Jeff Norris - SVP of Global Finance Richard Fairbank - Chairman and CEO Steve Crawford - Chief Financial Officer.

Ryan Nash - Goldman Sachs Sanjay Sakhrani - KBW Bill Carcache - Nomura Securities Brad Ball - Evercore Sameer Gokhale - Janney Capital Markets Brian Foran - Autonomous Research Martin Kemnec - Jefferies Ken Bruce - Bank of America Merrill Lynch Scott Valentin - FBR Capital Markets Chris Donat - Sandler O'Neill Matt Burnell - Wells Fargo Securities.

Welcome to the Capital One First 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, [Frety]. And welcome everyone to Capital One’s first 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 financials, we have included a presentation summarizing our first 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 are going to walk you through this presentation.

To access a copy of the presentation and the press release, please go to Capital One’s website, click on Investors, then 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. With that I’ll turn the call over to Mr. Crawford.

Steve?.

Thanks, Jeff. Let me begin with slide 3 tonight. Capital One earned $1.15 billion or $1.96 per share in the first quarter. On a continuing operations basis, we earned $1.12 billion or $1.91 per share and had a return on average tangible common equity of 16.8%.

As you know, our capital plan was approved in the quarter and our Board has authorized $2.5 billion in share repurchases over the next four quarters.

Included in continuing operations results this quarter were a lower provision for loan losses driven by lower charge-offs and a $208 million allowance release and $27 million in discrete tax items, primarily related to changes in New York State tax law.

Our historical financial statements have been revised, as we adopted a new accounting standard for investments in low income housing tax credits in the quarter, resulting in the cost of investing in qualified affordable housing projects no longer being recognized above the line in operating expense or rather below the line as a component of tax expense.

In addition, the new accounting standard results in higher costs in the earlier years of the investment [flows] due to faster amortization, resulting in a modest reduction in historical earnings and a one-time $112 million reduction to retained earnings.

We have provided an appendix slide that outlines the impact of the consolidated company and the segment results due to the adoption of the accounting rule. Excluding the impact above, operating expenses decline quarter over quarter, largely due to the absence of non-recurring restructuring expenses in the fourth quarter.

Additionally, linked-quarter revenues were lower, driven largely by day count and lower seasonal volumes in cards. Turning to slide 4, let me briefly touch on net interest margin. Reported NIM decreased 11 basis points in the first quarter to 6.62%, more than entirely driven from the first quarter having fewer days worth of recognized income.

Average interest-earning assets were down modestly quarter-over-quarter driven by lower average investment securities and cash offset by higher average loan balances.

Average loans were higher on a linked-quarter basis due to continued growth in our auto, finance and commercial businesses offset by declines in card balances primarily due to seasonality. Our guidance for card runoff in 2014 remains $1 billion. We are updating our expectations for mortgage runoff in 2014 to $5 billion from $4 billion previously.

Turning to slide five, I will briefly cover capital trends. As expected, Basel III standardized became our primary regulatory capital regime in the first quarter. Regulatory capital ratios for periods prior to the first quarter are reported under Basel I.

Our common equity Tier 1 capital ratio on a Basel III standardized fully phased-in basis was 11.7% in the first quarter compared to the same number of 10.9% in the fourth quarter of 2013.

With the benefit of phasing our common equity Tier 1 capital ratio on a Basel III standardized basis was 13%, up 80 basis points from the same 12.2% in the fourth quarter of 2013.

While there is still work in progress, industry wide on the final implications for capital under the Basel III advanced approaches , we continue to estimate we are above our target of 8%.

Based on the quantitative and qualitative outcomes in the recent CCAR process, we look forward to returning capital to our shareholders through the approved $2.5 billion in share repurchases over the next four quarters. The bar surpassing CCAR is high and will likely continue to rise.

We have and will continue to invest in our processes to exceed these standards. We have demonstrated our commitment to return capital and understand that remains an important part of return equation for our investors. Let me close briefly with an update of our expectations for 2014.

The early adoption of the new accounting standard for low income housing tax credits and the change we made to prospectively recognize auto reposition expense and operating expenses instead of as a component of vehicle, impact on our outlook for PP&E and its components.

We’ve previously expected pre-provision earnings for 2014 of approximately $9.8 billion excluding extraordinary items. Adjusting for the shift in geography of these two items with the impact of the new accounting standard being a primary driver, we now expect 2014 pre-provision earnings to be about $10 billion within a reasonable margin there.

Looking beyond the impact of these geography moves, we expect some modest or principally offsetting changes with higher revenues offsetting higher expenses. With that, let me turn the call over to Rich..

