Jeff Norris – Senior Vice President, Global Finance Richard D. Fairbank – Chief Executive Officer, Founder and Chairman Stephen S. Crawford – Chief Financial Officer.

Sanjay Sakhrani – Keefe Bruyette & Woods Betsy Graseck – Morgan Stanley Ryan Nash – Goldman Sachs Kenneth Bruce – Bank of America Merrill Lynch Bill Carcache – Nomura Securities Donald James Fandetti – Citigroup Global Markets Inc. Robert Napoli – William Blair & Company Christopher R. Donat – Sandler O’Neill Partners, L.P. Richard Barry Shane – J.P.

Morgan Securities LLC Brian Foran – Autonomous Research Matthew Burnell – Wells Fargo Securities.

Welcome to the Capital One Third Quarter 2014 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period. (Operator Instructions) Thank you. I would now like to turn the call over to Mr. Jeff Norris, Senior Vice President of Global Finance.

Sir, you may begin..

Thanks very much, Laurine. And welcome everyone to Capital One’s third quarter 2014 earnings conference call. As usual, we are webcasting live over the Internet. To access the call on the Internet, please log on to Capital One’s website at capitalone.com and follow the links from there.

In addition to the press release and the financials, we’ve included a presentation summarizing our third quarter 2014 results. With me today are Mr. Richard Fairbank, Capital One’s Chairman and Chief Executive Officer; and Mr. Steve Crawford, Capital One’s Chief Financial Officer. Rich and Steve will walk you through the presentation.

To access a copy of the presentation and press release, please go to Capital One’s website, click on Investors, and click on Quarterly Earnings Release. Please note that this presentation may contain forward-looking statements.

Information regarding Capital One’s financial performance and any forward-looking statements contained in today’s discussion and the materials speak only as of the particular date or dates indicated in the materials.

Capital One does not undertake any obligation to update or revise any of this information, whether as a result of new information, future events or otherwise. Numerous factors could cause our actual results to differ materially from those described in forward-looking statements.

For more information on these factors, please see the section entitled Forward-Looking Information in the earnings release presentation and the Risk Factors section in our annual and quarterly reports accessible at the Capital One website and filed with the SEC. And with that, I’ll turn the call over to Mr. Crawford.

Steve?.

Thanks, Jeff. I’ll begin tonight with Slide 3. Capital One earned $1.1 billion or $1.86 per share in the third quarter. On a continuing operations basis, we earned $1.94 per share and had a return on average tangible common equity of 15.7%.

Included in continuing operations results this quarter were higher linked-quarter revenue, flat linked-quarter non-interest expenses, higher provision for loan losses driven by $214 million allowance build, partially offset by lower charge-offs. There were a few non-recurring legal reserve changes in the quarter, I would like to highlight.

First, a $27 million contra revenue impact; second, we had charges in non-interest expense, which were offset by a $28 million benefit in our domestic card business. And last, we had a $70 million charge from rep and warranty expense and discontinued operations.

Turning to Slide 4, net interest margin increased 14 basis points in the third quarter to 6.69%, primarily driven by a higher average balances in our domestic card business and the third quarter having one more day worth of recognized income.

Average interest earning assets were up quarter-over-quarter driven by higher average loan balances in our domestic card, auto finance, and commercial banking businesses. Turning to Slide 5, let me cover capital trends.

Our common equity Tier 1 capital ratio on a Basel III standardized fully phased-in basis was 11.8% in the third quarter, compared to 11.6% in the second quarter of this year. With the benefit of phase-in our common equity Tier 1 capital ratio on a Basel III standardized basis was 12.7%.

And while we have yet to enter parallel run for Basel III advanced approaches, we continue to estimate we are above our target of 8%. We reduced our net share count by 3 million shares in the quarter, primarily reflecting our share buyback actions.

We completed approximately 500 million of our share buyback program in the third quarter, and we expect to buy an additional 1 billion over the next two quarters. Let me close the night with a brief update of our 2014 expectations. We continue to expect pre-provision earnings to be about $10 billion, excluding non-recurring items.

Traditionally, our marketing expenses were seasonally higher in the fourth quarter. That seasonal increase in marketing as well as our operating expense investments in growth, which Rich will review in more detail will drive an increase in non-interest expense in the fourth quarter of this year, which will carry into 2015.

We highlighted for you last quarter that allowance releases were less likely going forward. In the third quarter, we build allowances as we grew our card loans and expectations for future card growth will likely drive allowance build in the coming quarters. With that let me turning the call over to Rich..

Thanks, Steve. I’ll begin on Slide 7 with our domestic card business, which delivered another quarter of strong results. Ending loans were up about 5% year-over-year and about 3% from the linked-quarter, stronger than typical seasonal growth in the third quarter.

Continuing momentum and new account originations and credit line increase programs drove loan growth in the quarter. Purchase volume on general purpose credit cards, which excludes private label cards that don’t produce interchange revenue grew 17.5% year-over-year.

Revenue margin for the quarter increased 34 basis points to about 17.4%, consistent with normal seasonality. Revenue dollars grew about 6% from the linked-quarter, driven by growth in average loans and the seasonal increase in revenue margin.

Year-over-year, revenue dollars were down about 4% as the revenue impact of our choice to sell the Best Buy portfolio was partially offset by strong underlying growth in average loans. Non-interest expenses increased $17 million from the prior quarter, driven by higher marketing expense.

