Jeff Norris - SVP, Global Finance Richard Fairbank - Chairman & CEO Scott Blackley - CFO

John Pancari - Evercore ISI Moshe Orenbuch - Credit Suisse Ryan Nash - Goldman Sachs David Ho - Deutsche Bank Steven Kwok - KBW Betsy Graseck - Morgan Stanley Bill Carcache - Nomura Chris Donat - Sandler O'Neill Rick Shane - JPMorgan Brian Foran - Autonomous John Hecht - Jefferies Ken Bruce - Bank of America

Please standby. We're about to begin. Welcome to the Capital One Q2 2017 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.

Thank you very much, Liane. And welcome, everybody to Capital One's Second Quarter 2017 Earnings Conference Call. As usual, we are webcasting live over the internet. And if you want to access the call via 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 second quarter 2017 results. With me today are Mr. Richard Fairbank, Capital One's Chairman and Chief Executive Officer and Mr. Scott Blackley, Capital One's Chief Financial Officer. Rich and Scott will walk you through this presentation. To access a copy of the presentation and press release, please go to Capital One's website, click on Investors, and 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 material speak only as of the particular date or dates indicated in the material. 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 titled 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. Fairbank. Rich?

Thanks, Jeff and good evening everyone. Capital One earned just over $1 billion or $1.94 per share, in the second quarter. Pre-provision earnings for the quarter were $3.3 billion and we continued to deliver year-over-year loan and revenue growth across our businesses. As we discussed last quarter, we continue to expect domestic charge-off rate for full-year 2017 to be in the high 4s to around 5. We continue to expect full-year efficiency ratio for the total company to be in the 51 net of adjusting items and plus or minus a reasonable margin of volatility and while the margin for error remains tight based on what we see today, we remain well positioned to deliver 7% to 11% growth in EPS in 2017 net of adjusting items. All of our guidance excludes the potential impact of the Cabela's transaction. Now I'll turn the call over to Scott to discuss second quarter results for the company. Scott?

Thanks Rich. I'll begin tonight with Slide 3. Capital One earned $1 billion or $1.94 per share in the second quarter. In the quarter, we recognized $12 million of non-interest expenses related to our anticipated close of the Cabela's transaction. Excluding these costs, earnings per share was $1.96. We will continue to break out future deal and integration costs as well as the initial allowance build associated with the onboarding of the Cabela's assets. The closing of this transaction is still pending regulatory approval. Pre-provision earnings increased 6% on the linked quarter basis as we recognized higher revenues and lower non-interest expenses. Provision for credit losses decreased 10% on a linked quarter basis as higher charge-offs primarily in our commercial banking business were more than offset by lower linked quarter allowance builds. We have provided an allowance roll-forward by business segment which can be found on Table 8 of our earnings supplement. Let me take a moment to explain the movements in our allowance across our businesses. In our domestic card business, we built $155 million of allowance in the quarter, two primary factors drove that build balanced growth in the quarter and our expectation of rising charge-offs. Allowance on our consumer banking segment increased by $36 million in the quarter. This increase was attributable to our auto business where we build allowance for new origination. In the second quarter, we had about a 40 basis point impact to our auto charge-off rate from the initial effective accounting changes and the timing of charge-offs which I've discussed over the last couple of quarters in our calls. Beginning in the third quarter and continuing throughout 2018, we expect these accounting changes to increase annualized charge-off rates by 15 to 20 basis points after which the effect begins to reverse overtime. Lastly, we had a $4 million release in reserves on our commercial banking segment as we released reserves associated with loans that moved to charge-offs which was partially offset by reserve builds primarily focused in our taxi medallion business. Turning to Slide 4, you can see that reported net interest margin was flat for the first quarter at 6.9%, and it was up 15 basis points on a year-over-year basis fueled by strong growth in our domestic card business and higher rates. Turning to Slide 5, I'll discuss capital. As previously announced following the Federal Reserve's conditional non-objection to our 2017 CCAR plan, our Board has authorized repurchases of up to 1.85 billion of common stock through the end of the second quarter of 2018, and we expect to maintain our quarterly dividend of $0.40 per share which is subject to Board approval. Our common equity Tier 1 capital ratio on a Basel III standardized basis was 10.7% which reflects current phase-in. On a standardized fully phased-in basis it was 10.6% and with that I'll turn the call back over to Rich.