Thanks Steve. I’ll begin on slide 7, with an overview of the domestic card business. Ending loans were down about 7% from the fourth quarter driven by expected seasonal pay downs and continuing planned run-off. Ending loans declined about 3% year-over-year. Excluding the planned run-off, the year-over-year decline in ending loans was about 1%.

Purchase volume on general [purpose] credit cards, which excludes private-label cards, which don't produce interchange revenue, grew about 11% year-over-year.

Looking below the surface, the year-over-year trends in loans and purchase volumes continue to reflect our strategic choices, which focus on generating attractive, sustainable and resilient returns. We're avoiding high-balance revolvers and allowing the least resilient parts of the acquired HSBC portfolio to run-off.

In contrast, we're seeing underlying year-over-year loan growth in many segments, including transactors and revolvers other than high-balance revolvers.

New account originations continue to grow at a strong pace and we continue to see opportunities to increase lines for existing customers, which should improve the trajectory of both loan growth and purchase volume growth overtime.

As we said last quarter, we expect these improvements to result in overall year-over-year loan growth in the domestic card business sometime in the second half of 2014. Revenue margin for the quarter was just under 17%, down seasonally from the fourth quarter.

Revenue dollars were down about 10% year-over-year driven primarily by our choice to sell the Best Buy portfolio. Non-interest expenses improved by $119 million from the sequential quarter, driven by operating efficiency and seasonally lower marketing. On a linked-quarter basis, the charge-off rate increased by about 12 basis points to 4.01%.

Delinquency rate decreased about 41 basis points to 3.02%. The improvement in delinquencies was better than normal seasonal expectations. First quarter charge-offs in delinquencies include the temporary increase we discussed last quarter.

Recall that in July 2013, we changed a number of customer practices on the HSBC branded card portfolio to align them with regulatory guidelines and Capital One practices. These changes temporarily increased fourth quarter delinquency rate.

The delinquency impacted largely run its course which contributed to the improvement in delinquency rate in the first quarter. We originally estimated that the changes to align HSBC customer practices would temporarily increase the monthly domestic card charge-off rate by about 35 basis points from December through March.

The actual impact was closer to 25 basis points and we expect it to diminish to about 10 basis points in April and be mostly out of the charge-off rate by the end of the second quarter.

Looking beyond these temporary impacts, we expect that our focus on resilience and our strong credit risk underwriting will continue to drive strong credit results with normal seasonal patterns. Our card business remains well positioned.

We’re poised to return to year-over-year loan growth in the second half of 2014 despite continuing run-off and our choice to avoid high balance revolvers. We’re delivering strong, sustainable and resilient returns, and we’re generating capital on a strong trajectory, which strengthens our balance sheet and enables capital distribution.

Moving to slide 8. The Consumer banking business delivered another quarter of solid results. Ending loans declined about $35 million from the fourth quarter and about $2.9 billion year-over-year. Continued growth in auto loans was more than offset by expected mortgage runoff.

Auto originations increased from the fourth quarter and remain on a strong growth trajectory. Subprime originations were relatively stable, while prime originations grew as we captured additional prime share from our existing dealers. Ending deposit balances grew by about $3.9 billion in the quarter.

Year-over-year deposit balances declined about $1.1 billion, mostly in our legacy Capital One direct banking businesses. Consumer banking revenue was modestly lower compared to the fourth quarter driven by declining consumer banking loan balances, persistently low interest rates and margin compression in auto finance.

Non-interest expense decreased $88 million in the quarter as a result of lower marketing expense in our deposit businesses, the absence of several small non-recurring operating expenses we recognized in the fourth quarter in continuating operating efficiencies.

These improvements were partially offset by a change in the geography of where we recognize auto repossession expenses which are now included in operating expense rather than in net charge-offs. Provision for credit losses improved in the quarter.

Auto charge-off rate and delinquencies improved in the first quarter in line with expected seasonal patterns and aided by the shift in presentation of repossession expenses that I just described. Home loans credit trends remain favorable and continue to perform well inside of the assumptions we made when we acquired the mortgage portfolio.

The overall consumer banking charge-off rate remains strong at about 1%. While we continue to expect that auto finance revenues, margins and returns will decline as we move from exceptional levels to more cycle average performance, we remain committed to the auto finance business.

We build deep and sustainable dealer relationships, we have developed proven underwriting and customer service capabilities and we expect that the auto finance business will continue to deliver resilient and well above hurdle returns.

Additionally, we expect that the [inaccessible] impact of the prolonged low rate environment will continue to pressure the economics of our retail deposit business even if rates rise in 2014. As you can see on slide 9, our commercial banking business delivered another quarter of profitable growth.

