Capital One (COF) Q2 2025 Earnings Call Transcript

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DATE

• Tuesday, July 22, 2025, at 5 p.m. EDT

CALL PARTICIPANTS

• Chairman and Chief Executive Officer — Richard D. Fairbank
• Chief Financial Officer — Andrew M. Young
• Managing Vice President, Investor Relations — Jeff Norris

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RISKS

• Chairman Fairbank stated, "We expect our integration costs will be somewhat higher than our previously announced $2.8 billion" for the Discover acquisition, indicating higher-than-anticipated deal-related expenses.
• Chief Financial Officer Young reported a GAAP net loss of $4.3 billion for Q2 2025, driven by purchase accounting impacts and the initial Discover allowance build.
• The company cited a "one notable item": a law change in California that increased the effective tax rate in Q2 2025, although it was offset by a $128 million one-time tax benefit from a deferred tax asset true-up.

TAKEAWAYS

• Discover Acquisition: The Discover deal closed on May 18 and contributed $2 billion of revenue and a $6.4 billion net loss from continuing operations for the partial quarter (GAAP).
• Net Income / Adjusted Net Income: GAAP net loss was $4.3 billion, or $8.58 per diluted share; excluding adjusting items, net income was $2.8 billion and diluted EPS was $5.48.
• Revenue Growth: Revenue (GAAP) increased $2.5 billion, or 25% sequentially from the prior quarter; adjusted revenue grew 26%, or $2.6 billion, compared to the first quarter of 2025.
• Expense Dynamics: Noninterest expense (GAAP) rose 18% sequentially, or 14% net of adjustments; purchase accounting intangibles amortization contributed $255 million to noninterest expense.
• Pre-Provision Earnings: Pre-provision earnings increased 34% sequentially; net of adjustments, up 40% compared to the first quarter of 2025.
• Provision for Credit Losses: GAAP provision was $11.4 billion, including $8.8 billion related to Discover; provision excluding Discover initial allowance build was $2.7 billion, an increase of $294 million compared to the prior quarter, driven by $324 million in higher net charge-offs.
• Loan Growth: Ending loan balances increased 72% year over year due to the inclusion of $99.7 billion Discover card loans; Excluding Discover, ending loans grew about 4% year over year.
• Allowance for Credit Losses: Total allowance rose $7.9 billion to $23.9 billion; coverage ratio increased 52 basis points to 5.43%.
• Liquidity: Total liquidity reserves reached $144 billion, up $13 billion from the prior quarter; cash position was $59.1 billion, up $10.5 billion from the prior quarter.
• Net Interest Margin (NIM): NIM for the quarter was 7.62%, up 69 basis points sequentially, with Discover contributing a 40 basis point increase to net interest margin.
• CET1 Capital Ratio: Common equity Tier 1 ratio was 14%, up roughly 40 basis points from the prior quarter.
• Domestic Card Metrics: Year-over-year purchase volume grew 22%, including Discover; Excluding Discover, year-over-year purchase volume growth was about 6%. The domestic card net charge-off rate was 5.25%, down 80 basis points from the prior year quarter; 30-plus delinquency rate was 3.6%, down 54 basis points year-over-year. Legacy Capital One card net charge-off rate was 5.5%, and 30-plus delinquency was 3.92%.
• Consumer Banking: Global payment network transaction volume from the Discover close through quarter-end was about $74 billion. Auto originations grew 28% year-over-year. Consumer banking ending loans rose $5.6 billion, about 7% year-over-year. Ending consumer deposits grew 36%; average deposits were up about 21%, primarily from Discover.
• Commercial Banking: Ending and average loan balances were up 1% sequentially; ending deposits down about 2% from the linked quarter. Annualized net charge-off rate increased 22 basis points sequentially to 0.33%.
• Marketing Spend: Total company marketing expense was $1.35 billion, 26% higher year-over-year, primarily driven by domestic card activity and integration of Discover marketing spend.
• Updated Guidance on Synergies: Chairman Fairbank stated, "We are on track to deliver the $2.5 billion in total net synergies" as discussed previously.

SUMMARY

Capital One Financial (NYSE:COF) closed its acquisition of Discover, which drove significant reported GAAP loss and materially expanded balance sheet metrics. Management confirmed the integration is advancing as planned, with synergy targets reaffirmed and excess capital levels providing flexibility pending further internal analysis. Early phases of migrating debit card volume to the Discover Network have begun, with anticipated completion by early 2026. The company is raising both integration cost estimates and long-term investment in technology, international acceptance, and marketing following the completion of the Discover acquisition, characterizing this as essential to sustaining growth and returns. Management remains confident that the combined company's go-forward earnings power, as it emerges from integration, aligns with initial deal expectations, despite line-item volatility and the need for incremental outlays.

• Chairman Fairbank said, "We began reissuing Capital One debit cards onto the Discover Network with early pilot populations in June, and we expect the conversion to continue in phases through early 2026," providing a timeline for interchange benefits realization.
• Chief Financial Officer Young clarified that additional investments beyond integration costs are "distinct from the achievement of the cost synergies" and will be evaluated for incremental value creation, not embedded in the $2.5 billion synergy target as discussed on the April earnings call.
• Chairman Fairbank described increased investment in "international acceptance and then a global network brand" as prerequisites for realizing revenue synergies from the network business.
• Management indicated plans to "lean in" to growth opportunities at Discover, including the student credit card and secured card segments, while preserving legacy customer experience strengths.
• The company observed that the shift to including late fees in interest income and amortization of fair value marks each produced offsetting six basis point impacts on NIM.
• Young observed, "We are operating with excess capital above the long-term need of the combined company," but full guidance on target levels will follow completion of internal model updates.

INDUSTRY GLOSSARY

• PCD Loans: Purchased Credit Deteriorated loans — acquired loan assets determined to have experienced significant credit deterioration since origination, requiring specific accounting treatment.
• Core Deposit Intangible: An intangible asset recognized to account for the economic value of stable, low-cost core deposits acquired in a bank acquisition.
• SCB (Stress Capital Buffer): The regulatory capital buffer determined by the Federal Reserve stress test, specifying the minimum common equity Tier 1 capital above regulatory minimums.
• Network Brand: Refers to the branded payments network (e.g., Discover Network) owned and operated for transaction processing, acceptance, and brand value.
• VentureX: Capital One’s premium travel-focused credit card targeting high-spending consumers, highlighted for its earn-rate and rewards structure.

Full Conference Call Transcript

Jeff Norris: Thanks very much, Josh, and welcome, everybody. Just a few opening remarks. To access the live webcast of this call, please go to the Investors section of Capital One's website, capital1.com. A copy of the earnings presentation, press release, and financial supplement can also be found on the Investors section of Capital One's website by selecting Financials, then Quarterly Earnings Releases. With me tonight are Mr. Richard Fairbank, Capital One's Chairman and Chief Executive Officer, and Mr. Andrew Young, Capital One's Chief Financial Officer. Rich and Andrew are going to walk you through the presentation summarizing our second 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. 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. Fairbank. Rich?

Richard Fairbank: Thanks, Jeff, and good evening to everyone on tonight's call. I want to begin tonight by welcoming our colleagues at Discover to the Capital One journey. As you know, we completed our acquisition of Discover on May 18, and we're fully mobilized and hard at work on integration, which is going well. It's still early days, but we very much like what we've seen so far. We share key cultural attributes with Discover, including a deep shared commitment to customers. And we're as excited as ever by the expanding set of opportunities to grow and create value as a combined company. From our founding days, we've been on a quest to build, you know, a great financial institution.