We expect both operating expenses and marketing to increase in the fourth quarter; driven by loan growth, the expected seasonal ramp in marketing and continuing opportunities, we see to drove customer relationships, purchase volume, and loans. Domestic charge-off rate improved 69 basis points on a sequential quarter basis to 2.83%.

We believe the sharp improvement in the quarter is temporary. The third quarter is usually the seasonal low point for card losses, but we think seasonality drove only about half of the improvement that we saw in the quarter.

Most of the remaining improvement was the result of better than seasonal delinquency rates we experienced in the first half of the year flowing through the charge-offs in the quarter. We’ve already seen this short-term delinquency benefit reverse itself.

We think the 2.83% charge-off rate is an unsustainable low point, and that losses are headed up from here. In the short-term, we expect normal seasonal increases in the charge-off rate in the fourth quarter and the first quarter of 2015.

Beyond seasonality, the temporary delinquency benefit I just described has run its course which will add to the upward trend in the charge-off rate in the fourth quarter. Longer term, loan growth will start to impact the charge-off rate in 2015. As new loan balances season, they will start putting upward pressure on losses.

While the impact on the charge-off rate will be modest at first, we expect that the impact will grow throughout 2015 and beyond. Pulling together both the short-term and long-term factors including seasonal variability, we expect the quarterly domestic charge-off rates throughout 2015 to be in the mid-to-high 3% range.

In addition to rising charge-offs, we expect allowance additions resulting from loan growth. We aren’t counting on further economic improvement helping our credit loss nor are we projecting renewed economic weakness. Of course, changes in a still tenuous economic recovery could substantially impact our current loss expectations.

Our current business remains well positioned. Loans, purchase volumes, and revenues are growing, and we are delivering strong and resilient returns. Moving to Slide 8. The consumer banking business delivered another quarter of solid results. Ending loans were flat compared to the linked-quarter and declined modestly from the prior year.

Growth in auto loans continues to be offset by expected mortgage run-off. Auto originations increased 14% year-over-year. Most of the growth came from prime originations as we continue to capture additional prime share from our existing dealers. On a linked-quarter basis, auto originations were essentially flat.

Ending deposit balances declined by about $1.5 billion or 1% in the quarter. Year-over-year deposit balances declined about $800 million. We’ve had an abundance of deposits since the ING Direct acquisition, and we’ve been allowing the least attractive deposits from Capital One’s legacy direct bank to run-off.

Consumer banking revenue was flat compared to the second quarter. Year-over-year revenue declined by $61 million or 4% driven by the impact of persistently low interest rates on the deposit business, declining mortgage balances, and margin compression in auto. Auto loan growth partially offset these negative revenue impacts.

Non-interest expense increased $29 million or 3% from the prior year. The increase resulted from growth in auto loans as well as a change in the geography of where we recognized auto repossession expenses, which are now included in operating expense rather than in net charge-offs.

Provision for credit losses increased $55 million from the linked-quarter driven by expected seasonal trends in auto charge-off. Home loans credit trends remain favorable and continue to perform well inside the assumptions we made when we acquired the mortgage portfolios.

Our consumer banking businesses are delivering solid performance in the phase of continuing challenges. While we expect that auto returns will continue to be resilient and well above hurdle, we expect that they will continue to decline as we move from exceptional levels to more cycle average performance.

And in our retail deposit business, we expect that the inexorable impacts of the prolonged low rate environment will continue to pressure returns even if rates rise in 2015. As you can see on Slide 9, our Commercial Banking business delivered another quarter of profitable growth. Loan balances increased about 3% in the quarter and 17% year-over-year.

Most of this growth is in specialized industry verticals in C&I lending and CRE. Loan yields declined 11 basis points in the quarter and 48 basis points compared to the prior year, driven by increased competition and our choice to originate more variable rate loans. Revenues increased 3% from the second quarter and about 10% from the prior year.

The year-over-year increase was the result of growth in loan and deposit balances across the franchise, offset by declining loan yields. The stronger increase in non-interest income was driven by the Beech Street acquisition and growth of fee generating business.

Non-interest expenses were up 18% from the prior year as a result of growth including the Beech Street acquisition and continuing infrastructure investments to drive future growth. In the quarter, non-interest expense was flat. We continue to closely manage credit risk.

Charge-offs, non-performing loans and criticized loans all improved in the quarter and remain at exceptionally low levels. While commercial credit results remain very strong, the current levels are not sustainable through the cycle. Commercial Banking competition continues to increase pressuring margins and returns.

As competition continues to increase, it’s likely that the pace of our commercial loan growth will be slower in 2015 and closer to overall industry growth rate. But we expect our focus in specialized approach will continue to deliver strong returns in the commercial bank. I’ll conclude my remarks this evening on Slide 10.

We posted another quarter of solid results for the company and across our businesses and we continue to return capital to our shareholders as we execute our announced $2.5 billion share repurchase program. As Steve mentioned, we are on track to deliver 2014 pre-provision earnings of about $10 billion.

We expect growth in full year revenues in 2015 driven by strong growth in average loans. While the efficiency ratio will vary from quarter-to-quarter, we expect the full year 2015 efficiency ratio to be between 53% and 54% excluding non-recurring items.

