Capital One Financial Corp Q1 FY2026 Earnings Call

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

Thanks very much, Josh, and welcome, everyone. To access the webcast of this call, please go to the Investors section of Capital One's website at capitalone.com. A copy of the earnings presentation, press release and financial supplement can also be found in the Investors section of Capital One's website at capitalone.com by selecting financials and then quarterly earnings release. With me this evening are Mr. Richard Fairbank, Capital One's Chairman and Chief Executive Officer; and Mr. Andrew Young, Capital One's Chief Financial Officer. Rich and Andrew will walk you through the presentation summarizing our first quarter results for 2026. Please note that this presentation may contain forward-looking statements. Information regarding Capital One's financial performance and any forward-looking statements contained in today's discussion and the materials speak only as of the particular date or dates indicated in the materials. Capital One does not undertake any obligation to update or revise any of this information, whether as a result of new information, future events or otherwise. Numerous factors could cause our actual results to differ materially from those described in forward-looking statements and for more information on those factors, please see the section titled Forward-Looking Statements in the earnings release presentation and the Risk Factors section of our annual and quarterly reports, which are accessible at Capital One's website and filed with the SEC. With that, I'll turn the call over to Andrew.

Thanks, Jeff, and good afternoon, everyone. I will start on Slide 3 of tonight's presentation. In the first quarter, Capital One earned $2.2 billion or $3.34 per diluted common share. Included in the results for the quarter were adjusting items related to the ongoing Discover integration and purchase accounting impacts, which are outlined on the slide. Net of these adjusting items, first quarter earnings per share or $4.42. Relative to the fourth quarter, revenue declined 2%, while noninterest expense declined 9%. Pre-provision earnings in the quarter increased sequentially by about $530 million or 8%. On an adjusted basis, pre-provision earnings increased about $430 million or 6%. Our provision for credit losses was roughly flat at $4.1 billion in the quarter. Included in the provision costs is about $3.8 billion of net charge-offs and an allowance build of $230 million. Turning to Slide 4, I'll cover the allowance in greater detail. The $230 million allowance build in the quarter brought the allowance balance to $23.6 billion. Our total portfolio coverage ratio increased 12 basis points and now stands at 5.28%. I'll cover the drivers of the changes in allowance and coverage ratio by segment on Slide 5. In our Domestic Card segment, the allowance balance was flat at $18.8 billion. Favorable observed credit in the quarter was offset by greater consideration to downside economic scenarios related to heightened geopolitical uncertainty. The coverage ratio increased 23 basis points to 7.4%, largely driven by the paydown of fourth quarter seasonal balances. In our Consumer Banking segment, we built $155 million of allowance primarily driven by strong growth in the auto business, a slightly higher subprime mix, and a modestly lower outlook for vehicle values. The coverage ratio ended the quarter at 2.36%, 13 basis points higher than in the fourth quarter. Finally, in our Commercial Banking segment, we built $83 million of allowance primarily driven by a very small number of specific reserves in our real estate portfolio as well as a modest increase in our criticized rate. The commercial banking coverage ratio increased 7 basis points quarter-over-quarter to 1.7%. Turning to Page 6, I'll now discuss liquidity. Total liquidity reserves ended the first quarter at about $165 billion, up about $21 million from the prior quarter. Our cash position increased by $19 billion and ended the quarter at approximately $76 billion. The increase was driven by continued strong deposit growth in our retail banking business and the paydown of seasonal card balances. Our preliminary average liquidity coverage ratio was 166%. Turning to Page 7, I'll cover our net interest margin. Our first quarter net interest margin was 7.87%, 39 basis points lower than the prior quarter. The decline was driven by several factors. First, two fewer days in the quarter drove 18 basis points of the decline. Second, we had the normal seasonal effect of lower average card balances. Third, average cash levels were elevated due to a combination of the typical seasonal increase, strong deposit growth in the quarter, and the full quarter impact of last quarter's sale of the Discover Home Loans portfolio. Turning to Slide 8, I will end by discussing our capital position. Our common equity Tier 1 capital ratio ended the quarter at 14.4%, 10 basis points higher than the fourth quarter. Income in the quarter and the seasonal decline in risk-weighted assets were partially offset by $2.5 billion in share repurchases. Before I pass the call over to Rich, I also want to highlight that we closed our acquisition of Brex shortly after the quarter closed. The consideration paid to shareholders was approximately $4.5 billion. As a reminder, the Brex transaction is expected to decrease the CET1 ratio by a little over 40 basis points in the second quarter. Given the recency of the close, we are still working through the purchase accounting marks and will provide a breakout of those impacts in the second quarter earnings call. With that, I will turn the call over to Rich.