An integrated banking and global payment platform that's positioned at the forefront of the opportunities that will come as technology and data transform financial services. Discover enhances and accelerates our progress on this quest. I'll share additional thoughts on the hard work, investments, and compelling opportunities we see going forward at the conclusion of tonight's call. But for now, I'll turn the call over to Andrew to discuss the balance sheet and purchase accounting impacts of the deal, as well as our financial performance in the second quarter. Andrew?

Andrew Young: Thanks, Rich, and good afternoon, everyone. I will start on Slide three of tonight's presentation. As Rich just discussed, we closed the acquisition of Discover on May 18. We have now completed provisional purchase accounting and incorporated Discover's business lines into our reported segments. With Discover's domestic card and personal loans now included in our credit card segment, and Discover's deposits and network businesses in our consumer segment. As part of the acquisition, we acquired $98.3 billion of domestic card loans with a net fair value discount of $220 million. We also acquired $9.9 billion of personal loans with a net fair value discount of $114 million.

And we acquired $106.7 billion of deposits with a net fair value discount of $30 million. The amortization of these net fair value marks decreased net interest income by $85 million in the quarter. The full loan and deposit amortization schedule is included on slide 17 of the appendix. We also acquired $7.9 billion of home loans which have been marked as held for sale and are now included in discontinued operations. The net credit mark on the Discover loan portfolio increased the allowance on the balance sheet by $8.4 billion, with $8.8 billion of provision expense for non-PCD loans flowing through the P&L. I will discuss the allowance in greater detail in a moment.

There were multiple amortizing intangibles created as a result of the acquisition. We recognized a core deposit intangible of $1 billion, a purchased credit card relationships intangible of $10.3 billion, and network and financial partner relationships intangibles of $1.5 billion. The amortization of these intangibles increased noninterest expense by $255 million in the second quarter. We have included a full intangible amortization schedule on slide 18 in the appendix. We also recognize two intangibles with indefinite lives: a network intangible of $3.1 billion and brand and trade name intangibles of $2.3 billion. And finally, we recorded goodwill of $13.2 billion.

Including the impact of purchase accounting and the allowance build, the partial quarter impact of the legacy Discover businesses contributed $2 billion of revenue and a $6.4 billion net loss to the results from continuing operations. I'll also note that as we bring the two companies together, there are financial reporting presentation realignments and business changes that impact the reporting geography of revenue, marketing, and operating expense recognition. In total, these moves increase the operating efficiency by roughly 30 basis points and the total efficiency by roughly 15 basis points in the second quarter.

Looking ahead, we expect the run rate impact of these changes to result in a roughly 90 basis point increase to the operating efficiency ratio and a roughly 50 basis point increase to the total efficiency ratio all else equal. There is no impact from the reclassification to the timing of recognition in either the second quarter or in future quarters so the net impact to the bottom line is negligible. Turning to slide four. I'll cover the second quarter financial highlights for the combined company. Our results for the quarter were significantly impacted by the completion of the Discover acquisition.

On a GAAP basis, we had a net loss of $4.3 billion, or a loss of $8.58 per diluted common share. Included in the results for the quarter were multiple adjusting items related to Discover, as well as a small addition to our legal reserves. Net of these adjusting items, net income in the quarter was $2.8 billion and diluted earnings per share was $5.48. There was also one notable item in the quarter. A law change in the state of California increased our effective tax rate but also created a one-time $128 million tax benefit as a result of truing up our deferred tax asset.

Revenue in the second quarter increased $2.5 billion or 25% compared to the first quarter. Adjusted revenue increased 26% or $2.6 billion. Noninterest expense increased 18% or 14% net of adjustments. Pre-provision earnings in the second quarter were up 34% to the first quarter. Net of adjustments, pre-provision earnings increased by 40%. The increase in pre-provision earnings was largely driven by the partial quarter impact of Discover, while also benefiting from strong legacy Capital One results. On a GAAP basis, our provision for credit losses was $11.4 billion in the quarter. Excluding the $8.8 billion initial allowance build for Discover, provision for credit losses was $2.7 billion. An increase of $294 million compared to the prior quarter.

The increase was more than driven by $324 million in higher net charge-offs. A decline in charge-offs at Legacy Capital One was more than entirely offset by the addition of the partial quarter of the Discover portfolio. Turning to slide five, I'll now cover the allowance in greater detail. We built $7.9 billion of allowance in the quarter, bringing the allowance balance to $23.9 billion. The primary drivers of the change in allowance related to the Discover acquisition which included an $8.8 billion expense for non-PCD loans and a $2.9 billion initial allowance for PCD loans offset by a $3.3 billion benefit from the expected recoveries of acquired Discover loans that are fully charged off.

Excluding these Discover impacts, the allowance balance declined by approximately $400 million. Our total portfolio coverage ratio increased 52 basis points to 5.43%, driven largely by the mix shift of our portfolio. I'll cover the drivers of the changes in allowance and coverage ratio by segment on slide six. In our credit card segment, we built approximately $8 billion of allowance in the quarter. Roughly $760 million of the build is driven by the acquisition of Discover's personal loan portfolio, with the remaining $7.2 billion build in the domestic card business. The domestic card build was driven by two factors. First, we released approximately $400 million of allowance in the legacy Capital One portfolio.

This legacy card release was driven by continued favorable credit performance in the quarter partially offset by modestly worse economic outlook. And second, we built $7.6 billion of allowance for the Discover domestic card loans added in the quarter. The combination of incorporating an updated economic outlook, aligning allowance methodologies, and reserving for growth in the portfolio, led to a roughly $400 million increase in the allowance for Discover's card loans, relative to the equivalent balance as a standalone company at the end of Q1. The consolidated domestic card coverage ratio now stands at 7.62%. The allowance balance in our consumer banking segment was largely flat at $1.9 billion.

Observed credit favorability and the impact of stable auction prices was largely offset by growth in the auto business. The ending coverage ratio of 2.29% was down eight basis points from the prior quarter. And finally, the commercial banking allowance balance of $1.5 billion and coverage ratio of 1.74% are largely flat to the prior quarter. Turning to page seven, I'll now discuss liquidity. Total liquidity reserves ended the second quarter at $144 billion, up roughly $13 billion relative to last quarter. Our cash position sits at $59.1 billion, up $10.5 billion from the prior quarter.

The increase in cash was primarily driven by proceeds from the sale of a portion of Discover Securities, as well as the addition of acquired cash from Discover. Our preliminary average liquidity coverage ratio increased slightly during the second quarter to 157%. And our average NSFR remained roughly flat at 136%. Turning to page eight, I'll cover our net interest margin. Our second quarter net interest margin was 7.62%, 69 basis points higher than the prior quarter. The partial quarter impact of adding Discover increased NIM by roughly 40 basis points.

This 40 basis point increase includes the roughly offsetting effects of a six basis point drag from the fair value marks, and a six basis point tailwind from changing Discover's historical practice to now include late fees in interest income. The remaining nearly 30 basis point improvement in NIM was driven by legacy Capital One. Had lower rate paid on deposits, a liability mix shift towards deposits, and one additional day in the quarter. Looking ahead, we expect the full quarter benefit from the Discover acquisition to drive an additional 40 basis point increase to NIM all else equal. Turning to slide nine, I will end by discussing our capital position.

Our common equity Tier one capital ratio ended the quarter at 14%, approximately 40 basis points higher than the prior quarter. The impact of the equity issuance for the acquisition was partially offset by the additional goodwill and intangible assets, the increase in risk-weighted assets, the net loss in the quarter, dividends, and $150 million of share repurchases. During the quarter, the Federal Reserve released the results of their stress test. Our preliminary stress capital buffer requirement is 4.5%, resulting in a CET one need of 9%. The new SCB becomes effective on October 1.