Our expectations for both the remainder of 2014 and 2015 include the impacts of investments to drive future growth to be a leader in digital banking and to continue to meet rising industry regulatory requirements.

Continuing opportunities to grow our domestic card business are expected to drive higher marketing expense in the fourth quarter and in 2015. Marketing efficiency, cost to acquire new accounts and the NPV of our marketing investments are strong.

We are also making significant investments in digital and technology, banking inherently is a digital product and digital will transform banking over time. The momentum around digital is building across financial services. Consumers increasingly expect elegant and robust digital experiences from all companies, including banks.

Software is a predominant way consumers interact with their banks even today and that engagement will only go up. Activity in the payment space from financial services companies and non-banks is accelerating. The ability to efficiently store and use vast amounts of data will unlock new opportunities.

Capital One is well positioned to succeed in a digital world and we are investing in the foundational infrastructure and capabilities to be a digital leader. We are continuing to expand Capital One 360 as a national digital banking platform.

We are bringing in significant native digital talent, engineers, product developers, designers and data scientists. We are very active in mobile and in payment. For example we are one of only a handful of banks, included in Apples launch of Apple pay in September and shortly thereafter launched our Capital One digital wallet.

We are focused on delivering an exceptional user experience to our customers and recently acquired a leading design firm in San Francisco called Adaptive Path. While the financial cost was modest, Adaptive Path has been a pioneer in the UX field and they will make a big impact on our customer experience.

Also, Capital One has a deep heritage as an information based company and Big Data is tailor made for us. We are investing in our Big Data infrastructure to enable rapid psycho analysis in the generation of even more powerful insights and new services.

As we are reminded of almost daily in the media, there are significant threats to information security across all industries, including financial services. At Capital One, protecting customer information is paramount and requires that we are ever vigilant in our defenses.

We’ve made significant investments in this area over the years and we will continue to invest aggressively. Ultimately, the winners in banking will have the capability of world-class software company. Most of the leverage and most of our investment is in building the foundational underpinnings and talent model of a great digital company.

To succeed in a digital world, the company can’t just boast digital capabilities onto the side of an analog business. At Capital One, we’re embedding technology, data and software development deeply into our business model and how we work.

For example we’re focused on building reusable plug and play middleware using restful APIs, modern software development and design, integrating our platforms and making them scalable in real time and building a powerful and flexible data infrastructure.

These foundational investments while not only the most visible are glamorous aspect of our digital journey create sustainable competitive advantages and position us to continue to thrive as banking goes even more digital. We’re also investing to continue to meet rising industry regulatory requirements.

We are enhancing our capabilities, infrastructure and talent to meet heightened expectations for risk management and regulatory reporting. We are continuously improving processes for capital and liquidity management including CCAR and the new LCR requirements, and we’re investing to deliver on the broad set of emerging regulatory requirements.

The expectations for large financial institutions continue to rise and we’ll continue to invest to keep pace with these requirements. Pulling up Capital One is delivering attractive risk adjusted returns today and we expect that will continue. We have the financial strength to invest in our future without comprising current financial results.

We remain focused on the leverage that create and sustain high performance. We’ll continue to pursue growth opportunities in card, auto and commercial banking.

We’ll maintain our long standing discipline in underwriting across our businesses and our preemptive focus on resilient, and we will actively work to return capital to shareholders, as capital distribution remains an important part of how we expect to deliver value to our investors. Now, Steve and I will be happy to answer your questions.

Jeff?.

Thank you, Rich. We’ll now start our Q&A session. As a courtesy to other investors and analysts who may wish to ask a question, please limit yourself to one question plus a single follow-up. If you have any further follow-up questions after the Q&A session, the Investor Relations team will be available after the call.

Lauren, please start the Q&A session..

Thank you. (Operator Instructions) Our first question comes from Sanjay Sakhrani with KBW..

Good evening.

First question just on your expectations for charge-offs, I appreciate the color, is it fair to assume the ramp in the reserves was kind of related to that as well as the growth and maybe you could just remind us of the methodology you use to determine reserve adequacy? And I guess second question, I’ll ask upfront just the growth in the balances, it’s pretty encouraging, what are you seeing that’s different from maybe a year ago that’s driving that growth in balances in card? Thank you..

I’ll take the first. I think Rich will take the second. You are spot on in your observation about what drives the allowances, it’s really two factors, loan growth which we’ve been talking about returning in the second half for a while and then also the higher delinquencies which translates into higher NACO likely in the future.

And basically, we have an extremely low quarter of NACO this quarter. As Rich talked about, we expect that to normalize and that replacement effect also has an impact on allowances.

So going forward, you should absolutely be focused on loan growth and then to the extent that you believe delinquencies in acres are headed up, and that’s going to have an impact on allowance and obviously if you thought the opposite, the opposite would be true, but it’s really both factors..

And Sanjay, what we’re seeing is continuation of what I’ve been talking about for – in a sense, talking about what we’re working on for a number of years, and talking about the traction the last several quarters, the traction that we’re getting, it is really in both originations and in line increases.

In originations, we in the areas that we have really chosen to focus on including the top of the market with the heavy spender segment and in revolvers other than high balance revolvers. We have seen really growing traction in those areas, and that’s a good thing to see. The other big effect is line increases.