Thanks, Scott. I will begin on Slide 9 with second quarter results for our domestic card business. Loan growth and purchase volume growth decelerated in the quarter but remained strong. Compared to the second quarter of last year, our ending loans grew $4.3 billion or about 5%. Average loans were up $5.8 billion or about 7%. Second quarter purchase volume increased about 7% from the prior year. Revenue for the quarter increased 7% from the prior year in line with average loan growth. Revenue margin for the quarter was 16.6%. Non-interest expense increased about 3% compared to the prior year quarter. Our domestic card business continues to gain scale and improved efficiency. The charge-off rate for the quarter was 5.11% and the 30 plus delinquency rate at quarter end was 3.63%. Both metrics were down a few basis points from the sequential quarter compared to the second quarter of last year both metrics were higher as expected. The impact of growth math remains largely in line with our expectation. As a reminder, growth math is defined as the upward pressure on delinquencies and charge-offs as new loan balances in our front book season and become a larger proportion of our overall portfolio relative to the older and highly seasoned back book. We continue to expect the impact of growth math will moderate in the second half of 2017 with a small tail beyond 2017. As growth math runs its course, we believe that our delinquency and charge-off rate trends will be driven more by broader industry factors. Slide 10 summarizes second quarter results for our consumer banking business. Ending loans grew about 5% year-over-year. Growth in auto loans was partially offset by planned mortgage runoff. Ending deposits were up about 6% year-over-year with a four basis point increase in deposit rate paid. Compared to the second quarter of 2016, auto originations were up 14% to $7.5 billion with strong growth in prime, near prime, and sub-prime. As we discussed last quarter, competitive intensity in the auto finance marketplace remains a bit muted which continues to contribute to our growth. While we still see attractive opportunities for future growth, there are also reasons for caution in the auto industry including expected declines in auction prices and an increasingly indebted consumer. Our underwriting assumes a decline in used car prices and we've dialed back on some less resilient programs even as our overall originations have grown. As the cycle plays out, we continue to expect the charge-off rate will increase gradually and that growth will moderate. Consumer banking revenue for the quarter increased about 9% from the second quarter of last year driven by growth in auto loans as well as deposit pricing and volumes. Non-interest expense for the quarter increased 5% compared to the prior year quarter driven by growth in auto loans and an increase in marketing. Second quarter provision for credit losses was up from the prior year primarily as the result of charge-offs and additions to the allowance for loan losses for the auto portfolio. Moving to Slide 11, I'll discuss our commercial banking business. Second quarter ending loan balances increased 2% year-over-year and average loans increased 4%. Higher average loans as well as higher non-interest income in our capital markets and agency businesses drove revenue growth of 9% compared to the second quarter of 2016. Non-interest expense was up 11% primarily as the result of growth technology investments and other business initiatives. Provision for credit losses increased from the second quarter of last year driven by charge-offs in the oilfield services and taxi medallion portfolios. The charge-off rate for the quarter was 80 basis points. Criticized in non-performing loans rates were relatively stable in the quarter. The commercial bank criticized performing loan rate for the quarter was 3.9% and the criticized non-performing loan rate was 1.0%. Credit pressures continue to be focused in the oilfield services and taxi medallion portfolios. We've provided summaries of loans, exposures, reserves, and other metrics for these portfolios on Slide 16 and 17. I will close tonight with a summary of key second quarter themes. Capital One continued to post solid year-over-year growth in loans, deposits, revenues, and pre-provision earnings. We continued to tightly manage costs and improve efficiencies even as we invest to grow and drive our digital transformation and we continued to carefully manage risk across all our consumer and commercial banking businesses. Based on what we see today, we are affirming our guidance for full-year 2017 domestic card charge-off rate, total company efficiency ratio and growth in EPS. All of our guidance is net of adjusting items and the potential impact of Cabela's. As Scott mentioned, the Federal Reserve completed its CCAR process in the quarter. Our capital plan received a conditional non-objection which requires us to resubmit a revised capital plan by December 28. We will resubmit our capital plan and are fully committed to addressing the Federal Reserve's concerns with our capital planning process in a timely manner. Pulling up, we continue to be struck by the amount of change that's coming in the marketplace and the opportunity to capitalize on that. We have invested heavily in transforming our company and driving growth opportunities. We are well on our way to rebuilding our infrastructure with a modern technology architecture and along the way we are redesigning how we work. We are delivering resilient growth across our businesses. We are driving improving efficiency and we are building an enduring customer franchise. We continue to be in a strong position to deliver attractive growth and return as well as significant capital distribution subject to regulatory approval. Now Scott and I will be happy to answer your questions.

Thank you, Rich. We will 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 one question plus a single follow-up and if you have follow-up questions after the Q&A session, the Investor Relations team will be available after the call. Liane, please start the Q&A.

[Operator Instructions]. We will take our first question from John Pancari with Evercore ISI.

Good evening. Just wanted to ask about the vintages that you're seeing in the loss trends within the card vintages. I know you had indicated last quarter that your updated charge-off expectations incorporate your expectation for losses in the 2016 vintage to be on par with 2015, is that still the case or are you seeing any changes there? Thanks.

