Good day and thank you for standing by. Welcome to the Capital One Q1 2025 Earnings Call. Please be advised that today's conference is being recorded. After the speakers’ presentation, there will be a question and answer session. 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 to everyone. To access our live webcast of this call, please go to the Investors section of Capital One's website at capitalone.com and follow the links from there. A copy of the earnings presentation, press release and financial supplement can be found in the investors section of Capital One's website at capitalone.com by selecting financials and then quarterly earnings releases. 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. Richard and Andrew are going to walk you through our presentation, summarizing our first 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 factor section of our annual and quarterly reports accessible at Capital One's website and filed with the SEC. And 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 first quarter, Capital One earned $1.4 billion, or $3.45 per diluted common share. Included in the results for the quarter were adjusting items for legal reserve activities and discover integration expenses. Net of these adjusting items, first quarter earnings per share were $4.06. Pre-provision earnings in the first quarter were largely flat to the fourth quarter at $4.1 billion. On an adjusted basis, pre-provision earnings increased 2% from the fourth quarter. Revenue in the linked quarter declined 2% driven by 2 fewer days in the quarter. Noninterest expense decreased 5% on an adjusted basis, driven by declines in both marketing and operating expenses. Our provision for credit losses was $2.4 billion in the quarter, a decrease of $273 million compared to the prior quarter. The decrease was driven by $148 million lower net charge-offs and $123 million larger reserve release. Turning to Slide 4. I will cover the allowance in greater detail. We released $368 million in allowance this quarter, bringing the allowance balance to $15.9 billion. Our total portfolio coverage ratio decreased 5 basis points to 4.91%. I'll cover the drivers of the changes in allowance and coverage ratio by segment on Slide 5. In our Domestic Card business, we released $458 million in allowance. The allowance release was driven by continued favorable credit performance in the quarter, partially offset by higher consideration to our downside economic scenario and increased qualitative factors to account for heightened uncertainty. The coverage ratio remained largely flat as the impact of the allowance release was offset by the denominator effect from the paydown of seasonal balances. As a reminder, our Domestic Card coverage ratio is about 100 basis points above CECL day 1 after taking into account the impact of the termination of the Walmart agreement. 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 coverage ratio decreased by 4 basis points. And finally, our commercial banking allowance increased by $117 million. The build in allowance was driven by increased qualitative factors to account for heightened uncertainty as well as specific reserves for a small number of individual credits. Coverage ratio increased by 12 basis points to 1.73%. Turning to Page 6. I'll now discuss liquidity. Total liquidity reserves in the quarter increased to $131 billion, about $7 billion higher than last quarter. Our cash position ended in the quarter at approximately $49 billion, up $5 billion from the prior quarter. 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 during the first quarter was 152%. Turning to Page 7, I'll cover our net interest margin. Our first quarter net interest margin was 6.93%. It was 10 basis points lower than last quarter. The quarter-over-quarter decrease was driven by the 15 basis point impact of having 2 fewer days in the quarter. Beyond day count, NIM increased 5 basis points as the beneficial impact of the reduction in the repay in our deposits was only partially offset by the seasonal impact of lower average card loans and higher cash. On a year-over-year basis, NIM increased 24 basis points, driven by a favorable mix towards card loan and the termination of the revenue sharing agreement with Walmart, partially offset by 1 fewer day relative to last year's leap year. Turning to Slide 8. I will end by discussing our capital position. Our common equity Tier 1 capital ratio ended quarter at 13.6%, approximately 10 basis points higher than the prior quarter. Net income in the quarter and the impact of seasonal loan declines were largely offset by the impact of the final CECL phase-in dividends and $150 million of share repurchases. Looking ahead, we expect the record date for the second quarter dividend for both Discover and Capital One to be after the May 18 closing date. As a result, we expect current Discover shareholders will be shareholders of Capital One's common stock as of the expected record date and will therefore receive Capital One's $0.60 second quarter dividend, subject to Board approval. 