Line increase is something that is always a central part of how we manage our business. As you know, we were kind of experienced sort of a line increased brown-out, starting really in some sense back in the throes of the great recession.

We’re very conservative and then of course we had the Card Act and the rules associated with proof of income before we could do line increases.

So in some sense, what you see now is moving from a browned-out line increase situation through now where we’re back into equilibrium in doing that and also catching up with some deferred line increases along the way.

So there is a lot of strength in both areas, and I think we’re encouraged not only by the traction, but by the prospects for continuing traction..

Next question please?.

Our next question comes from Betsy Graseck of Morgan Stanley..

Hi, a couple of follow ups. One is just on the ALLR ratio itself.

I guess your point that expecting NCOs to come back up, are you using a forward look of I would say 12 months, 18 months, and I also just wanted to understand if – how you are assessing what ratio to get that ALLR up to today?.

Yes, it’s actually different, Betsy, based on product, but the big driver is card and card, and the most important timeframe is the next 12 months, so it’s really the view of what’s going to happen to loss rate over the next 12 months, it’s going to be the principal driver. In addition to that, you’ve also got to factor in what the growth will be..

Next question please?.

We’ll take our next question from Ryan Nash with Goldman Sachs..

Good evening. Steve, when you think about the 53% to 54% efficiency ratio for 2015, can you give us a sense of what type of PP&R would be associated with that.

I know you noted, Rich noted that you expect growth in revenues for the coming year, but Rich also gave a long list of things that you needed to invest in, so I guess if we do continue to see balance sheet growth at the pace that we are seeing, can you just help us understand what might be a good base level for us to anchor to, thanks..

Yes. So I think Rich did a couple of things, he reconfirmed at 53% to 54%. He also said we expect loan growth to really drive the revenue outlook. So, I think we’ll leave it up to you to really figure out what you think a reasonable rate of loan growth is, and that’s probably as far as we are prepared to go in 2015 in terms of forecasting PP&R..

And then if I could ask one follow-up question, Rich, you talked a lot about digital investments, Steve spoke about opportunities to make a business more efficient in the past. I know you guys are talking about a 53% to 54% next year, which is essentially flat on a core basis.

But as we look out over the next few years, do you think there is enough leverage in the investments that you are making now that we should see continued efficiency improvement over time?.

Ryan, I think that digital, there are many benefits to digital investment. I would – the economics ultimately of going digital are pretty dramatic. The marginal cost of a digital interaction is virtually zero, and we are far from that in the analog activities that we do.

A couple of things I want to say about that, first of all, I don’t even think the biggest benefit or the most compelling case for digital is just to lower costs even though I do believe that that is the end game.

This is one of those few things in life where it’s pretty much everything gets better, but we are talking about being able to be faster, more efficient, a better customer experience, better controlled in an intense regulatory environment, much more able to innovate a better associate experience, so there is a lot of things that come on this journey.

From an economic point of view, we have tracked digital investment, and also the clear savings that come from that, most importantly from driving customers to digital. Just because you build it, they don’t necessarily come. So we have a lot of efforts on that and we are making a lot of progress.

That said, the tally right now for the measurable parts is we’re spending more than the manifest savings are, and I think actually that differential will continue because there is a lot to invest in, but it’s very clear to me that we can see savings and we can see a lot of other benefits happening.

But the thing I want to leave with you is this is not a program, this is not a project, this is not a one year kind of thing. I mean we’re essentially talking about – we happen to be living through probably one of the biggest revolutions in the history of the world up there with possibly fire at [will] (ph).

So that said, I think there’s a lot of transformation to go on in banking. And so, I think that the impacted digital investment will put upward pressure on efficiency ratios as opposed to downward in the near and medium-term. Longer run its direction is clearly downward, but I just wanted to leave you with that..

Next question please?.

We’ll go to Ken Bruce of Bank of America Merrill Lynch..

Thanks. Good evening.

I guess I would like to delve into what you’re seeing within the portfolio or just generally that’s leaving you to believe that that delinquencies are heading higher teens, just looking at some of trust data that you see a little bit of a seasonal effect, but I’m wondering if there’s something specific that you’re kind of focused on or what’s kind of leaving you to believe that we’re going to pass the best in delinquencies?.

Well, so, let me separate out sort of the comments I often make about where we are in the cycle versus things related to Capital One and the strategies that we have. I don’t have a changed point of view about where we are in the cycle. We’re in an extraordinary time. It’s hard to imagine. As an industry loss is getting much better than this.

I’ve been wrong before that over the last few years. It’s really quite extraordinary where we have come to. But this is not. When we’re talking about delinquencies and charge-offs going up, this is not calling a turn in a sense of – finally the credit card industry has gotten beyond its lowest point. At some point that’s going to happen.

What we have going on here is much more – is partly just mechanics that we want to share with you and then most importantly, it’s the growth story. The mechanics are that we had an unusually low third quarter. And so, coming back often unusually low third quarter is part of the math that we want to make sure that everybody understands.

And within that of course you have the seasonal effects, but also we’ve seen – in our history we watch very, very carefully for changes in flow rates that we see across the business.

There was a particularly positive good surge in flow rates in the first half of this year that just looking at the mechanics of that, that has sort of reversed itself not into something bad but more of a just kind of reversing of that particular surge. That’s one effect that kind of going on here.