The current and historical results on slide 9 and in our financial tables have been restated to reflect the change in accounting for low income housing tax credits that Steve described earlier.

As shown in the appendix slide, the net effects on the commercial banking segment are reductions in revenue, operating expense and income tax as well as the modest decrease in net income from operations. Loan balances increased about 3% in the quarter and 18% year-over-year, driven by growth in specialized industry verticals in C&I lending and CRE.

Loan yields declined in the quarter and compared to the prior year, driven by lower market pricing for increased competition and our choice to originate loans with even better credit quality. Revenues declined 12% from the fourth quarter.

Lower loan yields as well as lower tax equivalent yields in our equipment leasing business drove the quarterly decrease in revenue. In contrast, revenues increased about 5% from the prior year. The year-over-year increase was the result of growth in loan and deposit balances across the franchise, partially offset by declining loan yields.

Non-interest expense was up 15% from the prior year as a result of the Beech Street acquisition and continued growth in loan balances. In the quarter, non-interest expense was down about 9% with lower amortization expense and seasonal trends. Commercial credit remains very strong with the charge-off rate at 4 basis points.

While the current very low charge-off levels are not necessarily sustainable, we continue to see low levels of non-performing and criticized loan balances, so we expect the strong credit performance of our commercial banking business to continue.

While increasing competition particularly in generic middle market lending may continue to impact the pricing and volume of new loan originations, we expect our focused and specialized approach to deliver strong results in the commercial bank. I will conclude my remarks this evening on slide 10.

In the first quarter of 2014, we posted another quarter of solid results for the company and across our businesses. We received no objection to our CCAR capital plan and announced the $2.5 billion share repurchase program that we expect to complete by the end of the first quarter of 2015.

Capital One is earning very attractive risk adjusted returns and we expect that will continue in 2014. But we’re always focused on the important levers that will sustain and further improve our profitability. We are committed to tightly managing cost across our businesses.

We don’t view this as a one-off initiative, it’s a major multi-year agenda and it remains the top priority in all of our businesses and in every budget cycle. Our credit results are strong driven by a long standing discipline in underwriting across our businesses and our continuing focus on resilience.

Growth remains a high priority for us, but only in the context of the preemptive focus on generating attractive, sustainable and resilient return. We expect planned run off will drive declining home loan balances.

On the other hand, we expect growth in areas we’re emphasizing including commercial banking and out finance will continue, and we expect year-over-year growth in domestic card loans to resume in the second half of 2014.

And with respect to capital, our CCAR submission and our 2014 capital plans are strong evidence of our commitment to return capital to shareholders. The bar for passing CCAR is high and will likely continue to rise. We have invested and we’ll continue to invest in our processes to exceed these rising standards.

Our capital and liquidity positions remained strong. Our businesses continue to deliver attractive and sustainable returns and generate capital on a strong trajectory. Industry loan growth remains low and in our case, planned run-off frees up capital as well. We're comfortable also with our strategic footprint.

These conditions create excess capital that can be distributed to shareholders. We recognized that capital distribution is important to our investors and capital management remains an important part of how we expect to deliver superior and sustainable value to our investors in 2014 and beyond. Now Steve and I will be happy to take your questions.

Jeff?.

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

[Vicky], please start the Q&A session..

(Operator Instructions). And we'll go first to Ryan Nash with Goldman Sachs..

Yes, just two quick questions. I guess first on loan growth, you're still talking about returning positive in the back half of the year.

Can you just help us understand some of the drivers behind that? Is it from new account acquisitions driven from the recent marketing spend, is there an expectation that the existing customer base will begin revolving against slower run-off.

Can you just tease out what some of the main drivers are? And then for Steve, just thinking on a longer-term on capital return, you talked several times that the bar does continue to rise.

But given the strong capital position all else equal, do you think the current year's capital return is sustainable or given the fact that you don't move to be in advance for several years, we can actually see further increases to capital returns in the near-term? Thanks..

Yes Ryan, we continue to be on track to have loan growth in our card business return in the second half of 2014. What’s really driving that is continued success in new account origination; I think we feel very good about the results we see there.

On the existing customer base things are going very well and we’ve gotten traction, a lot of traction in the line increase area where I am sure you know that we had sort of a brown out with respect to line increases as we were adapting to a regulatory guideline. So, that’s pretty much back on track.

So we feel good with respect to being able to play offense if you will. With respect to the defense side, every year the run-off becomes less and we continue on our journey of running off also our high balance revolver.

And so net-net, the line is finally crossed in the second half of this year and I think we feel good about the trajectory from there..

So Ryan, as Rich mentioned, we’re not at a point where we’re prepared to provide specific guidance going forward and I am sure you can imagine there is a bunch of reasons for that. But in our couple of observations, some of which you’ve heard it from Rich and I already.