Now that we've closed the Discover transaction, we are working through our internal modeling of the combined companies' capital need and look forward to sharing an update once our work is complete. With that, will turn the call back over to Rich.

Richard Fairbank: Thanks, Andrew. Slide 11 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 12. The Discover acquisition was the dominant driver of second quarter domestic card results, including the impact of a partial quarter of combined operations, a combined quarter-end balance sheet, and purchase accounting effects. Looking through the Discover impact, the combined domestic card business delivered another quarter of top-line growth, strong margins, and improving credit. Year-over-year purchase volume growth for the quarter was 22%, which includes $26.5 billion of Discover purchase volume. Excluding Discover, year-over-year purchase volume growth was about 6%.

Ending loan balances increased 72% largely as a result of adding $99.7 billion of Discover card loans. Excluding Discover, ending loans grew about 4% year-over-year. And revenue was up 33% from the second quarter of 2024, driven largely by adding the partial quarter of Discover revenue. Excluding Discover, year-over-year revenue growth was about 8% driven by underlying growth in purchase volume and loans. Revenue margin for the quarter was 17.3% including a 121 basis point impact from the partial quarter of combined operations and amortization of the purchase accounting fair value mark. Excluding these Discover impacts, revenue margin would have been 18.5%. The domestic card net charge-off rate was 5.25%, down 80 basis points from the prior year quarter.

The 30 plus delinquency rate was 3.6%, down 54 basis points from the prior year. These metrics were impacted by the addition of Discover, which has historically had lower losses and delinquencies than Capital One. The delinquency metric was also impacted by aligning methodologies between Discover and Capital One. Capital One's legacy domestic card portfolio would have had a net charge-off rate of 5.5%, down 55 basis points year-over-year. And a 30 plus delinquency rate of 3.92%, down 22 basis points from the prior year. Capital One's card delinquencies have been improving on a seasonally adjusted basis since October, and our losses have been improving since January.

Discover's card credit metrics peaked about a quarter later but are now improving steadily following a similar path to what we observe on the legacy Capital One portfolio. Domestic card noninterest expense was up 42% compared to the second quarter of 2024. Operating expense and marketing both increased year-over-year. Total company marketing expense in the quarter was $1.35 billion, up 26% year-over-year. Our choices in domestic card are the biggest driver of total company marketing. We continue to see compelling growth opportunities in our domestic card business. Our marketing continues to deliver strong new account growth across the domestic card business and build an enduring franchise with every spender at the top of the market.

Compared to the second quarter of 2024, domestic card marketing in the quarter included the addition of Discover marketing, higher direct response marketing, higher media spend, and increased investment in premium benefits and differentiated customer experiences. As always, all of our marketing and origination choices are informed by our continuous monitoring of portfolio trends, market conditions, and consumer and competitor behaviors. Slide 13 shows second quarter results in our consumer banking business. Global payment network transaction volume from the May 18 close of the Discover acquisition through quarter-end was about $74 billion. Auto originations were up 28% from the prior year quarter driven by overall market growth and our strong position to pursue resilient growth in the current marketplace.

Consumer banking ending loan balances increased $5.6 billion or about 7% year-over-year. Average loans were up 6% compared to the year-ago quarter. Ending consumer deposits grew at 36% and average consumer deposits were up about 21% 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 powered by our technology transfer and our compelling no fees, no minimums, and no overdraft fees customer value proposition. Consumer banking revenue for the quarter was up about 16% year-over-year, driven predominantly by the partial quarter of Discover, as well as growth in auto loans.

Noninterest expense was up about 37% compared to the second quarter of 2024, driven largely by the partial quarter of Discover, as well as increased auto originations, the legal reserve addition that Andrew mentioned, higher marketing to drive growth in our national consumer banking business, and continued technology investments. The auto charge-off rate for the quarter was 1.25%, down 56 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 4.84%, down 83 basis points year-over-year. Slide 14 shows second quarter results for our commercial banking business.

Compared to the linked quarter, both ending and average loan balances were up 1%. Ending deposits were down about 2% from the linked quarter. Average deposits were down 4%. Continue to manage down selected less attractive commercial deposit balance. Second quarter revenue was up 6% from the linked quarter and noninterest expense was up by about 1%. The commercial banking annualized net charge-off rate for the second quarter increased 22 basis points from the sequential quarter to 0.33%. The commercial criticized performing loan rate was 5.89%, down 52 basis points compared to the linked quarter. The criticized nonperforming loan rate was down 10 basis points to 1.30%.

As we close this presentation, and before we open it up for Q&A, I want to pull up and reflect not just on the quarter, but also on where we are. In the second quarter, bringing on Discover for a partial quarter, and the related purchase accounting impacts dominated our reported results. But looking through these effects, our adjusted earnings, top-line growth, credit results, and capital generation continued to be strong. We completed the Discover acquisition on May 18. And we continue to be very excited about the opportunity. Here are some early financial observations. They are, of course, still subject to change, but we wanted to share our thoughts with you. Let me start with integration costs.

Our integration budget covers a wide array of expenses, including deal costs, moving Discover onto our tech stack, integrating their products and experiences, making additional investments in risk management and compliance, and integrating the talent and taking care of the associates along the way. The integration is off to a great start. But as we have gotten more granularity on each of these efforts, we expect our integration costs will be somewhat higher than our previously announced $2.8 billion. Let me turn now to synergies. We are on track to deliver the $2.5 billion in total net synergies we discussed on the April earnings call.

There are significant cost savings and also significant real revenue synergies, and we have line of sight to achieving them. I also want to savor this moment and where we are. We are on the cusp of even greater opportunities down the road. These opportunities come both from this deal and also from Capital One's to be at the frontier of a rapidly changing marketplace. These opportunities are exciting, but they will require significant investment to bring them home. Let me start with the opportunities with Discover. The revenue synergies we have already identified come from moving our debit business and a portion of our credit business onto the Discover network.

To move more volume and capitalize on the tremendous scale benefits of the network. We need to achieve greater international acceptance and then build a global network brand. This will enable moving bigger spenders onto the Discover network. These additional moves require sustained investment for a number of years, and we will begin to undertake these investments first in acceptance and then when we get the network to critical mass, we will invest in the network brand. There are only two banks in the world with their own network, and we are one of them. We are moving to capitalize on this rare and valuable opportunity.

With all the discussion of we can lose sight of the very important place Legacy Capital One is in. We are in the thirteenth year of an all-in technology transformation. While most companies have invested in transforming technology at the top of the tech stack. In other words, leading with customer-facing applications. We have taken the much harder but ultimately necessary journey. We have been rebuilding the company from the bottom of the tech stack up essentially building a modern technology company that does banking. As we move up to tech stack, the opportunities are accelerating. We are also the beneficiary of decades of investment in our data and analytics capabilities and the building of a well-known national brand.

Together with our leading technology capabilities, they are the enablers of our many opportunities. Take our retail bank. The universal playbook in banking is to build a national bank through acquisitions. However, we are doing it organically on the shoulders of our modern tech stack, our full-service digital banking offerings, our thin physical distribution of showroom branches, and our national brand. We are enjoying a lot of traction and the acquisition of a network propels us forward even more. Building the national bank requires sustained investment in marketing and we are doing that. And we expect to lean in even more. Let me turn to our card business.

After building a mass market credit card business, we declared in 2010 were launching a quest to win at the top of the market with heavy spenders. Few card players have chosen sustainably to take on this quest. We have been steadfast. We have had a lot of success in this journey. But it is a long one. Our two biggest competitors are investing heavily, and we know we will need to keep leaning into this big opportunity. As we have moved up to tech stack, we have seized the opportunity to pursue emerging growth opportunities across our company. Some of the salient ones you have seen and hopefully experienced. Like Capital One Shopping and Capital One Travel.

