NEW YORK (AP) — Capital One Financial is buying Discover Financial Services for $35 billion, in a deal that would bring together two of the nation’s biggest lenders and credit card issuers.

Discover Financial shareholders will receive Capital One shares valued at nearly $140, according to a news release issued by the companies Monday. Discover shares closed Friday trading at $110.49.

Virginia-based Capital One was the 12th largest U.S. bank as of the third quarter, with $471.4 billion in total assets and $346 billion in deposits, according to S&P Global. Illinois-based Discover was the 33rd biggest, with $143.4 billion in assets and $104 billion in deposits.

Both companies have benefitted from Americans’ increased use of credit cards. In the fourth quarter of 2023, Americans held $1.13 trillion on their credit cards, and aggregate household debt balances increased by $212 billion, up 1.2%, according to the latest data from the New York Federal Reserve.

As they run up their card balances, consumers are also paying higher interest rates. The average interest rate on a bank credit card is roughly 21.5%, the highest it’s been since the Federal Reserve started tracking the data in 1994.

At the same time, the two lenders have had to boost their reserves against the possibility of rising borrower defaults. After battling inflation for more than two years, many lower- and middle-income Americans have run through their savings and are increasingly running up their credit card balances and taking on personal loans.

The additional reserves have weighed on both banks’ profits. Last year, Capital One’s net income available to common shareholders slumped 35% versus 2022, as its provisions for loan losses soared 78% to $10.4 billion. Discover’s full-year profit sank 33.6% versus its 2022 results as its provisions for credit losses more than doubled to $6.02 billion.

Discover’s customers are carrying $102 billion in balances on their credit cards, up 13% from a year earlier. Meanwhile, the charge-off rates and 30-day delinquency rates have climbed.

Beyond boosting bank deposits and loan accounts, the acquisition would also give Capital One access to the Discover payment processing network. While smaller than industry giants Visa and Mastercard, the Discover network will enable Capital One to get revenue from fees charged for every merchant transaction that runs on the network.

Discover has been operating under heightened scrutiny from regulators. Last summer, the company disclosed that beginning around mid-2007, it incorrectly classified certain card accounts into its highest merchant pricing tiers. The company also received an unrelated consent order from the Federal Deposit Insurance Corporation over its customer compliance management.

Analysts at Citigroup say the regulatory issues may have prompted the sale.

“We are surprised that DFS would sell, but suppose that its regulatory challenges such as its recent October FDIC consent order and the card product misclassification issue may have opened the door for the board to consider strategic alternatives that it may not have in the past,” wrote analysts Arren Cyganovich and Kaili Wang in a note to clients.