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, our 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 5%. The first quarter of 2024 had an extra day since it was a leap year. Adjusting for this leap year effect, year-over-year purchase volume growth was about 6%. Ending loan balances increased $6.4 billion or about 4% year-over-year. Average loans increased about 5% and revenue was up 7% from the first quarter of 2024, driven by the growth in purchase volume and loans. Revenue margin for the quarter increased 37 basis points from the prior year quarter to 18.2%, primarily driven by the impact of the end of the Walmart revenue sharing agreement. The charge-off rate for the quarter was 6.19%, up 25 basis points year-over-year. The impact of the end of the Walmart loss sharing agreement increased the first quarter charge-off rate by 42 basis points. Excluding this impact, the charge-off rate for the quarter would have been 5.77%, a year-over-year improvement of 17 basis points. Our delinquencies have been improving steadily for several quarters on a seasonally adjusted basis. The 30-plus delinquency rate at the end of the first quarter was down 4.25%, down 23 basis points from the prior year. Domestic Card noninterest expense was up 13% compared to the first quarter of 2024. Operating expense and marketing both increased year-over-year. Total company marketing expense in the quarter was $1.2 billion, up 19% 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 heavy spenders at the top of the marketplace. Compared to the first quarter of 2024, domestic card marketing in the quarter included higher direct response marketing, higher media spend and increased investment in premium benefits and differentiated customer experiences like our travel portal, airline lounges, and Capital One shopping. 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 12 shows first quarter results in our Consumer Banking business. Auto originations were up 22% 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 $3.8 billion or about 5% year-over-year. Average loans were also up 5%. Compared to the year-ago quarter, ending consumer deposits grew about 8% and average consumer deposits were up about 9%. Our digital-first national consumer banking business continues to grow and gain traction, powered by our technology transformation and our compelling no fees, no minimums, and no overdraft fees customer value proposition. Consumer Banking revenue for the quarter was down about 2% year-over-year, driven by margin compression in Retail Banking, partially offset by growth in auto loans and retail deposits. Noninterest expense was up about 27% compared to the first quarter of 2024 driven largely by the first-quarter adjusting item Andrew discussed, 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 1.55%, down 44 basis points year-over-year, largely as a result of our choice to tighten credit and pull back in 2022, auto charge-offs have been a strong and stable contributor on a seasonally adjusted basis. The 30-plus delinquency rate was 4.93%, down 35 basis points year-over-year. Slide 13 shows the first-quarter results for our Commercial Banking business. Compared to the linked quarter, both ending and average loan balances were essentially flat. Ending deposits were down about 5% from the linked quarter. Average deposits were roughly flat. We continue to manage down select less attractive commercial deposit balances. First quarter revenue was down 7% from the linked quarter and non-interest expense was down by about 6%. The commercial banking annualized net charge-off rate for the first quarter declined 15 basis points from the sequential quarter to 0.11%. The commercial criticized performing loan rate was 6.41%, up 6 basis points compared to the linked quarter. The criticized non-performing loan rate was essentially flat at 1.40%. In closing, we continued to post strong and steady results in the first quarter. We delivered another quarter of top-line growth in domestic card loans, purchase volume, and revenue. In the auto business, we posted growth in originations and loan balances. Our national Consumer Banking business continued to deliver strong year-over-year growth, and consumer credit continued to improve. Looking forward, we're very excited to move forward with our acquisition of Discover. Last week, we received regulatory approval for our acquisition of Discover, and we're fully mobilized to complete the transaction on May 18. Until we close, we are still separate public companies, so we have limited access to Discover's information. Based on our due diligence and integration planning, we continue to expect that we will achieve the synergies we estimated when we announced the deal, enabled by the integration costs we estimated at the announcement. And we continue to believe that we'll achieve the synergies run rate in about 24 months following the May 18 closing date. And also, just a reminder, our network synergy estimate assumed the implementation of lower debit interchange rates proposed by the Fed under Reg II in October 2023. Those proposed rates are still pending because of various lawsuits. If there is ultimately no reduction to the current debit interchange fee levels it would lower our debit network synergy because it would increase the baseline to which we are comparing by about $170 million. But it would have no impact on our company's future revenue because, of course, the debit business will be on the Discover Network. Pulling way up, the acquisition of Discover is a singular opportunity. The combination of Capital One and Discover will create a leading consumer banking and payments platform with unique capabilities, modern technology, powerful brands, and a customer franchise of over 100 million customers that spans the marketplace. It combines proven and complementary banking and credit card businesses with a global payments network. It leverages Capital One's technology transformation and digital capabilities across a significantly larger customer franchise. It delivers compelling financial results and offers the potential to enhance competition and create significant value for merchants and customers, and it enables and drives significant strategic and economic upside over the long-term. And now we'll be happy to answer your questions. Jeff?

