tech transformation of Capital One had as its objective function, being able to be an information-based company powered by AI itself. And of course, that's where the world is going. So -- and then we've got, of course, the Discover and the Brex acquisition. So we don't give -- not that we never do, but as a general matter, we like to share with our investors why we're excited about the opportunities we have and what we're investing in. But what we're -- and so we don't specifically guide to things like efficiency ratio as a general matter, but there is an important grounding that we give to you -- we've been giving to you every quarter related to the despite all the things that have moved since we announced the deal, that the earnings power and the upside of the Discover integration is consistent with what we expected at the time of the Discovery deal inclusive now of the Brex and Hopper acquisitions.

So implicit in there, there needs to be an efficiency ratio that makes the numbers work. There's -- we try to power as much of our efficiency ratio through growth rather than just cutting costs. But the impression I really want to leave with investors is that we have exceptional opportunities. These opportunities have come to us because we have been the company that's been willing to invest in longer-term opportunities than maybe happens in the marketplace. And at the same time, through this game-changing Discover deal, we are really landing this integration in a way that collectively between the Discover deal and all the investment agenda of Capital One that we're landing this plane in a place where the earnings power is intact relative to the assumptions at the outset. And to be in that position and to be simultaneously investing in these various opportunities really puts our company and our investors in a strong place, longer run. Even though one of the things that comes with the territory is sometimes a little less guidance and a little more investment than maybe happens at the next company.

Rich, if I can just squeeze a follow-up on to that. I appreciate the answer. I think the market appreciates that you've been saying that this is consistent with what you expected when the deal was announced. I think the challenge on the outside looking in is that we don't know the starting point of what it's relative to. And I think it's certainly weighed on the stock. So I appreciate you don't want to give guidance, obviously, you not have been following the company for a long time. But is there anything that you can share that actually helps the market understand what that means to give comfort that the earnings power is not too far off from market expectations.

So I don't have -- well, let me actually give a little more granularity on 1 point on a couple of things. When we say earnings power, now earnings power is -- can be lots of things. And I -- we've spent a lot of time -- our whole financial focus as a company, be sure we're building a company with robust earnings power. When we're talking in the form of this guidance when we say earnings power, we're talking about ROTCE. And in a sense, we're talking about ROTCE at a constant level of capital. Just a constant level of capital in the sense not that the capital would be exactly at the same at the beginning of the end, but just as a way to think about earnings power itself. .

The capital level assumed in the deal model was 12.5%. So the guidance on earnings power is assuming that same level of capital. Now at the rate we are going -- the guidance would still hold at higher capital levels, but the actual guidance is based on the 12.5% number. even though that's not a projection of where our capital is going to be at that time. But I share with you that we normalize for the capital to calculate the earnings power, but the earnings power is in a strong position even with somewhat higher capital levels.

Our next question comes from Moshe Orenbuch with TD Cowen.

Great. I wanted to talk about how to think about growth, particularly in your card business, obviously, the auto finance business has been growing quite nicely. It looks like -- I mean, you've had 3 months at which balanced growth had stepped up if you kind of add back the Discover volume spending looks like it's 200 basis points higher growth in Q1 than it was in Q4. And there have been some reports about Discover products, card products that you've been mailing. Could you talk a little bit about how we should kind of think about growth in the card business over the next year?

Thank you, Moshe. The legacy sort of go right to the core of Capital One, the legacy branded card business is powering along very strongly. We do a normalization, for example, of looking at the growth metrics of the booked up market part of Capital One. The best way to proxy what we -- if we had the sort of the score cutoffs that the major competitors do I think you'd be impressed if you saw the growth metrics of the branded card book, it would be basically at the top of the league tables. But not necessarily precisely apples and apples to the other competitors.

My point is the branded card business and particularly the growth metrics of the sort of booked up market part of the business is showing a lot of strength. Even as the card business as an overall matter, is sort of slowing down, not that it's going slowly, but it had such ferocious growth for years. It's settling out into something probably more normal. A little bit the elephant in the room at the moment with respect to growth is the Discover brown out not to be at all interpreted it as anything alarming. But with respect to the math of that, let's just talk a little bit about this brown out.

So following Discover's credit expansion in their card business in 2022 and 2023, they dialed back their origination programs and credit line management by a fair amount toward the end of 2023 and they basically largely sustained those dial backs. Since we took over, we've been trimming on the margins of Discover's credit policies in areas where we're a little less comfortable with the resiliency of the underlying customers. And it's basically in the high-balance revolver parts of the business. So as a result of these pullbacks, the portfolio contracted a bit in 2025, and it continues to face some headwinds to growth as these more recent smaller vintages mature.

So in the first quarter, Discover Card outstandings were down 1.2% year-over-year and the brown out will increase a bit until we get to the other side of the tech integration with Discover. And it's Importantly, worth noting that the flip side of these pullbacks and the brown out has been strong credit performance, and we're very glad to see that playing through the system. And I sometimes use the phrase, we have to live with all the great credit performance from these choices that we think Discover made good choices and we certainly are happy with ours. As I've said on the other side of our integration, we believe there are good opportunities to grow the Discover business and you think about what do we mean by the Discover business?

Because, of course, it's part of Capital One, but there will be -- we're going to be out there marketing Discover and marketing their flagship product and all of these things. And some of the great programs that they had. So we're going to have a flow into Capital One of a lot of interested prospects and people that apply. We believe that there is an opportunity to expand discovers on the origination side to expand the business above and below their historical focus on prime customers. And that's also, frankly, a point about the existing book that they've already originated over the years. So even as we continue to be more conservative on high-balance revolvers, we will lean into heavier spenders and also expand opportunities for emerging prime customers. So we are bullish about the opportunities to build on this Discover franchise, both the existing customers and the flow that comes to people seeking to get a Discover card.

You mentioned the conversion timing. Let me talk a little bit about that. We have already started originating Discover cards on our platform. It's at relatively low levels we've been testing. I think we're up to like 8%. No, I'm not even scratched that number. I'm not exactly sure what the levels are, but we expect to have fully transitioned new originations by the end of Q3. In fact, I think it was 8% at this point. But think of by the end of Q3, basically in September, we will be fully transitioned to the Discover branded originations being booked on Capital One's technology and with Capital One's underwriting and strategies.

Now with respect to the back book, we expect that the back book of existing Discover accounts will be fully converted onto our platform by the first quarter of next year. It will be a phased conversion starting late this year going in through the first quarter of next year. And as the customers get on our platform, we're going to be able to start leaning in more into originations and credit line management, leveraging the many credit policies and strategies and opportunities that we have while, by the way, still preserving some very amazing great things that we've learned from Discover and things they've taught us about exceptional things to do with certain customer segments. And then finally, when you think about that timing, just now that the loan growth benefits will be lagged by another couple of quarters just as the balances build.

One other thing. In parallel to Discover's dial back of card loans, they also dialed back personal loans. Those loans are mostly cross-sell to the existing file. And those cross-sells have been further scaled back sort of for mechanical reasons during the integration process. So there is a brownout in personal loans also during this period, even as we like that business that they have built and do plan to lean into that on the other side. So pulling way up, these brownouts are a natural and temporary part of the deal and have been accompanied by a better credit and even some margin strength along the way. So we're very pleased with how the integration is going. Pleased with what we find about Discover and their franchise and their credit policies they've used but bullish about being able to bring that into the Capital One technology and credit policy. So kind of pulling way up on your question, their strength in our core branded card business, particularly the higher upmarket you go in terms of the growth metrics. And we'll be held back a little bit by the brown out and -- but we'll continue to lean into the opportunity on the other side.

I could just sneak in a follow-up. Just to kind of follow up on Ryan's question. Is there a way to think about, particularly with respect to Brex, way to think about kind of payback periods because it would seem that's not the longest kind of payback period. I would think that those customers kind of generate revenue relatively quickly. Is there a way to think about that for Brex?

Well, Moshe, we have been very struck as I'm sure many are from the outside with the rapid growth of this business, and we believe that they're not just growing but they're also growing value and they're growing earnings power along the way. So we like very much what they're doing. The one thing just to keep in mind is that what Capital One plans to do with Brex is to rather than rush to do a big integration, we are focused on enabling them to be able to grow rapidly. And so really, it's an enablement strategy of Capital One. And in fact, much of what really brought Brex to Capital One was the opportunity to leverage some of the resources and capabilities we had that could allow this amazing growth play to really be enhanced. So our focus is going to be on doing that.

Now along the way, Moshe, that will mean increasing investments along the way. So that again has a little bit of a deferral of the vertical impact of these benefits but we -- when you think about some of the benefits of -- that we can bring to Brex along the way we bring substantially lower cost of funds. That's a benefit that sort of happens right away. The brand benefits are sort of a right-of-way thing once the word spreads, but the benefits of the Capital One, the credibility of the Capital One brand, they are already finding they're able to be in conversations that weren't available to them before just by the credibility of being part of Capital One.

Over the coming months, as we test and learn, we're going to start leaning in with marketing dollars and sharing some of the high potential leads and the benefits of big databases that we have built and then a little bit more down the road. We will leverage the marketing machine of Capital One that requires a little more of a technical integration. We got to set up data pipelines. We've got to calibrate our models for Brex's customer base. So that's a little further down the road, then a little further beyond that. We see the opportunities for benefits on the travel side of the business, but we got to focus first on the Hopper build-out on our end.

So what we're going to have here is a rolling set of -- I sometimes have used the phrase, just add water. It's a metaphor I use for a lot of the benefits that we can bring to Capital One are pretty easy to bring without a full integration and there are things that are very easy for them to capitalize in. That will happen on a phased basis. But from a financial point of view, the one thing we should all understand, the more traction we see will probably lean in more and invest more. So from a vertical impact point of view that in the sort of classic thing that happens with Capital One, sometimes the more success we see a little bit more delayed the current vertical financial benefit is. But we're very optimistic about the value creation here. Thank you.

Our next question comes from Erika Najarian with UBS.

My first question is on capital. Clearly, you have plenty at 14.4% CET1. But Andrew, I'm wondering if you could give us your preview of how Basel III end game could play out for you. Clearly, with your current asset size, you have to be considering both RSA and ERBA. So I'm wondering if you could give us a preview on what the RWA impact could be and how that could potentially shift your thinking on capital allocation?

Sure, Erika. Well, let me start with the Category 2 reference you made. We're currently at roughly $680 billion of assets, so about $20 billion or so below the $700 billion cap, but our threshold. But recall that, that's triggered with a 4-quarter trailing average. So first of all, it's likely to be a fair amount of time before we trigger that threshold. And there's also uncertainty on whether the threshold remains at $700 billion or whether it's indexed up, given the GDP and other metric growth since the tailoring was first created nearly a decade ago.

And so therefore, that would also delay us triggering category 2 if the threshold is indexed up.

With respect then to the proposal, the punchline is the effect under the standardized approach for us if it were enacted on a fully phased-in basis today would increase our CET1 by something like 20 basis points. That is to somewhat offsetting forces, one is the RWA impact is roughly 8% to 9% decrease for us, and that's about a 140 basis point tailwind, and that 8% or 9% decrease by the way, is pretty similar under both standardized and IRBA. Given that IRBA does come with an ops risk charge. So that kind of offsets the slight benefit to risk-weighted assets there.

With AOCI, that's the same across most standardized and IRBA, we had something like a $5.2 billion of AOCI and so fully phased in which, of course, the current proposal isn't. But if we were to fully phase it in, it's roughly 120 basis point headwind. And so that headwind as forward rates follow forwards, we would see some of that AOCI pull to par and I will note that you can be in today's disclosure. We also have begun using held to maturity in anticipation of these rules. So that may further help insulate capital ratios from some of the AOCI volatility. But again, fully phasing in AOCI where it stands today as a 120 basis point headwind, the 140 basis point tailwind from the RWA is modest is a modest good guy for us.

And so the only thing that really differs would be under IRBA that the DTA threshold comes down from 25% to 10%, and so that's a modest decrease to our spot CET1. But again, we don't anticipate electing IRBA just given that it's a modest negative for us. The next part of your question then of what does that mean to capital actions. Look, we're sitting here today at 14.4%. There's a number of things we take into account when determining the pace of share repurchases, the current and projected capital levels, both as we sit today as well as incorporating in potential regulatory changes, the expected balance sheet growth, the regulatory environment more broadly, market valuations and very importantly, the macroeconomic environment.

And so as we manage our balance sheet, our focus is maintaining a conservative posture to ensure resilience and have strong risk management, and we are acutely aware of the asymmetrical value of capital in certain environments. And so we considered all of these factors in the first quarter, and we repurchased $2.5 billion. Looking ahead, we'll continue to evaluate all of those factors that I just mentioned when determining our future pace.

And if I could squeeze one in, please give an expanding the ROTCE conversation, I just have to follow up to Ryan's million-dollar question on the starting point to EPS to which you responded you're talking about ROTCE at a constant level of capital. I just wanted to make sure we heard correctly. You mentioned you were talking about ROTCE at a constant level of capital and the capital level you assuming deal model was 12%. Now Rich, I think you said something to the effect of the guidance would still hold even at the current capital level of 14.4%, which means that perhaps the numerator is better. Did we misinterpret that?

So let me clarify. Thank you. I'm glad you raised it because these things matter. First of all, 12.5%, Erika, was the capital level assumed in the deal model. And so in terms of how we are sort of measuring earnings power, we are holding capital level constant in this particular exercise in this particular guidance. So the guidance on earnings power is assuming that same level of capital.

Now my other point was that's not guidance itself on what the capital levels would be. And my thing was that, that -- we're in a pretty strong position here, and that guidance would still hold at some higher capital levels. I'm not going to precisely get into exactly what is the break point capital level for which it wouldn't. But my point because -- and every quarter, things change. But my point is that I wanted you to know that we normalized the calculation to be at 12.5%. Andrew just talked about our own capital choices. Of course, these days have been holding higher capital levels than that.

But my other point was just that, that guidance does have some ability to hold at somewhat higher capital levels, but we're not going to quantify that precisely because each time we come back to you, I'm sure that breakeven point would be slightly different. But our point is, I think we're and quite pulling way up from the comment I said earlier, we bought this amazing company with Discover and at really the very same time partly because of Discover, but also because of the incredible number of the tech transformation we have been building. We just have a very significant number of investment imperatives and really the nice part of the story is that we're able we're able to lean into these investment imperatives and still deliver a the Discover integration with the earnings power that we assumed at the at the outset.

And by the way, how is all but possible. It's possible a lot of different elements in the financial equation have moved in different directions along the way, but also at Capital One, we have worked really hard to manage the choices we're making the investments, the efficiency of everything else in the company even as we lean in so hard. And again, the tech transformation enables some of this to happen, this paradox that we can lean in so much into investment and still generate additional earnings power on 1 minus the investment areas, and that's part of the value creation equation that's driven us since the beginning of our technology transformation. So thanks for your question, Erika.

Our next question comes from Don Fandetti with Wells Fargo.

Richard, I was wondering if you could talk a little bit about investors are very concerned around AI job loss risk and how you're thinking about that? Do you build anything into your credit underwriting as you think about unemployment from that factor alone.

Thank you, Don. So gosh, I don't know if I've ever seen it. Well, I suppose there are lots of other things in our world where there are so many different divergent and stated with great confidence points of view on a topic. But certainly, the impact of AI on jobs is one of them and people are -- people who know live deeply in the tech world are at all parts of this spectrum.

I'll give you just a few comments and just get back to your credit point in a minute. It's really informative to go back as we have done at Capital One and look at how it felt. In periods really when the industrial revolution came in, actually, we've gone back and gotten some striking comments around when printing came in, but within the industrial revolution and how it felt then and then, of course, at the various stages of the digital revolution. And if you look at the quotes of what we said with great passion. It sounds like the conversation today. And then, of course, the reveal is, yes, that was in like 1860. And that's not to say it won't be different this time, but it is a reminder of what it feels like when things change so much. It's always so much easier to see what's going to change, what right in front of you might change relative to what might open up as an opportunity on the other side.

So I think if I were to pull way up, just a personal view is I think that people are underestimating the dynamism in our economy. They're underestimating what happens when jobs get elevated, meaning that people doing those jobs powered by AI can do even more that in a lot of these areas, the demand actually goes up, not in all -- but in some, I think software development being a good example, you can really have demand go up quite a bit. So we are we are not here to prognosticate what's going to happen with respect to employment. I am absolutely here to prognosticate that AI is going to transform pretty much everything about how we live and how we work. I'm probably on the more optimistic side of the spectrum with respect to the implications on the economy and on employment. But so -- but we have to -- we will watch with great interest all of this.

Now from a credit point of view, were there -- credit is very linked to employment. There's no doubt about it. So if anything that drives very significant changes in unemployment can have important credit consequences. So we will watch carefully. We certainly are not making credit policy choices now in anticipation of things like that. But one of the reasons that we are so focused in our underwriting on resilience and first of all, taking a 3- or 4-decade history in our modeling to see many things that have happened and then putting an important buffer of resilience in there, is to be in a position to adapt when the things we don't anticipate come to be.

But pulling way up in spirit of your question, we are at an extraordinary time when I think that we are dealing with the transformation that we are -- have the privilege to live to is up there with fire and electricity. And all of us have great interest to see where it goes. And importantly, we're building a company to be at the forefront of that and our technology transformation that we began in 2013 -- what that transformation had as its objective function, was working back. Building a company that could deliver machine learning and AI-powered customized solutions in real time because that's where we saw the world going. And we didn't know back then about generative AI. We didn't know about agenetic AI, but it turns out had we known those things, we would have built what we're building because, in some ways, it's a continuous strategic thread way back from the founding of Capital One, which was all about -- which was building a company, an information-based company bringing customized solutions powered by technology, data, massive scientific testing and statistical modeling.

And what's happened over time is that same quest has brought us from a batch to real time and brought us from regression models to neural net machine learning models to the modern world of AI and the amount of data has gone from things measured in terabytes to things starting to look at words like exabytes and -- but in some ways, what we are building and working backwards from has been -- it's all part of the same continuous journey, and we're very excited to be at the forefront of that. Thank you.

Our next question comes from Mihir Bhatia with Bank of America.

I wanted to start by asking about the Discover network integration. I think -- so maybe just any learnings from the debit conversions and updates on the timing of the credit conversion. I think you gave an update on when Discover originations will start on Capital One technology, but maybe just also an update on how you're thinking about Capital One originations and issuing on the Discover network on the credit side? And then just related to this integration, is that like when we start seeing some of the integration expenses start to wind down and some of the expense synergies come through.

So thank you here. Thanks so much. So the debit conversion, the debit conversion has -- we are very pleased with how that has gone. That conversion is completed. And we've learned a lot along the way and how we can get better and better as we do these conversions. But one thing that it has shown us is that it has reinforced our belief in the doability and the success that we can have with customers in doing these conversions. So we're very pleased with that.

With respect to -- so on the card side, we right now are just in the early stages of testing on the origination side testing originating cards on the Discover network and then down the road really as more of a next year thing would be being able to -- moving credit cards over to the Discover network. And we -- of course, that is moving a portion of our book over. But what we're doing in -- we're trying to do a lot of things at once. And when I sort of wave my arms and say, Capital One has a pretty big investment imperative, this is an important part of it. We are trying to work backwards from what could create opportunities for us to move more of our business onto the Discover Network.