Another example is Auto Navigator, which is a three-party platform designed to reduce friction for consumers and dealers. In buying and financing. A car. Most importantly, we continue to invest in our modern technology stack. The gap between the modern technology companies fully in the cloud built on modern applications and data. And the rest of corporate America continues to grow. The modern tech companies are well positioned to win as the world continues to evolve and we have spent years. To become one of them. The rage of the world is AI. Some aspects of the AI revolution will be broadly accessible to all companies and other aspects will be very exclusive.

Most companies will benefit from the transformation in how work is done that will be available through third-party AI tools. But only the companies built on a modern tech stack and deeply invested in data will be in a position to reinvent their business model to put AI at the heart of operations, risk management, and the customer experience. The opportunities are transformational, and we are well positioned in that quest. But these opportunities require sustained investment in AI and in AI talent. And we are doing that. In a company built for innovation and organic growth, I am struck by the number of compelling opportunities for innovation and value creation that we see.

These opportunities are made possible by the choices we have made. Over the last many years. As I have been saying, these opportunities require And for many of them, timing is critical as we strive to seize competitive advantage. Collectively, these investments across Discover and Legacy Capital One are significant. But they also will 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. When I reflect on our journey from founding the company to where we are today, we got here by always working backwards from where winning is and driving the continual transformations and investments to get there. The choices we made over the years also created the opportunity for us to acquire Discover. And in the spirit of that quest, thirty-eight years after the founding idea for Capital One, we find ourselves as well positioned as we've ever been.

To drive future success and value creation. And now we'll be happy to answer your questions. Jeff?

Jeff Norris: Thank you, Rich. I'll 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. If you have follow-up questions after the Q&A session, the Investor Relations team will be available. Josh, please start the Q&A session.

Operator: Thank you. Star one on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. One moment for questions. Our first question comes from Terry Ma with Barclays. You may proceed.

Terry Ma: Now that you've closed the acquisition and do appreciate the updated financial observations, but do you have any kind of updated thoughts on economics of the deal that you can share, whether it's, you know, earnings power over time or some sort of return targets? That investors should be kinda thinking about?

Richard Fairbank: Terry, thank you. We were really glad to be in a position of finally being able to close the deal, and we're, you know, a number of weeks into being on the other side of that. You know, I shared some comments in the prepared remarks about how we're thinking about continuing to be very much believing in the earnings power of our combined entity. And, also, of course, we're, you know, leaning into the opportunities that are classic Capital One in terms of really, laying the foundation for longer-term earnings power on top of that.

So we don't have any really other than my earlier comments, I don't have any further specific updates on that, but we certainly are very bullish about the deal and the economics and earnings power and opportunities on the other side.

Terry Ma: Got it. And then as a follow-up just on capital level, which you mentioned you guys are doing your internal work. Any sense of the kind of timing of when you kinda get that informed view and communicate that to investors then as I kinda take a step back, you guys were at 14% CET1. That's meaningfully above what legacy Capital One's target was of 11% in Discover's 10% to 11%. Is there any reason why on a consolidated basis, it would be kinda meaningfully different? Thank you.

Andrew Young: Yes, Terry. Having closed the deal just a couple of months ago, you know, we are just getting full access to all of Discover's customer level data, and we need to run all of that information through our models. And so while we received the SCB from the Fed and it declined it to 9%, as you well know, you know, that number's fluctuated from, you know, 10.3 to 7 over the last handful of years. So we think about capital largely through the lens of our internal assessment of our longer-term capital need versus the Fed's, which is why we need to do that modeling. And so we are still in the middle of that work right now.

I will say that we're not finding anything surprising at all in our analysis. And we feel comfortable that at 14%, we're operating with excess capital above the long-term need of the combined company, and we have the flexibility with our repurchase actions as we're operating under the SCB, but we need to complete that work. So as we get closer to finishing the work, think it's reasonable to assume that we'll begin to step up our repurchases from recent levels, but we look forward to sharing an update more broadly on our work when it's complete.

Jeff Norris: Next question, please.

Operator: Our next question comes from Rick Shane with JPMorgan. You may proceed.

Rick Shane: Thanks for taking my question. Look, I'm going to break my own personal rule here. Congratulations on this completion of the acquisition. It's transformational, and it's gonna be very interesting to see what happens from here. Rich, you had alluded to the fact that the integration expenses are going to be above the initial $2.8 billion target. Could you help us understand that more specifically? And also, could you put into context where you're seeing the opportunity for incremental investment? So that way, we can sort of translate where, you know, what the opportunity would be.

Richard Fairbank: So to Rick, thank you. Thanks for your congratulations. It's been a long time coming. We're all very excited about it, and we know our investors are pretty excited as well. With respect to the integration costs, you know, I think when one embarks on a thing at the very beginning is we're undertaking a deal, we do our very best to take all the different things that would be involved in integration and, you know, go around the house and, you know, ask everybody what they think and add it up. And, basically, this is just a matter of as we get deeper into it, it is, you know, coming in.

So it's coming in well, first of all, you know, we're not we don't have an absolute definitive final estimate of it, but it's, you know, coming in somewhat higher. But it's not in any one thing. It's really just across a variety of the many elements of this deal. So we just, you know, as we as we, you know, got a sense it was gonna be somewhat higher, we just wanted to flag that. You know, the investments. Let me talk about it. The investments here. Everything that I talked about in my remarks a few minutes ago about investments. Our investments and opportunities, we've been talking about some period of time.

So we're not unveiling new, you know, something brand new that we've never talked about before. But my point the point I really wanted to make and why I took the time to share that conversation is that all of these opportunities have we have been pursuing for a long period of time. And they stand on the shoulders of investments we have been making for a very long period of time, most notably the investment in transforming the tech stack of Capital One. But, also, very much investments in brand and deep, deep investments over many, many years. On data and analytics and things like machine learning and AI itself.

So the point of that I was sharing with you is as we move up the tech stack and get deeper and get closer in the pursuit of these opportunities, we find these opportunities are we're very excited about these opportunities, and some of the opportunities are sort of accelerating as we look at them. But the only way to get here get there from here, is to lean into the investments.

We've been investing for quite some time, but our point was we're gonna really be leaning in from here to pursue this set of opportunities that if I calibrate relative to the whole history of founding and building Capital One, the portfolio of we have is the broadest and biggest set of opportunities that I've seen in our history. But the only way to get there is with investment. And you know the Capital One philosophy where we get very rigorous about what the opportunity is and you know, what it costs to get there.

But we lean into those investments, and I think that you know, the value creation for our investors on the other side of this, consistent with the plots we've taken in the whole history of building Capital One. And I think you know, it's there's a lot of value creation opportunity. But we're gonna we're gonna invest significantly to get there. Thank you.

Jeff Norris: Next question, please.

Operator: Next question comes from Sanjay Sakhrani with KBW. You may proceed.

Sanjay Sakhrani: Thanks. Rich, obviously, Discover is working through a number of credit issues. And not really leaning into growth like Capital One had been. I guess, since credit's now somewhat under control there, do you expect to sort of lean into growth at Discover as well inside of Prime as we look forward?

Richard Fairbank: Yeah. Yes. Sanjay, We do plan to lean into growth opportunities with Discover. Let me comment just a little bit about their card business and sort of and you've seen this. From the outside, but just sort of stand back standing back and talking about it. It's an amazing franchise they've built over the years. The credit losses got higher than they probably higher than anyone expected, and due to a number of choices that were made in the preceding years. And they very proactively stepped in and, you know, dialed back and went a little bit more back to the basics of how they had built their franchise.