But as we look forward, so first of all we’re reversing out of the unusual momentarily low of this quarter. And then you pretty much from there you’re looking at seasonality and we’re heading into the seasonal ramping part of the year. And then you have the growth, the dynamics of growth taking over from there.

So this isn’t really about the charge, the credit card industry, it’s really about Capital One and the effect of the very positive story that we see developing in terms of our growth, but we want to make sure people understand that what comes with that territory is increasing losses, particularly compared with our environment of not much growth and even shrinking over the last few years, and we want to make sure investors just understand the charge-off math associated with that..

Okay.

And everybody is focused on credit card growth, it seems that the success that you’ve all had is being kind of looked at by others jealously and I’m wondering if you’ve seen any change in the competitive landscape based on others behavior?.

So I think the competitive landscape in card continues to be intense, but strikingly stable. And again I would compare that you’ve often heard me talk about, I think both the commercial business and the auto business are getting kind of into a degrading state of competition and as they regret towards the main and so on.

I think that so, but the card business, the pricing is relatively stable, you’ve had mail volumes increase by about 16% over the last year and so we got to keep an eye on that.

And by the way that mail volumes increasing in the context of where the world is increasingly going to digital so that the total amount of marketing is even greater than kind of what you see in mail volumes.

So certainly there’s more – there’s competitive intensity there, but I think the real thing that’s going on is there’s – the surviving and successful players in the card business have looked back in their rear view mirror as they’re tripped through the great recession.

And they have figured out where they’re good and where they’re not so good, and they have staked out in most cases strikingly different strategies.

And I think each of those strategies makes a lot of sense for the particular issuer and it’s playing to the strength of the particular issuer, but I think it helps to contribute to a rationale competitive environment in which in its own way we can kind of all succeed.

And one thing kind of helping us a little bit after all of these years of the card industry and total growth growing nowhere you have seen in the last few months just looking at revolving credit date I think inching up from near zero to in March 1.5%, April 2.6%, May 2.5%, June 2.9%, July 3.4%, August 3.3%.

So it’s a little bit of rising of the tide as well. So these alleged jealous competitors, I think, are feeling very good about how they’re doing in, it’s a pretty stable industry. Next question please..

We’ll go to Bill Carcache with Nomura Securities.

Thank you. Good evening. There is a kind of focus on auto and – so I had a couple of questions that I’ll ask upfront.

Rich, can you give some perspectives around how the auto business at Capital One has transformed from its early years to where it is today and the extent to which during that time there has been a remixing the way from what was then maybe a bit more of a focus on sub-prime customers to perhaps a bit more of a focus on prime today? And just kind of bring us to where your mix of prime versus sub-prime is currently? And maybe you talk about the relative attractiveness of each of those segments in the current market? And then finally maybe just doesn’t necessarily have to follow that the risk of loss is greater in sub-prime given collateral quality and to the extent to which used car prices still remain pretty strong? I know there is a lot there, but I would appreciate any color on that.

Thank you..

And you say as the risk of loss greater in sub-prime, greater than – what greater than it was before greater than prime, what did you….

Yes, I mean, I guess you’d maybe just talk about like risk adjusted margins and how they have changed in both prime and sub-prime and how collateral plays into that?.

Okay, thank you, Bill. So, Capital One, in 1998 we entered the auto finance business with the belief that this highly fragmented industry was going to go national and we wanted to bring information based strategies and the national kind of strategy to that business and we bought a sub-prime credit card company, Summit Acceptance Corporation.

So our initial foundation came out of the sub-prime side and over the decade and a half that we’ve been doing it since we have migrated to a pretty much full credit spectrum perspective.

This is not only to leverage scale economies, but what’s very clear is that the real leverage is in deep dealer relationships and there is economic benefit in that and I think in terms of the quality, the kind of loans that come out of that, it’s a win-win to build deep dealer relationships. And also it is our nature.

If you look across the businesses that we do, that we tend to try to play across the credit spectrum and tend not to specialize just in one particular place. So this has been a long journey over this period of time, but you can see the continuing move toward not only near-prime, but so much growth in prime.

And I think – and most of this is a matter of solidifying and deepening the exiting dealer relationships that we already have. So I think it’s a win-win as we do that. Now when you think about the economics of the business, sub-prime has high margins and higher losses and it’s all about how well one can play the credit risk management game.

And I think this is not for the faint of heart. This is companies that deeply invest in that and we have 15 years experience in auto and couple of decades experience in the card business and underwriting in that particular segment and we feel very good about the risk adjusted through cycle returns that we experience there.

And I think our rearview mirror experience in the Great Recession is confirmatory as well Near-prime by the way is just in between everything that I’m going to say about prime and sub-prime.

On the prime side, this is very thin margins and very low credit losses and that is a business that where scale matters and every expense dollar is really important and so on. But I think we’ve managed to build one of the top positions in that business. And while the returns are much lower we are comfortable with those returns.

They’re much lower than sub-prime. We’re comfortable with the returns and we’re very comfortable with the integrated economics we’re getting in this business. Just one comment about the cycle for a second.

The extraordinary returns a few years ago in the auto business as competition headed for the hills, have now pretty much regressed very close to the mean. Some prime remains a little bit above in terms of returns at this point and the prime business is really right there at the intense point in the cycle from a margin point of view.