Hey John, our expectations are the same 2016 vintage on par with 2015 vintage.

Your follow-up.

Okay all right, thanks. Yes a follow-up to that was just on the auto front. I know you had indicated that you do expect charge-offs in the auto book to increase moderately over time just consistent with the general pressure you're seeing in the business. Can you just help quantify the piece or just help quantify that what you mean by moderately there and then also are you providing at a higher level at this point given the worsening severities as used car values have pulled back?

John why don't I start on the back end of that question and turn it over to Rich. So in terms of our allowance process we've been assuming kind of used car prices to fall and it continued to fall. So we've already been building that into our allowance and I think that that's something that we would expect to continue.

John relative to the charge-off outlook, you could go back and it's probably for the last three years I've been saying that we expect charge-offs to gradually increase in the auto business and we're saying it again. Now and the reason for that is the same reason that that's driven this conversation over these years which is off of an exceptionally low base of charge-offs that the phenomenon of normalization we have fully expected. Now the interesting thing is Capital One's charge-offs that we have posted over time in general haven't gone up in that way and there's been a couple of things going on there, the biggest thing has been sort of a gradual mix shift, up market in that sense the particularly the higher growth that we've gotten at the higher end of the market has sort of offset that effect but beneath it all, if we look at the things like the sub-prime business there. There has been some gradual normalization going on it's a natural phenomenon. Probably all in all, the amount of normalization has not been as high as we have ourselves internally forecasted because we've been pretty cautious about what we expect with respect to new used car prices and frankly some of the competitive dynamics in the auto business I think have kind of helped in competitive meaning the easing of some of the competition particularly on the sub-prime side I think has eased things. So if we look in hindsight at this, three or four year period while we've been raising our estimates for losses, we think there's been a lot of value creation, there's good opportunities for growth. The business is in bit of an odd place with some easing competitive intensity but still the other dynamics that are associated with increasing potential for risk things like used cars but all in all, it's -- there's a good opportunity right now but I think you should expect losses will gradually go up over time.

Next question please.

And we'll take our next question from Ryan Nash with Goldman Sachs.

Are you there Ryan? Ryan may be you come back. Let's go to the next question please.

And we'll take our next question from Moshe Orenbuch with Credit Suisse.

Great. Rich, you talked a little about credit in the credit card business. Can you talk a little bit about the competitive environment from a growth perspective I mean we've seen a little -- a number the large banks are starting to actually show some growth acceleration and so what are you kind of looking at that's different and kind of how do you see that playing out over the next year?

Yes, I mean Moshe we first of all we believe the opportunity to grow continues in the card business. What I would say is the exceptional opportunity has mostly run its course and now there's a more just there is just a good opportunity let's talk about the exceptional opportunity for a second while a lot of people were not -- they weren't as heavily marketing and not as seeing the growth opportunity that we saw, we pretty much captured several years of outsized growth and I think that it served us very well even though we all know of course the upfront costs of that in terms of credit and allowance have been little rough on the P&L. What I think has happened over time, the competition has definitely intensified but it's not irrational. So let’s talk about it at a couple of levels. First of all at the where it's most -- where it's competition is most obvious to everyone who has like a television or anything else is in the reward space and it is very clear that marketing levels are up, rewards, rewards levels on various cards are up, we've not only seen several players come forward with higher, higher things like cash card rates. One of the striking things to me is what's happening on the co-brand side in the process of the renewal of Co-brand deals, there has been a pretty significant cranking up of some of the rewards associated with those. The other striking thing happening Moshe on the competitive front at the top of the market is the early bonus the giveaways associated with that. Now we that particular area we worry a lot about and we pretty much live inside the frontier of those early bonuses only because we have so much experience over the last 20 years on what happens when you get the Hoppers, the Teaser Hoppers, the Bonus Hoppers the various folks there. So I think we all have to keep an eye on what happens there, so it is clear that that the table stakes are higher, the investment is higher and the competition is higher at the top of the market going after rewards. That said we continue to be very pleased with our performance there and we continue to -- continue to winning in that space is about sustaining investment and about winning in product, marketing, service, digital experience brand there's a lot to that but we very much note the competition but we were all in and we still like very much what's going on. The other thing I would comment though is about more the revolver side of the marketplace. I think people are you are seeing more growth there but I'd put it in the rationale category, we don't see really anything going on about pricing in that marketplace; we don't see underwriting standards being compromised. So I think it is that the more kind of normal phase in a market which is just people stepping up and investing more and trying to grow more. So in the context of all of that, I think it's still a reasonably healthy card marketplace, the growth opportunity we had before is not quite what it was but we still we still like the opportunity.

And do you have a follow-up, Moshe?