And, you know, that has, you know, muted their originations in their growth over this period of time, but it's they were very important choices, and it's also been powering, you know, their good credit performance. So just as an example, their vintage their most recent vintages are coming in a lot better than prior years, and it's just it's it's a manifestation of pulling back. Now when pulling back happens, you know, there's the growth you know, the growth is somewhat muted, and that's the situation that they're in. Now we're coming in and getting to know them, and they're impressive card business, and we, you know, we like the products.

So, you know, we plan to continue their flagship credit card products have an amazing student lending business that we're very excited to continue to not student lending. Sorry. Student credit card business. We're excited to continue to lean into that. They've been very successful. In a secured card starter card business that they have had. So from a product point of view, we're gonna continue to lean into the business. We've spent a lot of time looking at their customer experience. They score very high on metrics that we ourselves collect, not just their own collected metrics, but we ourselves in calibrated metrics in the industry, great customer experiences, and very high levels of customer engagement.

So we are adopting a lot of the sort of customer technology choices that they have made. They have a great servicing experience. That we're going to very much try to just continue pretty much exactly what they're doing there. And from a brand point of view, of course, Discover won't be a corporate brand anymore. But on the credit card side, envision it, Sanjay, as a very salient product brand. So we will lean into the opportunities there. It's gonna be in the context of a little bit of muted growth at the moment. And I think as we fully get into there, there'll probably be a few areas we'll dial back around the edges.

And there I'm pretty confident there will be some areas where we will lean even harder into growth than they were. But it is certainly one of our goals to lean in to grow the franchise and try to preserve the very special things. That enabled them to build one of the great credit card companies. In America. Thank you. Just a follow-up for Andrew. Sorry to ask this question. Because I'm sure I can parse through all of this excellent disclosure that you provided in your comments. To get to some of my conclusions.

But just as we look ahead, what are some of the variables that we need to think about as a result of these purchase accounting changes? I heard you mention the NIM having a 40 basis point tailwind because of the reclass of late fees and such. But maybe, Andrew, can you just like help us think through some of the progression of the major line items as a result of this? Thanks.

Andrew Young: Well, appreciate the acknowledgment. Sanjay, worked really hard to disclose a lot, and I think you'll find not only in the presentation itself and in some of the footnotes, but the monthly 8-K data that went out today. There's some additional disclosures around, delinquency and charge-offs as well. So really did our best to provide visibility into all of those pieces. Reluctant to try to give you the full reconciliation of all of the metrics. I'd really point you to the couple of slides in the appendix because that very clearly spells out what are the implications to NIM, what are the implications to operating expenses in the footnote there?

You will see that we not only gave annual views, but we gave a quarterly view of this year. But for instance, you can see that NIM given the very short life, for instance, of the non-PCD card loans, which are marked above par, that actually creates a net drag in the immediate term, but that burns off very quickly. And so the non-PCD I'm sorry. The PCD that carries forward is actually gonna be a good guide to NIM over the course of multiple years. So it's really hard to give you a succinct summary of all of those pieces, which is why we did our best to lay everything out as best we can.

Of course, you know, these are subject to some revisions over time, which is, you know, why I phrased it in the way that we did, but you know, we're hopeful that these ultimately end up being the final marks.

Jeff Norris: Next question, please.

Operator: Our next question comes from Ryan Nash with Goldman Sachs. You may proceed.

Ryan Nash: Good evening, everyone.

Richard Fairbank: Hey, Ryan.

Ryan Nash: Hey, Ryan. So Rich, you know, you talked about significant sustained investment. I think the phrase was used several times. Talk about acceptance, marketing, the tech stack, and AI. And I think, you know, this will obviously create questions about how much all of this is going to cost. So is there anything that you can share that can give the market comfort that there isn't significant synergy reinvestment risk and that eventually this will result in a more consult in a more efficient consolidated company over time.

Richard Fairbank: Thank you, Ryan. So you think about the opportunities that we're talking about investing in, there are things I think investors have come to know over the years. And you know, we have talked a lot about them. But it starts with the tech transformation itself. As I say, we're in the thirteenth year of our technology transformation. The world continues to evolve, and we continue to build the most, you know, fully modern aspect up and down the tech stack. There's still work to do with respect to that, but we've had amazing progress.

And we're not just trying to modernize the company, but rebuild it in a way that is really way more efficient, way more able to scale up in innovation. Way more able to, you know, more effectively manage risk, credit risk, fraud risk, operating risk, and, you know, to, you know, create enhanced customer experience and, you know, collectively, we have found virtually all the things that we would like the capabilities we'd like for our company to have. They all have the same shared path, which is through the modernization of technology. So we will continue to invest there.

And so I don't think there's anything from an investor point of view that would surprise them with respect to that. It's just that as we move up the tech stack, you know, when it's a it's a lonely journey when you're in the bottom of the tech stack modernizing one piece of core infrastructure until a lot of other things are modernized, it's hard to see the tangible benefits. But moving up to tech stack, moves one closer in the ability to more monetize the opportunities. Then of course, you know, beyond that, we have now the whole Discover opportunity and, you know, there's lots we're investing in terms of integration and things like that.

But specifically, I call out that after this first wave of moving, all of our debit card business and a portion of our credit card business onto the network. To really capitalize on the tremendous scale that the scale economics in the network business we really wanna work to move more volume there and all roads in that quest lead through investing in international acceptance. And then a global network brand. So, you know, that I think and we've talked a lot to investors about that. We're very compelled by the opportunities on the other side, but it's very clear to us that's a multiyear journey, and it's gonna require quite a bit of investment.

Additionally, let's talk about our national bank. We're the only, you know, major bank that I know of that is trying to build a national full-service bank organically. Everybody else is doing it through acquisitions. That requires a lot of investment. We have a we've had a lot of success in building this, now bringing on the Discover network and seeing the traction that we're getting collectively in our business, we are the these are very attractive, you know, we see great opportunity to continue to lean in, in fact, lean in harder. On building our national bank. And then, of course, there's the quest at the top of the market.

We all see what, even including, over the last week or so, what players the small number of players who are really focused on winning at the very top of the market. They're investing hard. And, you know? But there's a reason they're investing hard because there is a great opportunity at the at the top of the market, and it's not an opportunity that is available widely to, you know, all the credit card companies that requires a lot of sustained investment and brand building and technology. And experiences and products, etcetera. So that we're very pleased with the traction there.

And Ryan each year in our quest, we've we find that while we're getting good growth in our card business, the highest the fastest growing part of our card business has been with the heavier spenders. And it's a continued indication of the success as we keep moving higher in the marketplace, build the strength of our brand a little bit more each year. And, you know, that's something we're excited about. And the and the traction we're getting is validation to us. Of the payoff of continuing to invest there. As we have moved up the top of the tech stack, we also are building customer experiences to capitalize on being a company.

If you pull up Ryan, and think about this, we're not trying to just build a bank like the next bank down the street. We're trying to build a bank that is right at the heart of consumers' and businesses' financial lives with the with primary banking relationships and primary spending relationships. And we now have well over a 100 million customers and the ability to, over time, leverage that franchise of very highly engaged customers. With not just banking and credit card products, but in fact, build a much broader franchise with those highly engaged customers. That's why we're leaning into opportunities like Capital One Shopping.

Capital One Travel, and Auto Navigator each of which is much more deeply expanding our franchise, and each of them is getting a significant growth and traction and also able to leverage the size of our franchise, which, by the way, just got quite a bit bigger with this acquisition. So my point to investors is in a in a calibration across all the years I've been building Capital One, We've always taken the philosophy of working backwards from where winning is. And investing with our, you know, pencil sharpened and very rigorously from a value creation framework. Investing on what it takes to win as the marketplace evolves.