But overall things here we feel good..

Also look for additional information on the mix of our auto portfolio in our upcoming 10-Q..

Next question please?.

We’ll go to Don Fandetti with Citigroup..

Yes. Rich, I have some question around Apple Pay. It seems like the banks may be paying some type of fee to Apple. Obviously, you can’t talk about the specifics. I was curious if you can offset that outside of fraudulent. Secondarily, I know the networks are creating a vault and charging the banks.

And there’s been some talks that the banks might create a vault. I was wondering if you consider that as well..

Okay. Don, we don’t get into the economics of our contract with Apple. But the decisions that we make come with the belief that this is an important thing for us to do. And I think it offers a good, opportunity and upside for us.

The vault that that bill is referring to let me just comment for a second, one of the key elements in security, that’s a very important breakthrough is that, card numbers are not going to be embedded inside the secured element on a phone. Instead, one-time single-use or a few times use tokens will be in a sense, sent to the phone.

So that the risk of extended fraud is massively reduced. Visa and MasterCard are creating a vault and there is other activity that’s going on of some alternative approaches, as well just in the nature of an evolving industry. I think people aren’t leaving single solutions as the only way to go.

But whether it is coming from Visa and MasterCard or from a banking industry vaults are really actually from individual issuers vault. There’s work going on in all three of those dimensions, but the big story there is, this tokenization is a game changer in terms of security..

Thank you..

Next question please?.

We’ll go to Bob Napoli with William Blair..

Thank you. Good afternoon.

Just on the credit card business, Rich, I mean your growth just over the last few months has just really accelerated and it is there – are we getting to high single-digit growth or double-digit growth in the credit card business or is it just – this is just kind of a one-time catch up in bringing the credit lines – kind of catching up with the increases in credit lines that you had delayed for several years? Pretty stark increase in loan growth from 0% to 5% in the last three or four months.

.

Yes, it’s funny given the heritage of the company that we would think numbers like this are….

Right, go ahead..

Are so big, but all jokes aside of course we did live through the period where not only where we – so you had – we’re going from an environment where we had a very cautious consumer and we ourselves had a certain challenges that we had to deal with that I talked about earlier.

And then we also had sort of the running off of some of the HSBC highest risk things and then our multi-year is still going on avoidance and running off of high balance revolver. So that’s a lot of things that sort of conspired to generate some anemic and frankly negative numbers in terms of our growth.

And what’s going on here Bob is not really a kind of one-time effect, on the line increases there is a bit of a – there is some element of kind of catch up with that, but I would more leave you with – this is really the product of the steady work we done from a number of years both in the line increase innovation side and on originating in the segments, we know so well.

It’s actually continued traction there. You know as well enough to know that we’re not going to make a forecast of growth, but you can also tell that that we feel pretty good about the traction we have right now and we do look forward to seeing continued growth. .

Then last question is just on the commercial business, you’ve had very good growth there, but loan yields – well credit is phenomenal, your yield has dropped almost 50 basis points and deposit costs are relatively flat year-over-year, and you talked about very intense competition.

But how does – where do the loan yields flattened out here, does the growth really slow down because it’s too competitive.

Can you really generate the returns you’re looking for with the trends that I’m looking at?.

Well, look at – I think that the nature – let me comment for a second about the nature of how I think credit cycles work.

When you’re in the sort of good part of the credit cycle, which has been like the last few years where borrowers are more careful and lenders are more careful and maybe a little more scarce, as you go on in the cycle, I think there is a very kind of classic pattern that occurs that as competition increases, lenders, particularly those who have strong memories of a recent recession like we all do here, what happens is the competition becomes almost singularly focused on price.

And I think that prices fall until you get kind of down to that point where there’s not a lot of room there. And then you kind of move to phase two in the industries – in the cycle evolution where people start compromising various underwriting terms.

I think most of the – I describe commercial that this battle has been played out on the pricing side, but also there is certainly other things going on the C&I side.

The impact of the CLO market and the covenant light loans has put a lot of pressure on sort of the lower end of the marketplace, but it’s not impacting banks that much at this point, but we have a wary eye on that.

I mean, just the percentage of loans in the institutional market that are covenant light is substantially higher than before the great recession. So we certainly have to keep an eye on this.

And in other areas, individual areas you start to see some loosening of some underwriting standards in the industry, but I think all in all if the things aren’t too in a bad place yet.

The key thing we’re doing is focusing on segments where we are comfortable with the segments and for us that’s mostly the specialty lending segments that are not as subject to 8,000 banks who are looking for assets, trying to go out and see if they can generate business.

This is kind of like the card business where highly sophisticated limited number of players, who know what they are doing are competing in these spaces. So the net effect of all of that is I’m going to leave you with.

I mean, we still feel that there is good business to be had in commercial, but you should be thanking as this regresses to the main our growth is going to do the same..

Next question please?.

We will take Chris Donat with Sandra O’Neil..

Hi, good afternoon, thanks for taking my question. Wanted to ask about the marketing spend in the third quarter, which typically at least in the last few years has been down from the second quarter, but it’s uptick this year.

I’m just wondering if that’s reflective of opportunities you’re seeing that are then translating into new account growth, or is it more tied to other campaigns, or something like Quicksilver. Just little explanation about where we are in the third quarter also with your comments of expecting an increase in the fourth quarter..