Thank you, Rich. We'll 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 1 question plus a single follow-up. If you have follow-up questions after the session is over, the Investor Relations team will be available to answer them. Josh, please start the Q&A.

Good evening Rich, good evening Andrew. Rich, there are evident concerns in the market about tariffs and consumer conditions. However, these worries don't seem to reflect in the results, especially with the better-than-expected credit and reserve release. Could you share what you're observing in the data at Capital One that led to your confidence in releasing reserves? And for Andrew, you mentioned factors like favorable credit and higher allocations for potential risks. Could you clarify what is included in the allowance for both unemployment and the overall economy? Thank you.

Thank you, Ryan. Let me address your question regarding the data we're observing. I'll start with a broader view of consumer health and the performance of our key credit metrics. Then I'll provide more detail on recent spending trends as that is being closely monitored. Overall, the U.S. consumer is still a strong pillar of the economy, reflected in various metrics. Unemployment remains low and stable, job creation is healthy, and real wages are on the rise. Consumer debt service levels are stable, close to what they were before the pandemic. In our credit card portfolio, we are noticing improved delinquency rates and fewer new delinquent accounts, along with a year-over-year increase in payment rates. However, individual circumstances may vary, and while some consumers are facing challenges due to inflation and higher interest rates, overall, I would say the U.S. consumer is in a good position. We continuously monitor leading credit indicators to gauge future trends. Looking specifically at our portfolio, delinquencies have remained stable on a seasonally adjusted basis for most of 2024, with recent improvements exceeding seasonal expectations, which is encouraging. Additionally, we've seen card payment rates increase year-over-year for the last two quarters, aligning with improved delinquency rates. Although increased payment rates may slow down loan growth, we consider this a worthwhile exchange due to better credit performance. Beneath this overall improvement, we've noticed a higher percentage of customers making only the minimum payments, indicating that some individuals are likely feeling inflationary pressure and rising interest rates. As for revolve rates, they have stabilized over the past year but remain below pre-pandemic levels across our key products and segments, which is another positive sign. While no single observation is definitive, together they provide valuable insights into credit and economic trends. Regarding new account origins, we've seen early performance that aligns with our expectations, showing stability and slight improvement compared to previous vintages and consistency with pre-pandemic levels. This stability may largely result from actions we've taken since 2020 to manage inflated bureau scores and navigate competitive dynamics and increased fintech options. Our proactive management may have mitigated some of the underlying weaknesses in the market. We are also monitoring recovery rates, which continue to rebuild after normalizing charge-offs, presenting a gradual benefit to our losses over time, assuming other factors remain unchanged. This reflects our overall solid credit situation, especially in the current uncertain environment. Moving on to spending trends in our card business and auto sector, spending patterns remained stable through the first quarter. Recently, we've detected an increase in per customer spending growth compared to last year across our consumer segments, although this trend has not yet appeared in our small business card portfolio. Part of this increase may be influenced by the timing of the Easter holiday this year compared to last year, so we should consider that factor. We've also seen recent retail spending increases, particularly in electronics, which may indicate earlier purchases due to tariff concerns. On the other hand, we're observing a slight dip in travel and entertainment spending growth, especially airfare. Lastly, regarding auto trends, early industry data suggest a pull-forward effect in auto purchases, likely as consumers aim to preempt potential tariff impacts. We're keeping an eye on our application and origination volumes and have noticed early signs that auction prices are rising beyond normal seasonal patterns. All of these observations are preliminary, but that's what we currently see at the margins. Now I'll hand it over to Andrew for your question.

Yes, Ryan, there are several factors influencing the allowance. Let me start with our baseline forecast and then address water considerations. For the baseline forecast, as Rich mentioned, our seasonally adjusted delinquency rates have improved year-over-year since about October of last year, and charge-offs have been getting better over the last few months after accounting for Walmart. Based on these observed credit results and our baseline forecast at the end of March, we used consensus estimates that were quite similar to those at the end of December. Unemployment was peaking in the 3% to 4% range, with GDP growth around 2% and inflation in the high 2% range, coming down from there. When we combine our observed credit results with that baseline forecast, the outcome would have indicated a larger allowance release than what we actually reported this quarter. The reason we minimized the size of that allowance release was due to our consideration of downside economic risks and increased uncertainty, which became more apparent in the final days of the quarter. We took a stronger look at our downside scenario, which includes the possibility of rising unemployment and renewed inflation, compared to the downside scenario from the previous quarter. Although the favorable trends I referenced earlier were present, they were somewhat offset by this greater attention to the downside and uncertainties surrounding the forecast. Ultimately, all these factors contributed to the approximately $450 million release you observed this quarter.

Next question please.

Thank you. Rich, Andrew. Rich, you mentioned you're fully mobilized to integrate. I'm just curious how we should think about the timing in terms of some of the milestones to achieve the synergies. For example, how long would it take for the debit conversion to happen and maybe a similar point on expenses?

Yes. Sanjay, as you said, we are still in the midst of doing our planning. But what I would highlight for you is based on what we know today, our assumption is that we are essentially just picking up all of the assumptions that we provided 14 months ago at deal announcement and pushing it back by a little less than 6 months because you'll recall, we assumed the transaction would close when we did the announcement in late Q4, early Q1, so a center date there of January 1. Now we're closing on May 18. I would point you back to the timing that we included in the announcement and just shift all of that back to correspond to the later closing date.

Okay. Great. And then maybe a follow-up on capital return. Obviously, you guys are well above the CET1 target, I think, Discover as well you've talked about sort of a phased migration back towards your target. Could you just discuss how we should think about it going forward in terms of when you might be able to start sort of elevating the amount of capital return? Thanks.