Thanks, Andrew, and good evening, everyone. Slide 10 shows first quarter results in our credit card business. Credit Card segment results are largely a function of our domestic card results and trends, which are shown on Slide 11. In the first quarter, the domestic card business posted another quarter of top line growth and strong credit results. Year-over-year purchase volume growth for the quarter was 40%, driven primarily by the addition of Discover purchases as well as continued strong growth in our heavy spender franchise. Excluding Discover, year-over-year purchase volume growth was about 8%. Ending loan balances increased 69% year-over-year, also largely as a result of adding Discover card loans. Excluding Discover, ending loans grew about 3.9% year-over-year. The legacy Discover card loans continued to contract slightly and will likely continue to face a temporary growth headwind in the near term due to Discover's prior credit policy cutbacks and some additional credit policy changes we've made since closing the acquisition. We continue to see good opportunities to grow the Discover Card business on the other side of our tech integration, where we can implement growth expansions powered by our unique technology and underwriting. Revenue was up about from the first quarter of 2025, largely driven by the addition of Discover revenue. Excluding Discover, year-over-year revenue growth was about 6.8% driven by underlying growth in purchase volume and loans. Revenue margin for the quarter was 16.9%. The domestic card charge-off rate for the first quarter was 5.1%, up 17 basis points from the prior quarter, in line with normal seasonality. The charge-off rate improved by 109 basis points year-over-year. About half of this improvement is the result of incorporating Discover's card portfolio into our domestic card business. The rest is driven by the steady improvement of charge-offs we've seen over the past year for both the legacy Capital One and legacy Discover portfolios. Our domestic card delinquency rate was 3.7%, down 29 basis points from the prior quarter and down 55 basis points from a year ago. On a sequential quarter basis, the delinquency rate trend was a bit better than the normal seasonality. Domestic Card noninterest events were up 51% compared to the first quarter of 2025, driven by the addition of Discover. Operating expense and marketing both increased year-over-year. Our choices in domestic card are the biggest driver of total company marketing, but choices in our consumer banking business have an increasing impact as well. Total company marketing expense in the quarter was about $1.5 billion, up 25% year-over-year driven by the addition of Discover as well as higher legacy Capital One direct marketing in our Domestic Card and Consumer Banking businesses, increased media spend, and continuing investments in premium benefits. As is usually the case, first quarter marketing was seasonally low, and that seasonal trend was amplified this year as the timing of some of our planned marketing investments for the year shifted out of the first quarter into the second quarter and subsequent quarters this year. Pulling up, our marketing continues to deliver strong new account originations to build an enduring franchise with heavy spenders at the top of the domestic credit card market and to grow checking accounts on a national scale in our consumer banking business. We expect to increasingly lean into marketing to take advantage of these compelling market opportunities. Slide 12 shows first quarter results in our Consumer Banking business. Global payment network transaction volume for the quarter was steady at about $174 billion as the typical seasonal decline was mostly offset by transaction volume growth related to the completion of our conversion of Capital One debit customers to the Discover Network. Auto originations were up 21% from the prior year quarter. Competitor activity in the quarter remained high, but we continue to be in a strong position to pursue resilient growth in the current marketplace. Consumer banking ending loan balances increased $8 billion or about 10% year-over-year. Average loans were up 9%. Compared to the year-ago quarter, ending consumer deposits grew about 35%, driven largely by the addition of Discover deposits. Average deposits were up 34%. Looking through the Discover impact, our Digital First National Consumer Banking business continues to grow and gain traction. Consumer Banking revenue for the quarter was up about 37% year-over-year, driven predominantly by the addition of Discover operations as well as Discover revenue synergies and growth in auto loans. Noninterest expense was up about 26% compared to the first quarter of 2025, driven largely by the addition of Discover as well as by higher marketing to drive growth in our National Consumer Banking business, increased auto originations, and continued technology investments. The auto charge-off rate for the quarter was 1.64%, up 9 basis points year-over-year and down 18 basis points from the sequential quarter, in line with expected seasonality. Auto charge-offs have been stable at near pre-pandemic levels for the past year. The auto delinquency rate decreased seasonally from the linked quarter, down 102 basis points to 4.21%. On a year-over-year basis, our auto delinquencies improved by 72 basis points. Slide 13 shows first quarter results for our Commercial Banking business. Compared to the linked quarter, both ending and average loan balances were up about 1%. Ending and average deposits were both down about 1% from the linked quarter. The commercial banking annualized net charge-off rate for the first quarter decreased 14 basis points from the sequential quarter to 0.29%. The commercial criticized performing loan rate was 4.99%, up 31 basis points compared to the linked quarter. The criticized nonperforming loan rate was up 4 basis points to 1.4%. In closing, first quarter results continued to reflect solid top line growth and strong credit performance. We made expected progress on the Discover integration and synergies in the quarter, including the successful conversion of Capital One's debit customers to the Discover Network. We remain on track to deliver the expected synergies. Following the quarter, we achieved two important strategic milestones in April. We closed the Brex acquisition on April 7. Acquiring Brex accelerates our quest to build a banking and payments company that's positioned to win where the world of business payments is going. As we mentioned at the announcement, we will be leveraging Capital One assets and increasing investment levels to drive enhanced growth at Brex. We also in April brought the technology and capabilities that power Capital One travel in-house. We now fully own the technology that we have built in partnership with Hopper and the Hopper talent we've worked with will join Capital One. We also launched the new Capital One travel app and we're excited to bring our award-winning travel experience to more consumers and businesses as we continue to grow our travel business. Brex and Capital One travel are just two of the opportunities we are investing in. For years, we've been working backward from the coming dramatic transformation of the business marketplace with modern technology, data and AI. We are in the 14th year of our technology transformation from the bottom of the tech stack up. This has involved going 100% into the cloud, building a modern data ecosystem and rebuilding the company on modern technology platforms that can handle big data and AI in real time. We are well down that path, but we are still investing in some very powerful capabilities. All companies will be able to take advantage of AI, but the leverage is vastly greater when AI is embedded in the company's ecosystem. Our entire technology is architected to enable these capabilities at scale embedded in our modern ecosystem. We continue to invest in building AI infrastructure and specific AI experiences. We also continue to invest in growing our heavy spender franchise at the top of the market, including rewards, lounges, unique access to experiences and breakthrough digital capabilities. We also continue to lean in through our unique quest to organically build a digital-first full-service national bank. Many of our opportunities are enhanced by the Discover acquisition, which, of course, also brings the new opportunity to grow and scale our own global payments network. We continue to invest in network acceptance brand and technology. As we've discussed, these investments will continue to be reflected in the efficiency ratio, but they are also the engine that powers long-term growth and returns. Our numbers starting in the second quarter will include Brex and the insourcing of our travel business as well. Pulling way up, we continue to build momentum from the game-changing acquisition of Discover. Even though some individual variables in our deal model have moved since the announcement and we have acquired Brex and the Hopper travel infrastructure, we still expect our earnings power on the other side of the Discover integration to be consistent with what we expected at the time we announced the deal. And now we will be happy to answer your questions. Jeff?