One, the qualitative bar continues to go up for all banks and I think the good reasons for us to emphasize flexibility in our future capital plans probably means that share repurchases will be a continuing emphases.

And I think in terms of thinking about payout levels going forward, I kind of go back to the way Rich ended, which is we have a really strong capital position and continue to deliver high returns. Industry-wide loan growth is relatively low and in our case it’s magnified by run-off. We continue to be comfortable with our strategic footprint.

So, and most importantly, I think hopefully demonstrated over the last couple of years; we understand how important capital return is to delivering enduring value to our shareholders..

Next question please?.

We’ll go next to Sanjay Sakhrani with KBW..

Thank you. I guess I’ll ask my couple of questions upfront. Steve, I was just wondering if you could just go over that breakdown of the revision in the PP&E again. Just how much is coming from the specific tax changes versus other stuff of that $200 million increase in PP&E? And then secondly, question for Rich.

We’ve had a couple of large players in auto go public recently, one that’s pretty focused on prime and I think I heard you say that you guys took share in prime from dealers. I was just wondering if you could talk about how you expect the trajectory to be going forward in auto lending in terms of growth. Thank you..

So let me go first. In terms of the PP revisions, again these are primarily changes in geography. So, we would have approximately $240 million of incremental operating expense.

If we have the current standards prevail into this year with respect to how we were accounting for [Litech], we would similarly have $40 million that would stay in (inaudible) instead of moving up to operating expense.

These are again approximate numbers that gets you to the around $200 million, which is why the guidance went up from $9.8 billion to $10 billion, again that excludes extraordinary items and we’re not defining that’s the last decimal point..

Yes Sanjay, in the auto business we continue to feel very good about the auto business.

We’ve wanted to make sure that our investors understood that the confluence of kind of once in a lifetime event that led to extraordinary return opportunities and exceptional growth opportunities that’s redressing towards the main, but that’s not to take away from that fact that we continue to feel good about the opportunities to be very successful and earn well above hurdle rate returns in this business.

The growth -- basically I think the way to think about the growth trajectory is subprime is pretty flat these days and we continue to grow in the prime space and that’s really just further penetration of the dealers that we have very good relationships with. So it’s kind of a natural to do this growth.

And so despite that growing competition and of course we see two players that are now out there with IPOs and they are going to be intensely trying to generate growth, I think we feel pretty good about our position here.

Of course the prime growth, as we get a mix change with more prime growth and more flattish on the subprime side that puts additional kind of pressure on the overall average margin and in addition to just what’s happening competitively.

The other thing just to say on the auto growth side is the -- we continue to keep a close watch on the underwriting practices that are going on in the business. And I think it’s pretty much the same story I have been saying the last few quarters.

There is a little slippage on some of the metrics, but overall still more slippage back towards the main as opposed to things that would cause us to really pull back..

Next question please?.

We'll go next to Bill Carcache with Nomura Securities. Bill check your line..

Hello, can you hear me?.

We can hear you Bill..

Okay, great. Thank you.

You guys had a healthy year-over-year purchase volume growth as did some other issuers that have reported but you as that they also saw a non-interest income decreases in your card segments? And I was wondering if you could talk to what's driving that? It seems that there is a benefit from the interchange revenues that would be kind of on the plus side, but maybe if you could talk about what else is going on that would be helpful?.

Bill on the, so first of all just purchase volume continues strong for Capital One and we think we're continuing to gain share of role in that space.

With respect to non-interest income, there are couple of things going on, first of all our interchange growth in the quarter was basically flat despite the significant growth in purchase volume and more importantly the significant growth in general purpose credit card purchase volume.

And I just want to point out, there is a lot of volatility in that particular metric in anyone quarter.

But there is also a medium term kind of sustaining phenomenon here where we are very committed to our rewards business and we are upgrading rewards products for some of our existing rewards customers and consistent I think with the industry overall extending rewards product to some existing customers who don’t have rewards.

And so near-term you will see some interchange cannibalization as we do this, this is very intentional and it’s all part of building a deeper customer franchise and all part of frankly are deep believe in the power of building relationships through strong rewards business.

The other thing is the late fees were light in the quarter reflecting the delinquency real strong delinquency performance and that’s probably something that a number of other competitors would have seen as well.

But a little light on the interchange side and late fees that’s a flip side of a very good credit effect are the contributors to a little weakness on the non-interest income..

Thank you so much Richard, I was hoping I could ask one follow up to Stephen.