Yes. We're still operating as two independent companies, Sanjay. So at this point, our access to a lot of the more proprietary and confidential data has been limited. And after we close the transaction, we'll have access to the data, we need to do the analysis to determine what we believe is the capital need of the combined company. And in addition, we're in the midst of this year's CCAR, and we'll get our new SEB in June. And so as a result of that, I'd say, at least for the second quarter, it's reasonable to assume we'll likely maintain the pace we've been on, until we get to the other side of close and do that analysis. But once we've completed that work, we understand the importance of returning excess capital to shareholders, and we intend to do so.

Next question, please.

Hi, thank you. Good evening. So you called out marketing was up 19% year-over-year. It seems like you're still seeing some compelling opportunities and are leaning in. So maybe talk about where you're seeing the best opportunities right now? And then also, how are you thinking about balancing that investment for growth versus risk management, particularly in subprime? Thank you.

Yes, Terry, thank you and good evening. Our marketing investment continues to drive the future growth of the company as we take advantage of opportunities created by our past decisions, especially our technology transformation. Our marketing investments are generally divided into three categories. First, we invest in fueling customer growth, and we are particularly excited about the opportunities in our card business. The tech transformation has enabled us to utilize more data and advanced modeling techniques, including machine learning and AI. These insights allow us to create increasingly tailored solutions for customers, offering them the right products and services when they need them. Additionally, we have been expanding the channels and sources for acquiring new accounts. This encompasses foundational marketing efforts focused on stimulus response. Second, we continue to invest to win over high-spending customers. This has been a long-term focus for us, and we've emphasized this in our discussions. The growth from high spenders brings long-term benefits to our business, generating substantial spend growth while also providing low losses, low attrition, and an uplift in our brand across all franchises. Attracting these customers does require significant expense and ongoing investment to retain them. We are committing to substantial marketing investments, upfront bonuses, and enhancing the experiences we offer our premium customers, which includes access to exclusive amenities not found in the general market, such as lounge access and our full-service travel portal. The third area of our marketing investment is building our national bank. Over a decade ago, we committed to developing a digital-first, full-service national bank. This strategy includes limited physical branches in select markets and cafés in major metropolitan areas while prioritizing digital capabilities for remote banking. Unlike other banks whose marketing focus revolves around their branches, Capital One's approach emphasizes digital-first banking, shifting the marketing distribution ratio. We are pleased with the momentum in this area and believe that our combination with Discover will enhance our scale and presence. To summarize, these three significant marketing areas are where we are concentrating our efforts and investments. We are applying substantial energy toward measurement to assess the effectiveness of our investments continuously. This is a fundamental engine driving our company's future growth, and based on our recent performance and investment levels, we are very optimistic about our prospects. Regarding the balance between growth and risk management, especially concerning subprime, we see consumers in a favorable position. We are engaging in marketing efforts across the board, and the subprime consumer segment has shown a quicker recovery post-normalization compared to others. We remain confident in this area, though we are aware of potential economic uncertainties that could impact this market segment. Overall, we will continue to engage while staying vigilant and monitoring for any early signs of problems.

Next question.

Great. You just in the last answer mentioned that the Discover transaction is going to kind of help advance kind of the national banking franchise. Hoping maybe you could kind of drill into that is when you think about the elements that either Discover brings or things you'd like to add to your national banking products? I mean, is rewards checking among them? Like what are the things that you think Capital One needs to do better to enhance that as you think about it going forward?

Our national banking strategy is very distinct from that of most banks. Many banks tend to focus on having numerous physical branches, emphasizing physical distribution and associated customer experiences. Additionally, many regional banks are attempting to transform into national banks primarily through acquisitions. I find it ironic to mention this right after announcing a major acquisition approval by regulators, as it does not involve the typical full-service branch bank. Our approach to building a national bank does not revolve around acquiring regional and local banks. Instead, we are striving to establish a national bank model that has not been widely seen in America. The key aspect of our strategy involves creating a bank with leaner operations, reducing the need for branches, and focusing on modern technology and digital experiences. This approach attracts customers who prefer a more digitally-oriented experience, leading to lower operational costs, which we are able to pass on to consumers through competitive pricing, zero fees, no minimum balances, and no overdraft fees. Our business model emphasizes streamlined economics and aggressively priced services. The Discover acquisition, while seeming contradictory since we are acquiring a credit card business, will actually bolster our margins through vertical integration, allowing us to invest further in organically growing this national bank, something that hasn't really been attempted before. This acquisition will significantly enhance our national banking efforts.