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

Our first question comes from Terry Ma with Barclays. You may proceed.

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

Thank you, Terry. The U.S. consumer remained healthy overall, and the economy remained resilient through the first quarter. The unemployment rate improved slightly in the quarter despite some high-profile headlines about layoffs. The total volume of job losses and new jobless claims remains low and stable. Income growth continued to run ahead of inflation. Consumer spending remained robust. Because of last year's budget bill, tax withholdings are lower than a year ago, and tax refunds are higher. In our Domestic Card business, our credit metrics continue to improve on a year-over-year basis in the quarter. On a sequential quarter basis, our charge-off rate moved in line with the seasonality, while our delinquencies improved relative to what we would expect from normal seasonality. Our auto credit metrics were strong as well. Auto losses were slightly higher on a year-over-year basis in Q1, but this was consistent with a modest increase in the subprime mix of that portfolio over the past year. Our auto losses have been back near pre-pandemic levels for over a year, and our auto credit is supported by strong performance of recent originations and generally stable vehicle prices. Of course, the new conflict in the Persian Gulf represents a significant cloud on the horizon. We've already seen energy prices spike sharply over the past six weeks. Inflation moved higher in March, largely because of the higher gas prices. So if energy prices remain elevated for an extended period, that would be a real headwind for consumers and probably a drag on the overall macro economy. But so far, we've not seen any adverse effects on our portfolio, either in our credit or in our spend metrics. We've judgmentally incorporated elevated macroeconomic risk into our allowance through qualitative factors. But we continue to really feel very good about not only our portfolio performance, but good for the credit outlook of consumers and good for the opportunity to continue to lean into origination and credit line growth in our business. Once again, it seems like every quarter we're having a conversation just like this. There's a lot of noise in the external environment, but the consumer is showing quite a bit of resilience. I want to comment for just a second back to the credit card delinquencies moving just a little bit better than seasonality. I don't think we're ready to declare that it's diverging from where it is, but it's certainly good to see that. Of course, there's a little uncertainty in reading things in a world of tax refunds and other things. But certainly, we think our recent credit number is just another indication of the strength of the consumer and particularly the strength of our portfolio and some of the choices that we've made in credit.