I had a question on your target 8% common equity Tier 1 ratio under Basel III I was hoping that maybe you could discuss the extent to which the severely adverse scenario under CCAR could become your binding constraint I was just looking to get your thoughts on whether those two ratios could produce difference answers that could impact what you manage the business to? And that’s it, thank you..

Well that’s a great question frankly it’s a long way off in the future for us and we’ve just had the first couple of banks exit parallel and those banks to my understanding even in the 2015 fee cost they’re not going to be tested assuming the advanced approaches apply.

So I don’t think anybody can give you a really good feel as to the intersection between CCAR and advanced approaches. What I would tell you in terms of how we think about our capital that is you start with an assessment of the proper capital levels for our inherent risk.

As you know we’ve talked about the company’s use of stress test for many years in assessing how much capital we use. And we’re also informed by relevant experience, we had hopefully the most robust test we’ll have for a while in the great recession.

So a lot of that is the grounding for the capital that we need but moving away from the internal view, there are still moving pieces it’s not just how advanced approaches gets into CCAR I don’t think CCAR is stable at this point. And we haven’t even entered parallel run.

So while there is significant uncertainty we believe the 8% target is right and wouldn’t communicate that to Europe, we thought it was fairly inconsistent with the regulatory framework. That’s not a guarantee that 8% is the correct point estimate.

But any other number at this point would be speculative and remember our 8% number does include a 100 basis point cushion above regulatory amendments..

Next question please..

We’ll go next to Brad Ball with Evercore..

Thanks.

Could you talk about the card revenue margin, the compression this quarter was entirely seasonality or were there others factors and how do you feel about the revenue margin in the context of the growth that you are talking about in the second half, are you thinking around 17% would be still sustainable and then just lastly on credit, the delinquency improvement, I suppose this quarter is what drove the reserve release is there still more room for additional reserve releases going forward, what’s your thought on credit broadly? Thank you..

Okay. Brad on the revenue margin, yes in terms of the first quarter, the revenue margin for the quarter was 16.9% and that’s down from 17.3% in the fourth quarter and that decrease, you are right was primarily driven by normal seasonality of the revenue margin.

And sort of putting the revenue margin in the context, 2011 the revenue margin was around 17%, 2012 we added the HSBC portfolio and adjusting for a purchase accounting effects the margin was also around 17%. In 2013 after adjusting for Best Buy help for sale impacts and the deal related items, the revenue margin was also in the low 17% range.

The benefits from the removal of Best Buy’s low margin business were roughly offset by what we call franchise enhancement so basically moves that we are making to consistent with our very strong customer advocacy things we’re doing in the company. And going forward there are going to be many puts and takes on the revenue margin.

There will always be some franchise enhancement actions that we continue to take overtime, but I think overall we believe Brad, the margin will remain healthy, we’re not going to give a specific forecast about the revenue margin, but I think we believe it will continue to be strong. And on credit, yes, the delinquency is what drove the release.

It’s just, you probably heard and we keep saying quarter after quarter, it’s hard to imagine things getting much better than this. And let’s really enjoy it while we’re in this part of the cycle. I think we are struck by the strength of the credit performance, we continue to see the relatively low delinquency levels and the low roll rate.

So, I don’t think as we look at it that we’re here to declare that credit is going to get even better, but I think I would say this that the continued strong performance of all the credit metrics reinforces our strength, our belief in the strength and continuation of a good credit performance that can help generate very nice returns in the business..

Next question please?.

We’ll go next to Sameer Gokhale with Janney Capital Markets..

Hi, can you hear me? Sorry about that. So I just had a couple of questions, and I apologize I got to the call a little later. But one question I have is in terms of your liquidity coverage ratio requirements.

Where do you stand on that? How far along you think you are? And how should we think about the impact to net interest margin as you try to make progress on the LCR?.

Is that it?.

That was the first question, sorry..

Okay. So let me start with LCR. Basically we don’t think there is going to be a material financial impact. It’s a little bit hard to be, too definitive on the ultimate impact because we don’t even have final rules at this point. But I think almost -- unless the rules change materially, we wouldn’t see a real financial impact from this.

There is however the greater operational and governance burden that’s primarily a function of having to calculate this ratio on a daily basis and kind of when the industry needs to be able to do that certainly plays into the operational challenges.

But we will be able to satisfy what currently it seems like the bar you have to get over which is the 80% LCR ratio requirement as of January ‘15..

Okay, that’s helpful. And just my follow on question is on a different note. I think you announced that you are going to seize working with some sort of providers like payday lenders and cheque cashers and the like. It would be helpful just to get your sense or your perspective on that.

Why seize working with all of these providers, why not just start working with some of the ones who are less compliant or is the issue of trying to figure about who is or isn’t compliant with the regulatory requirements? I’d just like to get your thought process as far as that goes..