Got it. Thanks. Maybe just keeping on the theme with Discover, recognizing that obviously, you don't run the company yet and haven't been inside. But just from what you know about the card business and its focus and what it's done and the fact that it's probably been less aggressively managed over the last somewhere between a year and two years, depending on when you start that. What do you think are the things that need to be done? And does that portfolio shrink before it grows? Any thoughts as to the Discover market and how to think about what you'd like to do with it?

We are very impressed by how well their business model complements ours. We have expanded across the credit spectrum, from high-end to subprime, while they have concentrated on the prime segment of the market. They have dedicated years to optimizing that area, and I have great respect for their ability to effectively target customers, craft their marketing, and enhance the overall experience. We have also come to recognize how exceptional some of their customer experiences are. I have not seen any other card issuer that promotes their servicing experience so prominently on national television. While we have our own success stories, it’s noteworthy that they are willing to advertise this aspect. Our analysis of data over time, especially recent findings, indicates that they receive high marks for their customer, servicing, and product experiences. What stands out about Discover is their customer-centric approach, focusing on specific segments and ensuring everything aligns with excelling in those areas. As we integrate and leverage Capital One's technology and risk management strengths, we remain committed to respecting the key success factors of their business model. We are eager to delve into this opportunity as we learn more in the coming weeks. Many acquisitions aim to merge two companies and cut costs, but we believe that Discover offers us a growth platform, both on the network side and through their card division, that allows us to preserve their strengths while utilizing Capital One’s capabilities to create something truly remarkable.

Next question please.

Hey, guys. Thanks for taking my question this afternoon. Look, I think one thing that is pretty clear over the last few years, there's been a significant divergence in technology investment between Capital One and Discover. Obviously, you are very interested in the synergies. I'm curious, as you've gone through your due diligence process, how the technology stacks compare for each company? Is this going to be an easy transition to get the Discover systems onto the Capital One system? Or is it going to be sort of the equivalent of you're looking for folks who can code COBOL or something antiquated because of the more limited investment?

We have greatly benefited from a 12-year technology transformation at Capital One, which included significant investments in building our core infrastructure. This transformation involved moving to the cloud and modernizing all 1,300 applications that support Capital One, as well as updating our data ecosystem. The investments we've made in our technology foundation position us well for acquisitions, particularly a credit card company like Discover. They will be able to integrate smoothly with our technology advancements, allowing us to achieve considerable cost savings and more importantly, assist them in utilizing a more modern tech stack. Discover currently relies on mainframes and data centers, even as they transition some business to the cloud. We have extensive experience managing data centers and migrating those operations to the cloud. For Capital One, the new aspect of our technological journey will be the network. Managing a global network is complex and requires high stakes involvement, and we believe Discover has handled this effectively. Capital One's approach is to embrace technology, and we look forward to modernizing Discover’s strong network over time. It’s important to note that this will mark a return for Capital One to data centers after some time. However, we view this not as a regression, but as an opportunity to leverage our existing scale and enhance a remarkable company by bringing it to more contemporary technology, ultimately improving customer experiences and financial outcomes.

Next question please.

Good evening. I appreciate that you cited no change to the Discover synergies or integration. I also know you indicated you don't own the company yet. So it's tough to completely look under the hood. Is there anything about the backdrop today, the regulatory developments, the competitive backdrop or anything that you see today that you think could lead to a revision to those synergies once you close the deal in May? And then separately, you didn't mention 15% EPS accretion of 27% or to 14% CET1 on close. Just wondering if there's any change there. Thanks.

John, to the last point, in terms of the assumptions of the metric. First of all, with CET1 again, that was just what we assumed at the time of the announcement where both companies would be combined for CET1. And so you can look haven't yet seen Discover's results for Q1, but you'll be able to do that math quite easily of where the combined CET1 will be. And then I'd refer you back to the earlier question in terms of our capital plans from there. With respect to metrics like EPS accretion or ROIC, a number of things have changed over the course of the last year, not the least of which is the denominator there. And so as we just take a step back and look at the overall numbers and the moving parts. So I would just say the strategic and financial benefits that we assumed 14 months ago remain fully intact. And we're just excited today as we were at the time of the announcement. And then with respect to the regulatory environment and backdrop, I would sort of lump that in with a number of things have changed over the course of the last 14 months, but nothing that we are specifically pointing to in terms of the strategic implications at all to the deal.