Our next question comes from Sanjay Sakhrani with KBW.

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

So thank you, Sanjay. As you mentioned, Brex and Hopper are two investments that are not currently represented in the efficiency ratio, and not all of our investments are reflected in the first quarter, certainly these being the biggest highlights that are not included. But we also continue to lean into our investment imperative. Our expenses, of course, will be impacted by the synergies that grow as we get closer to the end of integration next year. So we'll have to keep that one in mind. As I mentioned in the opening remarks, marketing levels will be heavier over the course of the year as we lean in, and the impacts of seasonality and marketing play through. But all of these investments are the engine that powers long-term growth and returns. They will be reflected in the efficiency in multiple line items. Most importantly, we still expect our earnings power on the other side of the Discover integration to be consistent with what we expected at the time we announced the deal, inclusive of the Brex and Hopper travel infrastructure.

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

Sure, Sanjay. Let me just frame it in a broader NIM story, and then I'll double-click into your point about the cash. If we take a step back and look at what happened to NIM over the last number of years, coming out of the pandemic, growth in our card business significantly outpaced the rest of the balance sheet, and that pushed our NIM gradually higher. We then closed Discover in the second quarter of last year, and that alone drove up our NIM by about 85 basis points. When we got to the back half of last year, the card outpaced the rest of the balance sheet, at least at that moment in time, had largely played through, and Discover was in our numbers. I would say what you saw in the back half of last year is what I would consider to be a new kind of structural level, but there are always a seasonality that impacts NIM in any given quarter. So in Q1, as I said in my remarks, the first thing is we had two fewer days bringing down NIM by just under 20 basis points. We typically see fewer higher yield card loans in Q1 just as people pay down holiday spend. And then third, we typically see higher low-yielding cash driven by the same seasonal card paydown plus the tax refund and first quarter bonus dynamics, even though the average effect of cash tends to be a bit more muted because it tends to be more back-loaded in the quarter. But this year, in the first quarter, we saw not only those seasonal effects, we did see a particularly elevated level of cash. We sold the home loan portfolio in late November, so we had the full quarter of that. We saw strong growth in our retail deposit franchise beyond what we normally see in tax season as we're getting great traction in the market. The net flows from taxes this year are a bit more favorable as you've seen publicly highlighted. People are getting average refunds that are a bit higher, and more people are getting refunds. As we look ahead, specifically in the second quarter, there's going to be one more day that's 9 basis points, and the same 9 basis point jump as we head to Q3 and Q4. Specifically to your cash point, I do expect that cash position will trend down over time, given that it is particularly elevated this quarter. We have about $8 billion of debt maturities in Q2, and we typically see a bit of tax payments in the second quarter. So the direction of travel for cash should be down from here. Absent any meaningful change in the balance sheet mix beyond the cash trending down, the structural level for NIM that we saw after we closed the Discover transaction should persist. Of course, each calendar quarter is just going to be impacted by seasonal impacts. But if you look at the back half of the year, that on a seasonally adjusted basis is a pretty good indication of where you should expect NIM to kind of structurally be.

Our next question comes from Ryan Nash with Goldman Sachs.