Yes. Sameer, we consistently review our business plans across the company and our customers individually and as groups to ensure that they are aligned with our strategic goals and our objectives on all dimensions including regulatory compliance and everything.

And we took a number of factors into consideration and determined that the check cashing business being bankers to check cashers no longer fits with our strategic priorities. The financial impact of this exit is really not material. This business was the small part of the overall enterprise..

Next question, please?.

We’ll go next to Brian Foran with Autonomous Research..

Good afternoon. I guess one question on the guidance and then I had follow-up on auto. Steve, you mentioned beyond the geography moves, so setting aside all that. There were some modest upgrades to the revenue expectations offset by expenses.

I wonder if you could just -- what drove the upgrades to your revenue expectations, any sense of magnitude and are the offsetting expenses more on the marketing side or on the operating expense side?.

Yes. That is down to as you kind of probably anticipate the answer to this question down to a level of guidance in detail that we’re not going to go to like last year. We provided guidance and as we move through the year we really stand it on to provision net revenue. This is a really dynamic business with a lot of moving pieces.

And as was true last year, we may get to the guidance that we laid out at the beginning of the year in different ways. We’ve centered on pre-provision net revenue for a bunch of reasons, but it’s obviously the foundation for our ability to invest the future growth and to return capital to you.

Adjusted for changes in geography, we’re not changing our guidance, which obviously excludes extraordinary items. And as Rich mentioned, we’re leaving out the credit story, which remains pretty strong as well..

I appreciate that.

And then on auto, and I guess with the benefit of hindsight, I mean your originations pulled back a lot in 4Q ‘12 through 2Q ‘13, they’ve kind of reaccelerated in the second half of ‘13 and the various credit data that’s out there for you and competitors, if you guess to the extent there was a problem that was in the first half ‘13 [vintages], in the second half ‘13 vintages are improving or performing better.

I wonder if you agree with that.

And if -- what was it about the first half ‘13, because it is not obvious when you look at credit cycles or terms across the industry why kind of across the industry first half ‘13 than to just see little weaker in second half ‘13 and first half ‘14 seem to now be doing better?.

So I’m not sure what you are referring to, I don’t have our origination data right in front of me, but I’m not sure what you are referring to about a pull back in 2012. My recollection to the following that the auto business spiked early in the great recession.

A lot of people exited, we pulled back to our really core dealer relationships and then looked for the inflection points.

You may remember that we’ve often articulated that some of the best lending opportunities are actually in the [roads] of downturns when you pass kind of inflection point relating to customer behavior and competitor supply and demand and sort of underwriting standards.

And so really into as I recall it was in 2009 and in the 2010 that we really accelerated originations in the auto business and we have continued very strong right through this point all through this period believing this is kind of the best part of the cycle and checking very carefully each vintage.

As it’s turned out, despite our inflection point monitoring and our belief that this was the best part of the cycle and the supply and demand were in a good place, the vintages have actually outperformed in a good way our own expectations. And so certainly in hindsight, we feel very good about our acceleration.

And I’m not aware of anything that would characterize the early -- the vintages in the first half or second half of a particular year. Along the way with these vintages there has been some expansion of -- some loosening of our very tight credit standards back to just tight, if you will.

And so a couple of the vintages have had expected higher risk, but overall this has been a continuous period of accelerating originations and very strong credit performance..

Next question please?.

We'll go next to Daniel Furtado with Jefferies..

Hi, can you hear me?.

Yes..

Great. Hey, this is Martin Kemnec in for Dan Furtado today. Thanks for taking my question.

First, can you kind of help us think about sort of the impact that higher rates have on the transactor strategy and how you guys can maybe potentially look to offset some of the higher cost to carry there? I mean does that strategy become uneconomical with short rates pushing up at some point down the road? And just kind of maybe walk us through what type of leverage you can pull either on the funding side or the reward side? And then secondly Steve maybe for you, pretty impressive when we look at the recovery levels in the card book, at least what we can see from kind of the master trust seems to be pushing higher in the early part of this year.

Is that kind of an organic effect as the economy improves, we’re seeing a little bit better consumer spending numbers, things picking up, or is that sort of an inorganic effect from potentially selling those accounts and then booking the gain there, maybe just an update on the dynamics you’re seeing on recoveries and expectations for that going forward?.

Okay. Martin, let me take first of all your question about our transactor business and its exposure to higher interest rates. We fund the expected lifetime balances for our transacting customers. And we expense rewards as they are earned.

So as such, as rates rise, we feel very good about preserving the profitability and the benefits for our existing customers. Additionally, we subject our investment decisions as you can imagine to worsening conditions in the marketplace including higher interest rates. So, our products have a built-in resilience even at a higher interest rate level.