And in addition to the mechanical aspects of conversion. Importantly, we are investing in acceptance, particularly international acceptance, sloping that effort toward the geographies that have the highest rate of travel by our customers. And we're also building the network brand and the brand credibility. And then along the way, we will do a lot of different testing. But if we pull way up, we continue to be -- as we were at the time of the deal announcement that we can move not only our debit business, but a portion of our credit card business there and continue and get the flywheel turning in a tremendously scale-driven business. And as the flywheel turns, I think that helps acceptance. It helps conversions. It helps the customer experience, and it helps our economics and enhances the opportunity to then move more business over time. So it's not an easy journey, and it's a long journey, but we're taking very important steps early on in this. Thank you, Mihir.

And then Mihir, I think you asked something about the expense synergies. So on the expense side, they are more back loaded relative to the revenue synergies since those expense synergies come from the conversion of the technology platforms and then sort of the associated processes and the decommissioning of applications that Rich just talked about. And so the expense synergies happen more iteratively over the integration window and just are more backloaded because they are highly dependent on those technology conversions. That said, we do make or are making some progress on the expense synergies along the way. But you should expect that we won't be fully at our expense synergies until the conversions are complete, and that will be in the first half of '27.

And so on the revenue side, that is much more tied to the debit conversion that is substantially completed at this point. So we're seeing a meaningful portion of the revenue synergies already in our Q1 results and the at least full portion of the revenue synergies coming from debit will be in the Q2 results. But if we put those things together, we still feel very good about achieving the full $2.5 billion of synergies by the time we complete integration in the middle of '27.

Got it. And then just on a different topic, just on the commercial segment and the reserve, the allowance build there. this quarter. Can you just provide a little more color on what that's related to and just your confidence that, that exposure is, I guess, bring fence now and we won't see continuing increases in the allowance build.

Yes. Mihir, you had a little over an $80 million reserve build. I believe the number was, and it's really just tied to a small number of borrowers across C&I. And if you look back through history, commercial losses, just tend to be a bit lumpy. And so to the allowance as we just have some higher criticized loans and then just worse performance across a handful of specific credits. So I don't think there's anything in particular to see here, and I think you should just expect that there's a little bit of lumpiness in the system as there always is.

Our next question comes from John Pancari with Evercore ISI. .

I'll just ask one question here in the interest of time. On the capital front, just the Brex deal was somewhat unexpected, albeit definitely additive to your longer-term goals. Can you just update us on any incremental M&A interest, how would you approach other opportunities that may arise either in your own active effort to pursue something? Or if something comes up that not by your doing, though, that would be additive to your franchise, would you consider it? Just want to get your interest in broader M&A.

Thank you, John. As I said, earlier, and I've been saying really since the founding days, our focus is on having an organic growth company and all the capabilities and talent and infrastructure and financial frameworks to be able to do that. We also are a company that works backwards is such a centerpiece of who we are is the way we approach strategy, and we always work backwards. We don't work forward from where we are. We work backward from where the world is going and where winning is and that has led us to many times declare we're 'going way over there' with respect to transforming our company, and it's an important reason we're here today.

Along the way in those journeys, M&A has played sort of an interesting role for Capital One. I've often described it as the purchase of growth platforms. we have been much less focused on sort of buying companies and adding the earnings power of a company to ours, although it's not that we wouldn't do that. But being the growth company that we are. We're very focused on what are the enablers of us from a structural point of view to be able to win in the carefully selected marketplaces where we have said winning is so important. And Brex was just a classic example of that because we had already declared the commercial card was such an important part of our future. We already had a commercial card. We had already internally declared that we had to go very much in the direction Brex was. And so we were going down the path of building those capabilities and then this opportunity came along.

So I share all that to give you a window that we will continue to be the company that is working backwards from where winning is. We will, of course, continue to look at the marketplace, and there will be times when opportunities, special opportunities align in ways that are a little hard to predict in advance. One other crucial thing that I would say is that most other banks are out there focusing on buying banks. We are not at all focused on buying banks. We bought banks in our history to transform the balance sheet of Capital One from a capital markets funded company to a FDIC insured deposit funded company but a defining thing about Capital One now is that we have built a modern tech stack and the alignment that we have technologically philosophically, strategically and in terms of talent, is sort of right there with tech companies, and it puts us in a position to be able to successfully do acquisitions of little tech companies that I think for big banks, it would be very, very hard to pull it off and make it work and have the talent stay and sort of all that all those challenges that come along the way. But I think Capital One's future is much more a future -- with respect to acquisitions, is much more a future of smaller tech companies and companies built very much like ourselves, and therefore, a very different strategy than all -- pretty much all other major banks are pursuing.

And our final question comes from Saul Martinez with HSBC.

Maybe a follow-up to Erika's question on capital. I mean, why not up the buyback from the $2.5 billion per quarter level. I mean you're fully loaded with the new standardized approach, including AOCI and even factoring in back you're kind of over that 14% to 14.5% CET1 range and fully acknowledging all the factors, Andrew, that you've highlighted, growth and uncertainty in regulations, it wouldn't seem like that's an optimal capital level. And just given the growth outlook, at least in the near term, why not be more aggressive in bringing that capital ratio down? Because you still have a comfortable capital position with a lot of excess capital. So just kind of wanted to get your thoughts on that.

Yes. So you highlighted the reasons that I shared with Erika. And so I would just, first of all say, we have nearly $12 billion of authorization that remains from the Board. We have flexibility under SEB, but the way we approach capital is we think about variety of things when making that -- making our decisions around repurchase pace, and we're always going to err on the side of conservatism and focus on resilience. And so we are well aware that capital has asymmetrical value in certain environments. And so like we're just going to use the flexibility in the moment to make a call of what level to repurchase at any given time.

And Andrew, I would just add that all of that sort of conservative speech, which, by the way, I would have said the same thing in answering that question. it is still also the case that share repurchases are a very important part of the value creation equation at Capital One. And we're -- we've worked really hard to be a company with the earnings power to be able to be able to create a lot of value, be able to buy back shares and still be -- take a very conservative philosophy with respect to capital. So thank you so much for your question.

Fair enough. If I can squeeze in a follow-up. It's a very specific question. Loan and -- I noticed that you didn't give the outlook for loan and deposit fair value mark amortization this quarter, and I think there was like $1 million this quarter, which is -- and I think you had guided like $98 million for the full year and increasing in '27. But is there adjustment to the balance sheet that caused this? Or is this just -- do you just kind of feel like this is sort of a consequential number at this point, given the magnitude of the impact?

And Saul, are you referencing for Discover, I presume, right?

Yes, yes, yes. Yes, for Discover exactly.

We finalized the measurement period and so we provided the final amortization schedule in the prior call. And so those are the numbers, I think, especially with respect to NIM, it was something like $1 million. So it was inconsequential in the quarter and it didn't move the metric at all, but I would just direct you back to the tables that we already provided because the measurement period is final and those are the numbers that are going to flow through the P&L going forward.

Concludes our earnings call and the Q&A for this evening. I want to thank everybody for joining us on the conference call today. Thank you for your interest in Capital One. Have a great evening, everyone. .

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.

All right, everybody. Thanks for coming back to the room, and our next speaker, obviously needs no introduction. We have Capital One up next. And we have Chairman and CEO, Rich Fairbank; and CFO, Andrew Young. Thank you, gentlemen, for coming.

Thank you, Erika.

Thank you. Happy to be here.

So pretty much all of your fireside conversations to Rich, start with the state of the consumer, but I felt that there was so much going on with your company that we should really just start there and maybe focus there. So the first thing I want to unpack is that you mentioned during the earnings call that several things have moved since you announced the Discover acquisition. But you still expect earnings power on the other side of the Discover integration to be consistent with what you expected at deal announcement. Could you double-click on that for us in terms of what has turned out to be better or worse in terms of Discover and Capital One earnings power?

So thank you, and thanks, everybody, for coming here and for those listening in on the webcast. So we announced the deal at the beginning of 2024. It seems like a long time ago. And we had high hopes and expectations about the earnings power of our combination on the other side of the integration, and we continue to have those high hopes. A lot of things have moved along the way in different directions. Let's just favor a few of those.

What I call the brownout of growth for Discover, which was driven by some of the credit pullbacks that they did and some trimming around the edges on their credit policies that we have done. By the way, so that's been a headwind. But then on the other side, that's also contributed to credit coming in a little better than we expected. So that's been a good guy.

Margins have been a little stronger than we expected early on. When we think about some of the drivers of the positive margin trajectory bringing the whole Walmart portfolio in-house helped with respect to margins. The retail deposit growth has been higher than we expected. That's beneficial on the margin side as well.

The other big thing that's happened along the way is the growth in opportunities that we see at Capital One and opportunities are very exciting things, but they also require quite a bit of investment. And so we have been saying to investors that when we look at the full opportunity set, a bunch of it actually brought by Discover, but also much of it really the product of years of work at Capital One. We're very excited by the opportunities, but it requires a lot of investment. So we're leaning in even more than usual into investments at Capital One.

And then along comes Brex. And we see that as a great opportunity. And -- but we also -- a key reason for the deal is the chance for Capital One to lean in and bring more resources and more investment into Brex. So when we pull up on all of these things that have moved in different directions. The more things change, the more they stay the same in a sense because we feel that the earnings power coming out the other side of integration is pretty consistent with what we thought going in a couple of years ago.

Thank you for that. So you mentioned Brex, and during the earnings call, you made a very clear case for the benefits of the acquisition and how this advances your agenda in terms of growth in business payments. I think maybe the investor base needs to continue to appreciate how unique and helpful is to growth is Brex in terms of having an in-house fully modern core versus maybe peers that have a third-party tech solution.

So we have always admired Brex from the outside. We never really thought that we would be in a position to actually be combining as companies. But as we have gotten to know them more, we are electrified by what they have built. And when you think about any start-up, it is just such a tough thing to start a company and trying to make it through every day and have the money on the other side and drive growth as you invest. It's a choice almost every start-up makes is to try to get as much help as they can from other companies to build their tech solutions.

It's a very natural thing. It's shocking to me and to our team how Brex was able to build a full vertically integrated tech stack all the way down to the core. And it was striking to us, and we, of course, have gone on a parallel journey since our tech transformation began in 2013, where we have rebuilt our whole tech stack from the bottom up. But along the way, it makes us even more referential to see those who have made those choices.

But why are we so excited to see a company like Brex that has made that choice and live to tell about it. When you have your own tech stack, the flexibility that you have, the control of your own destiny, in a world where the world is moving so fast, the need to adapt, the need to innovate. When you have your own vertically integrated tech stack, that is a very special thing. Otherwise, one is reliant on the road map of your partners along the way. But the -- also the cybersecurity associated with having your own tech stack and the ability to stand on the shoulders of that stack and now add other business vectors and opportunities, it's really been the quest of our company and now to be able to take Brex with their vertically integrated tech stack and combine it into Capital One with ours is especially a powerful combination.

So I'm just really pretty odd by the choices that Brex has made and what they have built.

So Rich, if I could shift over to the state of the Capital One consumer. In the fourth quarter, year-over-year stand-alone growth in outstandings was about 3.3%. And how would you peg consumer confidence at this point? Is there a telling difference by cohort? And do you think card outstanding growth could reaccelerate from that 3% to 0.3%?

The one word I would use to describe the consumer these days and everything we observe at Capital One, is the word stable. So if we -- let's just start with the sort of from a macro point of view, things despite all the noise in the economy, things are pretty stable. Unemployment inched up a little bit, but it's at relatively low levels on a historical basis. The job basically the -- well, there's a striking thing going on, and there's very little people losing -- very little of people losing their jobs and very little sort of new job creation. So it's at a stable but odd place in terms of the velocity of movement within it has slowed down. But wage growth, real wage growth is still positive. Spending is robust.

So on the other hand, obviously, inflation is still at levels that are not where the Fed wants them to be. So there are reasons to be concerned about the economy. But overall, I think it's a fairly stable economy that the consumer finds themselves in.

Now when we look at our portfolio, it is -- here is how I would summarize like on the credit card side, starting in mid-2024 on a seasonally adjusted basis, delinquencies continued to improve all the way until approximately August of 2025. And then ever since it's been flat. And that's why we see a very stable situation.

Now Erika, when you ask about how is it for different segments within our portfolio. A lot of people ask, how are people at the lower end, lower income, lower FICO, how are they doing relative to the rest? And I'd start with the principle that we've seen for years and years. The people at the lower end are usually first-in and first-out, when the economy changes. So when we go all the way back to the financial crisis, they were the canaries in the coal mine and then coming out, they actually healed strikingly well. We then went into COVID. They were the first -- they showed dramatic improvements. Of course, there was a lot of government stimulus and loan forbearance going on, but the most improving group was the sort of lower FICO, lower income.

Now when I say lower income within Capital One, that's not describing necessarily the lowest income in the economy. But anyway, then credit -- then after COVID, credit started normalizing and losses were going up and the very first group to level out and fully normalize was again at the lower end. And where we are right now in the context of what I would call stable overall in our portfolio is that each of the segments are doing pretty much the same. So just another sign of the stability that we see.

So given your statements on stability, is this growth level sort of what to expect for stand-alone?

Sorry, I didn't answer your question about growth, I'm so sorry. So if we think about credit card growth, just think about industry growth, there was a great shrinking that went on when -- during COVID, people pulled back, they stopped spending. And then there was this amazing growth of the card business for a few years on the other side of COVID. And then since then, it's been just settling down to a more modest growth rate. As you mentioned, our own -- our legacy Capital One business in the last quarter grew at I think, 3.3%. Our overall card business grew less than that because we've had the brownout of the Discover business, where Discover is actually has been shrinking.

So if I think about where things go from here, I think we're picking up a little steam in the legacy Capital One business, but also the shrinking continues on the Discover side. And we look forward to the brownout of Discover, hopefully, a changing direction. When Discover gets on our technology platform because we have always felt that they have an amazing franchise -- but they've stayed very much in sort of a single lane with respect to customer targeting. Capital One has been much broader up and down the credit spectrum.

And so we look forward to taking this amazing franchise of Discover and stretching both up and down the spectrum with their franchise and sort of leveraging our big marketing machine to hopefully reignite some growth there. So we look forward to that.

So just wanted to pivot. The company has emphasized expanding international acceptance as a critical focus to optimize the Discover network. And you've mentioned that this is more of a boots on the ground issue versus a tech issue to maybe unpack that approach for us.

So let's just pull way back, networks are an amazing -- it's an amazing thing to see a credit card or a debit card network. There aren't very many of them in the world. And the reason there aren't very many in the world is it's a very scale-driven business. And of course, it's a chicken and egg problem to ever get one started, and it's somewhat of a chicken and egg problem to get them growing.

So we've been amazed at how Discover with their modest volume was able to build essentially like nearly universal acceptance in the United States. And then strikingly, a solid acceptance internationally, but that international acceptance is still well short of what we would like it to be for heavy international travelers.

So what we've said from the time we announced the deal, and we're still very much going down this path, that when we think about the opportunity to move Capital One business onto the Discover network. Any quest we have runs through two things: building greater acceptance internationally; and secondly, investing more in the network brand. So these are -- those are two of the things in our list of things that were "leaning in" even more to invest in, we are doing those two things.

In the meantime, we have moved our full debit card portfolio. We just finished moving that onto the Discover network. And as we announced a couple of years ago, we will be moving some of our credit cards over onto the Discover network after the integration enables that to happen. And then we will continue to invest in the network to hopefully be able to move more business over time.

The way to build international acceptance is really a boots on the ground exercise. And Discover has done that just really for years with a ground game that includes the following things: partnering with merchant acquirers who have many, many relationships with ultimately end merchants, also partnering with big merchants themselves, then there is the opportunity to partner with local networks. And finally, the opportunity to partner with local issuers, where an issuer would in another country, would issue a Discover card. And all of those are ground games, and they just take time and they take investment. But the good thing is Discover has already demonstrated how to do it. We're just going to need to lean in and do more of it.

So speaking of investment, you referred to some of this opportunity that you see in front of you and how that could create near-term pressure on the efficiency ratio. So maybe first off, can you define what the baseline is for the efficiency ratio, given all of the moving pieces?

So if you think about the efficiency ratio sort of generally where it has been since we closed on the Discover deal. We expect -- the efficiency ratio will be pressured by our continuing investments in the near term, it would be pressured. We've also said to our earlier commentary that we expect coming out of the other side of the Discover integration, the earnings power will be pretty consistent with what we believed at the time of the announcement.

But the message we have though is that we just see a lot of investment opportunities. Many of them are enabled by years of investing in our technology transformation. And as we move up the tech stack, those opportunities are accelerating, but they require investment, then also some of our additional investment opportunities are coming from Discover itself and also now from Brex.

So let's pivot to the synergy opportunities from the Discover deal. Can you give us an update on the $2.5 billion combined revenue and expense synergies?

I'll take that one, Eric. The integration is going exceptionally well, and we're very much on track to achieve the $2.5 billion by the second quarter of '27. So the 2-year integration window that we had said at the time of the announcement, if I unpack that into the two big drivers, one being the revenue synergies, as Rich mentioned a couple of minutes ago, that is predominantly driven by the debit conversion, and we've essentially completed the debit conversion shipping of cards. It takes a little bit of time for the spend to fully ramp up but a very meaningful portion of the revenue synergies were actually in the fourth quarter results. We expect it to be the debit portion of it 100% by the second quarter of this year.

On the expense side, that is going to be much more backloaded. We need to merge people and processes and technology and decommission applications. And so we expect that to be much closer to the back end of the 2-year integration window. But overall, again, very much on track, and we feel just as excited today, maybe even more so about the strategic and financial benefits of the deal. And achieving the synergies are a really important part of that.

So I think what was potentially a little bit lost on the call because of the Brex announcement, it was your statement that you plan to originate Capital One cards on the Discover network, and migrate existing cards early next year, you mentioned the integration. What kind of cards do you plan to migrate? And what kind of spending volume does that typically represent of your combined total?

So we announced at the time of the deal that we plan to move a total of $175 billion of spend between debit and credit as sort of the initial wave of migration. The debit card move has already happened. Let me give you a little window into how we're thinking about credit cards. We've already said that we have work to do on the international acceptance, and we have work to do with respect to the network brand. So what we're doing is very much kind of sloping the work, if you will, and targeting the customers that really don't have international travel. And looking also where we -- where the economic -- or the economics are more favorable from -- moving from where we are on to the Discover network. Those economics, including on the Discover side, the vertical integration benefit of capturing the network margin.

So we take our portfolio and look at where we think there would be the least friction and sort of best economics with respect to moving and that's what we targeted at the beginning. And then in the meantime, we will do a bunch of things. We're going to keep investing in the network, keep -- will be investing in the network brand and then also doing a lot of testing of different -- taking different parts of our portfolio and different choices, testing different ways to put them on the network and the offers and various things, all of that informing our strategic opportunity down the road to see where and how much we can move our volume onto the network down the road.

Thank you for that. You mentioned the completion of the debit conversion. And of course, you're one of one in terms of being both an issuer and a network on the debit side. And I think that presents a pretty unique set of opportunities as someone that covers big banks. What kind of deposit offering do you think Capital One can offer on the back of this that could be a standout product?

So Eric, I think what -- to answer your question, what I'd like to do is just pull way up and talk about our journey on the retail banking side because it has been very different from most banks. So first of all, we weren't -- we were really a fintech, I think before the word was invented, we were kind of like the original fintech. And we went to great length to transform our company by buying banks to build an insured deposit balance sheet. And that was a defining moment for Capital One, and we were motivated to do that, first and foremost, by the need to get a balance sheet that we felt would be resilient at all times.