This you know, as you know, where we are at this time in the evolution of the company has probably the best opportunities that I've seen. And we are leaning into this. And also, as I mentioned, the earnings power, even as we look at the investments we're talking about here, the earnings power, you know, remains consistent in our estimation, remains consistent with what we expected. At the announcement.

Ryan Nash: Appreciate the call. I'm gonna step back with somebody else's question.

Jeff Norris: Next question, please.

Operator: Our next question comes from Erica Najarian with UBS. You may proceed.

Erika Najarian: Hi. Good afternoon. I'm I'm gonna just move off the expense question for a second and then re-ask a question on capital. Fully appreciate that you're going through a review and fully appreciate the statement that you found nothing yet that's surprising. You know, as we think about the 4% versus the legacy targets of Capital One and Discover, I guess another way to ask the question is, how much time will you give yourself to optimize the capital to where you think the right level is for the company?

Andrew Young: Yeah. Well, there's two parts, I think, to that question, Erica. One is kind of what level are we heading towards, which it also impacted any point in time of what just happening more broadly around us. Which then spills into the second piece of it of how much do we wanna be repurchasing at any one moment in time. So I don't have a precise answer for you. Of course, there is, you know, some upper bound in terms of SEC limitations to repurchases. But, what I would point you to is we're gonna work through the customer level data determine our longer-term capital need.

And, you know, as we move towards finishing that work, I think the phrase that I said earlier is, we'll likely begin to step up our repurchases from recent levels. But once that work is complete, which we're doing quickly as we can, we'll provide an update at that time.

Erika Najarian: And just a quick follow-up. For me. You know, Ryan mentioned it was so important to investors, and I just picked up on something that Rich said at the end of his answers. To Ryan, which is that EPS power remains consistent with how you thought about it, you know, you know, in the beginning of this journey with Discover. And I guess if I break it down your integration expenses are coming in a little heavier than the $2.8 billion. You did mention, you'd reiterate the synergy targets, which I would surmise to include the expense synergy targets.

And so I guess the last piece that in that everyone's trying to get at is does the run rate of expense growth that's flipped for lack of a better word, legacy Capital One accelerate? And I guess based on the explanation of what you're investing in, it seems like that would have been the case, but then Rich threw an EPS power should remain consistent with what you originally thought. So again, I know we're belaboring a point, I think could critical for investors as we think about the pro forma EPS power of this company.

Richard Fairbank: Yeah. Erica, I think we you were breaking up a little bit, but I we got the essence of what you were saying there. So Capital One and Discover have both historically had strong earnings power. And in combining them, we can build we can create a very strong institution and a course, also add synergies. There have been many moving pieces since we announced the deal. In both companies' actual operating results and investment choices, and, of course, in the broader economic competitive and credit backdrop. Since the deal announcement, individual line items have has it line items have, of course, drifted. But the net drift has so far been in a favorable direction.

At the same time, the opportunities and the investment associated with them have also grown. So we estimate that the net earnings power of our combined company as it emerges from integration is similar to our estimates in the deal model.

Jeff Norris: Next question, please.

Operator: Our next question comes from Moshe Orenbuch with TD Cowen. You may proceed.

Moshe Orenbuch: Great. Thanks. Rich, a couple of times you have alluded to competition in the high end of the card business. I was hoping you could kind of give us your sense as to how the major competitors, perhaps three if you, you know, you include all of all of the ones that have made announcements thus far. And whether there are any elements, you know, of the transaction that will be kinda helpful to Capital One in, you know, in addressing that. And I do have a follow-up. Thanks.

Richard Fairbank: Yes. Moshe. So the when we look at the competitive environment, I you know, I've said for years, competition is very intense in the card business. Certainly, most striking of late has been competition at the at the very top of the market. And you know what?

Before we get into specifically sort of things that happened over the last couple of weeks, two areas that the stakes have gone up and, you know, the investment required is sort of gone up to be at the highest level is in lounges, and you see a little bit of the sort of like an arms race that's probably not the right word, but certainly, the effort of the biggest players at the top of the market to build their own lounges in addition to offering partnership you know, a network of lounges through partners.

And, you know, Capital One has been doing that, and we're we're very, very pleased with the four lounges that I guess, five lounges that we have now I guess, five plus what we call the landing the one we have at Reagan National Airport. But so that's one of the areas that there's a lot of competition. But the research shows people really care about lounges. And so know, we understand that's part of the game, and we are very pleased with the customer reaction there, the traction, the volumes, and the pickup, in our own originations that we think is coming from that. Another area of competition at the top of the market is competition in marketing spend.

And competition in you know, creating unique access for customers. We also in this space, have been very pleased with some of the unique access we've been able to offer. Obviously, our Taylor Swift partnership has been a special opportunity for us. But this is this is the flip side of the some of the investments required is that a small number of players, I think, are separating from the pack relative to their offerings and the extent of their commitment to this space. So I think, competitively, there are real opportunities on the flip on other side of the sort of higher stakes of investment. Then get to the products.

And it is striking that at the top of the market, you know, both Chase and American Express have made announcements about things that the well, with American Express, it's still know, we haven't seen what they're gonna come out with. But certainly, on the Chase side, we have seen you know, a higher fee on the one hand, but also ramping up some of the rewards and also extending the list significantly of sort of the opportunities more on a coupon type basis that can come. So it's very clear. Both com and Amex seems to be you know, they've already been on a similar path there for a number of years.

And, I think that we would expect they'll come out with some enhanced offerings there. We have crafted our strategy at the top of the market. To not just be going out and try to exactly copy what the others do. But to try to create something that in its own way for the right customers is a absolutely best in class experience. So take our VentureX product. First of all, in terms of the earn rates on Venture X, it's earning at the 2X rate, which is the, you know, higher earn rates and some of the competitive products. Other products have co-brand relationships with airlines, and they're both a lot of expenses there but also unique offerings.

We instead have the any airline and sort of the unique aspect of the 2X on everything with Venturex. But what I would share with you is we are very pleased with the traction on Venturex. You've seen us on television continuing to tell our story. And I think that as other competitors, you know, come out with their plays that are different from ours, there continues to be, I think, quite a lot of open space. At our price point and our collective set of offerings and experiences that really, I think, offers a lot of opportunity for us. So we're leaning in hard with VentureX. And then we're continuing to build.

Enhanced capabilities across digital experiences, product offerings, lounges, and special preferred access. That I think will continue to position Capital One in a very attractive way in the competitive environment. You ask about the network. And, basically, will adding Discover what impact will that have? Certainly, adding the scale of Discover certainly helps us with respect to the just more opportunity to you know, even though Discover was not a top of the market player, but then I think also Moshe down the road longer term, I think we see opportunities on the network side of the business relative to the higher end of the market.

But I think that's an opportunity that is more way down the road than one in the near term.

Moshe Orenbuch: Got it. Thanks. Maybe just as kind of a follow-up I think the, you know, the one of the things that you know, that we've thought about a little bit is using the benefit of unregulated debit interchange to help build the banking franchise and to go to a rewards checking model. And you talked about, you know, the banking franchise and some of those impacts. Could you talk about how you see that in you know, now that, you know, you've got access to this and can start migrating your debit accounts.

Richard Fairbank: So our national bank strategy has always been about offering industry-leading products backed by a business model that can economically support that. So you think about that, we have a full-service digital bank. There are a lot of folks out there with digital bank capabilities. A key differentiator is Capital One has full service. Digital banking, We do believe physical presence matters, and our research continues to confirm that. Even ironically, so many people say, yeah. I never go into branch. But in their choices, physical presence does matter to a lot of people. And that's why we have built our thin distribution model of these sort of showroom branches.