Hi, good afternoon, thanks for taking my question. Wanted to ask about the marketing spend in the third quarter, which typically at least in the last few years has been down from the second quarter, but it’s uptick this year.

I’m just wondering if that’s reflective of opportunities you’re seeing that are then translating into new account growth, or is it more tied to other campaigns, or something like Quicksilver. Just little explanation about where we are in the third quarter also with your comments of expecting an increase in the fourth quarter..

Yes, so it’s a very natural thing for everybody, when they think marketing to think of TV ads, because that’s what you all see unless you’re blessed by having your mail box full of some of our solicitations, and so on.

I want to say that just as a reminder, the amount of money we spend on television advertising is a modest portion of the entire expenditures that we do in marketing. So my short answer is that a lot – there you’ve seen the seasonality of marketing spend and a bunch of that comes from campaign seasonality.

So things like our sponsorship of a lot of things in the NFL, I mean in college football and things like that, there’s a whole seasonality there. Campaigns you see like Quick Silver and various things, there’s a lot of hard wiring in advance of some of that stuff.

But the increases that you see beyond the normal seasonality really are a reflection of real time seizing of the opportunity that’s going on at Capital One, as we see growth opportunities. So there’s kind of a fixed component in the near term and there’s a variable component.

And we’ve always said that in the end that variable component is pretty sizable, as well. And you’re just seeing the manifestation of kind of seizing the moment and taking advantage of that.

Next question please?.

We’ll take Rick Shane with JP Morgan..

Thanks guys for taking my question. I actually want to circle back a little bit on the question upon Bob Napoli raised. When we look at margins, particularly in the card segment, when we strip out, sort of the impact of the HSBC portfolio and the run-off there, it actually looks like your margins have been pretty stable.

Rich I know you’ve given a lot of metrics, related to 2015 outlook, in terms of credit and expenses. And I don’t want to push too hard in terms of getting you to give us one more. But give us a sense, I mean, do you think that we are – and again you guys have talked for a long time about margin erosion and then backed away from it.

Do you think that we’re at that inflection point now?.

You’re talking, Rick, about the card business?.

I am talking about the card business..

Yes..

Yes..

I don’t see evidence that we are. I mean look, I’m the last guy you’ll ever see saying, read my lips, no price reductions from here kind of thing. But now I see people intensely competing in the segments where they see their strengths. All of them are sophisticated, they all have fresh memories from the great recession.

And I – look, yes, we have been one that has been predicting margin decline for a number of years. And so first of all, you probably shouldn’t be asking me giving my credibility that has been lost over that subject, but I see again a very competitive but stable rational environment.

And probably in the longer run, there will be pressure on that, but I don’t. It sure has a different feel for me again than the other segments we play in, where things are only going in one direction..

Got it. Yes I mean, I think, if it is that – several years ago, you talked about margin compression following Card Act and eventually sort of threw your hands up and said, hey, we’re not just seeing it, it feels that way still..

Yes, I mean, again, a lot of my predictions about the margin compression back in the post Card Act days, really was sort of thinking through the mechanics of all the aspects of the Card Act and how that would play out and some of that stuff. It didn’t play out exactly as we had predicted.

The other thing that’s going on, I really want to draw another thing too into this conversation in both the commercial and the auto space, if I were to calibrate that compared with the card business. In the commercial and auto space, you literally had people heading for the hills for a whole period of time as the great recession was raging.

A lot of auto players literally liked bailed out of the business. You had a lot of particularly European players bail out of the business so much capital markets money, and so on leaving the commercial space. And so supply itself has really changed over this period of time and it’s led to margins to really go up and then to really go down.

In contrast, in the card business, all the players who pretty much entered the great recession are still the same list of players on the other side of it. We were all a little wiser now, but we’re all very committed to the card business and pretty much doing all the things that continue to make it successful.

So the card business never had the spike in margins that occurred in the other businesses nor does it have the kind – the regression to the mean therefore that occurred in the other businesses. .

Next question please?.

Operator:.

:.

Hi, good evening.

Can you hear me?.

Yes, Brain, go ahead..

Okay. I guess I don’t know want to – I know you said you don’t want to give revenue guidance.

I guess the question I have is you’re being fairly explicit about expenses going up and we are at a $12 billion annualized run rate, so it feels like the current consensus is 12.3%, it feels like up is something more than that and you’re still talking about a 53% to 54% efficiency ratio.

Just to make those two die out, would revenue growth have to be in the high single-digits just to make the math work?.

No, Brain, if we’d wanted to get that specific by line item we really would. There is a lot of moving pieces in the environment. We’re trying to do a lot of the same things – a lot of things at the same time, keep our customers, our regulators, and our shareholders delighted and particularly in this interest rate environment that’s a handful.

So we feel comfortable with our guidance of 53% to 54%. We’ve tried to give you senses as to what’s going to drive the top-line growth next year, which is really loan growth. We just talked a little bit about how we feel about loan growth. I think given where we are that’s probably as far as we’re prepared to go..

Fair enough.

Maybe a follow-up on a separate tack is marketplace lending or peer-to-peer whichever term you prefer I mean how do you think about it both as a competitive threat and as an opportunity for Capital One?.