But a benefit of that, that we were very excited about, though, was the chance to pursue a business opportunity that we had always held out as the other best one beside credit cards. In the founding days, we said the best opportunities are credit cards and then retail banking, which itself is going to be transformed by technology. So what we set out to do is not to build a retail bank, just like the other banks down the street, but really a very different one, a digital-first bank, more what we call the bank of the future, which was digital first, but not only digital. We have built physical presence that includes not only the branches that we bought in our bank acquisitions, but now sort of showroom/cafes/branches, in pretty much all the major metropolitan areas in the U.S.

And we have digitally built full-service banking. So we're not talking about just attaching a debit card onto the side of a deposit. We're talking about taking all the services that we offer in a branch and digitizing every -- pretty much almost all of them, and then also creating ways that people can have access to cash nationally through ATMs and through stores and so on. So this has been the full-service digital-first retail bank of the future that we have been building.

It was designed to be lower cost, which it is than regular retail banking with a branch on every corner. And what we've done is to take the cost savings that we get in this leaner economic model and pass it on to consumers in the form of a really pretty electrifying offer, no fees, no minimums and no overdraft fees. And that is a value proposition that is not matched in the marketplace by the major banks. It has been a pretty lean way to make a living because obviously, we have taken out quite a bit of the revenue in the retail banking model.

Now with the Discover acquisition that adds some octane to our business model. But basically, we really already have what we think is the value proposition that's that we need that no fees, no minimums, no overdraft fee model. And because we don't have branches everywhere, how we grow that business is with marketing. And we're leaning hard into the marketing. You can see us on national TV, and we're leaning in even harder now.

You've talked about, and you just referred to this earlier, the growth brownout at Discover until fully integrated. What's the best guess in terms of the time frame between now and full integration? And what are your plans for the Discover brand?

So the Discover brownout, let's talk a little bit more about this thing that I call the Discover brownout. Discover ran into some credit challenges which were a contributing factor to their choice to sell to Capital One. And they dialed back very significantly. And that was great from a credit loss point of view, it led to some continuing sort of weakness on the growth side. Capital One has also dialed back a little bit more trimming around the edges with some of their higher balance revolver business, which we have philosophically tried to stay away from in our own legacy Capital One. So both of those have contributed to basically a negative growth rate of the Discover portfolio.

We are looking forward to turning around that growth and the timing of that doesn't come at a single moment. Basically, there are different aspects of the integration when they are complete, we're going to be able to lean in. But as a general matter, think of it as closer to the end of the integration that you'll see the sort of full benefit of our leaning back into Discover growth.

And maybe switching topics to capital return. You stressed during the earnings call that the Brex acquisition does not divert from your capital return plans and you bought back $2.5 billion in the fourth quarter. Is that the right quarterly cadence for investors to ballpark for 2026?

I think it will be helpful to just provide a little bit of historical context, Erika, in answering that question. If you go back to when we announced the Discover deal in February of '24 after that, Capital One slowed our repurchases to a de minimis amount and Discover completely shut off their repurchases. And so we were accreting capital to when we got to close in May of last year. And then after that, we needed a period to do the bottoms-up analysis to assess what our combined company long-term capital need is, which in the third quarter, we announced is 11%. And in conjunction with that, also announced a new $16 billion repurchase authorization. And so in that window, we continued to accrete capital and found ourselves at very healthy levels.

So in the fourth quarter, we upped our dividend by 33% to $0.80. And we, as you mentioned, increased our repurchase to $2.5 billion. So we ended the fourth quarter at 14.3% CET1, clearly very healthy capital levels. And our approach to repurchases is to look at a number of variables, growth opportunities, the macroeconomic environment, the regulatory environment, AOCI, and we have a lot of flexibility under SCB to increase and decrease the repurchase pace based on what we see in the environment around us at any point, and we're going to take advantage of that flexibility going forward.

And it's frozen until '27.

It is not frozen until October '27 now. Yes or at least the level of their SCB are our 11% though, we view as our long-term capital needs based on our evaluation, but the Fed's SCB level of us won't be enforced in the '26 CCAR.

Yes. So finally, Rich, as we wrap up, there's so much going on at your company, and it's very unique. And if you could just sort of distill it to one or two takeaways that you really want long-term investors to take away, particularly given the very unique opportunity set from both the Discover and Brex acquisitions.

Thank you, Erica. If we pull way up, let's just think about this journey -- so since our -- you think about all the other major banks have been around for 100 or a couple of hundred years. And so Capital One really was just created in the last few decades. And really, as we said, is really an original fintech. But because we were building a bank from scratch. We got a chance to do things differently than banks that have been around for 100 years. And it started with saying, let's really carefully choose what businesses we're in because we don't think all aspects of banking are attractive, and there are some parts of banking that are really attractive, but let's always really look at the marketplace, look at the structure of markets and of industries and then let's choose where to play. And then let's go all in.

So we chose to go after -- started with the credit card business. And we've obviously built a big card business, built an auto business. We built a retail banking business. But if you sort of stand back and say, why did we make the choices that we did? There are a couple of different ways that I would describe these choices. First of all, in terms of industry structure, credit cards and retail banking are just have amazing structure. And it's also right at the heart of consumer financial lives. So as we build a franchise there, then on top of that, we can build very attractive vectors of growth in things like shopping, like travel, like buying a car and very much opportunities to bring great solutions to businesses.

So we've come a long way in building that portfolio and Discover and Brex really enhance that. But let me describe our journey a little differently, same journey, but described differently. We believe since the founding days that payments were going to be the tip of the spear in the transformation of banking and financial services. And so we have always worked backwards from building a payments company. So again, it started with credit cards, and then you've got the payment side on the banking side. But then we were able to get the Discover network, which is an amazing piece in a payment franchise along comes the Brex opportunity, which on the small business and really businesses of all sizes is its own little tip of the spear in transforming how payments work on the business side.

But if you pull up we've ended up building a vertically integrated payments company with a very unique set of assets, but in every case, we have a business model that's at the forefront of how banking is changing, and we're leaning into that. And the other big thing I would use to describe Capital One is, while the founding battle cry of Capital One was build an information-based technology company that does banking, competing against banks who use technology and information, but it's not who they are. That was the founding battle cry, way back several decades ago.

When 2013 came, we pulled up and said, while the world views us as an information-based technology company. The truth is, our tech is now old school. It was new school, but now it's old school, and we're going to transform from the bottom of the tech stack up this company that we have built. And we have done that. That was in 2013. We're now in 2026, way down the path, but still not done with this extraordinary journey. But if I pull way up about what excites me about Capital One is we've chosen the businesses, where we think the winning is, we've built a business to be the tip of the spear of how the world is changing and a tech stack to be able to power the next chapters in this unlikely story.

Well, Rich, I think that's a perfect way to wrap up the conversation. Rich and Andrew, thank you so much for joining us.

Thank you.

Thanks so much, Erika.

Thank you.

Good day, and thank you for standing by. Welcome to the Capital One Q4 2025 Earnings Call. Please be advised that today's conference is being recorded. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Jeff Norris, Senior Vice President of Finance. Please go ahead.

Thanks very much, Josh, and welcome, everyone. To access the live webcast of the call, please go to the Investors section of Capital One's website at capitalone.com. A copy of the earnings presentation, press release and financial supplement can also be found in the Investors section of Capital One's website, capitalone.com, by selecting financials and then quarterly earnings release.

With me this evening 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 this presentation that summarizes our fourth quarter 2025 results.

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's website and filed with the SEC.

With that, I'll turn the call over to Mr. Young. Andrew?

Thanks, Jeff, and good afternoon, everyone. Let me begin by saying that we are incredibly excited to announce that we have entered into a definitive agreement to acquire Brex. Rich will talk more about the Brex acquisition in a moment.

I'll start tonight's presentation by covering the highlights of our fourth quarter results on Slide 3. In the fourth quarter, Capital One earned $2.1 billion or $3.26 in per diluted common share. For the full year, Capital One earned $2.5 billion or $4.03 per share.

We completed the sale of the $8.8 billion Discover home loans portfolio in the quarter. After refining our preliminary purchase accounting estimates, the proceeds resulted in a net gain on sale of $483 million, which is reported in the results for discontinued operations. You can find the revised Discover purchase consideration walk and amortization schedules in the appendix of tonight's presentations.

Net of the home loan sales and the other adjusting items, fourth quarter earnings per share were $3.86. Full year adjusted earnings per share were $19.61. We also had 2 notable items in the quarter. million of accelerated philanthropy contributions and $37 million of pension termination expense. Relative to the prior quarter, fourth quarter revenue increased about 1% and noninterest expense increased 13%.

Pre-provision earnings declined 12% or 10% net of adjustments. Our provision for credit losses was $4.1 billion in the quarter, an increase of about $1.4 billion relative to the third quarter. The increase was driven by an allowance build of $302 million in the quarter versus last quarter's release as well as a $360 million increase in net charge-offs.

Turning to Slide 4. I'll now cover the allowance in greater detail. The $302 million allowance build in the quarter brought the allowance balance to $23.4 billion. Our total portfolio coverage ratio decreased 5 basis points and now stands at 5.16%.

I'll cover the drivers of the changes in allowance and coverage ratio by segment. on Slide 5. In our Domestic Card segment, our coverage ratio declined by 11 basis points and now stands at 7.17%. The $335 million allowance build was largely driven by loan growth in the quarter. The allowance balance in our Consumer Banking segment was largely flat at $1.9 billion. Growth in the auto business was largely offset by continued observed credit favorability. The coverage ratio ended the quarter at 2.23%, 3 basis points lower than the prior quarter.

And finally, in our Commercial Banking segment, we released $47 million of allowance. The allowance release was largely driven by charge-offs in the quarter. The commercial banking coverage ratio declined 6 basis points and now stands at 1.63%.

Turning to Page 6. I'll now discuss liquidity. Total liquidity reserves ended the fourth quarter at about $144 billion, up modestly from the prior quarter. Our preliminary average liquidity coverage ratio increased to 173% in the quarter, driven by higher average cash and lower net outflows.

Turning to Page 7, I'll cover our net interest margin. Our fourth quarter net interest margin was 8.26%, 10 basis points lower than the prior quarter. The decline was driven by lower asset yields and a higher cash balance as the impact of the sale of the Discover Home Loans portfolio more than offset the typical seasonal decline in cash.

Turning to Slide 8. I will end by discussing our capital position. Our common equity Tier 1 capital ratio ended the quarter at 14.3%, approximately 10 basis points lower than the prior quarter. Quarterly earnings were more than offset by $2.5 billion in share repurchases and the increase in risk-weighted assets.

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

Thanks, Andrew. 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. In the fourth quarter, the combined domestic card business posted steady top line growth, strong margins and stable credit. Year-over-year purchase volume growth for the quarter was 39% and driven primarily, of course, by the addition of Discover purchase volume. Excluding Discover, year-over-year purchase volume growth was about 6.2%.

Ending loan balances increased 69% year-over-year, also largely as a result of adding Discover card loans. Excluding Discover, ending loans grew about 33% year-over-year. While competitive intensity remains high, we continue to see good traction across our legacy card business, with stronger growth results in our heavy spender franchise at the top of the marketplace.

The legacy Discover card loans continued to contract slightly and will likely continue to face near-term growth headwinds due to Discover prior credit policy cutbacks and some trimming around the edges that we're doing. We continue to see good opportunities to grow the Discover card business on the other side of our tech integration, where we can implement growth expansions powered by our unique technology and underwriting.

Revenue was up 58% from the fourth quarter of 2024, largely driven by the addition of Discover revenue. Excluding Discover, year-over-year revenue growth was about 6.2%, driven by underlying growth in purchase volume and loans.

Revenue margin for the quarter was steady at 17.3%. The domestic card charge-off rate for the fourth quarter was 4.93%, up 30 basis points from the prior quarter and down 113 basis points from a year ago.

Our domestic card delinquency rate was 3.99%, up 10 basis points from the prior quarter and down 54 basis points from a year ago. On a sequential quarter basis, both our charge-offs and delinquencies moved in line with normal seasonality. Our credit metrics appear to be settling out after almost a year of steady improvement.

Domestic Card noninterest expense was up 60% compared to the fourth quarter of 2020 for reflecting a full quarter of combined operations and purchase accounting amortization. Operating expense and marketing both increased year-over-year. Total company marketing expense in the quarter was about $1.9 billion, up 41% year-over-year.

Our choices in Domestic Card are the biggest driver of total company marketing. Compared to the fourth quarter of 2024, domestic card marketing in the quarter included the addition of Discover marketing, higher media spend and increased investment in premium benefits and differentiated customer experiences. Our marketing continues to deliver strong new account originations and to build an enduring franchise with heavy spenders at the top of the market.

Slide 12 shows fourth quarter results in our Consumer Banking business. Global payment network transaction volume for the quarter was about $175 billion. Auto originations were up 8% from the prior year quarter. Increased competitor activity in the quarter drove a slowdown in our originations growth. but we continue to be in a strong position to pursue resilient growth in the current marketplace.

Consumer Banking ending loan balances increased $6.7 billion or about 9% year-over-year. Average loans were also up 9%. Compared to the year ago quarter, ending in average consumer deposits grew about 33% driven largely by the addition of Discover deposits. Looking through the Discover impact our digital-first national consumer banking business continues to grow and gain traction.

Consumer Banking revenue for the quarter was up about 36% year-over-year, driven predominantly by the full quarter of Discover operations as well as discover revenue synergies and growth in auto loans. Noninterest expense was up about compared to the fourth quarter of 2024, driven largely by the full quarter of Discover as well as higher marketing to drive growth in our national consumer banking business. increased auto originations and continued technology investments.

The auto charge-off rate for the quarter was 1.82%, down 50 basis points year-over-year and up 28 basis points from the third quarter, in line with expected seasonality. Auto charge-offs have been stable near pre-pandemic levels for the past year. The auto delinquency rate increased seasonally in the quarter, up 24 basis points to 5.23%. On a year-over-year basis, our auto delinquencies improved by 72 basis points.

Slide 13 shows fourth quarter results for our Commercial Banking business. Compared to the linked quarter, both ending and average loan balances were flat. Ending deposits were up about 4% from the linked quarter. Average deposits were up 5%. The Commercial Banking annualized net charge-off rate for the fourth quarter increased 22 basis points from the sequential quarter to 0.43%. The commercial criticized performing loan rate was 4.68%, down 45 basis points compared to the linked quarter. The criticized nonperforming loan rate was down 3 basis points to 1.36%.

In closing, fourth quarter results continued to reflect solid top line growth and strong and stable credit performance. continuing capital generation and our strong balance sheet powered increased share repurchases of $2.5 billion in the quarter. and we made expected progress on Discover integration and synergies in the quarter. We remain on track to deliver the expected synergies.

2025 was a seminal year for Capital One. In addition to delivering strong performance across our businesses, we completed the acquisition of Discover, a singular transaction that's delivering near-term synergies and unlocking significant strategic opportunity and upside over the long term. Our 2025 performance was enabled by years of strategic preparation and our choice to consistently invest to sustain long-term growth and returns. And these same choices put us in a strong position going forward. As we enter 2026, I'm struck by the number and quality of the opportunities we have before us.

We've been investing in many of our opportunities for years, like building our heavy spender franchise with consumers and small businesses at the top of the credit card marketplace, building a national franchise of primary banking relationships in our retail banking business and building a modern technology and data infrastructure. And as we continue to build on foundational tech investments to migrate up the tech stack, we're generating new growth opportunities like Capital One Travel, Capital One Shopping and Auto Navigator. Our tech stack was built from the outset working backwards from the AI revolution, and we are now building AI solutions across our businesses.

Many of our opportunities are enhanced by the Discover acquisition, which, of course, also brings the new opportunity to grow and scale our own global payments network. To capitalize on these opportunities at this special moment, we need to make significant and sustained investments, and we are leaning into them.

Tonight, I'm excited to announce our agreement to acquire Brex for a combination of stock and cash totaling $5.15 billion. We've included slides in the earnings presentation appendix that summarize key aspects of the transaction. Brex is a pioneer in the dynamically changing business payment space, with industry-leading technology and world-class talent. Acquiring Brex accelerates a journey we've been on since our founding days, the quest to build a banking and payments company that's positioned to win where the world is going.

The transaction will create purchase accounting impacts that will need to help investors navigate. Importantly, we expect Brex to have no impact on the Discover integration or expected synergies. And the total consideration for the Brex acquisition is around 3.5% of Capital One's market capitalization. So it doesn't change the expected pace or magnitude of our quarterly share repurchases. And perhaps most importantly, we still expect our earnings power on the other side of the Discover integration to be consistent with what we expected at the time we announced the Discover deal, inclusive of Brex.

And now we'll be happy to answer your questions. Jeff?

Thanks, Rich. We'll now start the Q&A session. As a courtesy to other investors and analysts who may wish to ask a question. Please limit yourself to 1 question plus a single follow-up. If you have follow-up questions after the Q&A session, you can get in touch with the Investor Relations team, and we will be available to answer them for you. Josh, please start the Q&A session. .

[Operator Instructions] Our first question comes from Sanjay Sakhrani with KBW.

I want to talk a little bit about the Brex acquisition first. Rich, could you just talk a little bit about the strategic value of adding this capability. I see how it could really enhance sort of your platform in the small business space, especially with the network. But maybe you could just talk a little bit about how you see it coming together over time?

Yes. Thank you. Let me just kind of pull up here and talk about the opportunity and Brex holistically. Acquiring Brex builds on and accelerates the journey we've been on since our founding days. It is the quest to build a banking and payments company that's positioned to win where the world is going. We were the original fintech years before that term was coined. And we grew by carefully choosing businesses with attractive industry structures that are at the heart of consumers' financial lives. And also that we're ripe for transformation by technology and data.

As a result, we aren't in all the businesses that other banks are in. We have focused on a select set of businesses that have relevant scale in the competitive marketplace and which fit together synergistically. A central part of that envelope of activities has been payments. From the founding of the company, we have believed that payments will be the tip of the spear in the transformation of banking and financial services.

Over time, we built a payments company encompassing credit cards and banking across consumers and businesses and recently added one of the nation's only payment networks. Business payments have been a growing part of our strategy and investment agenda. We have built the nation's third largest small business credit card franchise, and we have been investing to grow our small business bank. Our announcement today represents an important step change towards our business payments destination in a broader marketplace that we believe is ripe for reinvention.

Let's talk about what's happening in the business payments marketplace. The credit card is an important piece of a bigger customer need. For decades, businesses of all sizes have faced chronic pain points when dealing with payments, including collecting hundreds or thousands of invoices, deciphering what payment vehicles or platforms to use dealing with approvals, expense budgets, spending policies, booking travel and tracking employee T&E spending.

And after all of that, businesses need to reconcile and connect all these transactions with accounting and reporting systems. It's often manual error prone and very time-consuming. I don't know a single business owner who went into business because they were really passionate about managing the complexity of spending and payments. solutions and tools to help businesses address these issues have been piecemeal. Banks offer business credit cards and bill pay features. Software companies offer accounts payable and expense management tools.

While these solutions are valuable, they only address pieces of the pain and are not integrated or comprehensive. Many are built on legacy technology. The pain points remain, and so does the opportunity to provide a truly integrated modern solution. Brex was the pioneer of that modern solution. In 2017, Brex invented the integrated combination of business credit cards, spend management software and banking together in a single platform.

They totally changed the game by delivering breakthrough experiences like customizable credit card limits and controls, automated expense receipt capture real-time blocks for out-of-policy spend reconciling spend data with internal budgeting catching payment fraud and errors by matching invoice data to purchase orders and enabling businesses to close their books effortlessly through real-time ERP integrations.