John, I want to add a few points. While we are still independent public companies and won't have complete access to Discovery's information until the acquisition is finalized, we still anticipate achieving the synergies we projected when we announced the deal, based on our estimated integration budget. Regarding risk management, as Andrew mentioned, we have always believed this will require a significant investment, and we continue to hold that view. They are making good progress, and from our perspective, we have not seen any reason to alter our estimates of the resources required. We are committed to doing whatever is necessary to reach our goals and maintain our understanding of the undertaking's scope. I also want to touch on long-term opportunities. At the time of the announcement, we indicated that we see considerable strategic and economic opportunities not included in our synergy estimates or the deal model. These opportunities would involve expanding our business on the Discover network beyond what was initially accounted for. The goal is to enhance international acceptance of the Discover Network and strengthen its global brand. We believe that investment in the brand is best made once this international acceptance reaches a favorable level. While initially cautious, we expect to fully develop the global network brand over time. Similar to past investments, we think these will be long-term and yield significant benefits that build and compound over time. Essentially, we have a deal model for immediate benefits and costs, which we still view as accurate, and we are also excited about the longer-term opportunities that will take time and investment to realize.

Next question please.

Hi congrats and thank you for taking my question. Just wanted to talk a little bit about just the uncertain macro. Maybe, Rich, it's been a while since we've had what you would call maybe a normal recession. Obviously, we had COVID a few years back. But I was just wondering if you could talk a little bit about just the recession resiliency at Capital One, maybe some of the factors or some of the levers that you can pull if you start seeing the macro deteriorate? And just how is it different now than the last time between 10 and 15 years since we had one. So just how is Capital One different from a recession resilience point of view?

Thank you, Mihir. It’s interesting that you mention a normal recession. It’s true that COVID makes it challenging to draw many conclusions. That said, during that period, credit activity reached unprecedented levels. Our business model is fundamentally based on resilience. Every underwriting decision we make considers environments that are more stressed than what we currently experience. We analyze past results and apply stress testing to every decision. The stress testing led by the Fed has improved the modeling practices across institutions, and we dedicate significant effort to this. It’s essential to maintain substantial capital buffers, as well as margin and operational flexibility. A notable aspect of credit card businesses in what we might call a normal recession is that consumer spending often decreases, providing some relief on the balance sheet side. The Fed's models don’t account for this behavior because they expect companies to continue pursuing growth, despite historical trends showing otherwise during recessions. This situation gives us flexibility regarding our balance sheet and marketing strategies. While we have a sizeable marketing budget, some investments are more fixed than one might realize. You can easily reduce spending on solicitations, but some aspects of marketing may not be as flexible as they used to be. However, we still have various levers available within our business structure. In the last normal recession, Capital One performed well, although we had a majority of our card assets off the balance sheet. In the future, we might not benefit from that same structure, and we also operate under CECL now. To summarize, your question touches on our day-to-day approach: we intentionally stress our business model during underwriting and management decisions. Paradoxically, the unsecured credit card business demonstrates considerable resilience. While many prefer secured assets, historical banking failures often occurred when collateral values dropped significantly. The card business inherently operates in an unsecured manner, and we understand that in our underwriting, incorporating the necessary buffers and flexibility to withstand tough times.

Rich, just in the spirit of what's different this time than the last time maybe a word about we're in a really different place in the technology world and the capabilities that that gives us to sort of look at way more data and way more algorithms in our underwriting and fine-tune things around the edges. That's also a big change.

Well, the ability we can certainly move quite a bit faster than ever before. It's one thing to decide on credit policy changes. It's another thing for any company to be able to implement it right away. So with the ability to move quickly the ability to gather data at an incredibly granular level across so many different slices of the business is very valuable. The ability to leverage machine learning and AI to diagnostically help us see variances and aberrations that might take humans some precious months to sort of identify. So I think that one of the big benefits of our tech transformation is the ability to have way better granularity and monitoring. And the monitoring has the opportunity to be full file real-time and diagnostic in its nature, and these things can really help when the economy turns.

Thank you. Next question please.

Rich, I was wondering if you could talk a little bit about the auto lending business. in terms of how you're thinking about loan growth. You've got a lot of different dynamics like tariffs going on. Are you still leaning in? And do you think that there will be the demand to support that growth?

We are very optimistic about our auto business. The delinquency and loss performance in this sector is impressive, demonstrating consistent strength due to proactive decisions we've made over the years. While we made some adjustments in card lending, we took more significant measures in auto lending by reducing our exposure in 2022 and 2023 in response to margin pressures, normalizing credit conditions, and inflated vehicle prices. This strategy has positioned us strongly in the market. Looking at growth, we have recently focused on seizing opportunities and our origination volumes rose by 22% year-over-year in the first quarter. Our outstanding loans have also increased by about 5% year-over-year. We have made substantial investments in technology for our auto business, enhancing our credit underwriting process and developing our Navigator platform. This platform allows customers and dealers to quickly access financing information for any vehicle across the U.S., aiding both parties in making informed financing decisions. We are experiencing positive momentum in this area. Regarding tariffs, if trade tensions continue, our auto business could be affected, particularly through rising vehicle prices, which would have mixed effects on auto credit. Increased production and supply chain costs may lead to disruptions in vehicle values. While higher vehicle prices could enhance equity positions for borrowers and improve recovery rates for our existing loans, they would also present challenges for new originations due to decreased consumer demand and credit strains. It's also important to note that fluctuating tariffs can lead to sudden changes in vehicle values, which could negatively impact our credit conditions. Overall, we maintain a positive outlook on our auto business and are closely monitoring economic uncertainties while continuing to engage with growth opportunities.