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

Thank you, Ryan. As I've been talking about for a number of quarters now, we have a significant investment agenda at Capital One. And in many ways, from the founding of this company, we've built a company in a banking industry where the growth strategy involves buying other companies. Now it's ironic that I'm saying this in the wake of two acquisitions. But we built a company designed to be an organic growth company. All the financial horizontal accounting we put in place, the information-based strategy, the investment in talent, really everything we've done is to build a company that creates value patiently and rigorously by a combination of really identifying strategic opportunities and then leveraging information-based strategy to enable us to create unique growth opportunities. That's kind of who we are. Along the way, we haven't really been the company that's been in the guidance business. I know that many companies—most companies do that probably more than we do. I'm not trying to be difficult about that. What I've run into reinforcing since the founding of this company is that we really focus on identifying opportunities, validating the value creation, and really leaning into those when the opportunity is there. As I've been saying recently, we have a striking number of opportunities down the road, longer-term opportunities, some of them closer in opportunities. The striking thing is the number of them, and they all require investment. Now it's not an accident. We're in this position because we have patiently been working our way through our technology transformation. As we get up to the top of the tech stack, the opportunities really start expanding. By the way, the tech transformation of Capital One had as its objective function being able to be an information-based company powered by AI itself. That's where the world is going. We don't give—well, not that we never do, but we generally don't share with our investors why we're excited about the opportunities we have and what we're investing in. But we're not specifically guiding to things like efficiency ratio as a general matter. There is an important grounding that we give you every quarter related to the fact that despite all the things that have moved since we announced the deal, the earnings power and the upside of the Discover integration is consistent with what we expected at the time of the Discover deal, inclusive now of the Brex and Hopper acquisitions. Implicit in there, there's an efficiency ratio that makes the numbers work. We try to power as much of our efficiency ratio through growth rather than just cutting costs. The impression I really want to leave with investors is that we have exceptional opportunities. These opportunities have come to us because we've been the company willing to invest in longer-term opportunities.

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

I don't have—let me give a little more granularity on a couple of things. When we say earnings power, that can be lots of things. Our whole financial focus as a company is to be sure we're building a company with robust earnings power. When we talk in terms of this guidance, we are talking about returning on tangible common equity (ROTCE). In a sense, we're discussing ROTCE at a constant level of capital. The capital level assumed in the deal model was 12.5%. The guidance on earnings power is assuming that same level of capital. At the rate we are going, the guidance would still hold at higher capital levels. I'm not going to precisely get into exactly what the break-even capital level is for which it wouldn't apply. But my point is that we're in a strong position here, and that guidance would still hold at some higher capital levels, although we won't quantify that. Each quarter, things change. I want you to know that we normalized the calculation to be at 12.5%. Andrew just talked about our own capital choices. These days, we've been holding higher capital levels than that. My other point was just that this guidance has some ability to hold at somewhat higher capital levels, but we're not quantifying that precisely.

Our next question comes from Moshe Orenbuch with TD Cowen.