But, again, importantly, working backwards from having the economics that's different from a branch on every corner kind of a thing. So the economics of this have supported a product offer that's industry-leading. No fees. No minimums. And no overdraft fees. And no other major bank has a primary that matches that. And actually, our product offer is democratizing banking by making it available to anyone. At no cost. And customers have responded, very positively. Let me turn to Discover. Discover has a small portfolio of cash back debit cards. We plan to keep those customers in their current product.

And we are and with the benefit of the network now, and, you know, bringing Discover on, we are raising the investment levels in our flagship product. To help propel our national bank growth with the very successful industry-leading value proposition that has gotten us here. So we are keeping what Discover had for its customers and we will lean into our industry-leading banking product going forward.

Jeff Norris: Next question, please.

Operator: Our next question comes from Don Fandetti with Wells Fargo. You may proceed.

Don Fandetti: Rich, can you share a little bit more about your international acceptance build-out plans? I'm just trying to think if there's a way you can help size it or talk about how the expenses funded because I guess the revenue benefit of moving the bulk of the credit cards over to the network happens after you get the acceptance. If there are any sort of guideposts or targets that you have would be helpful.

Richard Fairbank: Don, we, of course, you know, haven't been in the network business. So over the course of our what was it? Fifteen or sixteen or seventeen months pre-deal, we did everything we could to learn about the network business. We brought in a bunch of consultants to teach us everything they knew about that. And now, especially as we get on the other side of this, we are really going to school on the amazing, you know, learnings we're able to get with Discover. And I really wanna say it I've seen I've seen a lot of scale businesses in my days, and every just about every banking business I've ever seen is really quite scale-driven.

I've never seen any business as scale-driven as a network. Because, you know, the marginal cost of a transaction is virtually zero. And you know, the fixed costs are high in a business like that. So, it's not an accident that there are two, Visa and Mastercard are enormous companies and that, you know, most banks around the world don't have enough scale to have their own network even if they could solve the chicken and egg problem to get there. So we look at this, and we're certainly blessed to have a network. And I am struck this that given discovers really small scale, you know, domestically pretty small scale, but globally, strikingly modest scale.

I am struck at how extensive the international acceptance that they have already built is. Now it's not up to the levels that, you know, we would really want it to be in order to move more internationally traveling customers there. But I certainly was surprised at how good it is relative to the scale and sort of their, you know, thinking about the challenge they have to get there. But here's the inspiring thing. They've already built pretty good international acceptance. And they have a playbook to do it. That is the same playbook one would use to get quite a bit more international acceptance.

And there are four ways basically, that to build international acceptance and four ways that Discover has cobbled together this international network acceptance. Partnering with other networks, partnering with merchant acquirers, partnering with card issuing financial institutions, and finally, going directly to merchants. And they used a combination of all four of those. We have sat with them and said, how feasible is it to get more, and how would you get more? And the answer really is continue leveraging those four. And just lean in harder and invest more than Discover has historically invested.

We don't you know, we're you know, I in the calibration of the of the hills that Capital One has taken on over time and the journeys and the investments we've done in the history of our company. This is right down the fairway of the kind of challenge we take on working backwards from where winning is. I'm not we don't have you know, an estimate of exactly what it will take. And there's also another thing of even what acceptance level is exactly what we need because this is something as we get into it and see our customers experience. It's a bit of a you know it when you see it kind of a thing.

But what I'm comfortable with is the playbook is there. And the opportunity on the other side of this is very clear because that is the path to help us move more volume. To the other side. That plus the building of I mean, Discover already has a network brand. When I talk about building a global network brand, picture something that is has a more global it's more of a global brand more of a upmarket brand, and these are things working backwards from, you know, where we would try to go with our business down the road. So it's a it's to us, it's a very clear path.

It is classic Capital One, and we have taken on many challenges many opportunities like this, and patiently worked backwards from demonstrated opportunities, and this is right in the wheelhouse of that.

Jeff Norris: Thank you. Next question, please.

Operator: Our next question comes from John Pancari with Evercore. You may proceed.

John Pancari: Good evening. Just to go back to the cost topic again, the expense topic, sorry to go back to it. But just to clarify, what type of costs are included in the upfront integration costs that you indicated are likely to come in higher? And then what types of investments are netted against the 1.5 billion in cost saves that you set out.

Andrew Young: John, I wanna ask for clarification on the back half of your question. But in terms of what is included in the integration costs, you know, we had deal costs. We are making additional investments in their risk management. We're integrating, you know, their people. We're moving them to our tech stack. So those are the components that were included in the integration cost. So it's not one specific thing that I would point you to in terms of what is increasing the integration and signaling that we think they might be somewhat higher. But I didn't quite follow the half of your question. So could you just repeat that?

John Pancari: Yeah. I was just trying to determine the difference between the type of costs that are included in the upfront integration costs that are coming in higher versus the type of investments, like the investments in the network, any investments in regulatory areas that are that may be netted against the net cost saves that you set out.

Andrew Young: Yeah. So investments would include things like building out additional capabilities for debit on the network to enable future spend and increase customer engagement as opposed to in the integration cost that just reflects the sheer act of taking their or our debit volume and moving them onto their system. So, you know, philosophically, hopefully, that provides a bit of a window into the distinction between what is an integration spend versus what is an ongoing investment.

John Pancari: Right. So there's investments. There's ongoing investments that you being that they are netted against the cost saves and that you feel good about or that you had indicated in your prepared remarks that you are on track to achieve the expected $2.5 billion synergies. So is it fair to assume that there's no implied expected change in those investments that are within that $2.5 billion?

Andrew Young: There are three pieces to this. Maybe I'll put it in my language to make sure we're saying the same thing. One, are the integration cost, the $2.8 billion number that Rich referenced in his prepared remarks. And those are the necessary expenses, deal costs, people costs, integrating, you know, them onto our tech stack moving our debit onto their network. The second piece are the cost synergies that we have identified as a result of bringing those two our two organizations together. And those cost synergies are fully intact.

The third piece to it is additional investments that in some ways, like rich enumerated, that we will be making beyond, you know, the current levels of investments in certain areas that we're making today. So that is distinct from the achievement of the cost synergies that you articulated in the bucket. And I think you are netting the second and third category in your question, but I really wanna create a firm distinction between those two things because the additional investments are things that will power future growth and create additional value.

And the window or the evaluation process that we use for considering those investments are just like any other investment that we would make in Capital One, which is importantly distinct from achieving the synergies that we laid out in announcing the deal.

John Pancari: Okay. Alright. Thank you.

Jeff Norris: Next question, please.

Operator: Our next question comes from Jeff Adelson with Morgan Stanley. You may proceed.

Jeff Adelson: Hey. Good evening. Thanks for taking my question. Most of my questions have been asked and answered, but just on the debit conversion, I know you sort of characterize this as something that can happen relatively quickly. Can you just give us an update on where you are in that process? How quick you'll be able to pull that off, achieve the full the interchange benefit on a run rate basis. And maybe what are some of the steps you need to take from here to go through that and complete the conversion?

And as a part of that question, have you had any discussions with some of the largest merchants where your legacy Capital One debit customers are shopping today? Are those merchants on board with some of the changes that are coming forth and or are there any sort of negotiation that needs to happen?

Richard Fairbank: Okay. Thanks, Jeff. So we began reissuing Capital One debit cards onto the Discover Network. With early pilot populations in June. And we expect the conversion to continue in phases through early 2026. We expect the majority of customers to be on the debit excuse me, on the 2025 with all debit purchase volume running on the Discover Network by early 2026. So, you know, the one of the one of the real attractions to us of buying a network is the ability to have direct merchant relationships.