Next, question please.

Rich and Andrew. Following up on your expense commentary and the choices you're making. Do you think, Rich, may be necessary to adjust your investment priorities as you continue to build out your various businesses while now also allocating capital to the build-out of the network business? And if you could speak more broadly to how focused you are on managing expenses for the revenue environment and generating positive operating leverage along the way as you make these investments?

Thanks so much, Bill. We've been focused on operating efficiency improvement for years, as you know. And we'd like to go back to 2013 because that's when we began our technology transformation and started really leaning into investments in technology from that point all the way to today. Over that time, we've driven about 700 basis points of improvement even as we've continued to make significant investments in technology and this improvement was driven by significant revenue growth powered by marketing and credit breakthroughs enabled by the technology transformation as well as expense efficiency from process automation, analog cost savings and reduction in legacy tech vendor costs. So it is not an accident that operating efficiency ratio improvements and significant tech investments have been traveling companions. And that's because technology investments and efficiency improvement are on a shared path as modern technology is the engine of sustained revenue growth and digital productivity gains. Now 2023 and 2024 witnessed quite a big improvement in the efficiency ratio. I do want to point out that with the late fee risk hanging over the last couple of years. There was some deferral of investments. So with that risk effectively off the table, there is a little catch up there that you see in our numbers now. But our story on efficiency continues to be the same. And we continue to have our eyes very focused on the longer-term where operating efficiency continues to be an important way that we generate returns. To your point about priorities, it is not lost on us that we have a lot of opportunities that we are blessed with. We have all the opportunities that come from moving up the tech stack and the more we move up the tech stack, the more there are sort of direct benefits to the business in the form of better customer experiences, more opportunities, better leveraging of data to create marketing and credit opportunities and things like that. And we have the Discover deal. And I've talked many times about there is the sort of immediate opportunity that we capture in our deal model. But then there is the longer-term opportunity that comes from really investing in the network, especially internationally, investing in the brand. And then really being able to put more business on the network. So in that environment, we spend a lot of time on prioritization and it's a good problem to have as many opportunities as we do. But to the point of your question, we very much keep our big picture in mind and the measuring stick associated with our journey and a very important one of those is our efficiency journey. Thank you.

Next question please.

Good afternoon. Thanks for taking my question. I guess my question is around marketing synergies. On one hand, it seems that the amount of media advertising, maybe the physical mailings to the commerce, I mean 1 plus 1 is not going to equal 2, I think, with those endeavors. On the other hand, Rich, I think you're interested in really focusing on continued brand development, particularly on the global network. So how do we think about the kind of puts and takes of the opportunities for synergies versus the desire to spend and invest in the brand?

So Discover. And are you referring to the Discover brand, the Capital One brand, are you referring to both there as your particularly a Discover Point and the synergies associated with Discover?

Correct.

It's a privilege to have the chance to acquire such a well-known and strong brand. With this acquisition, we now have two companies that each boast impressive brands. Our plan is to continue investing in the Discover brand, as we believe it’s the right fit for the network. We're focused on enhancing its credibility and capabilities globally. The Discover brand will also remain a prominent player in the credit card market as a strong product brand, even though it will transition away from being a corporate brand. This aligns with the successful business model that has delivered excellent results over the years, with the brand being a crucial factor. We intend to keep our investments in this area while also finding efficiencies in our marketing campaigns. However, regarding our investment in the network brand, we don't plan to aggressively promote it on national television right after the acquisition. Instead, we aim to leverage the synergies we discussed when announcing the deal, particularly in moving our debit and part of our credit card business onto the network. Our goal is to build international acceptance until we reach a point where we feel confident in advancing global brand development. The timing for investing in brand promotion will depend on achieving this acceptance level, and we envision stepping up our efforts as the situation allows.

Next question please.

Good evening. Just two quick follow-up questions. First is for you, Andrew. I'm just going all the way back to Ryan's question on ACL. Is there any way to have a neat answer on what the weighted average unemployment rate would be if we took into account the heavier weighting on the downside scenario? And as we look forward for Capital One stand-alone. How should we think about the ACL ratio given improved credit performance relative to the heightened macro uncertainty? And I did have a follow-up.