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

Thank you, Moshe. The legacy sort of—go right to the core of Capital One. The legacy branded card business is powering along very strongly. We do a normalization, for example, of looking at the growth metrics of the booked-up market part of Capital One. The best way to proxy what we—if we had the sort of the score cutoffs that the major competitors do, I think you'd be impressed if you saw the growth metrics of the branded card book; it would be basically at the top of the league tables. But not necessarily precisely apples to apples to the other competitors. My point is the branded card business, and particularly the growth metrics of the booked-up market part of the business, is showing a lot of strength. Even as the card business overall is sort of slowing down, not that it's going slowly, but it had such ferocious growth for years; it's settling out into something probably more normal. A little bit the elephant in the room at the moment with respect to growth is the Discover brownout—not to be interpreted at all as alarming. Following Discover's credit expansion in their card business in 2022 and 2023, they dialed back their origination programs and credit line management significantly towards the end of 2023 and have largely sustained those dial backs. Since we took over, we've been trimming on the margins of Discover's credit policies in areas where we're a little less comfortable with the resiliency of the underlying customers, particularly in the high-balance revolver parts of the business. As a result of these pullbacks, the portfolio contracted slightly in 2025, and it continues to face some headwinds to growth as these more recent smaller vintages mature. In the first quarter, Discover Card outstandings were down 1.2% year-over-year, and the brownout will increase a bit until we get to the other side of the tech integration with Discover. Importantly, the flip side of these pullbacks and the brownout has been strong credit performance, and we're very happy to see that playing through the system. I sometimes use the phrase that we have to live with all the great credit performance from these choices; we think Discover made good choices, and we certainly are happy with ours. As I've said, on the other side of our integration, we believe there are good opportunities to grow the Discover business. When we think about what we mean by the Discover business, of course, it's part of Capital One, but we will be out there marketing Discover and marketing their flagship product and all of these things, and some of the great programs they had. We're in a position to start seeing a flow into Capital One of interested prospects and people that apply. We believe there is an opportunity to expand Discover's customer base above and below their historical focus on prime customers. That's also a point about the existing book that they've already originated over the years. Even as we continue to be more conservative on high-balance revolvers, we will lean into heavier spenders and also expand opportunities for emerging prime customers. We are bullish about the opportunities to build on this Discover franchise, both for existing customers and the flow that comes from people seeking to get a Discover card. You mentioned the conversion timing; let me talk a little bit about that. We have already started originating Discover cards on our platform, albeit at relatively low levels as we've been testing. I think we're up to about 8%, but we expect to have fully transitioned new originations by the end of Q3. In fact, I think it was at about 8% at this point. By the end of Q3, basically in September, we will be fully transitioned to the Discover branded originations being booked on Capital One's technology and with Capital One's underwriting and strategies. As for the back book, we expect that the back book of existing Discover accounts will be fully converted onto our platform by the first quarter of next year. It will be a phased conversion starting late this year going into the first quarter of next year. As customers get on our platform, we're going to start leaning in more into originations and credit line management, leveraging the many credit policies and strategies and opportunities that we have while, by the way, still preserving some very amazing and great things that we've learned from Discover and things they've taught us about exceptional things to do with certain customer segments. One last thing: in parallel to Discover's dial back of card loans, they also dialed back personal loans. Those loans are mostly cross-sold to the existing file, and those cross-sells have been further scaled back during the integration process. So there is a brownout in personal loans also during this period, even as we like that business that they have built and do plan to lean into that on the other side. Pulling way up: these brownouts are a natural and temporary part of the deal and have been accompanied by better credit and even some margin strength along the way. We're very pleased with how the integration is going and with what we find about Discover, their franchise, and their credit policies they've used, but we're bullish about being able to bring that into the Capital One technology and credit policy. So in summary, there's strength in our core branded card business, particularly the higher upmarket you go in terms of the growth metrics. We'll be held back a little bit by the brownout, but we'll continue to lean into the opportunity on the other side.

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

Well, Moshe, we have been very struck, as I'm sure many are from the outside, with the rapid growth of this business, and we believe that they're not just growing but they're also growing value and they're growing earnings power along the way. We like very much what they're doing. The one thing just to keep in mind is that what Capital One plans to do with Brex is rather than rush to do a big integration, we focus on enabling them to grow rapidly. This is an enablement strategy of Capital One. Much of what really brought Brex to Capital One was the opportunity to leverage some of the resources and capabilities we had that could allow this amazing growth play to really be enhanced. So our focus is going to be on doing that. Along the way, Moshe, that will mean increasing investments. That again has a little bit of a deferral of the vertical impact of these benefits. But when you think about the benefits we can bring to Brex along the way, we bring substantially lower cost of funds. That's a benefit that sort of happens right away. The brand benefits are sort of a right-of-way thing once the word spreads, but the benefits of the Capital One and the credibility of the Capital One brand are already allowing them to be in conversations that weren't available to them before just by the credibility of being part of Capital One. Over the coming months, as we test and learn, we're going to start leaning in with marketing dollars and sharing some of the high potential leads and the benefits of big databases that we've built, then a little bit more down the road. We'll leverage the marketing machine of Capital One, which requires a little more of a technical integration. We've got to set up data pipelines and calibrate our models for Brex's customer base. So that's a little further down the road, then a little further beyond that. We see the opportunities for benefits on the travel side of the business, but we've got to focus first on the Hopper build-out on our end. We're going to have a rolling set of opportunities. I sometimes have used the phrase, just add water. It's a metaphor I use for a lot of the benefits that we can bring to Capital One are easy to bring without a full integration, and there are things that are easy for them to capitalize on. That will happen on a phased basis. From a financial point of view, the one thing we should all understand is that the more traction we see will probably lead us to lean in more and invest more. So from a vertical impact point of view, this generally creates a dynamic where, in the traditional sense, more success we see, the more delayed the current vertical financial benefit is. But we're very optimistic about the value creation here.