You know, when you it's it's it's sort of the way the market works, but when I think about founding Capital One and building a company where I always believed that the tip of the spear of the technology revolution in financial services would be payments. And so, you know, we built basically a payments company, and it's always is an odd thing to have one part of the value chain, a very important part in the value chain run by an intermediary. And, of course, it's reflective of how scale-driven the industry is, and that's kind of why it happens.

But elsewhere in our Capital One business, we have been working really hard to go direct to merchants and build direct merchant relationships because we have a 100 million customers, and, you know, merchants want to every merchant has the same objective function. They wanna drive more sales. And we have over a 100 million customers that, you know, want to, you know, have better deals. So another sort of wing of Capital One is going direct to merchants and really being able to leverage our huge customer base and the massive investment we have made in data and technology and over time, AI to be able to create more value for merchants. In areas like reducing fraud.

We're way down that path in direct relationships with merchants. Direct specific merchant-funded deals. So we're excited that the Discover acquisition allows us to now take this, you know, one piece of the value chain that was entirely run through intermediaries. And for some of our business, to really go direct. So as we do that, Jeff, we will continue to have conversations with merchants about and we also like to bring them, you know, data to show them the value that we're adding and the benefits of all of this and the debit. And now moving more of our debit business will be another part of those conversations and the growing relationship with merchants.

But we look forward to all of that as and the big picture point of a company, the scale of Capital One, really increasingly building a direct to merchant. Business model.

Jeff Norris: Next question, please.

Operator: Our next question comes from Brian Farrain with Truist Securities. You may proceed.

Brian Foran: Hi. I know you haven't been big users of GuideIn historically, but there have been times where you set out these guideposts, you know, whether it's the OpEx efficiency target, the I think the threading the seam at one point. Loss guidance, EPS guidance, those kind of things when you're helping investors navigate periods of transition or trying to understand an issue. I know you're kinda deferring to give specific guidance right now, but is that something you're contemplating? I mean, it is hard to look at kind of numbers for 2Q with the mid-quarter close and all the adjustments and really get comfortable or confidence of what the core going to look like over the next couple of quarters?

Is it kind of is there a thought of giving guidance on some high-level metrics or targets on returns or something like that? Or is it going to be a little bit more of tips forward they may philosophy?

Richard Fairbank: Brian, thank you for your question. You know, if I stand back, I go back to the when the day we launched the IPO of Capital One and I had spent a lot of years as a strategy consultant before that, a lot of time looking at companies and being inside companies. And one thing I was struck by is the role that guidance played in sometimes a well-intentioned thing ended up ending becoming the objective function of the business instead of really creating value for investors.

And so what we have tried to do is not run the company through guidance, but to but instead, what we have done from the founding days is one of the first things that we built is a business model of what I call horizontal accounting where we were very struck that companies would make choices that, you know, working backwards from vertical earnings instead of rigorously measuring horizontal returns, the value of, you know? And we believe every choice that's made in the company, you know, it's ultimately a, you know, has cost upfront and return.

And we measure before during, and after what is the value that got created, and our business model is absolutely focused on while we invest a lot, is very focused on making sure that it's creating value on the other end of that, and that's been a hallmark of what we do. Now along the way, so we have, you know, hopefully, to build a brand a credibility with investors that our business model is one that builds long-term value. And, you know, hopefully, our track record speaks for that. We have chosen to give guidance from time to time.

Where there are specific things that we think it's really important that investors understand on something that matters a lot to them and something where we have a perspective that can be very, very useful there. What we try to do is to really help investors understand why we are making the choices we're making and how everything we're doing is built is focused on building a franchise for the long term. And create long-term growth and earnings power for our investors. So when I think about this important moment here as we bring Discover into Capital One and think about all the earnings power and the opportunities that we have.

My comments at the beginning were intended to sort of give sort of a little bit of a of a bounding of how we're thinking about things by my comments about the earnings power even in an environment where some of the metrics have already moved the individual line items and in an environment where we see a particularly, you know, significant number of investment opportunities, to, you know, indicate to investors that the earnings power we see out the other side of this pretty consistent with what we saw at the beginning, knowing that everyone will take it back to the envelope and try to, you know, do their own estimations of that. But generally, we you know?

So I guess the I would say our guidance is, you know, situational and it's not that we never give it. We I'm sure we will in future on certain things. But I wouldn't wanna set an expectation for investors that at a certain point, here coming out of the gate with Discover that we're gonna lay out specific numbers because it's probably not what we're going to do.

Jeff Norris: Next question, please.

Operator: And our final question comes from the line of John Hecht with Jefferies. You may proceed.

John Hecht: Thank you for all the information on the Discover yeah. The update on the Discover journey. I guess my question is going back some of the traditional questions we'd ask you, Rich, is know, what's your I guess a two-part question is all I have is what's your opinion on the state of affairs of The US consumer? Has that changed in the last quarter? And have you noticed anything different between your customer set and the Discover customer set in terms of payment behaviors or spend behaviors?

Richard Fairbank: Yes. Thank you so much. So the US consumer is in a in a great place here. That we continue to we see The US consumer as a source of strength in the economy. The unemployment rate remains low and stable, Job creation remains healthy. Real wages are, of course, growing steadily. Consumer debt servicing burdens remain stable and near pre-pandemic levels. In our card portfolio, we're seeing improving delinquency rates, and lower delinquency entries. And payment rates are improving on a year-over-year basis. Now of course, the circumstances of individual consumers and households will vary as they always do.

And as we've mentioned in past earnings calls, some pockets of consumers are feeling pressure from the cumulative effects of inflation and higher interest rates. And we're still seeing some delayed charge-off effects from the pandemic, although the improving trend in our delinquencies suggest these effects are moderating. On the whole, I'd say The US consumer is in really quite good shape. Of course, like all of you, we're keeping a close eye on the potential impact of tariffs and other public policy changes. And, you know, the and sort of with the tariffs, there's been a lot of uncertainty.

But, you know, for now, even in that area, of course, we've all seen markets rebound most economic metrics have remained strong. And we haven't seen any adverse signals in our credit performance. In spend or in payments even in the most leading edge data. We're also closely as student loan repayments and collections resume. After a pause of almost five years. Specifically, we're watching the performance of card and auto customers with student loans and especially those customers whose student loans are now being reported as delinquent. So far, we haven't seen any spillover effects in these segments. But we'll continue to monitor this closely. So pulling way up, there's a lot of positive momentum in our performance.

In our improving overall credit metrics, and in the performance of our front book of new originations. So we'll keep a very watchful eye on the economy here, but I think in a world of a lot of turbulence. And if you read the news every day, you can think the world's falling apart. But, actually, if we don't read the news and just look at what our customers are telling us with their behaviors. It is it is, you know, a picture of strength. The Discover card performance, you know, as we brought them on we've been able to start unpacking performance across a number of dimensions. We're seeing credit improving in recent months.

The loan and purchase volume growth has been muted due to their originations pullbacks in recent years. The customer engagement and loyalty metrics continue to be very strong. Discover has a little bit you know, Discover has a little bit more of a revolver-oriented portfolio. All of us have revolvers. They have been a little bit more of a revolver-led business. We've been a little bit more of a spend-driven business model that, of course, has a bunch of revolving. And so we're we look forward very much to, you know, rolling up our sleeves and looking at some of the differences. And I'm sure many of the great similarities between the two.

But pulling way up, the consumer is in a good place. And both companies' card performance, credit performance, is really very positive.

John Hecht: Thank you very much.

Jeff Norris: That concludes our session for this evening. Thank you for joining us on this call today, and thank you for your interest in Capital One. Have a great evening, everybody.

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

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