Brex has grown rapidly with companies from startups to large enterprises. Some of the world's most tech-forward companies use Brex today, including Anthropic, Robin Hood, TikTok, Coinbase, Scale AI, Toast, CrowdStrike, Cloudflare, and DoorDash. Brexit's heritage began with tech companies, but their solutions are equally valuable to all companies. Over the last 2 years, 60% of their originations have been to nontech companies.

Business cards represent approximately $2 trillion in purchase volume split roughly between corporate liability, where the business entity is responsible for making payments on the card and personal liability where the small business owner is personally responsible for making payments on the card. And that latter space, the personal liability card is where we primarily play today.

Collectively, this business card market is growing at about 9% annually as business payments continue the secular migration from cash and checks to digital payments. And companies like Brex have grown even faster. Brex is taking share from banks and software providers alike. The integrated platform solution they pioneered redefines and expands the market opportunity beyond credit cards to business payments, banking and spend management software.

Brex has been a beacon for us and we have admired them from afar. As we've gotten closer, we've been even more struck by what they have built. The Brex team has amazing talent. They built a full modern tech stack from the bottom up. Their card and banking businesses run on an in-house fully modern core, they're 100% in the cloud. While most fintechs we've seen through the years, leverage third-party technology solutions to get there faster, Brex has taken the more difficult and rarest of journeys for fintech. They've invested in a modern technology infrastructure and data ecosystem that's built to last.

And it powers remarkable capabilities. On the shoulders of their technology investments, Brex was able to rapidly develop and launch innovative solutions for a wide range of customers, from startups to large businesses with complex international needs. For example, Brex' technology enables them to issue business credit cards in local currencies in over 50 countries. This automated platform is the foundation for AI solutions on top of it.

Brex has built and deployed their own in-house AI agents for expense management and audit and are on the way to procurement, payments and accounting agents. Brex has grown from a startup into a thriving business with hundreds of millions of dollars in revenue and tens of thousands of customers. As we got to know this company, we kept asking ourselves, "How on earth did a startup pull off building a full tech stack from the bottom up?"

Brex has made the right choices, the hard choices to put themselves in a strong position to grow and win in the marketplace and to sustain success over the long term. Along the way, they realized that their exceptional growth opportunity was limited only by their scale and resources and that brought the 2 of us together.

Several Capital One strengths and capabilities are on the bull's eye of what Brex needs to fully capitalize on the growth opportunity. We have a compelling and ubiquitous brand. Brex has found that when they can get in the door with a potential customer, their success rate is impressive. We believe that our brand and our customer scale will open many more doors. Also, we can immediately leverage our marketing machine, bringing massive data scale, targeting models, extensive channels and a large customer base, to enhance the flow of prospects.

And Capital One's balance sheet, which is primarily funded by federally insured retail deposits is yet another enabler of growth, returns and resilience for Brex. And finally, we can bring additional investment capacity in marketing, sales force expansion, engineering and AI. The striking thing is most of these benefits from Capital One can be brought right away post close and do not need to wait for a fuller integration down the road. So we believe we can accelerate Brexit's growth almost from day 1.

As we integrate over time, there is more value to capture much of it coming from what Brex can bring to us. Brex brings exactly what Capital One needs to accelerate what we've been building. Brex opens up the opportunity in the corporate liability part of the marketplace where our presence is currently much smaller than it is in the personal liability space. Additionally, Capital One can leverage Brex' spend management tools to broaden and enhance our offerings for our existing personal liability card customers. And for our small business bank, which has been mostly a local offering in our branch footprint Brex gives us the capabilities to unlock a national small business banking opportunity.

Brex can also help to propel another important growth business at Capital One which is our travel business. Our travel portal is already on a strong growth trajectory, powered largely by our massive consumer franchise. As we integrate Brex and its spend management platform with our travel portal, businesses will be able to manage their corporate travel expenditures, payments and travel policies directly on the Capital One travel portal. This will open up the opportunity to grow business travel revenues as well as consumer travel.

Beyond the remarkably compatible technology and vision of where the world is going, we've also found amazing cultural alignment. We are both founder-led companies with a heritage of innovation and entrepreneurship. We've both disrupted the status quo to reimagine markets and drive transformation. And our strategic choices along the way have been guided by strikingly similar core tenets to invest to sustain growth and returns over the long term, to work backwards from where the world is going, to build from the bottom of the tech stack up and to search the world to find and hire great people and give them a chance to be great.

Pulling way up, acquiring Brex and joining forces to win in the business payments marketplace fits squarely into our more than 3-decade quest to build a banking and payments company. that's positioned to win where the world is going. It's a hand-in-glove fit that will accelerate and enhance the path that we were already on, propelling us to the frontier of business payments. Capital One and Brex have been on separate paths working toward the same business payments destination, an integrated platform that combines business payments, spend management and banking powered by a modern tech stack that's billed for and powered by AI. Combining our businesses and capabilities on to one shared path will accelerate the journey for both of us.

Thank you, Rich. That was a very interesting and appreciate it. Maybe just a follow-up question on the 10% credit card cap topic. Obviously, the industry has been quite vocal about the explicit and unintended consequences of it. I'm just curious to hear your view and if you've had any discussions with the administration on the issue.

We appreciate the energy to help consumers with affordability on many aspects of their spending. Let's talk about credit cards. Let me start by saying that we have built a company focused on providing Americans with products that are simple to understand and are accessible. All of our banking products have no minimum balance requirements and no fees, including no overdraft fees, and we offer many credit cards with no annual fees.

The credit card industry is intensely competitive as thousands of banks and credit unions compete directly based on product pricing and other features. Putting a price control in place, such as the proposed rate cap would not make credit more affordable, it would make credit much less available for consumers up and down the credit spectrum. This is far more than a subprime issue. This would happen because we and the industry would be compelled to immediately credit lines, restrict accounts, and limit new originations to a very small subset of consumers.

And consumers are the backbone of the American economy, 70% of GDP is driven by consumer spending and $6 trillion of that spending is on credit cards. A material contraction and available credit would likely cause multiple shocks throughout the economy as the lack of credit would result in greatly reduced consumer spending and would likely bring on a recession. And let's not forget about the impact of business is beyond lost sales. Other parts of the economy beyond banks are highly dependent on card programs from retailers to airlines to hotels.

In addition, credit cards are many consumers' initial entry point into building a credit history. A reduction in available credit could significantly impact their ability to get auto loans, mortgages and other forms of credit. And for many consumers, the credit card is their only access to credit. So while we can't predict what will happen next, we feel strongly that a cap on interest rates would catalyze a number of unintended consequences.

Next question. .

And our next question comes from Erika Najarian with UBS..

Rich, pulling up again, another point of discussion that was heavily debated in the past few weeks has been the Credit Card Competition Act. And given your acquisition of Discover, and what the opportunity set could be. Maybe help us think through what you think the consequences could be of passing CCCA? And also maybe the broader question is, as we think about the strategic imperatives over the next year or 2, where would you put increasing global acceptance?

Erika, interchange has been around for a long time because it's part of a well-established payments ecosystem in the United States that benefits both retailers and consumers alike. We believe that there is substantial competition in the payments industry already with banks like Capital One, taking a big portion of its interchange revenue and giving it to the consumer in the form of rewards. And that then stimulates consumer spending and the ecosystem thrives. So pulling up, we believe this is a system that is working well. I think government intervention in this marketplace in this manner may have unintended consequences that could harm market participants, including consumers.

Could you ask again your global acceptance question, Erika?

Yes. So I guess, I'm asking where on your strategic imperatives would increase in global acceptance rank as investors were thinking that if CCCA goes through given that you have a Discover network that you potentially could be a beneficiary as a second network on the card. But of course, the limitation currently would be global acceptance.

So Erika, as we have talked about since we announced the Discover deal, the network is a crown jewel in that acquisition. And when we looked at every strategic opportunity to leverage the network, every single one of them we found to capitalize on those opportunities had the same exact shared path. And that shared path was to raise international acceptance and to build the network brand. And so that is a path that we are already going down that path.

It's a long journey to build acceptance all over the world. And along the way, we are -- to use a phrase, we always use internally. We're sloping the work to put the highest emphasis on the places that Americans travel so we believe that this -- and so there are so many different types of opportunities that we have that all sort of need that same double set of solutions, and that's why we're investing in that. And that's -- and I'm struck. It's rare in business where every single thing that you hope to be down the road has the same shared path to get there. So it's why we're really leaning pretty hard into this network opportunity.

And our next question comes from Ryan Nash with Goldman Sachs.

So maybe putting aside all the macro stuff, we've spent the last few quarters talking about investing in business and can you maybe just talk a little bit about whether the acceleration that you've been speaking of has made its way into the results yet? What are some of the areas? And I guess, given the fears of rising efficiency, can you maybe just talk about whether or not you can manage it around these levels over the medium term, fully understand then that differ over any individual quarter?

So Ryan, yes, let me just pull up for a moment and reflect on your comment, your question about our investments, just to kind of reset the table here, as a result of years of strategic preparation, we have the wealth of opportunities today that put us in an advantageous position to grow and win in the marketplace as it continues to change at a breathtaking pace, and these investment areas include Discover.

And as we just talked about leaning into international acceptance and building the network brand. We are, of course, continue, as we have for many years to lean into the premium credit card space and there is just so much opportunity in building a franchise of heavy spenders. I do want to comment there that very clear that the biggest players in that space are leaning even harder into that, and they're investing. And so we are doing so as well.

I think the flip side of all that investment is it's going to be a higher hill for maybe other competitors to climb, but we're climbing that hill and seeing a lot of traction. In fact, our growth in our credit card business and purchase volume, the highest growth is at the very top of the market. In retail banking, for years, we've been building a national retail bank organically. We're the only major bank building such -- doing that organically that requires a lot of investment in marketing. And now with the Discover acquisition, we have continued opportunity in that space, and we're leaning pretty much even harder there.

As AI continues to transform the world, we, of course, are investing in AI and being on the top of the tech stack that we built AI has a really, I think, special especially high leverage at a company like Capital One. And in fact, as we have moved up the tech stack, we're investing in opportunities that sit on the tech stack, like Capital One shopping, Auto Navigator, our travel business. And now with Brex, we have a chance to massively accelerate and advance our journey with corporate liability, personal liability, the small business bank, as we talked about earlier.

So let me go back to your question about efficiency ratio. In recent quarters, we've talked about these opportunities, and we have indicated that collectively, these investments will put upward pressure on efficiency ratio in the near term, and we continue to lean into those. With the acquisition of Brex now, we have additional investments and they -- those investments we are making are directly in service of driving growth. But it's also the case that we already had investment dollars set aside for pursuing this market organically, which will be replaced by the Brex' investment. So as there is some offset there. And we've also tightened up in some other areas.

But the net effect of all these investments across Capital One in pursuit of opportunities that collectively are really as good as I've seen in my journey of funding Capital One and being there for all these years. The net effect will be some upward pressure on efficiency ratio in the near term. Now importantly, we still expect our earnings power on the other side of the Discover integration to be consistent with what we expected at the time we announced the Discover deal, inclusive of Brex.

Our next question comes from Terry Ma with Barclays.

Maybe a question for Rich. Credit card delinquencies are now down year-over-year, 13, 14 months in a row, there's consumer stimulus in the form of tax refunds this brings. You highlighted some of the comments you made around the loan growth grown out. Maybe just help us tie all that together, just kind of talk about how you think about the outlook for consumer health and growth at Capital One? And any color you can provide on how long the brown out will kind of process for?

Okay. Great. Let me actually start with the brown out. So the brownout that we flagged in prior earnings calls, just to just to remind ourselves, what's driving that is, first of all, following Discover's credit expansion this in the '22 kind of time frame. They ran into some issues discovered dialed back their origination programs by a fair amount toward the end of 2023 and have continued to run it at a scaled-back level. As a result, they've had some pretty darn good credit, but the flip side of that is they put a whole bunch of vintages in place that are just smaller than prior vintages were and that just has an extended impact on the growth in. So that's kind of factor number one.

We also, as we -- and this is not surprising that we find this. But as we look over Discover's shoulders at their credit policy, and things that are now being implemented fully still on the Discovery system. We are doing some trimming on the margins of their origination in areas, particularly around higher balance revolvers, which, as we've said for way more than a decade, that's an area that we probably relative to the industry are more trying to avoid. So there's been some trimming around the edges that we're adding on top of their dial back that they did that collectively leads to this brown out that we flag.

Now that is -- everything we're talking about is temporary in nature. And the thing that will change that trajectory is getting on the other side of the tech integration of Discover into Capital One because now when Discover is entirely on our platforms, and we're able to leverage all of our data credit policies, the marketing machine of Capital One connected to the technology and everything else, we look forward to being able to resume growth. And we've already identified a bunch of growth opportunities that are natural for Discovery is really quite remarkable brand and business position. So we look forward to that on the other side. So that's the brown out, but that will that will continue until the card integration is done.

Let me turn to your other question on the health of the consumer. The U.S. consumer and the overall macro economy remain resilient. The unemployment rate inched up in 2025, but remains pretty low by historical standards. Layoffs and new unemployment claims are low and stable. Wages are still growing in real terms and consumer spending remains robust. Debt servicing burdens remain stable and close to prepandemic levels. Because of the budget bill implemented last summer, consumers will see larger tax refunds this year than last year. Tax withholdings will also be lower in 2026.

I'll come back in a moment to tax refunds, but let me keep going for a moment. But I do think we're still in a period of elevated economic uncertainty. Inflation remains above the Fed's target, job creation slowed significantly in the second half of 2025. Some consumers are feeling pressure from the cumulative effects of price inflation, higher interest rates. And many of those relying on the Affordable Care Act for their health insurance, we'll see their premiums going higher quite sharply in some cases. And so I think these uncertainties will hang over the economy and hang over the choices that consumers make.

Let me make a comment before I turn to our individual -- our portfolio, just to comment on tax refunds. Tax refunds are an important driver of the seasonal improvements in delinquent payments that we see around March and April of each year in both card and auto. In 2026, the total amount of tax refunds is expected to be higher than in 2025 because some of the tax cuts in the Big Beautiful Bill last summer were made effective retroactively to the start of 2025. Tax withholdings will also be lower in 2026.

So all else equal, higher tax refunds will likely be a good guy for consumer credit, especially -- and I think this is a really important point, especially when they are higher than consumers expect. But we believe that this will probably be a onetime benefit because tax withholdings will be lower in 2026. So we won't see another round of higher refunds in 2027. And I think consumers will set their expectations. Hopefully, not counting on too big refund coming in 2027. So I think we're looking at a onetime effect that is our view there.

Let me turn to our own portfolio. We talked about the improvement in our charge-off rate, has steadily improved really through most of 2025. And in fact, in the fourth quarter, it was 113 basis points lower than a year ago. And our front book of new originations continues to perform well. As we look ahead, delinquencies remain the best leading indicator of credit performance. Our card delinquencies improved steadily beginning in the second half of 2024 all the way through the first half of 2025. But we've now seen 2 quarters in which they've moved more or less in line with normal seasonality.

This has been true both in our legacy domestic card portfolio and for Discover and it suggests that credit is settling out after almost a year of steady improvement. In auto, our credit performance has been strong and stable over the past year with losses back near pre-pandemic levels. But I think auto is also -- both auto and card are benefited by choices we made several years ago to normalize for the great inflation in credit scores that I think has been a surprise to the industry. But pulling way up, we think the health of the overall macro economy and of the U.S. consumer, it's really in a pretty good place. And as a result, we continue to lean into our growth opportunities.

Next question, please. .

Our next question comes from John Pancari with Evercore.

Wondered if you could provide some additional detail just around the financial impacts of the Brex deal. Could you possibly share some details on the tangible book dilution and earnings accretion and maybe book value earn back from the transaction? And then just separately, I totally understand the merits of the transaction and the commercial capability addition to your product suite that it provides. But anything just around the timing, like why now pursue the deal at this point, just given the ongoing effort around the Discover integration.

John, why don't I first take your question about the metrics? Given the relative size of Brex to Capital One, we don't intend to provide additional metrics. We're providing the purchase price and the associated balance sheet marks and integration costs as we're intending to break those out in our financial statements over the coming quarters. So we're providing our current estimates now and will provide revised marks and the quarterly amortization schedule after close. And then I'll turn it to Rich to talk about your second question.

Yes. Thank you, John. To your question of why now, obviously, not long ago, we did the Discover deal. And we are well down the path of what I think is a very successful integration. We very carefully looked at the impact that doing a deal like this might have on the resources and anything related to the Discover acquisition, we took a very close look at that because obviously, that's just a paramount priority doing that acquisition well. And it turns out that for the most part, the business areas that are impacted in this integration are different from the ones primarily in the Discover integration.

Obviously, Discover One was really about pulling consumer business together. This is about pulling a business related businesses together. So we look long in the heart at this from a resources point of view, and we concluded that we think we can do both of these in parallel. And we're very comfortable about that. Then the other aspect is sort of financially, I talked a little bit earlier. The we will lean in just in terms of sort of ongoing investment. We will lean into the growth opportunity for Brex. That's an important reason that Capital One -- it's important value that Capital One could add in the near term relative to sort of where they were on a stand-alone basis. So it's is the synergy that can happen be created right away even without the full integration.

It does -- financially, it does offset spending that we were otherwise doing investing in similar kinds of solutions at Capital One. And also around the company, we've really just managing things tightly. So that we're in a -- so that as we've talked about for the last few quarters, we're in the same position that we were before relative to the earnings power coming out the other side of the Discover integration. So even as we lean more into the Brex investment, our view of the earnings power out the other side is the same view that we've had all along.

Our next question comes from Richard Shane with JPMorgan.

Look, one of the unique assets of Capital One, I think this is the seventh acquisition I can name you have a management team that has a very long-term vision in terms of how you build this business. Rich, when we think about your target efficiency ratios, and sort of that 2027 guide, there's always something to invest in with Capital One. And that's part of the secret sauce here. Do you think that, that efficiency ratio will be because you grow the revenues into it? Or do you actually think we will see a peak in expenses that will recede?

Well, thank you, Rick. I think just pulling up for a moment on our philosophy and maybe distinguish it from -- I think a number of banks as they drive efficiency, first and foremost, I do it by really trying to dial back and manage expenses extremely tightly we try to manage expenses very carefully too. But our efficiency journey, which we've said is an important part of the value proposition for Capital One for investors is, first and foremost, the engine of that is growth. revenue growth.

And so what we have done since the founding of the company is to absolutely focused on where are the structurally good opportunities in the marketplace, make sure that we understand where the not good opportunities are and avoid those even if other banks are chasing them. But then where we see the good structural opportunities we work backwards from how can we capitalize on those? And one of the terms that I've used, you probably remember, Rick, is to have a growth platform and acquisitions that we have tended to do have been acquisitions of growth platforms to enable us to build a business. And so that we don't have to go from sort of 0 to 1 in a sense we can start it beyond that and then really leverage the opportunity.

And this acquisition of Brex is a classic case of that, it is right in the heart of our business strategy as a company, which is all about payments for both consumers and businesses. It is a growth platform, which interestingly, there's way, as I talked about, we can -- we have things that we bring that can enhance Brex's growth significantly and early on. And then Brex actually brings things that can strengthen our growth platforms across small business card, our small business bank and our travel business.

So we are, in many ways, the company that does invest. We've been investing since the founding of the company. But always, it is -- these are things that have gone along with that. From founding days, we built a rigorous horizontal accounting framework to rigorously measure before, during and after investments to see that they actually pay off. We're extremely focused on net present value. Despite announcing this acquisition today, we are built as an organic growth company.