Yes. Regarding the weighted edge, our process involves taking a baseline and then factoring in various considerations related to downside scenarios and uncertainties. It's not a straightforward calculation with multiple scenarios and probabilities that would allow us to provide a weighted average leverage figure, which is why we offer a qualitative description instead. Looking ahead at the allowance, if we continue to experience favorable credit performance in the near term, it will likely reduce coverage over time, all else being equal. Conversely, if we observe a significant decline in economic outlooks or shifts in consumer credit behavior compared to what we see today, that could increase our coverage. Given the current heightened uncertainty, I prefer not to speculate on where this might land in the upcoming quarter until we complete our comprehensive review at the end of the second quarter, at which point we will determine the final allowance.

Got it. And just my follow-up question. Implicit in your response to John Pancari's question, are you also affirming the purchase accounting assumptions from February of 2024? And just confirming that there are any adjustments to be made given the heightened uncertainty to the Discover portfolio in terms of credit going forward, it would be on the day 2 provision, of course, not the purchase credit impaired mark.

Right. Well, we're going to segment their portfolio for PCD and non-PCD and part of that, obviously, it would run through the balance sheet and part of that would run through the P&L on day 2. With respect to affirming balance sheet marks, I'll explicitly not affirm the balance sheet marks given that rates and credit and the stock price and a number of other variables have moved. And so we need to get to day 1 and do all of our analysis on those marks, and we'll provide the relevant updates at the appropriate time after we get to a close.

Next question please.

Hi, I had one on spend and one on the network. On spend, in prior quarters, you've given us the high end versus low end kind of updating commentary. I just wonder if you could give us that and maybe specifically on the tariff reaction, any differences you are observing in high end versus low end? Or is it about the same?

So Brian, the relative to the tariffs and any early impact that we have seen. We have not seen that a big difference between high end versus low end there. Again, these are very early observations. Spend has generally has picked up a little bit in the last week or two, whether that is a pull forward or whether that's some other effect remains to be seen, but we haven't seen a striking difference on where on the spectrum that falls.

And then on the network, and I apologize, I feel like I'm going to oversimplify this and ask this in a dumb way, but when I talk to people, I mean, I think everyone sees the value of a globally competitive network. We can just look at the multiples Visa Mastercard at. It also seems like a very long and expensive journey. I'm just trying to unpack what you're signaling. Is it incrementally each year investing in the network? Or is it like, and again, I know I'm simplifying this, I'm not trying to put words in your mouth, but like is there some signaling that like, hey, guys, we might reset the expense outlook to take on Visa Mastercard full stop?

Yes, I'm happy to address that. We are not aiming to replicate the models of Visa and MasterCard. They have exceptional business models serving as intermediaries for nearly all banks and merchants in the U.S., earning revenues from small transaction fees on vast volumes. It's an impressive operation. Additionally, Discover functions as a network provider for several thousand banks on the debit side, which is a valuable aspect of their business, stemming from their acquisition of the Pulse network in 2005. We are looking to grow that segment. Being a network for other financial institutions will likely play a role in our business model moving forward. To truly change the landscape, we need to enhance global network acceptance and brand credibility. The biggest opportunity for Capital One lies in increasing the volume on the network. Many of our customers frequently travel internationally, and I commend Discover for their global expansion. They have achieved widespread acceptance in the U.S., and while no one is universally accepted internationally, Discover is ahead in that regard. To harness the potential of the network effectively and to drive the scale necessary in this business, we believe the focus should be on improving international acceptance and strengthening the associated global brand. Ultimately, the main benefit of this strategy would be to increase the volume on our network in a scale-driven environment. In the future, we may also explore additional opportunities such as being a network for other financial institutions.

Next question please.

Hi guys. Rich, you've hit on the international acceptance theme quite a bit this evening and there internationally, it seems like that's more of a chicken and egg problem where you have to kind of build and catalyze acceptance. I'm wondering if you could share your thoughts on the specific investments strategies or levers you might have to solve that chicken and egg problem internationally and ultimately close the acceptance gap. Thanks.

Yes. When examining how major networks have developed their businesses, including Discover's efforts for international acceptance, it's clear that this involves creating a range of solutions through partnerships. For Discover, leveraging partnerships with networks, acquiring merchants at scale, collaborating with financial institutions like card-issuing banks in various countries, and engaging directly with merchants has led to significant acceptance levels. They've achieved this through a hands-on approach, and I feel confident that we can build on their success. We have the potential to be more aggressive than they were due to the opportunities and advantages we see with our combined scale. It is indeed a chicken and egg situation where potential partners want to understand the volume we can deliver, while we, in turn, need to show our acceptance levels as we onboard customers. However, we aren't starting from scratch; there's already a notable level of acceptance in place. They have structured their efforts based on popular American travel patterns, and we plan to utilize this established playbook while also identifying additional opportunities beyond what we've accounted for in our deal model.

Well, that concludes our Q&A session. Thank you all for joining us on the conference call today, and thank you for your continued interest in Capital One. Have a great evening, everybody.

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