Our next question comes from Erika Najarian with UBS.

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

Sure, Erika. Well, let me start with the Category 2 reference you made. We're currently at roughly $680 billion of assets, so about $20 billion or so below the $700 billion cap. But recall that, that's triggered with a four-quarter trailing average. So first of all, it's likely to be a fair amount of time before we trigger that threshold. There's also uncertainty on whether the threshold remains at $700 billion or whether it's indexed up, given the GDP and other metric growth since the tailoring was first created nearly a decade ago. Therefore, that would also delay us triggering category 2 if the threshold is indexed up. With respect then to the proposal, the punchline is the effect under the standardized approach for us if it were enacted on a fully phased-in basis today would increase our CET1 by something like 20 basis points. That is somewhat offsetting; one is the RWA impact is roughly 8% to 9% decrease for us, and that's about a 140 basis point tailwind. That 8% or 9% decrease, by the way, is pretty similar under both standardized and IRBA, given that IRBA does come with an ops risk charge. So that kind of offsets the slight benefit to risk-weighted assets there. With AOCI, that's the same across most standardized and IRBA. We had something like a $5.2 billion of AOCI, and so fully phased-in, which of course the current proposal isn't. But if we were to fully phase it in, it's roughly a 120 basis point headwind. We will start seeing the pull to par and I will note that you can see it in today's disclosure. We have also begun using held to maturity in anticipation of these rules. That may further help insulate capital ratios from some of the AOCI volatility. Fully phasing in AOCI where it stands today is a 120 basis point headwind; the 140 basis point tailwind from the RWA is a modest good sign for us. The only thing that really differs would be under IRBA that the DTA threshold comes down from 25% to 10%, and so that's a modest decrease to our spot CET1. But again, we don't anticipate electing IRBA just given that it's a modest negative for us. The next part of your question then of what does that mean to capital actions. Look, we're sitting here today at 14.4%. There are a number of things we take into account when determining the pace of share repurchases, including the current and projected capital levels, both as we sit today as well as incorporating in potential regulatory changes, expected balance sheet growth, regulatory environment more broadly, market valuations, and very importantly, the macroeconomic environment. As we manage our balance sheet, our focus is on maintaining a conservative posture to ensure resilience and have strong risk management, and we are acutely aware of the asymmetrical value of capital in certain environments. We considered all of these factors in the first quarter, and we repurchased $2.5 billion. Looking ahead, we'll continue to evaluate all of those factors that I just mentioned when determining our future pace.

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

Let me clarify. Thank you for raising it because these things matter. First of all, 12.5% was the capital level assumed in the deal model. In terms of how we are sort of measuring earnings power, we're holding capital level constant in this particular exercise and in this particular guidance. The guidance on earnings power is assuming that same level of capital. Now at the rate we are going, the guidance would still hold at higher capital levels. I'm not going to precisely get into what that break-even point is for which it wouldn't hold. But we're in a pretty strong position here, and that guidance would still hold at somewhat higher capital levels. We're not going to quantify that precisely, however, as each time we come back to you, I’m sure that breakeven point would be slightly different.

Our next question comes from Don Fandetti with Wells Fargo.

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

Thank you, Don. So gosh, I don't know if I've ever seen it. Well, I suppose there are lots of other things in our world where there are so many different divergent points of view, stated with great confidence on a topic. But certainly, the impact of AI on jobs is one of them, and people who know live deeply in the tech world are at all parts of this spectrum. I'll give you just a few comments and just get back to your credit point in a minute. It's really informative to go back as we have done at Capital One and look at how it felt in periods when the industrial revolution came in. We've gone back and gotten some striking comments around when printing came in but within the industrial revolution and how it felt then and various stages of the digital revolution. If you look at the quotes of what we said with great passion, it sounds like the conversation today. The reveal is, yes, that was in like 1860. That's not to say it won't be different this time, but it is a reminder of what it feels like when things change so much. It's always easier to see what's going to change in front of you compared to what's going to open up as an opportunity on the other side. If I were to pull way up, just a personal view is I think that people are underestimating the dynamism in our economy. They're underestimating what happens when jobs get elevated, meaning that people doing those jobs powered by AI can do even more. In many of these areas, the demand actually goes up, not in all, but in some, I think software development being a good example; you can have demand go up quite a bit. So, we are not here to prognosticate what's going to happen with respect to employment. I am absolutely here to prognosticate that AI is going to transform pretty much everything about how we live and how we work. I'm probably on the more optimistic spectrum about the implications on the economy and employment. But we have to watch with great interest all of this. From a credit point of view, credit is linked to employment. If anything drives significant changes in unemployment, it can have important credit consequences. So we will monitor it carefully. We are not making credit policy choices now in anticipation of things like that. One of the reasons we are so focused on our underwriting on resilience is taking a couple of decades of history into account in our modeling to see many things that have happened, placing an important buffer into our resilience to be in a position to adapt when the things we don't anticipate come to be. We are at an extraordinary time, and the transformation we have the privilege to live through is up there with fire and electricity. We are building a company to be at the forefront of that, and our technology transformation that we began in 2013 was focused on building that capacity.