So if I pull up on all of those, we are -- what I've been sharing with investors over the last number of quarters. is to say on a calibration across decades of building Capital One. I see more opportunities, which will drive future revenues that I've seen in some ways ever, but certainly the number and diversity of those. Why are they there? Because we built a technology platform from the bottom of the tech stack up. And as we go to the top of the platform, we are in a position to capitalize on opportunities that I think other companies would not be.

Along the way, as these opportunities manifest we have chosen to lean into investing, which, as I have said, in the near term, that pressures efficiency ratio. But while we don't give specific efficiency ratio guidance, all of these investments are in service of driving future revenue growth, which is the engine for efficiency ratio improvement and value creation in the long term.

Next question, please. .

Our next question comes from Mihir Bhatia with Bank of America. .

I was wondering if you could provide us with an update on how the debit transition to Discover is going. Any learnings from that process as you think about which and when to transition the credit portfolios. And also just related to that, any initial thoughts on if there's an opportunity to move Brex cards over to Discover?

Yes. Mihir, as we shared at the announcement of the deal, we are moving all of our debit business to the Discover debit network to take full advantage of the synergies that come from vertical integration. We've been migrating our debit cardholders to the Discover network since August of last year, and we are now nearly complete with our conversion. You're starting to see the network synergies and our reported results, and you will see more of those results as we complete the debit conversion.

On the credit card side, we plan to do a lot of testing. And by the middle of this year, we will be able to originate Capital One credit cards on the Discover network early next year, we will be able to move some existing credit cards to the Discover network. Now longer term, we will work on building Discover's international acceptance and strengthening the network brand, which will open the doors for us to have an opportunity to move more business over there.

You asked about the learnings. We are really pleased with what we've seen in the conversion in terms of the smoothness of the conversion, the customer take-up on the debit cards and really pretty much all aspects of this have gone as well or maybe a little better than we had expected. But we know that choices to move cards and everything along with that is it's a really, really important strategic choice and a very, very important thing from a customer experience point of view, which is why we have a big testing agenda in the near term and why we also are working so hard to make sure that we continue to raise the international acceptance and also create a lot of technology-based solutions to make it easier for consumers to move their cards.

Next question, please. .

Our next question comes from Moshe Orenbuch with T.D. Cowen.

I've got like one sort of housekeeping type thing and then a follow-up. The housekeeping question, Andrew, I appreciate that Brex is small relative to Cap One, but could you size for us the size of the small business card portfolio at Capital and the small business banking and perhaps maybe revenues from the travel portal that you would expect to affect, if you will, through the Brex acquisition?

Yes. Moshe, appreciate the interest there, but those just aren't metrics that we break out in our reporting, and we're not intending to do so at this point either.

Just Moshe, just to sort of just generally give you -- as I mentioned earlier, small business card portfolio is in purchase volume on the personal liability in the personal liability marketplace. Our small business bank is a still mostly a local bank that was built on the shoulders of the local banks that we bought, which are in about 18% of the U.S. We have strategically for quite a while, Moshe felt that the tremendously successful building of our national retail bank in that there's a parallel opportunity to go national and build our small business digital for small business bank, leveraging the capabilities that we now have in the small business space.

But what we have lacked in many ways is the business tech platform. on which to build that. We didn't have enough scale in our small business, bank business to -- we didn't feel that we had the scale to build the sort of tech stack fully necessary for that, but that comes along with the Brex acquisition, so it gives us a chance now to have shoulders to stand on to accelerate the growth of our small business bank.

Great. And Rich, you had talked about broad number of opportunities. Could you just talk a little bit about how both the Discover acquisition and the Brex acquisition might change kind of the priorities? And where -- what are the -- could you just talk a little bit about what the highest priorities in those investment opportunities are?

Discover and Brex expand the number of opportunities. And we already had a pretty good list of opportunities that -- it was not an accident. We had the opportunities we've had at legacy Capital One because we were working backwards from those opportunities for years as part of the benefit of transforming our technology platform. So along came Discover and that brings the network opportunity but also the network investments that we've talked about and along comes bricks and that brings the very near in growth opportunities, but the investments required that go along with that.

So this is -- but with respect to the opportunities that we have listed that I listed earlier, each of those on a stand-alone basis, our standard is, Moshe is this a value creation opportunity. And we look at the horizontal economics of this, we say, what is the payoff down the road and what does it take to get there and so on. And the other ones I've listed, we are very compelled by those opportunities and are continuing to pursue them. The opportunity at the top of the market, the National Retail Bank, which even got an extra benefit from the Discover deal.

The the emerging businesses of Capital One Shopping Auto Navigator on the auto side, our travel business, these are businesses that, on a stand-alone basis, we are very compelled by the opportunity. So what we are working to do is to try to really manage the company efficiently even as we pursue a large list of opportunities. But we are -- these opportunities are opportunities that are opportunities in a particular moment. And that's why we're investing quite a bit to pursue them.

Our next question comes from Don Fandetti with Wells Fargo.

Rich, as I look around at the card industry, I mean, it seems like every big bank is trying to grow market share, leaning in regional, fintechs. And I was just curious like how you think this plays out if the industry is going to remain disciplined? And do you think you can grow your card loans in that type of environment? Or could you consider sort of zagging and slowing things down a little?

Thanks, Don. I think it is pretty much a certainty that every time the economy is in a pretty good place, the card industry will have more competition and that competition is really coming from the big players. That competition is coming from fintechs and it is striking how much the card players are leaning into things. You can see it by turning on TV and see the advertisements that are being made, you can look at the products that people are refreshing at the very top of the market, and you can look at some of the early spend bonuses and other things going on. So it is clear. that the existing players and the fintechs coming from the side all believe that there is a good opportunity here.

But I want to give you, Don, a calibration that I shared with you from 30-some years of building Capital One. I feel this is a rational marketplace. It's definitely striking to see how much competitors are leaning in. But when I look at the choices they're making when I look at the thing I fear the most is reckless credit. I don't see that. I think that this is a market with opportunity for someone like Capital One. But we have our eyes open with respect to the competition. I think the investment, the table stakes of investment, to your point, I think, are higher than they might be at other times. But all of that, notwithstanding, I really believe this is a good marketplace and we are leaning in to capture the opportunities.

Next question, please. .

Our next question comes from Jeff Adelson with Morgan Stanley.

Rich, I appreciate all the color on the Brex' acquisition. I'm also just curious how you're thinking about specific benefits and synergies to your commercial banking franchise. I mean is this -- as you start to bring everything under one roof for your business customers, is this really something that could meaningfully accelerate your growth of lending and deposits within that segment as you maybe attract more of those customers or just you're able to do more for those customers under one roof over time?

So yes, let me -- Jeff, I really appreciate that question. I can't remember an acquisition we've done in our history that has had so many connection points to our own business model and the ability to lift so many different parts of the company. And you mentioned one that I didn't even list in my list, which was a benefit to the commercial business. But we have a treasury management business, like all major commercial banks do. And there's a lot of technology that goes into treasury management products.

Our TM team has looked closely at this extraordinary tech stack that Brex has built and believes that there is an opportunity over time to build on that tech stack. I didn't mention it because I think it's going to be a down the road kind of thing. There's going to be 2 really kind of pulled together an integrated treasury management capability is that was just less of a close-in opportunity. But you've seen me talk over the years. How many times do I talk about building a tech stack from the bottom of the tech stack up?

That is what we've done at Capital One. It is a very long and lonely journey to do it. Most companies build from the top of the tech stack down, but the benefits are multiplicative when you have a tech stack that is modern right from the core and moving up from there. What's extraordinary here is that on the business side of the house, we are bringing in a modern tech stack that has the ability to lift not only business cards but also all aspects of the business side of Capital One.

We've spent so much of our time collectively with investors talking about the consumer side of the house, that's a different tech stack. I mean, well, there's a lot of shared aspects about it, but consumer core is a different thing than commercial. And so I think that Brex is really bringing an opportunity to take some of our activities, particularly those that were lower scale at Capital One and have the opportunity to accelerate their journey.

Our next question comes from John Hecht with Jefferies.

First one is you guys have always gone after a barbell strategy where you're going after super prime and prime on one side and the non-prime on the other. You've generally had a mix in a specific range, but I'm wondering whether it's credit card or auto now, do you guys -- are you leaning into any cohorts in that way or leaning away from? Or is the mix expected to be relatively stable here?

John, thanks for your question. The barbell term, I think, was, in many ways, sort of an investor term over the years to try to, from a far sort of characterize what they saw at Capital One because we had clearly pioneered how to safely lend to mainstream America, including subprime. And also that we always were pushing right at the top of the market going after heavy spenders. I don't think it ever was as much of a barbell as sort of urban legend would have it. But I do want to say even way before the Discover acquisition, we were a full spectrum lender, including a significant player right in the middle of the market in prime.

The one thing that differentiated our strategy in prime from others is that we were more cautious on the prime revolver especially the more high-balance revolver, and so we have always played just a little more cautiously in that space. But we have played the credit spectrum and in fact, we want to -- with our customers, for example, our customers, our mainstream America customers to grow them to graduate them and move them up to being ultimately heavy spenders.

When Discover joined Capital One, as we said, this is striking, while Capital One has been a full spectrum lender, Discover has been a very specialized and focused player more in the prime part of the marketplace. We've now studied their underwriting. We think they underwrite very safely. We are trimming around the edges with our -- we have a little less appetite for the higher balance revolver than they and the industry do. So that's some of the brown out we've talked about. But Discover is will fit right in with our full spectrum strategy.

I do want to make a comment on the auto side. We are absolutely a full-spectrum player on the auto side. And in fact, one of the biggest players in the industry, in subprime, in near prime and in prime.

Okay. And then a quick follow-up question. Andrew, I'm wondering, given the forward curve timing of quarter end and days in quarter and tax, the kind of tax refund situation. Can you just give us your perspective on kind of the cadence of seasonality and how it might affect NIM or can we look to the past as a good indication of that?

Yes, John, as you said, that there's seasonal fix that in most quarters, actually impact NIM. So I'll touch on that, and then I'll just talk a bit more structural about our level of NIM. So looking ahead to the first quarter, there are 2 seasonal effects, one, 2 fewer days in the quarter, which is roughly, I think, 18 basis points or so of a headwind to that quarterly rate.

And then the second is we are likely to have higher levels of lower-yielding cash because average cash levels just tend to be elevated in Q1 as a result of pay down of seasonal loan balances. We have the added effect this year of the cash proceeds from the home loan sale that are unlikely to come all the way down in the immediate term with respect to the tax effect. We'll have to see how consumers behave to Rich's earlier comment. So I think that's a little bit more of a wildcard.

Then more structurally, I'll point to a couple of things. One is deposit pricing often lags as Fed funds move. So we could see brief periods of pressure after Fed moves if we were to see them in the coming quarters. But over time, given the relatively neutral position of our balance sheet, that largely corrects itself. And then the only other thing that is going to impact the ambient level of NIM would just be the relative growth in different asset classes over time, impacting balance sheet mix. But other than that, I don't really foresee any structural things impacting the balance sheet. So it really will be much more of a seasonal effect as we look ahead to the coming quarters.

Next question, please.

Our next question comes from Robert Wildhack with Autonomous Research.

Rich, you mentioned a couple of times earlier that Brex's growth opportunity stand-alone was limited by scale. Can you just expand on that a little bit more? Were they lacking scale maybe on the lending side of things or more on the technology side or somewhere else? And then do you see as the more attractive growth opportunity for Brex with some of the larger enterprise clients, a number of whom you listed earlier or more in the SMB space?

Thank you, Robert. So let's talk about Brex for a minute. Almost all rapidly growing startups are constrained on investment dollars. And Brex has built an amazing company and has big aspirations for what they can be. And achieving those aspiration requires a lot of dollars and also a lot of other capabilities as well. And I think as I've gotten to know Pedro Franceschi, their amazing founder, CEO and Ben Gamel, their President and the extraordinary team that they have, it's very clear that they know they have a tiger by the tail. And I think they know they had opportunities to go raise more capital.

And they certainly weren't at all looking to go sell a company, but I think what captivated them about the unique opportunity of Capital One is that we, as a tech company ourself with a modern tech stack and the entrepreneurial heritage of having been an original fintech that we could be a unique opportunity to bring a lot more resources and capabilities to them while still enabling their dream to stay alive and the entrepreneurial spirit that sometimes, when one thinks about large companies, might otherwise be hard to maintain. But I think they were pretty excited about the ability to have our brand to open doors all over the place and not just open the doors, but also just for people to know that they're part of one of the biggest banks in America.

The sophisticated marketing machine the balance sheet of the bank and the capacity to invest in sales and in marketing and engineering, and AI. I think it really was an opportunity in their mind to accelerate the accelerate the growth, while still very much keeping the dream that is Brex, alive. And again, I think that's something that's uniquely possible by pulling these 2 entrepreneurial companies together.

With respect to the customer base, I am really struck at, let's just pull way up and favor a couple of things. First of all, most times when one looks at a business in a marketplace and kind of say, well, who would have a need for something like this? The answer is just about every company in America, if not the world, has a need for this because every company has payables, expenses, and they got to manage all of the complexity of the ecosystem on the payment side of the business. And so and its need that has not been really filled in the marketplace with an integrated solution. So it starts with, wow, this thing could be attractive to companies all the way to really large ones.

So if you look at their journey, their journey was one of, in fact, over time, tapping into those. They started with start-ups, start-up tech companies, they built an incredible brand. And I think their customer base includes like 1/3 of tech companies. kind of thing. I don't -- that's not a statement I'm fully grounded. But let's just say it's -- they've had tremendous success with start-ups. But they also, on top of this amazing tech stack that they have built, we're able to build a lot more capabilities that then made their product attractive to middle market companies and in fact, pretty large middle market companies and companies that have business all over the world and their employees traveling all over the world.

So I believe that they are set up for success with small companies with medium-sized companies and, in fact, pretty large ones because their solution spans the needs of that broader range of customers and the elegance and simplicity of the solution make it something that small and large can implement.

And our final question comes from [ Saul Martinez ] with HSBC.

I wanted to follow up on John Pancari's question and I get that the deal is modest in size, and you don't want to give some of the financial metrics. But of the purchase price is allocated to goodwill. That's not a trivial amount on a $5 billion deal. And I suspect Brex is not profitable. And you can correct me if that is the wrong assumption to use here, you do have $950 million of transaction costs and incremental investments. Is it fair to say then that the deal at least initially will be EPS dilutive, intangible book dilutive, it's even at a modest amount, obviously overall value accretive to Capital One?

So in isolation, Brex will result in earnings dilution initially as we're buying a business with a growth rate that is multiples of industry growth rates. We believe this growth dynamic will lead to significant accretion over time.

Okay. All right. Fair enough. And I guess just a follow-up here is you mentioned you don't expect a change in the expected pace of your quarterly share repurchases, which was $2.5 billion. Is that -- I mean, is that a fair assumption? Or is that -- is it fair to think that, that's sort of a decent cadence for buybacks, at least as we stand here today?

Let me clarify the language a bit, which is we're saying that the Brex transaction itself we'll take down our capital by, I think, a little more than 40 basis points. So a meaningful amount, but certainly not enough to influence our thinking about near-term repurchases. So the point we were making is it's just not going to alter our approach to repurchases. And so we've said last quarter that our long-term needs given our current capital position, you saw this quarter, we accelerated our returns upping the repurchases to the $2.5 billion. You cited increased our dividend 33% to $0.80.

So with respect then to the pace of future buybacks, we're really going to look at a variety of things, just current and projected capital levels and our balance sheet growth opportunities, the economy, the regulatory environment. And it's not just a point estimate for those variables. We're going to think about a range of outcomes around them. But given all of that, we have healthy capital levels, we've got $14 billion of remaining authorization, and we've got flexibility under SCB. So we are going to take all of those things into consideration and manage our repurchases accordingly, but the Brex transaction itself is just not influencing our thinking about that plan base.

That concludes our Q&A session this evening, and I want to thank everybody for joining us on the conference call and for your continuing interest in Capital One. Have a great evening.

Thank you. This concludes today's conference call. Thank you for your participating. You may now disconnect.

Sorry, we're a minute or 2 late. We won't lose it on the back end. We're pleased to have Capital One joining us once again. It's been a busy year for Cap One, highlighted by the closing of the Discover acquisition in May. In addition, the company has continued to see improving credit despite an uncertain macro, and more recently began returning excess capital to shareholders. Here to tell us more about the story is Chairman and CEO, Rich Fairbank. Rich, welcome.

Thank you very much Ryan. Jeff Norris is going to join us here as well.

Chairman, chairperson, or chair is a...

My phone's AI picking up what you're saying.

Your AI defined what a Chairman is. I've always been wondering.

So Rich, Yes. So I think this is our 16th straight year doing this. And I think each year, we've started a similar way. I didn't have hair when we started. Let's maybe just start with the state of the consumer. Can you talk about what you're seeing from the consumer and how they're positioned as we move into '26?

Okay. Yes. Thank you, Ryan, and thanks, everybody, for being here, and thanks for those joining in on the webcast. It's always a highlight here, and I don't think I've missed one of these ever.

So the state of the consumer. I think the consumer is a source of strength in the economy. So let's kind of just tally up when we look at some of the economic metrics. Unemployment rate is inching up a little bit, but it's still relatively low. New unemployment claims are low and stable. The consumer debt burden is stable and only slightly above -- in other words, sort of debt servicing ratio, let's call it, is stable and just slightly higher than it was pre-pandemic. The on the -- and by the way, real wages continue to be positive.

Now on the other hand, I think it's striking new job growth is low and sort of declining. The inflation recently, the upward pressures there. So I think that there are things in different directions. But I think basically, still the consumer is in a pretty stable place and relative to sort of the entire economy, I think, is a source of strength. A couple of things we'll just have to just keep a look out for the -- this is more of a credit point, but the Affordable Care Act to the extent there is not a renewing of some of the subsidies there, I think you could see some pockets of pressure there.

On the other hand, the tax bill should probably bring some relief both in number of people and amount sort of in the tax refund season. So that's probably a good guy on the other side. If we pull way back, it's obvious there's quite a bit of uncertainty though, in the economy. So we are struck by the still sort of strength of the consumer, but the narrative is certainly surrounded by uncertainty in the economy.

Maybe just to bring that back to Capital One credit. You noted earnings that Credit Card performance was consistent with seasonality in the recent months. Maybe just talk about how you're thinking about overall credit in card and auto and maybe bifurcate between prime and subprime customers.

Okay. Thanks, Ryan. So if you think about credit, let's go back a number of years. During the pandemic, credit performance for Capital One and other banking institutions was at like world record low charge-offs. Then the -- there was the sort of the normalization we all expected. And it took charge-off levels to above pre-pandemic levels and everyone was watching to see where things would start to settle out.

In October of last year, that was the first month that our delinquencies actually started to improve. And from October, all the way through July, every single month, delinquencies improved. And then since then, the delinquencies, which are the one we watch the most because that's the early predictor of charge-offs. The delinquencies have been more or less in line with seasonality since then. So I think the great improvement is probably more now turning into sort of the stabilization at where we are.

Charge-offs continue to improve at Capital One, but that's typically because charge-offs are 3 months -- 3-plus months lagged relative to delinquencies. So we should expect those to settle out following the pattern of delinquencies. Just a few other comments. Charge-offs have been benefited by some pretty sizable recovery dollars. So there's -- the strength in recoveries has helped the numbers over time. But we see -- again, this is another indication sort of the strength that we see with the consumer.

Let me talk a little bit about -- you asked about how does the upper end versus sort of lower end from an income or FICO scores or how are they performing relatively? When we look at our Credit Card business, ranked in deciles or quintiles by income or by FICO score, we don't see really any significant effects. And I think that's striking given that everything one sees in the media is talking about a narrative of the lower end consumer understandably facing a number of challenges from inflation, higher interest rates and some of those things.