We have a great interest in all of the innovations that are coming out of the digital space. I think one thing that is a classic thing that banks do and I always worried that we resemble that description is to focus on things the way that we do it and miss the fact that they’re really break-through things going on.

I think they are – so the peer-to-peer lending, which is pretty much non-exiting activity on the banking side is clearly picking up quite a bit of steam in the startups and in the digital space.

I think there is a – it is our view that all of the opportunities in the digital space and we pretty obsessively study those including a bunch of lending ones. The peer-to-peer lending opportunity is not one that’s at the top of our list in terms of the opportunities.

I mean we’re going to be very close students of what’s going on, but I think there are number of other really clever things that are happening with startups that we’re a lot of more interested in.

I think there is a – when you think about peer-to-peer lending and all the risk issues associated with that, all the regulatory environment we live in and kind of the things that we have learned and – that I personally, for example, have learned in over two decades of building a consumer lending company.

There are a lot of challenges and a lot of risks in there. So what we’re going to do is probably be a very eager observer and we’ll go from there..

Next question please?.

Our final question this evening comes from that Matt Burnell with Wells Fargo Securities..

Thanks for taking my question. A bigger picture question then a fairly focused one. Rich, given – all the commentary you gave us in terms of your focus on improving the digital offerings and at a time when a lot of the traditional commercial banks are spending a lot of time and effort on doing the same thing.

Can you give us a sense as to your – the trend in your level of comfort and your ability to keep deposits and maintain deposit pricing relative to maybe where – how you were thinking about that a couple of years ago?.

Are you talking about the asset liability, sensitivity or….

I guess I’m really talking about deposit data, one of the questions we get most often from investors is Capital One spends a lot of time talking about their digital offerings and I think that in some cases gets investors worried about the potential for outflow of deposits faster at Capital One than at a “traditional bank” even though those traditional banks are now following down the path of Capital One trying to focus on digital acquisition of deposits..

Yes. So first of all, you know, so much – when I gave my little spit flying little passionate speech about digital a few minutes ago. One thing I want to say is the way digital is transforming banking goes far beyond what I think the thing people mostly think about, which is, today there are branches and tomorrow there is a branch in people’s pocket.

And look that is very important component of that whole thing. And by having bought ING Direct, by having before that already build to digital bank of our own, and having a big commitment to digital innovation and having a heritage of 20 some years being a direct marketing company, I’m very interested in the opportunities there.

But the bulk of our digital investment itself and capabilities is really for things that kind of extend beyond some of the narrowest view about just moving to a bank in your pocket kind of thing. Let me comment on deposit stickiness. And I really appreciate that you asked the question.

If the conventional wisdom out there is gosh well the only way that these, some of these online banks have got, they’ve used price as a way to generate their business.

Again having 10 years experienced ourselves in building an online direct bank and then having bought ING, we have a window that shows how very different that the actual world that we live in is, versus some of those perceptions.

And a lot of it, and it really pivots around what is it that is drawing customers into a bank like ING Direct, for example, and now Capital One 360. Many years ago at its very beginning ING offered one of the highest rates paid.

And over the years it had a very explicit goal that we are going to move into building of franchise and building a brand, and the benefit of that is that we’re going to get people to come for us for something other than just being number one in the league tables with respect to rate.

And over time the ING franchise has, now Capital One 360 has moved way off the frontier of where the hot money goes. And in fact, we now have well more than a decade of experience of just seeing how long live these customers are, and also how below this franchise is, the customer loyalty is really extraordinary.

And so while I would say that relative to the branch on the corner we in our own planning are assuming a deposit data that is higher than those most sticky of deposits. I think that people are going to be pleasantly surprised by the resilience of these deposits.

You make the other point, which is really important to, which is that there is a blurring of the lines here over time as more and more banking becomes digital.

And I think, especially with Capital One strategy ourselves to kind of create the fusion of the truly kind of ING oriented digital bank and the physical distribution Capital One that we are and I think that as our own lines blur also you’re going to see the industry lines blur and I think that over time it is a franchise with surprising striking resilience..

And, Rich, just to add, extending that beyond just how online versus in-branch deposits respond, I think the way your whole liability mix responds to changes in environment is a much bigger question. It’s a function of your wholesale, retail mix, what’s ensured, what’s not ensured, the size and duration of your deposit relationships.

And as we look at that we don’t feel disadvantaged relative to peers. And I think if you look at our asset sensitivity, you’d find that lines up pretty closely with the average peer bank..

Thanks, Steve. And then a quick question for you perhaps. You mentioned the LCR requirement.

How far long are you on that? And was the decline in the yield on investment securities this quarter versus the second quarter driven by some of the actions you’ve taken over the three months?.

We have been rotating. There will probably be a little bit more, but that’s not a big impact on margin. We’re going to be fine in terms of meeting the transitional requirements.

LCR isn’t a huge issue for us except there is a little bit of a margin compression and obviously there is some OpEx getting our systems in a place where we’ll be able to calculate all the stuff on a daily basis. It’s a good example of the regulatory cost that Rich was mentioning..

Well, thank you everyone for joining us on the call today. Thank you for your continued interest in Capital One. And remember the Investor Relations team will be here this evening to answer any further questions you may have. Have a great night..

Thank you. And that does conclude today’s conference. We thank you for your participation..