Of course, should rates rise enough, I think you get kind of to the point that, and all players would be pretty equally affected. I think the industry would probably react and the going forward product structures would logically potentially adapt at that point.

But in terms of the exposure to us, we kind of lock in as the best we can sort of all the existing things and we build in a buffer. And then I think if there were an adaptation, it would be an industry adaptation and we would react at that time.

With respect to recovery levels in the card business, I’ll make just a general comment about the recovery levels. In general, recovery dollars tend to come down somewhat at this stage of the cycle. It’s kind of the math of the shrinking inventory of fresh charge-offs against which to recover.

So in general, recovery rates have -- recovery dollars have been coming down just because recoveries are highest on fresh inventories, in the fresh inventories the good news is we haven’t been supplying our recoveries team with as much supply as they’ve been used to, so that’s a good thing.

It is also the case with respect to asset sales -- I mean debt sales. We are probably the lowest, they’re among the very lowest in the industry in terms of extent of debt sales. But those are sort of opportunistic decisions made based on pricing in the marketplace and that can affect any particular quarter for some of the metrics as well..

Next question please?.

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

Thanks. Good evening gentlemen. My first question is bigger picture. Rich, you’ve been a long-term observer in capital and it’s been a long-term participate in the revolving credit market in the U.S. in particular.

And I guess looking at the market today in consumers, do you sense that there is a difference or a change in their willingness to borrow? Obviously we’ve seen very slow revolver growth, generally speaking, there is obviously some higher levels of debt still existing from the housing crisis.

I wonder how you are thinking about the longer term growth prospects for revolving credit. And I have a follow-up..

Yes. Ken, I think we all in this business have just been struck by for really a number of years now, credit kind of comes in a little better than expected and growth is kind of hard to come by. And I think those are the flip side of the same phenomenon and it’s really what you’re identifying. The consumer is just being very conservative.

In some ways Ken, the very thing that sort of frustrates the economy from growing, which is consumers are not spending enough, what are they doing with their money? Well, a lot of times they are paying down debt and just being extra careful.

From a banking point of view, we should all be careful what we wish for here because the flip side of this growth weakness on the borrowing side is a tremendous kind of strength on the credit side and that has been powering a lot of great performance for some of the banks over this period of time.

I do think though it’s part of the macro trend and delevering that frankly consumers and corporations have been doing for a number of years. So, it’s hard to prognosticate, but we generally operate with an outlook that revolving debt will probably be, the growth of revolving debt will be pretty slow.

You’ve seen student lending of course growth has been pretty electrifying over this period of time and we’re not in that business, we’ve had a few cautions about that, but certainly that has been up. And we have been struck too by the strength of auto, borrowing over this period of time, solid borrowing and very good credit performance.

But I think overall, what you’re seeing is the consumer that has I think learned a lot through the great recession and is cautious. And I think that our metrics are probably likely to reflect that for better and for worse..

Okay. And then just as a follow-up, you had -- obviously the revenue margin has benefited from very low funding costs over the last few years and it’s nice to not hear you speaking about 15% revenue margins anytime soon.

But I guess, I’m interested in how you’re thinking about defending those margins as rates rise, obviously funding costs have been quite low.

And I guess this discussion around whether those core deposits are going to be sticky at these levels is really what I’m getting at, if you can give us any thoughts around that that would be helpful?.

The business overall was or for card specifically, because I think for the business overall, you can look at our exposure to rising rates and we actually feel pretty good about our asset sensitive position. And that’s going to accrue to the benefit of our shareholders, because we think obviously assets are going to re-price a little bit faster.

So, if it’s more of a card specific question, we can deal with that. But I think overall when you look at our position, we compare I think pretty favorably with the peer group..

Next question please?.

We’ll go next to Scott Valentin with FBR Capital Markets..

Good evening. Thanks for taking my question.

Just the first question, I think someone mentioned the pace of run-off in the mortgage book to accelerate from $4 billion to $5 billion this year and just wondering given what we’ve seen in the [MBA] did installing refinancing activity, is there anything specific to the portfolio, it seems you’re buckling the trend a little bit in terms of slowing prepayments? And then the second question was regarding commercial bank yields.

It did job pretty sharply this quarter. Just wondering if they will continue to compress or this is kind of a new level going forward..

No, there is nothing specific on price revision and increased mortgage run-off, it maybe a little bit I think you have to go back and look at when we provided the guidance and what rates were at that point versus what rates are now. I think you’d probably find there is a better connection there between the run-offs..

Scott, on commercial yields if we take the year-over-year perspective, loan yields decreased by 44 basis points due to the few factors.