One thing I really -- a caution that I want to make with respect to our observation is that what we are observing may not be indicative fully of what's happening out there in the marketplace only because Capital One has, over the last number of years, intervened on our own credit policy to a significant extent in anticipation of some of the drivers of worsening that could be happening out there.

So just for example, some years ago, Ryan, you'll remember this, we were flagging a lot of concern about credit score inflation basically from all of the stimulus and the forbearance from financial product payments that consumers enjoyed during the pandemic, we believe that was going to cause an artificial increase in people's credit scores. And so we flagged this issue and, in fact, intervened in our own models to put an overlay in to try to offset that, which, of course, caused us to pull back on some of our originations. And we also were concerned about inflation pressures and other things on the consumer.

In the auto finance business, we even more dialed back because we looked at what was happening with rising vehicle prices and the issues of affordability related to vehicle prices and interest rates. We looked at the pressure on margins that were coming from rising interest rates. And so we dialed back quite a bit in the auto finance business as well. So these have been beneficial choices relative to Capital One's credit performance, but I think it may not be as good an indicator of where the economy is.

So Rich, let's shift gears now. We're 7 months post the Discover acquisition closing. What are your impressions of what you purchased? What's going better? Where have there been challenges? And have there been any changes to your thoughts on the economics of the deal?

So we are -- continue to be very pleased with the Discover acquisition. I think that what we have found, if I pull way up, is very consistent with what we expected to find. And headlining it for me is the wonderful customer franchise Discover has had. They have a reference for the customer. We always noticed back before we did the acquisition over the years, we would -- when we would do industry league tables of customer advocacy or customer satisfaction, lots of things. We're always so struck at how great Discover would come out in those things. And I've now seen on the inside, really, it's a culture that everything that they did work backwards from how do you delight customers. And it's a great thing to be a part of in an acquisition because if you bought a company that didn't have that, it'd be very hard to inculcate that. So that's been a great thing.

And because we've had such a premium on that as well inside Capital One culturally, I really put a high mark there. We all know and the regulatory issues are indicative of that. Discover needs quite a bit of work relative to investment in risk management across the company, and we're leaning into that. That would be consistent, Ryan, with our expectations, and we got a lot of progress going on there. The network is what we hoped it would be. We're amazed at the acceptance that they've been able to build with the low scale that they have, but there's still more work internationally. I'm sure you'll probably come back to that.

The one thing I want to flag is the -- what we call the brownout of Discover credit card growth. That growth has kind of stalled there for a number of reasons we've talked about. And so that's a bit below the expectations but pulling way up. We love this acquisition, and we're happy that what we've seen on the inside is consistent with what we hoped on the outside.

And with respect to the deal economics, we continue to say we're still on track to achieve the synergies.

Yes. Sorry. Thank you for that most important point.

So maybe let's dig a little bit...

This is why I brought Jeff up to thank you.

He takes the easy one. So Rich, maybe let's dig into the brownout a little bit. I think it's my third brownout over the years. I think the last one was recoveries. I think you mentioned on the earnings call, it could take several years to work through. So maybe can you talk about what are you trimming, maybe size how big the book that you're looking at may be? And does this prevent the broader card business from growing, knowing that you don't set growth targets within the company?

Yes. So let me start by saying it does not prevent the broader card business from growing. We have a lot of really good traction on the legacy Capital One side. Let me talk a little bit about the -- what is behind this "brownout" that I call it with Discover growth. So I think there are 3 important factors that are driving this.

First one is Discover, when they ran into credit losses that were a lot higher than what they expected in the '23, '24 time period, really pulled back on originations. And they actually kept that tight reins on that all the way and even past out when we announced the deal. So -- but -- and that's been, by the way, a very beneficial thing with respect to Discover's credit losses. But what happened is there were just a number of quarterly vintages really over a few years where just the volumes were less. And over time, as those vintages become a bigger part of the portfolio, the math of growth suffered as a result.

The second factor is we knew from the outside but didn't have any way to sort of calibrate the magnitude of an effect of a little bit of a difference of credit philosophy that Discover has had versus ourselves. And Discover, I mean, we're very impressed with their business and the credit quality of what they booked. But they've always had more of an emphasis on leaning into the revolver side of the business and more comfortable with what we would call higher balance revolvers where revolvers and their balances across their entire consumers -- an individual consumers' portfolio across all the cards that they have.

They've had a higher level of comfort with that probably than Capital One has. We've been vocal over the years that we try to stay away from what we call the higher balance revolvers. We've had more of a spend first philosophy. So we knew when we went into this deal that we probably have bring a little bit of a different philosophy. As we've gotten inside, sure enough, we find some of the choices that they make at the margin on originations and line increases, probably we would take a notch more conservative. So we have put those choices into place, and that slows down growth.

Now we also knew when we did the acquisition, we were really looking forward to being able to take their origination machine with their branded cards and be able to grow. And if you think about it, Discover has had a very focused strategy on -- in the prime part of the market, and Capital One has been a very broad-based player, significantly north and south in a sense of where they focus. So we always said if we can take the Discover franchise, and bring all the things in Capital One that enabled us to expand up and down from that target. We believe there's a lot of growth opportunity with the Discover franchise.

The only issue is in order to pull off that expansion, we need Discover to be on our platform with our decision engines, our data machines and all of that. And that's the thing that's going to come in the latter part of the integration. So if you put it all together, the things that slowed -- the slowing happen now and the growth is going to happen later. Hence, the brownout, and I wanted to just make sure that investors could see that. And as you know, I always give it the colorful names. Hence, this is not my first brownout that I flagged.

I'm not sure if this is going to be a question for you or Jeff, but maybe just talk a little bit about how revenue and expense synergies are progressing and when do you expect them to be in the run rate and any changes to expectations?

Yes. So we continue to be on track for the synergies, $2.5 billion of synergies, and a significant part was revenue synergies and the rest cost synergies. Things continue on track there. We're working very hard. The revenue synergies are coming first because they are coming from the conversion of our debit portfolio from -- onto the Discover network. And so those -- that conversion started in August of this year and will be completed early next year. So those revenue synergies will show up earlier. The cost synergies, a majority of them really come from conversion of technology platforms, which is really very back-end loaded in the whole integration process. Hence, the cost -- most of the cost synergies will be late. But overall, we're on track for the $2.5 billion of synergies.

So I want to shift gears and talk a little bit about the network and broader investment and efficiency. So if you look over the last 12-plus years, you've redone the entire tech stack of the company. I remember when you introduced it here in 2013, you have real-time data, best-in-class technology. Before you begin to build out the international acceptance, which is a big thing that you've talked about, do you need to invest in the physical infrastructure of the network? And was that all factored into the deal upfront?

The international acceptance is mostly not a technology issue. That's a boots on the ground issue of just building one merchant at a time, one merchant acquirer at a time, one local network at a time, and one local issuer at a time to build partnerships to drive greater acceptance. At the same time, in parallel, we will be working to modernize the Discover network, which is mostly like all networks around the world that we know of are in data centers with some specific applications that are in the cloud.

So we expect over time to take that network on the modernization journey that we've taken the rest of Capital One. But that journey will not be required in order to do -- to continue to build the acceptance that we've been talking about.

So they could be done in isolation of each other. So I think as a big part of the acquisition, you noted that you intended to bring, I think it was $175 billion of volume onto the Discover network in terms of both debit and credit. You talked before debit is happening right now. And I would assume credit obviously has a little bit of a longer tail. Can you maybe talk about the process of bringing over credit volume? And what is the end goal for you in terms of volume and issuing partners on your network?

Yes. So almost all businesses in the modern world and in banking are very scale-driven. The network business is more than very scale-driven. It's extremely scale driven because the fixed cost of running a network are really that. They are fixed. And so therefore, all the marginal volume is just very, very beneficial. It is also a flywheel kind of thing where the more acceptance one gets, the more acceptance that drives and the better relationships with merchants, the better negotiating position one is in with respect to merchants, all benefits come just very clear.

There's a scale-driven flywheel with respect to Discover. And the -- it's extraordinary that they actually from way back in 1985 when they launched the Discover network to think that they, with the little scale that they've had, have been able to build the network that they have. But it's just -- it's crying out for more scale. So for us to move the debit card business, that was kind of an easy decision, and it involved customers that were mostly not international travelers. And we get the benefits of vertical integration, the power of the PULSE Network, which is a global ATM network on the debit side. So a lot of -- that was an easy decision.

On the credit card side, what -- here's what we have to confront on the way to being able to move more volume. And so it's sort of the economics on the one hand and the other is the customer reaction. So on the economic side, what we will do is compare for every segment of the business, what is the economics that we get today from Visa and Mastercard, who, by the way, have been great partners with Capital One. We have attractive rates that we get with them and to compare what -- on the other hand, what does Discover charge merchants, but it's not just a comparison of how much merchants are charged, but also the fact that we get the vertical integration benefit of the network margin that is available to us.

And so that's a big sort of economic analysis by different segments and products comparing the option set we have of very attractive deals with Visa and Mastercard and a compelling case to move business over to the Discover network. Then we move to the other side where on the customer reaction side of things.

What's -- here's just a few things that I would say. First of all, the reality of acceptance. Discover's acceptance domestically is just remarkably strong. And when we ask in research Discover customers, do you feel that this network is accepted at the places that you shop, it scores incredibly high right there with the customers of the major network, and that's a wonderful thing. But what's clear is that for people that are not Discover customers, there is a gap in the perception. The perception versus the reality has a significant gap. Now I always say from a branding point of view, what I really care about is starting with a good reality because you can build the brand if the reality is good. So I think they're -- Discover is in a very good place there.

The other thing, of course, is the longer journey on the international side where the acceptance is amazing to me given how small Discover is, but still has more work to do. So what we will do. So pulling way up -- we announced we're going to move $175 billion of volume between debit and credit as part of the deal, synergy calculations, all that is on its way. And then what we're going to do is invest further in international -- in the reality of acceptance and then very much lean into the brand acceptance story.

And then the other thing we're going to do is a lot of testing. The debit conversion was a straightforward thing we could do right away, but we need to be -- the credit card by mid-next year, we will be able to originate Capital One credit cards on the Discover network. And in 2027, we'll be able to move some existing credit cards to the Discover network. Over that period of time, we're going to massively lean into test different ways to do the conversion, customer reaction, and that will inform the journey. But if we pull way up, this is a network that needs a lot of scale, and we're looking to find opportunities, and plow the ground to be able to keep moving more volume over time.

So Rich, on the earnings call, you spent a lot of time talking about investments. You did mention a lot of them are not new, but they're accelerating marketing, technology, AI. We've gone through investment cycles before the tech investment cycle from '13 to '16 technology costs coming out of the pandemic. Maybe just think about -- I know you guys have been investing all along, but maybe just contextualize the pace or amount of investment this time relative to past investing cycles.

Well, so thank you for that question. I think when you mentioned our tech investment, I'll put words in your mouth, -- were you saying our tech transformation from 2013 to 2016.

Well, that was the start in terms of the increase of the operating expense.

Exactly, because that -- yes, that -- that's -- in some ways, that's always a lifetime journey because the world keeps modernizing. But Capital One in 2013 launched a massive transformation of the technology of our company from the bottom of the tech stack up. And that's a journey that still continues today, but we've got an amazing traction.

So let me pull up on why it was over the last couple of quarterly earnings calls when I have said, we are really going to lean in even more so to investments. And so there are 3 drivers to why for a company that always invests a lot, and we built our company to be an organic growth company, ironic that I'm saying it on the heels of the biggest acquisition in banking since the global financial crisis, but it's still very much. We built this to be an organic growth company.

The 3 drivers behind the sort of especially large investment agenda we have right now are: one, the Discover network and all the things that we just talked about; two, the reward for our transformation from the bottom of the tech stack up getting to the top of the tech stack because just as we had hoped, the opportunities are expanding significantly for things that we can do now that we have the technology foundation to be able to pull it off. And so all across our company, I'm just struck, I'm in meetings and just the opportunities, the demonstrated opportunities people have across our businesses are exciting, but they require investment in order to capitalize on that.

The third driver of why the investment is really the world's moment. I believe we are -- the magnitude of the AI revolution we're talking about, this is right there on par with harnessing fire and the biggest of the things that have happened in the history of the world. And I really, really believe this is -- maybe there's some hype around the edges, but I believe that AI is absolutely going to transform not only our lives, but absolutely transform what banking can be in terms of customer experiences as well as how banking works. So those are why we're leaning into investments.

So you talked about on the call that we should expect some near-term pressure on efficiency. Maybe you or Jeff just contextualize how we should expect the pressure as you make these investments? And once we're down the road through the integration, what do you see as sort of destination efficiency for the company?

So we -- it's interesting. We have been, since the start of our technology transformation on a journey that is actually -- since we started leaning in massively on the technology journey, our operating efficiency ratio has improved by a lot over that period of time, even as we invest -- have invested more and sort of like, well, how is that possible? Well, even as we invested, one of the great beneficiaries of all the tech investment is the ability to actually reduce costs along the way, including a lot of the legacy tech costs.

The other most important driver for Capital One efficiency is growth. We're not a company that just looks everywhere to see how we could cut our way to greatness in terms of cutting costs. We really want to grow our way to greatness in terms of creating growth opportunities and then efficiently trying to manage our expenses so that they create operating leverage along the way. But we -- so generally, that journey has been a productive one.

What we've kind of said at this point, when we look at the investments that we have across this wide agenda of Capital One that will pressure operating efficiency and pressuring and overall efficiency in the nearer term. But we believe that the outcome of all of that, that's in service of continuing the journey across Capital One to create more efficiency through growth, through automation and through a very large-scale financial institution where we've embedded our business model into the technology itself, the risk management in the technology itself. And so on the other side of this, we think one of the beneficiaries is efficiency, but we just wanted to flag that along the way, there's going to be some pressure on that.

Maybe one last question because we started a little bit late here. You announced the $16 billion buyback, the biggest one you've announced in a while. How should we think about both using the $16 billion? And also, how do we think about the pace to getting towards that 11% capital target? Do you expect to run at a higher level during the integration period?

Well, I'll take that one, Ryan. The $16 billion authorization is not time bound. So there's no like a clear-cut way to look at that. And we rearticulated our long-term capital need at around 11% CET1 ratio. That's this is a little bit parsing word. It's not a target. It's not a level we expect to get to and run at. If you look at our history, we've viewed that with a little bit of conservatism. All that said, after during the approval period being on a fairly minimum pace of share repurchases, we ramped it up to about $1 billion last quarter, and I think it's reasonable to assume that it's going to go up again.

And then as always, we'll manage our capital. We're in a very strong capital position. It's not going to be a race as fast as our feet can carry us to get to some specific target. We'll manage capital the way we always do with a little bit of a conservative [ tent ], but we'll be generating significant capital along the way, and I think there's room for some buybacks as well.

Awesome. Well, unfortunately, we're out of time, but please join me in thanking Rich and Jeff.

Thank you.

Thank you.

Good day, and thank you for standing by. Welcome to the Capital One Q3 2025 Earnings Call. Please be advised that today's conference is being recorded.

[Operator Instructions]

I would now like to hand the conference over to your speaker today, Jeff Norris, Senior Vice President of Finance. Please go ahead.

Thanks very much, Josh, and welcome, everybody, to tonight's earnings call. To access the live webcast of this call, please go to the Investors section of Capital One's website, capitalone.com. A copy of the earnings presentation, press release and financial supplement can also be found in the Investors section of the Capital One website, capitalone.com, by selecting Financials and then Quarterly Earnings Release. With me this evening 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 this presentation that summarizes our third quarter results for 2025.

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. 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 our website and filed with the SEC. Now I'll turn the call over to Mr. Young. Andrew?

Thanks, Jeff, and good afternoon, everyone. I will start on Slide 3 of tonight's presentation. In the third quarter, Capital One earned $3.2 billion or $4.83 per diluted common share. There were multiple adjusting items related to the Discover acquisition in the quarter, including integration costs, intangible amortization expense and loan and deposit fair value mark amortization. Net of these adjusting items, third quarter earnings per share were $5.95.

As expected, we continue to refine our purchase accounting assumptions while we are in the measurement period. In the quarter, our adjustments included a modest increase to goodwill along with other refinements. You can find the revised purchase consideration walk and amortization schedules in the appendix of tonight's presentation.

The results in the third quarter were impacted by the full quarter effect of the Discover acquisition. On a GAAP and adjusted basis, revenue in the third quarter increased $2.9 billion or 23% compared to the second quarter. Noninterest expense increased 18% or 16% net of adjustments, and pre-provision earnings were up 29% or 30% net of adjustments. Our provision for credit losses was $2.7 billion in the quarter. Excluding the $8.8 billion initial allowance build for Discover that we recognized last quarter, provision for credit losses increased about $50 million. Higher net charge-offs from the full quarter impact of Discover was roughly offset by a larger allowance release.

Turning to Slide 4. I'll now cover the allowance in greater detail. The $760 million of allowance release in the quarter brought the allowance balance to $23.1 billion. Our total portfolio coverage ratio decreased 22 basis points and now stands at 5.21%.

I'll cover the drivers of the changes in allowance and coverage ratio by segment on Slide 5. In our Domestic Card segment, we released $753 million of allowance in the quarter. The primary drivers of this quarter's release were continued observed credit favorability in both losses and recoveries as well as a slight improvement in the forecasted unemployment rate. These factors were partially offset by greater consideration of potential economic downside. The domestic card coverage ratio now stands at 7.28%. The allowance balance in our Consumer Banking segment was largely flat at $1.9 billion. Growth in the auto business was largely offset by observed credit favorability and continued strong vehicle prices. The ending coverage ratio of 2.26% was down 3 basis points from the prior quarter. And finally, in our Commercial Banking segment, we released $37 million of allowance in the quarter. The allowance release was largely driven by recent favorable credit performance. The commercial banking coverage ratio declined 5 basis points and now stands at 1.69%.

Turning to Page 6. I'll now discuss liquidity. Total liquidity reserves ended the quarter at $143 billion, down roughly $1 billion from last quarter. Our cash position ended the quarter at $55.3 billion, $3.8 billion lower than the second quarter. Our preliminary average liquidity coverage ratio increased slightly during the third quarter to 161%.

Turning to Page 7, I'll cover our net interest margin. Our third quarter net interest margin was 8.36%, 74 basis points higher than the prior quarter. Recall that in the second quarter, the partial quarter benefit from the acquisition of Discover was roughly 40 basis points. The full quarter of Discover in the third quarter drove approximately 45 basis points of incremental net interest margin. The remaining increase in NIM in the quarter was largely driven by higher yield on legacy Capital One domestic card loans and 1 additional day in the quarter.

Turning to Slide 8, I will end by discussing our capital position. Our common equity Tier 1 capital ratio ended the quarter at 14.4%, approximately 40 basis points higher than the prior quarter. Income in the quarter was partially offset by $1 billion in share repurchases, dividends and an increase in risk-weighted assets. In the third quarter, we completed our bottoms-up capital assessment for the combined franchise. Based on the results of that analysis, we believe the long-term capital need of the combined company is 11%. Now that we've completed this work our Board of Directors has approved a new repurchase authorization of up to $16 billion of the company's common stock. This new authorization becomes effective today and supersedes our previous repurchase authorization. In addition, we expect to increase our quarterly common stock dividend from $0.60 per share to $0.80 per share beginning in the fourth quarter, subject to board approval. With that, I will turn the call over to Rich. Rich?