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

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

Thank you, Mihir. The debit conversion has — we are very pleased with how that has gone. That conversion is complete. We've learned a lot along the way and how we can get better as we do these conversions. It has reinforced our belief in the doability and success that we can have with customers in doing these conversions. As it pertains to the card side, we are in the early stages of testing on the origination side, testing originating cards on the Discover network. The credit cards will be moving a portion of our book over. We are trying to do a lot of things at once. When I wave my arms and say, Capital One has a significant investment imperative, this is part of it. We are working backwards from what could create opportunities for us to move more of our business onto the Discover Network. In addition to the mechanical aspects of conversion, it's important to invest in acceptance, particularly international acceptance, targeting geographies with high travel rates by our customers. We're also building the network brand and brand credibility. We'll test with multiple facets. If we pull way up, we continue to believe that the opportunity exists to move not only our debit business, but a portion of our credit card business there, and as we continue to get the flywheel turning for a very scale-driven business. It's not an easy journey, but it's a long journey, considering we are taking important steps early on in this.

On the expense side, the expense synergies are more back-loaded relative to the revenue synergies since those expense synergies come from the conversion of the technology platforms and then sort of the associated processes and the decommissioning of applications that Rich just talked about. The expense synergies happen more iteratively over the integration window and are back-loaded since they are highly dependent on those technology conversions. That said, we are making or are making some progress on the expense synergies along the way. You should expect that we won't be fully at our expense synergies until the conversions are complete, and that will be in the first half of '27. For the revenue side, that's much more tied to the debit conversion, which is substantially completed at this point. We're seeing a meaningful portion of the revenue synergies in our Q1 results, with the full portion of the revenue synergies coming from debit expected in the Q2 results. We still feel very good about achieving the full $2.5 billion of synergies by the time we complete integration in the middle of '27.

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

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

Our next question comes from John Pancari with Evercore ISI.

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

Thank you, John. As I said earlier, and I've been saying since the founding days, our focus is on having an organic growth company and all the capabilities, talent, and infrastructure to be able to do that. We are a company that works backwards, and we always work backward from where the world is going and where winning is. This has led us to many times declare we're 'going way over there' regarding transforming our company, and that's a significant reason we're here today. M&A plays an insightful role for Capital One. I've often described it as the purchase of growth platforms. We've been much less focused on buying companies and adding earnings power from a company to ours, although it’s not that we wouldn’t consider that. The growth company we always focus on is the structural components that enable us to win in carefully selected marketplaces where we've stated winning is essential. Brex was a classic example of that because we had already declared that commercial cards are crucial to our future. We had already internally declared that we had to go very much in the direction Brex was. We will continue to be the company working backwards from where winning is. There will be special opportunities that align in ways that are a little hard to predict in advance. One other crucial thing is that most other banks are out there focusing on buying banks. That is not the case for us. We have built a modern tech stack, and the alignment we have technologically, philosophically, strategically, and in terms of talent, is there with tech companies, and it puts us in a position to be successful in acquiring smaller tech companies, which, for big banks, would be very challenging to implement.

And our final question comes from Saul Martinez with HSBC.

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

Yes. You highlighted the reasons that I shared with Erika. Our stance will always err on the side of conservatism and to focus on resilience. We are well aware that capital has asymmetrical value in certain environments. Share repurchases are very important for the value creation equation at Capital One. We are working hard to be a company with the earnings power to create a lot of value while maintaining a conservative philosophy with respect to capital.

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

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

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

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

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

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