I think at the top of our list would be the increased competitive pressure in the market especially in the vanilla markets that have very, very large number of banks competing in it like the C&I sort of generic businesses. We also have shifted toward, more towards floating rate loans that has had an impact.

We’ve always had very high quality originations, but we’ve even shifted toward loans with even higher credit quality and with a bit of trade-off with yields there. And ultimately in terms of how we make money. Our spreads have been somewhat, have not decreased by the same magnitude the loan yield has.

It’s partly offset by lower funding cost, but overall certainly the competitive environment is contributing to that. Quarter-over-quarter I don’t think I am going to go into details that we have the total tax equivalent yield that kind of affect that makes a lot of noise.

But competitively in the C&I business spreads definitely continue to compress and there has been some weakening in the non-investment grade credit structures as well. So we’re pretty cautious in those spaces. In commercial real-estate the spreads we see pressure on pricing and limited pockets of weaker lending terms but that’s largely in construction.

I think banks are being a lot more disciplined in real-estate and also you have a big difference between the C&I business and CRE business, in CRE the CMBS channel has been largely sidelined while of course the CLO market is back to levels that are pretty close to 2007 level, so that’s putting extra pressure on the C&I business.

So -- and again our strategy is mostly focused on specialty lending which is affected by all of these trends but tends to be -- the margins are holding up better because of the more balanced supply and demand..

Next question please..

We’ll go next to Chris Donat with Sandler O'Neill..

Hi good afternoon thanks for taking my call, just had one question on the comment about higher rewards that are netted against interchanges.

Is this reflecting the growth of the quick silver card and the cash rewards or is this amore of a mix with venture or just broader changes in customer behavior in use of rewards?.

It’s really, it’s several effects, so first of all, we have our flagship venture and quick silver products that have pretty rich rewards for the consumers and as a percentage of our whole book those are growing.

Then you have our extension of the richer rewards to existing rewards customers and then you also have extending rewards further to some customers who have not been a reward customer.

So all of those contribute to this gap between purchase volume growth and interchange growth and in the -- there is sort of a transitionary period where some of these penetration effects are more noticeable and I flag that only because we’re in sort of one of those kind of periods.

But it’s the flip side of our real belief in the power of this business model and in many ways the success of our rewards business..

We will take our last question for the evening from Matt Burnell..

Good evening gentlemen. Just I guess a question on the income statement. It looks like professional services costs were down pretty visibly quarter-over-quarter, year-over-year.

I wonder if that has to do with CCAR preparation or is there is some other factor driving that and how we should think about that number going forward?.

Yes, I wouldn't over read anything or seasonal impacts in that the CCAR of anything would be a small portion of it and it’s obviously incorporated into our overall guidance for the year..

Okay. And just not to get too deep into the weed but commercial real estate growth continues to be high teens 20% year-over-year. And I guess I'm just curious, Rich I understand your commentary about remaining very cautious or diligent in terms of your underwriting.

But there are some markets in the Southeast and particularly DC that have been flagged as being relatively aggressive.

And I guess, I'm just curious if you're seeing the same trends in those markets and how aggressive the competition has gotten in those the markets with commercial real estate?.

So, again I would say, my overall observation from the market, the blended kind of observation from the markets we’re in is that commercial real estate is quite a bit tamer than the C&I business.

And I think it's really just frankly the flip side of the fact that C&I performed so well in the last downturn and is available to so many banks that you have sort of a lot of folks rushing in there. And then you have the CLO impact, the growing CLO impact as well. So, that's the area I'd flag as the biggest concern we have.

On the commercial real estate side, again I think in most places people are licking their wounds and there is generally we see behavior that is more careful but that varies by markets, we don’t do commercial real estate in the southeast so I really don’t have an observation on that, we are relatively small players in DC.

But I guess -- and more than half of our, the majority of our commercial real estate in fact is in New York City that has a lot of strong market dynamics going on right now and generally the behavior is not too irrational.

But beyond sort of those qualitative descriptions I mean we spend a lot of time looking at key metrics and what’s happening to those key metrics.

And when we look at LTV debt service coverage ratio and debt yield in commercial real estate we see things that are well within the guard rails we would look at and frankly are still I think we are still pretty comfortable with how we see those metrics moving in the marketplace, at least with respect to the loans we are originating..

At this time I turn the call back over to Jeff Norris for any additional or closing remarks..

Thanks very much and thanks everyone for joining us on the conference call today. We thank you for your continuing interest in Capital One. Remember the Investor Relations team would be here this evening to answer any further questions you may have. Have a great evening..

That does conclude today’s conference. We thank you for your participation..