Thanks, Andrew, and good evening, everyone. Slide 10 shows third 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. Similar to the second quarter, the Discover acquisition was the dominant driver of third quarter domestic card results, including the impact of a full quarter of combined operations, a combined quarter end balance sheet and purchase accounting effects. Looking through the Discover impact, the combined domesticcard business delivered another quarter of top line growth, strong margins and improving credit. Year-over-year purchase volume growth for the quarter was 39%, driven primarily by the addition of a full quarter of Discover purchase volume.

[Audio Gap]

Excluding Discover, year-over-year purchase volume growth was about 6.5%. Ending loan balances increased 70% year-over-year, largely as a result of adding Discover card loans. Excluding Discover, ending loans grew about 3.5% year-over-year. While competitive intensity remains high, we continue to see good traction across our legacy card business, including strong growth with heavy spenders at the top of the market. The legacy Discover Card loans continued to contract slightly and will likely continue to face a growth headwind due to Discover's prior credit policy cutbacks and some trimming around the edges that we will implement going forward.

While that will create a short-term loan growth brownout, we continue to see good opportunities to grow the Discover Card business on the other side of our tech integration, where we can implement growth expansions powered by our unique technology and underwriting. Revenue was up 59% from the third quarter of 2024 with a full quarter of Discover revenue. Excluding Discover, year-over-year revenue growth was about 6.5%, driven by underlying growth in purchase volume and loans.

Revenue margin for the quarter was 17.3%, including the impact from a full quarter of combined operations and amortization of the purchase accounting fair value mark. The third quarter domestic card charge-off rate was 4.63%, down 62 basis points from the prior quarter and 98 basis points from a year ago. The third quarter is the seasonal low point for our card losses. But the linked quarter improvement we saw was significantly beyond what we would expect from normal seasonality. And our charge-off rate has been improving on a seasonally adjusted basis throughout 2025, following the trend of improving delinquencies that started in late 2024 and supported by strong recoveries. A small share of the linked quarter improvement about 10 basis points was the result of incorporating the Discover card portfolio for the full quarter. Our domestic card delinquency rate at quarter end was 3.89%, down 64 basis points year-over-year and up 29 basis points from the prior quarter.

The quarterly increase was consistent with expected seasonality. Domestic Card noninterest expense was up 62% compared to the third quarter of 2024, reflecting a full quarter of combined operations and purchase accounting amortization, operating expense and marketing both increased year-over-year. Total company marketing expense in the quarter was about $1.4 billion, up 26% year-over-year.

Our choices in domestic card are the biggest driver of total company marketing. Compared to the third quarter of 2024, domestic card marketing in the quarter included the addition of Discover marketing, higher media spend and increased investment in premium benefits and differentiated customer experiences.

Our marketing continues to deliver strong new account originations and to build an enduring franchise with heavy spenders at the top of the market. Fourth quarter marketing will likely be somewhat above recent seasonal patterns. Slide 12 shows third quarter results in our Consumer Banking business. Global Payment network transaction volume for the quarter was about $153 billion. Auto originations were up 17% from the prior year quarter, driven by overall market growth and our strong position to pursue a resilient growth in the current marketplace. Consumer Banking ending loan balances increased $6.5 billion or about 8% year-over-year.

Average loans were also up 8%. Compared to the year ago quarter, ending and average consumer deposits grew about 35%, driven largely by the addition of Discover deposits. Looking through the Discover impact, our digital-first national consumer banking business continues to grow and gain traction. Consumer Banking revenue for the quarter was up about 28% year-over-year, driven predominantly by the full quarter of Discover as well as growth in auto loans. Noninterest expense was up about 46% compared to the third quarter of 2024, driven largely by the full quarter of Discover as well as increased auto originations, higher marketing to drive growth in our National Consumer Banking business and continued technology investments.

The auto charge-off rate for the quarter was 1.54%, down 51 basis points year-over-year. largely as the result of our choice to tighten credit and pull back in 2022, auto charge-offs are improving on a seasonally adjusted basis. The 30-plus delinquency rate was 4.99%, down 62 basis points year-over-year.

Slide 13 shows third quarter results for our commercial banking business. Compared to the linked quarter, ending loan balances were up 1%. Average loan balances were flat compared to the linked quarter. Ending deposits were up about 2% from the linked quarter. Average deposits were down 2%. We continue to manage down selected less attractive commercial deposit balances.

The commercial banking annualized net charge-off rate for the second quarter decreased 12 basis points from the sequential quarter to 0.21%. The commercial criticized performing loan rate was 5.13%, down 76 basis points compared to the linked quarter. The criticized nonperforming loan rate was up 9 basis points to 1.39%. Pulling up, the full quarter of Discover operations and the related purchase accounting impacts dominated our reported results in the third quarter. But looking through these effects, our adjusted earnings, top line growth credit results and capital generation continued to be strong.

The Discover integration continues to go well. We continue to expect that integration costs will be somewhat higher than our original estimate and we remain on track to deliver $2.5 billion in combined synergies. Revenue synergies are largely driven by moving our debit business to the Discover network. That effort is going well, and we expect it to be largely completed in early 2026. So we expect revenue synergies to ramp up in the fourth quarter and in early 2026.

We're also making good progress on operating expense synergies. Many expense synergies are linked to platform conversion events, which happen at various points throughout the integration period with some conversions coming closer to the end of integration. Before we get to your questions, I want to pull up and reflect once again on where we are. As a result of years of strategic preparation, we have a wealth of opportunities today that put us in an advantageous position to grow and win in the marketplace as it continues to change dramatically. To capitalize on these opportunities at this special moment, we need to make significant and sustained investments. Our acquisition of Discover enhances and accelerates some of these opportunities, and of course, brings new opportunities as well.

Let me start with the Discover Network. This network is a rare and valuable asset, but it is very subscale in a scale-driven business. We are already underway with our announced plan to move our debit volume and a portion of our credit card volume to the network. These moves are powering our revenue synergies. To fully capitalize on the strategic benefit of being one of the few payment networks, we aspire to move more of our volume onto the network.

That will require additional investments in international acceptance and the network brand. While Discover is an extraordinary and unique addition to Capital One's strategic portfolio, I want to save the unique position legacy Capital One is in as a result of years of strategic transformation. We are in the 13th year of an all-in technology transformation. This transformation has been from the bottom of the tech stack up, essentially building a modern technology company that does banking. As we move up the tech stack, the opportunities are accelerating. We also stand on the shoulders of our data and analytics capability on which the company was built and our journey to create a national lending brand -- excuse me, just a national brand.

One of the most unique journeys at Capital One has been the building of our national retail bank. We have built what we believe is the bank of the future with full-service digital banking capabilities enhanced by thin physical distribution of showroom branches in iconic locations. We are the only major bank building a national bank organically, and we are enjoying a lot of traction. Having our own debit network accelerates this journey, but an organic growth model requires a lot of investment in marketing for many years and those investments are growing.

Let me turn to our credit card business. We are one of a very small number of players who are sustainably investing to win at the top of the market with heavy spenders. The fastest-growing part of our card business is with these heavy spenders. But it is very clear that winning in this part of the market takes a lot of sustained investment in standout products, amazing customer experiences, access to exclusive events, and the premium brand. It is not lost on us that our biggest competitors in this space have hugely stepped up their levels of investment, and we need to do the same. And a new front in this battle will be AI-driven experiences. We are gearing up for that.

As we moved up the tech stack, we are finding accelerating opportunities in new growth vectors. Some of the ones you have seen are Capital One shopping, Capital One Travel and Auto Navigator. These opportunities are growing rapidly, and we are investing to seize the moment in the marketplace. All of these opportunities stand on the shoulders of our modern technology stack. We continue to invest significantly in those shoulders. There are a number of -- excuse me, there are a small number of large modern technology companies fully in the cloud, built on modern applications and data they are in a unique position to win as the world continues to evolve. We are one of them. Since the beginning of our technology transformation, our journey has been focused on bringing AI into the heart of the business. Many companies will be bringing in third-party AI applications, which will help transform how work is done, but transforming the business model of banking with AI requires AI to be deeply embedded in the technology, operations, processes, risk management and customer experiences of the company.

That is what we have been working backwards from for all of these years in our tech transformation. These opportunities require significant investment in AI and AI talent, and we are doing that. Having founded this company and spent these many years building an adaptive company to capitalize on the rapidly changing marketplace, I am struck by the opportunity all around us, but I also know what it took to get here. And that was investing what it takes to be in a position to win. Our opportunities are many and they are large, but so too is the investment to get there. But these investments will also be the basis for our sustained growth and strong returns over the longer term.

The opportunities we are describing here have been years in the making, and you have heard me talking about them for quite some time. Importantly, the earnings power of our combined company that we envision on the other side of the deal integration is consistent with what we assumed at the time of our deal announcement, even though some individual variables have moved along the way. We are excited for the opportunities that lie in front of us. It is our imperative to lean in and capitalize on them. And now we'll be happy to answer your questions. Jeff?

Thanks, Rich. We'll now start the Q&A session.

[Operator Instructions]

If you have any follow-up questions after the Q&A session, the Investor Relations team will be available after the call. Josh, please start our Q&A.

[Operator Instructions]

And our first question comes from Sanjay Sakhrani with KBW.

Rich, it seems like great momentum in the business, but there's been a lot of chatter about the health of the consumer, some of the cracks we've seen, particularly in subprime and maybe even specifically in auto. Maybe you could just talk a little bit about what you guys are seeing. And we hear a lot about sort of underemployment and looking at these employment stats and maybe just having the reality sort of delineate from what we're seeing from the broader macro. So could you just talk about what you guys are seeing and how you see the path forward?

Yes, Sanjay, let me start with the health of the consumer. The U.S. consumer and the overall macro economy have been quite resilient so far in 2025. The unemployment rate has ticked up a bit recently, but remains quite low by historical standards. Layoffs and new unemployment claims are low and stable. Wages are growing in real terms and debt servicing burdens remain stable and close to pre-pandemic levels. But I do think we're in a period of elevated economic uncertainty. We've seen inflation tick back up. There's uncertainty related to tariffs. We've seen job creation be strikingly slow.

Some consumers are feeling pressure from the accumulated effects of price inflation and higher interest rates, which have increased the cost of new borrowing in most asset classes. We're watching closely as student loan repayments and collections resume. And of course, now we're in a government shutdown.

So in that context, let's talk about our credit. We -- our charge-off rate was -- let me check here, 4.63%. So that was 98 basis points lower than a year ago and 19 basis points of that was the result of incorporating the Discover Card portfolio and to our Domestic Card segment. But the predominant effect was the steady improvement of charge-offs, both at legacy Capital One and to Discover over the past few quarters. And I should note that our charge-offs have also been supported by strong recovery.

The front book of new originations continues to perform well with 2024 originations tracking at or below pre-pandemic benchmarks for both legacy Capital One and Discover. Now as we look ahead, our delinquencies remain our best leading indicator of near-term credit performance. In Q3, delinquencies moved in line with normal seasonality. Now this was true both in our legacy Domestic Card portfolio and at Discover. So now in auto, our credit has been very strong. And auto losses were 25% lower year-over-year in the third quarter, and those losses are in line with pre-pandemic levels and auto delinquencies continue to improve. When we compare the auto results with industry numbers, there is a really pretty striking gap there. And I think it is probably more indicative of the choices that we've made and some of the technology behind those choices in our auto business. So I think the striking performance of auto is not necessarily a statement about the auto industry. But certainly, these are all positive indicators here.

Let me turn to subprime, Sanjay, because you asked about that. It's interesting to look at this subprime almost always we find is the segment that sort of turns first. So subprime was the segment where credit moved first during the period of post-pandemic normalization, but it also -- but it also stabilized and began to improve first.

So overall, we are finding in our own subprime performance, subprime credit performance is moving in line with Prime. So there's not a lot of indicators there. In the subprime auto, let me move to subprime auto for a minute there. There's been a lot of noise in the subprime auto space, pointing to rising delinquency rates. Our own performance in subprime auto has remained stable through this time. And again, I think this is a product of choices that we made. We anticipated inflated credit scores normalizing credit and declining vehicle values. So that led us to pull back pretty back in 2022 and 2023. As a result, our front book vintages have remained stable and in line with pre-pandemic levels. This has been true in our subprime auto segment, just as it has been in our overall auto business.

But again, as I mentioned earlier, I think in the auto business, our stable performance is largely the result of our own adaptive underwriting. So it's not really a comment on the performance of subprime across the industry. When we look at some of the credit patterns for -- look at our credit metrics and then look at it with respect to income stratas or we look at it relative to FICO scores. When we look at our own numbers. [indiscernible], we're not seeing a lot of separation there. The consumer right now on our book -- and I'm back to the card business now, the consumer on our book tends to be moving in lockstep together. It certainly isn't lost on us that some of the economic metrics out there and some of the things a little bit more pressure on consumers on the lower end of income, and we'll certainly keep an eye on that. But we're not seeing differential impacts in our portfolio.

Our next question comes from Terry Ma with Barclays.

I just want to start off with capital return. It's nice to see the buyback pace pick up in the third quarter and also get the new authorization. As we look forward, is there any time frame that we should expect you to kind of optimize toward that internal target of 11% from above 14% today?

Yes, Terry, as you saw, we did step up the repurchase to $1 billion in the third quarter as we were in the final stages of completing that bottoms-up analysis to set that long-term capital need. And we now have the $16 billion of authorization. Over time, our actions are going to depend on current and projected levels of capital, but also very importantly, the environment that's around us at any given time and operating under the SCB provides us with a great deal of flexibility, and we'll certainly take advantage of that flexibility. So I don't want to be in the business of giving specific guidance as to our plans, primarily because our plans could shift fairly quickly. But I will say, based on what we know today, at least in the very near term, it's reasonable to assume that we'll be picking up the pace of share repurchases from here.

Got it. That's helpful. And then, Rich, I think you mentioned the Discovery portfolio will face a headwind as you kind of trim along the edges going forward. Kind of any color on what you're kind of looking to trim and then how long that headwind would kind of persist for?

Thank you. So this -- what I co-locally call the sort of brown out of growth. It reminds me when I use the term, the brown out of recoveries that temporarily happened for a while. The -- what you referred to is really 1 of 3 factors in this growth brown out. So let me just -- let me just pull up and give context to the whole thing. So following Discover's credit expansion, Discover dialed back meaningfully in their origination programs in 2023, 2024 and into 2025. These pullbacks led the portfolio to contract slightly this year and created a headwind to growth as more as vintages piled on top of each other, these relatively smaller vintages as they mature.

So in other words, the growth impact of tighter originations tend to extend and manifest a few years out. I should note, very importantly that these pullbacks have also led to improving credit quality in the card portfolio in recent quarters. Now as we move forward, so the first effect therefore of the 3 is the Discovers dial back, which turned out to be pretty significant and very extended in time period. with a bunch of benefits that came from that, but obvious impact on the growth.

Now we get to the second one, which is what you asked about. We will scale back some of their programs on the margin such as with certain pockets of higher balance revolvers. Let me just comment for a second. We've always had such a reverence for Discover. They built an amazing business. We are very fortunate to now be together in 1 company. They have philosophically had a credit policy that leans a little bit more into the revolving side and the probably a little bit more industry typical.

Capital One has, for years, been cautious about what we call high-balance revolvers, not that they're not attractive, it's just from a resilience point of view, we have been more -- we have, on a relative basis, lean more into a spender-first kind of strategy. So we've always been looking forward to pulling -- getting inside the Discover business, again, I think they've built a great company, but we're not surprised to see that, yes, around the edges we would trim some of the places where they have been more revolving oriented, particularly relative to when there are higher balances in a consumer's unsecured balances on a consumer's balance sheet.

So that's kind of effect number two. The third thing is we also believe that there are opportunities, good opportunities to lean in and expand Discover's legacy business from the very focused target that they have had to expand it actually above and below from a credit spectrum point of view relative to Discover. So when you think about the flow of business that's coming to Discover and including a lot of people who come there for the brand and everything else. We have a more -- we're going to take a more expansive view of this, including really leaning in on the higher end side to grab and try to win with the the heavier spenders there. And we have learned over the many years how to safely expand into the lower down in the credit spectrum than they underwrote. So we've always been looking forward to that opportunity. But basically, that will -- most of what I'm talking about there requires us to converge onto our technology so we can leverage our data and decisioning infrastructure. And that's why from a timing standpoint, we'll be able to do the trimming before the leaning in because the trimming could be done just by adjusting current Discover credit policies, whereas the leaning in requires us to implement a very integrated and sophisticated set of technology policies and decisions.

And that's why the net effect of that is a timing disconnect on cutback versus growth. And so collectively, when we pull up -- we're starting a little lower in outstandings, probably than we originally expected. Again, I think they made great solid choices. There are smaller vintages maturing, and we're going to pull back around the edges before we lean in. And these effects will collectively produce a bit of a "brown out" of Discovery's outstanding growth over the next couple of years. But these effects don't take away at all from our enthusiasm for the Discover business model.

Our next question comes from Ryan Nash with Goldman Sachs.

So I have two questions. I'll first one for Rich and then a follow-up after for Andrew. So Rich, I guess some of the last quarter at the end of the remarks, you made a decent amount of -- spend a decent amount of time talking about investments. And then there was some recognition of revenue and return that will come with these. So I guess, first, a 2-part question. Have any of these investments made it into the run rate? Or are they all incremental from here? And second, I know you've been hesitant to give any guidance, but parameters for us to think about where results are headed, whether it's PPNR growth, operating efficiency gains or anything that will narrow the range of outcomes that I think is on the minds of investors. And I have a follow-up for Andrew.

Okay. Thank you, Ryan. So with respect to this set of opportunities that I again talked about this quarter, these are -- have been years in the making. Not a single 1 other than the Discover opportunity that sort of is reasonably available to us. These have all been years in the making, working backwards from what we saw as significant opportunities. But as it always works in Capital One, we identify opportunities and then it takes investment on the way to the payoff and that's been our life story. And our portfolio is a blend of things that are in different stages of the life cycle with respect to investments and their value creation.

So there was very little that's new on the list, but here is an important distinction that I'm making. The opportunities are accelerating in a lot of these areas, the size of the opportunity, the validation that we're seeing in our own investments the impact of moving toward the top of the tech stack as we've so patiently built at the bottom of the tech stack and where you move to the top of the tech stack, you're now talking -- turns more into business opportunities and less into just investments in core technology. So all of these are the same things we've been investing in for years. I'm just struck by the opportunity that -- and the number of different opportunities that are coming as a direct result of years of strategic investment. And so my point is that using the same philosophy with which we build Capital One over all of these years.

When we see opportunities, we work patiently to invest in opportunities and then we always feel the imperative that when they're there, we've got to really give them what they need, and that's how Capital One is where it is today. But many of the things we've been talking about for a number of years are the actual investment imperative is growing in these. So all of -- many of these things are -- and the investments associated with them are already in the run rate. But the -- my point is that the incremental investment that we're leaning into is up from where it has been, and that's -- that, to me, is something that is -- I'm very excited about, but I just want to make sure to flag to investors that as we have always found in the history of Capital One, opportunities take investment to have them be what they can be, and that's where we are right at the moment.

Got it. That's super helpful, Rich. And then Andrew, when I look at the reported NIM in the high 8.30s, adjusted just a tad over 8.40%, now we all know that 3Q is seasonally strong. But maybe as we look ahead, help us think about some of the moving pieces on the margin? And do you think we're at or near a sustainable level for the margin over the medium term?

Yes. Sure, Ryan. I think describing where we're going is potentially helped by where we've been. So let me just kind of take a little bit of a walk over the course of the last year. So if you look relative to the year ago quarter, our NIM is up, excluding the fair value marks, I think, roughly 130 basis points. And so about $85 million of that, as we've enumerated on the last couple of calls, is from the addition of Discover. The remaining 45 basis points has really been a function of lower funding costs, so lower deposit rate paid, lower wholesale funding, lower wholesale funding mix. And those effects more than offsetting the lower yields on earning assets. And so as you said, there's seasonal effects in NIM. So looking ahead to the fourth quarter, you've got card and cash balances.

You've got day count in Q1, you've got revolve rate in Q3, as you referenced, being a strong quarter. But if I look outside of any of those quarterly effects, the things that are going to move NIM from here, there's a couple that would move it in either direction, and that's just the relative growth of different asset classes and then how customers behave in card and retail. One other factor that's uncertain is just how far and how quickly the Fed moves and that could just bring some beta lag with it, but that effect should sort itself out over time.

And so I really go back to the relative growth of assets and then customer behaviors as being the things that could move it in either direction. But overall, I would say the structural impacts that we've seen over the course of the last year and in particular, the addition of Discover are now reflected in the run rate that you see here in the third quarter.

Our next question comes from Richard Shane with JPMorgan.

When we look at the reserve rates and we adjust for sort of the Discover portfolio, your reserve ratios or your reserve rates on domestic card are basically have not been this low since the end of 2022. At that point, delinquencies were materially lower. I realize that the trend on net charge-offs is going to continue. But as you've talked about, the delinquency trend seems to be reverting to normal seasonality. So that cyclical tailwind seems to be abating. Is there much room for additional reserve release? And given that it looks like charge-offs may remain above historic norms. Why drift down this much right now.

Well, Rick, the movements in any quarter are obviously highly dependent on all of the assumptions that underlie the allowance at the end of the prior quarter. And then as we factor in all of the things that go into setting the quarterly allowance, your drift down comment is just a reflection of the delta between those 2 numbers. So I'll start by saying relative to the assumptions at the end of the second quarter. there were 3 things that impacted the level of this quarter's allowance. First, as Rich talked about in his response to Sanjay, observed credit including recoveries were favorable to what we had assumed a quarter ago. And then second, as I said in my prepared remarks, most economic variables in the third quarter consensus forecast are better than what they were a quarter ago, including, I think, peak unemployment and consensus estimates for the third quarter was down like something like 15 basis points to around [ 4.6 ] now. And so that improved economic baseline, improves our view of future losses, offsetting -- partially offsetting those 2 tailwinds, we added additional consideration for uncertainties including economic downside.

And so as I look ahead, the dollars will, of course, be impacted by growth. But if I focus on coverage, again, to my NIM answer to, there's always seasonality with the allowance. And in the fourth quarter, we have higher balances that pay down rapidly. But beyond that fourth quarter effect, our expectations are largely going to be driven by our view of future losses and those future losses are going to be impacted by economic assumptions and customer behavior and delinquencies are going to be the best leading indicator of future losses. And so we're going to take all of that into account, and that is what's going to drive what we book for future allowance.

Got it. And I appreciate the answer. I think the one variable that may drive this may be the catch-up in terms of recoveries as well that you may actually outperform on the net charge-off side because of that?

Correct. Well, there's 2 things. One is just the overall anticipated charge-offs, including the recoveries, but also, as you know, with CECL, we un-discount the expected overall recoveries as well. And so that's a tailwind to the current allowance because the quantum of recoveries that we now have is greater than what it was in the 2022 period that you referenced in your question.

Our next question comes from Moshe Orenbuch with TD Cowen.

Great. Rich, I was hoping we could go back to the discussion about the Discover kind of brand and kind of card and perhaps lumping the installment business as well. Given the trimming that you said that you might plan to do. But at the same time, I think Capital One has been known to be a stronger kind of underwriter with a broader range of products. Do you think that, that Discover kind of brand as it sits there as a lending tool will ultimately be back to the same share that it had before Discover maybe mistakes in '22 or '23.

So Moshe, you put your finger on very important things. So first of all, I really want to just start with the Discover brand itself. There are a small number of banking institutions in America with really national brands. we study NASH. As you can imagine, we study everything about national brands and brand metrics. And Discover is up there on brand awareness, brand consideration, brand equities that really show us that while they haven't invested sort of as much as Capital One and our brand in many of these metrics may be comes in on the high end. We believe this is a great asset, this brand. And so we we absolutely want to nurture this and invest in this. And of course, the brand is both the network brand and issuer brand. So on the network side, we are absolutely going to keep that brand and an important part of our opportunity to move more business onto that network is that road goes through the building of and strengthening of the Discover network acceptance brand.

On the -- on the issuing side, obviously, Discover is no longer going to be able to be a corporate brand, but we very -- the way to think about it, Moshe, is that Discover will be a very salient product brand in our portfolio. So when we look at their products, we are going to retain their flagship cash product. We're going to really keep there and really continue to invest in some of their things like their student business and a lot of the things that have helped make a discover what they are, including, by the way, very importantly, something that they're amazingly good at, which is the servicing side of the business.

We have watched from the outside and measured things, they are -- they just or at the top of the league tables with respect to servicing metrics as we've gotten to know the company, you can just feel whole company in the ecosystem is so geared toward creating an amazing experience when a Discover customer encounters Discover people like on the servicing side. So we're doing the sort of sharing of best practices there, but it is our plan very much to lean into and invest in and continue discovers servicing and take some of the great insights and practices there.

We also plan to keep the Discover website while we're going to integrate the -- as a practical matter, integrating onto a single app, but the -- but we actually believe there's real value to continue the Discover website and it gets hundreds of millions of visits and so that will also be another thing that we preserve there. So -- and then finally, Moshe, to your -- on the shoulders of what they've invested in terms of brand and customer experience and products, which we're going to kind of continue. We are then going to on the other side of conversion, be able to lean in with the very sophisticated data science and analytics and modeling that we have, the technology, the marketing channels, the breadth of marketing channels that we now have cultivated and are deeply into at Capital One. And so to try to take the sort of the best of the marketing and credit machinery of Capital One and direct it to driving more business through the Discover brand itself.

So it's easy to draw this up on paper. Obviously, to execute on that is going to take a bunch of years and a lot of hard work. But all the early indicators are, we are optimistic about the possibilities. And then I just wanted to be sure to flag to investors that for a few reasons, the growth is going to be sort of -- in a sort of brown out period, but that's not an indication of the long-term possibilities at all. It's just something I want to make sure investors we're aware of.

Got it. Maybe just as a follow-up, given what you've seen over the course of the last few months at the high end, the transactor card business, you've seen kind of product launches or refreshes from 3 major players out there, American Express, Chase and Citi. Sometimes those have effects of like bringing more people into that ecosystem? And how do you think about that competitive dynamic for Capital One?

So thank you for your question, Moshe. Let me just start by saying that I believe that the -- what I call the top of the market and our quest to win at the top of the market, which basically the heavy spender business, that is not a simple extrapolation for card companies to take what they do and make a bit better products and better ads and spend more that since we launched I go all the way back to 2010 when we launch venture. That's when we -- prior to that, we had built a very successful mass market company, but we had really studied the top of the market and said, we believe we're in a position now to really go after the top of the market. But way back then, we said we know we can't just bolt on some more sophisticated things onto the mass market product offering and experiences that what we have to do is we have to work backwards from what it takes to win in these spaces, including the technology, the the experiences, the access to extraordinary things and a very tricky one to have a credible premium brand in that space. And of course, then Moshe to create products that can be differentiated and in which we can win.

So from -- and this is, in many ways, my story, I'm sharing right here is a microcosm of my sort of investment speech that I gave at the end of the prepared remarks that we really study where winning is and then we work backwards from what it takes and then we invest for years to get there. So we have had really remarkable traction. Every year, we see that we have -- in general, the highest growing part of our business is with -- at the higher level of spenders. And then each year, we reach a little bit higher because we can, and we're sort of earning the right to do that. So along the way, we introduced Venture X and Venture X was -- has really been a standout product that we launched it in 2023. We had a lot of response and then the -- it is sustained traction from the day we launched it all the way to now. So that has really been a great thing. And that was designed to compete against the really great players who were there in the market. And now we have watched -- to your -- to the point of your question, we have watched a striking things happen.

Those competitors are leaning even more to investing. And of course, that raises the bar of competition. They're working really hard to create more offerings and for -- and more experiences for their customers. But strikingly also, they raised the price quite a bit and have -- are going after a little bit of a different model than we have had. And 1 is necessarily better than the other. It's just different. They have had a list of sort of many different experiences that are available if you manage your own experiences consistent with that. And that can be a great thing. Capital One has really gone after the space of the very simple messaging and on everything and then the 10x on hotels and 5x on Capital One, travel through our portal.

So strikingly, I think the competitors move probably enhances our opportunity with Venture X. But I do want to say at the same time, we have great respect for the competitors and we, too, continue to really invest in experiences and differentiated opportunities at the very top of the market. So I respect very much what they've done. I think it actually opens up opportunity for us with our existing capabilities. But also if you pull way up what they are -- you can just absolutely see that they are all in to win in this extraordinary area of opportunity at the very top of the market. It's available mostly for those who are willing to invest for years patiently and Capital One is 1 of those companies. And we really like where we are and we're going to keep leaning in and every year stretch just a little bit higher.

Our next question comes from Don Fandetti with Wells Fargo.

Rich, can you talk a bit about the credit outlook for your commercial portfolio? I know there have been market concerns around private credit NBFIs, but your metrics were good. And I think there was a modest release this quarter.

Yes. Thank you, Don. So let me take a step back and talk about the commercial banking market holistically. As we have all observed, there have been large sustained inflows of capital into private credit and private equity that have driven significant growth in commercial lending across the industry. This rapid increase in demand, coupled with a long benign credit environment has had the natural effect of both reducing spreads and putting pressure on lending standards as the expanded group of market participants compete for loans. In response to these shifting market conditions, we have been highly focused on maintaining credit discipline even when it means sacrificing growth in market share in the commercial business.

This includes decisions to begin tightening credit very early all the way back in 2022 as we saw pressures mounting in commercial real estate and the potential for rising rates to pressure corporate borrowers. One of the results of these decisions is that Capital One commercial loans have decreased by 6% versus commercial market growth of 10% since year-end 2022. We have also made a conscious decision to shift more of our business from traditional lending to credit-enhanced structures. These structures provide the diversification benefits of pooled collateral as well as a credit enhancement from subordinated capital provided by NBFI clients that absorb losses before the senior position can be impacted.

Now let's talk specifically about the NBFI sector within commercial. First, it's important to acknowledge that the term nonbank financial institution is incredibly broad and the risks to lenders can vary a lot across the many industry subcategories that span corporate, commercial real estate, consumer and financial lending within the sector. At Capital One, we have built specialized relationship management credit and underwriting team for these sectors. We are laser-focused on the subcategories of this market where we continue to feel good about the credit, the underlying collateral and the structural protections provided by our lending vehicles in the current market. The credit performance of our NBFI lending portfolio continues to be very strong. But given the heightened level of competition that I mentioned, we continue to closely monitor the portfolio and govern our lending terms. One of the impacts of this added caution has been a reduction in our pace of NBFI lending growth since the end of 2022, even as the industry has continued to lean into this space. So that's a general view of that industry. We're -- we are junkies at Capital One about industry structure. We didn't start -- since we started with nothing in building this company. We don't go out to do everything banks do. I sort of equip that we do half the thing banks do and then really do them at scale and a very critical criterion and centerpiece of our strategy is we focus so much on industry structure.

As a general comment, the commercial marketplace certainly has a more challenged industry structure than most of the consumer side of the business. And very importantly, just because of the growing share that nonbank financials have in that marketplace and the fact that sometimes they have different economic structures behind them. So we've been absolutely watching the structure of that marketplace and then rather than declare, we just have to be a certain size. What we do is work backwards from that structure. And identify the high ground where we believe that we can win and we lean into that and never give our teams -- we never anywhere at Capital One set objectives, okay, this year, you need to have this kind of a growth thing. We want all of our teams everywhere to know that. The greatest choice you can make sometimes is to pull back. And so that's a little in a nutshell, our strategy in a marketplace that's very big, but also 1 that requires some real care.

. Our next question comes from Jeff Adelson with Morgan Stanley.

If I could just follow up on the premium card question. You discussed the investments your peers have made in premium card recently, which have come with notable increases to their annual fees as well. I think we're now sitting with a pretty sizable gap on your venture accident versus some of the others, and I don't believe you've increased that since the launch several years ago. So do you think this is an opportunity for you to maybe revisit the car's value proposition? Or do you feel like you're still finding good success with the growth and customers you're getting coming through so far?

Jeff, thank you for the great question. I'd start with that I just have such respect for the leading players in this space. They do amazing things, and we try to learn from them and watch what they do. I think they are -- they continue to believe that there is just a lot of opportunity. They too take Chase, for example, it just keeps stretching up going after customers at the higher end and a natural part of that is going out with products that are even more premium than where they were before. I think the end game in this for the major players that are in this space is to have a set of products that meet the that themselves are differentiated across one's own products and then that are also differentiated versus the competition. So we are both leaning into the venture X opportunity and also continuing to build even greater experiences and opportunities for our customers at the higher end of the market. But I don't feel like it's an either/or choice or we have to have a 1 size fits all. I think in the end, it's going to be a broad quest with several arrows in our quiver and hopefully, something for all the different kind of customers at the top of the market. And I should also mention small business is another area that Capital One has invested a lot, and that has big overlaps with the consumer side of the business and a lot of shared investment and brand opportunities there. So our quest is continues here we are 15 years after we launched Venture and the Quest continues. In fact, as I even said in my closing remarks, that we even are leaning in harder. But Venture X is beautifully along the way, VentureX is beautifully positioned and I think some space has even opened up for it.

Our next question comes from John Pancari with Evercore.

I'll just ask one question, give -- one question given the timing here. Just back to Ryan's expense question, when you're weighing in the necessary significant and sustained investments that you mentioned, it sounds like it is mostly in the run rate, if I'm correct there. How should we -- if that's the case, how should we think about a reasonable near-term or medium-term efficiency ratio as you have now sized up the required investments and as you're making them and if you're unable to quantify that, yes, do you think you may be in a position to provide that expectation as we head into 2026.

So I want to clarify you're playing back -- I may not have said it clearly enough. When you said these expenses are mostly in the run rate. What I'm saying is in the run rate, our investments in every 1 of the opportunities that I've talked about with the exception of the new Discover investments. So they're in the run rate because these are years in the making. I mean, even some of the "stuff" like Capital One shopping our Travelport Auto Navigator. They are years and years in the making. And that's how -- I'm still waiting to find the first organic opportunity in the history of Capital One, that just kind of appears, and we can go for it. And everything is a -- in this -- and striking the Capital One as a company that our growth model from the founding days to today is all about organic growth. Now it is ironic that we just closed on the biggest bank deal since the global financial crisis.

So yes, we do acquisitions from time to time, but especially with the focus on acquiring growth platforms or as opposed to acquisitions being our business model. So this is over the years at Capital win. It's a tough way to make a living, to have a business model where our organic growth is the engine of our business, take our car business. Basically, you look at all the growth of our card business from where -- from basically the beginning till now.

There have only been 2 acquisitions in the whole history of that. We bought HSBC's card business in 2012 and then now Discover. So this is why, and I feel such a differentiation versus all the regional banks and other banks that are our size. We come to work every day and it's about organic growth. So what that means is a lot of strategy work really working hard to identify where the growth opportunities are. And then when we see where they are, we work backwards from that, and we tend to go all in to get there, including patient lead for years on this invariably. From a P&L point of view, you dig a hole before the payoff comes and we have a portfolio of places of opportunities where we're in the holding stage and others that are in the acceleration stage and some in the mature really paying off stage. So we -- so as I said, pulling up on this, we I am struck by the fruit -- the fruits -- just the positive indication from years of quest that we have. And again, the imperative to invest in that to capitalize on that. Ryan asked the question earlier and you're sort of asking, so -- but from a metric point of view, what -- where do these things show up.

The biggest place -- the answer is partly across all the parts of the P&L. And -- but the to build an organic growth company, there's a word in there, which is growth, and that is where Capital One is very focused with everything that we do. So the payoff for much of the stuff that we're investing in longer term shows up in terms of growth. Now by the way, 1 of the striking things about the investment in the tech transformation is that unlike most cases in business where 1 has to do a trade-off, do you want to like be that over time? Or do you want to be that -- do you want to have that capability over time. What we find is when we say we want to be a growth company. We want to be -- have amazing customer experiences. We want to be fast to market. We want to have better efficiency. We want to have world-class risk management. The striking thing is and this is different from just about any other occasion I've seen in business.

This is an occasion where the journey to any of those objectives goes through the same path. It's the same shared path. The first 99% is the same. The last mile is different, but that path is the transformation of our technology in the company. That's the path we're down, which is why on the other side of it, we see opportunities that are exciting across growth opportunities, customer experiences, efficiency benefits, breakthroughs in credit, fraud, risk management, lots of and then ultimately now transformed through AI.

So when we think about the metrics, the long-term beneficiary biggest beneficiary is growth. Revenue growth along the way. There's a lot of investment in operating costs, also in marketing. And the timing of those, many of the investments tend to come before some of the growth. So in many ways, those investments put a little pressure on things like efficiency ratio in the shorter term. But you can see from the historical journey of Capital One, actually, if you look back to when we started our tech journey and invested so heavily in an extraordinary rebuilding of the company, we've had a lot of -- a number of efficiency benefits along the way. So we -- so anyway, that's just a window into the choices that we're making and how they might play out over time.

Our next question comes from Erika Najarian with UBS.

My questions have been asked and answered. Thank you.

And our final question comes from John Hecht with Jefferies.

Two questions. First one is just the other expense line item had like a step function upward, obviously, first full quarter of Discover. But is there a way for us to think that -- is there a part of that, that's integration expense? And is there a way to think of the what accounts for other expense.

Yes, John, there's really 3 main things going on in there. One is just the run rate of what Discover expenses would be otherwise categorized in our bucket of other. In addition to that, there's some of the integration expenses and then the third piece is recall that there were some things that we talked about -- or I talked about in last quarter's call around business changes and reporting alignment that was going to impact the operating efficiency by roughly 90 basis points and the total efficiency by 50 basis points. that were P&L neutral, but making those geography changes and 1 of the elements fit into that line item as well. So that's causing all 3 of those forces are causing a bit of lumpiness in that line item this quarter.

Okay. That's very helpful. Appreciate that. And then, Rich, you did talk about private commercial credit markets. I'm wondering if you could talk about your opinion on the influence that private credit is having on consumer finance at this point in time.

So John, that is a great question. I think, obviously, the -- for many, many years, private credit has just so much of all of its energy has gone toward the commercial side of the business. We're on high alert, obviously, watching some of the things going on, on the consumer side of the business. also we participate from a business point of view in our NBFI business with some lending in that space. But I don't have a huge strategic assessment to share with you at this point. I think it's much earlier days. And there are certain aspects of the consumer business, most notably credit cards that don't lend themselves as naturally to private credit. But again, whereas other things like installment loans and in many ways, auto lending being installment loan closed in kind of business models lend themselves more to that. So I think we -- I really appreciate your question. We're all going to need to watch carefully in that space. And we need to both watch it from a defensive point of view, but also, as always, from an opportunity point of view as well.

That concludes our Q&A session this evening. I just wanted to close by thanking everybody for joining our conference call today, and thanks for your interest in Capital One. Have a great evening.

Thank you. This concludes today's conference call. Thank you for your participating, and you may now disconnect.