Yes if you just kind of extend some of that to auto, you mentioned there is some easing in the sub-prime, are you tilting more in direction or more in the prime in that business at this point?

Well I think we're pursuing the same strategy that we probably a big word for this the same -- the same approach and underwriting standards pretty much consistently across from the top of the market through near prime and into the part of subprime that we play as well. The point I would make is that the competitive easing is more in the near prime and prime part of the marketplace. So that therefore the opportunity for growth is a little higher there. So it's in a sense same approach same strategy, same underwriting but a little bit different market dynamics depending on which part of the market we're talking about.

Next question please?

And we will take our next question from Ryan Nash with Goldman Sachs.

Do you hear me this time?

We got you, Ryan.

Okay. Sorry about that. I was having headset problems. A question for Scott. Scott, you noted that the card reserve build was for both growth and the expectation for higher charges which I'm assuming you're trying to imply 2Q 2018 charges would be above 2Q 2017 but just given what we -- everything you're seeing competition vintages what you're seeing in terms of your delinquency improvement I guess there was no change in the macro or the competitive environment. Any sense about how you would think about charge-offs for 2018 and/or when would you actually expect to see charge-offs begin to level off on a year-over-year basis?

Yes, Ryan, thanks for the question. Look as we said last quarter, we thought that Q1 was the high point for reserve build in the domestic card portfolio as growth math is starting to moderate in through the back end of 2017 with the tail after 2017. The effective growth math on the allowance is no longer going to be the biggest driving factor and that's been over the last couple of years that's been the really big driver. So what I would say with the allowances as we move through 2017 increasingly, the allowance is not going to be really driven by kind of that upward pressure of growth math that we've been talking about but it's really going to be driven by more just the overall industry factors and where those go, I think is it's something that we'll be talking about going forward but I don't have a forecast for you for 2018.

Got it. And then maybe if I could just ask one quick follow-up Rich when you reiterated the EPS guidance 7% to 11%, you noted again that the margin there remained tight. Can you maybe just give us a sense of your confidence of hitting the target and what are the key swing factors at this point in time just in terms of being bottom of the range versus top of the range?

So yes thanks Ryan. Look I want to start by saying that I stepped out of my character and you might have wondered what happened to Rich Fairbank that you knew because I haven't you'd have to go way back a lot of -- a lot of years ago to where we have given EPS guidance because kind of to your point, I mean this is in the end the difference of large numbers and it's subject to very big swings associated with allowance and other things that can happen. So we generally and I want to make sure people know that I'm generally don't plan to be in the EPS guidance business. The reason that we kind of stepped out and did that last quarter was really more to show the market that while there's a lot of noise associated with some of these credit numbers, our story is our belief and growth math that the belief in what we could do on the efficiency ratio side, the momentum of the company, and our ability to successfully get there, I think we felt pretty confident about that but again we cautioned of course and to your point it's a pretty small range. So what is the biggest drivers of that? I mean the biggest driver still always is credit and in a world where everything's on balance sheet and small changes in expectations lead to you know this into the whopping allowance effect that is certainly something that is a probably at the top of the list for the biggest effect. On that one we feel good about the trajectory of growth math but we know that small, small changes can have effect. So we're certainly aware of that. I think that is the big one I think beyond that, the -- I think the trajectory of our spending on things like marketing, the seizing of growth opportunities, the timing of progress on our continuing quest for efficiency will also be factors that play into this and the other thing I would say of course that rates, interest rates they can always play a factor. But that's just a little window into our own dialogue with ourselves about this but when we look at those things while there is always risk associated with the guidance like this, we feel, we like our chances, we like our momentum here, and we continue to maintain that guidance.

Next question please.

And we will take our next question from David Ho with Deutsche Bank.

Good evening. Just wanted to circle back on underwriting standards that you may have tightened over the past year and large part trying to get those vintages to perform in line with expectations. Have you seen or have you done an additional tightening for 2017 vintages are you comfortable in your underwriting standards there? Obviously it's hard to track FICO but, in terms of the mix how does that stabilize as well?

Yes, David, we one thing is of course this is hundreds of programs we're talking about and changes that we constantly do around the edges. But to generalize it was around the beginning of 2016 that we started tightening around the edges and we talked about that and it is that tightening that had led us to be pretty confident that in fact 2016 vintage was going to come in better than 2015. You may recall that we had talked about that and certainly had early indications consistent with that. Some of the slippage in the marketplace and relative to our expectations there was kind of -- we’re now more these are more on par with each other. Over the course of this journey, watching the marketplace, the competitive environment, the greater supply, and continuing to look at all of our programs and where credit was coming in, to your question, we have continued to tighten a bit around the edges and important, but not only but probably the majority contributor to our reduced growth is just our continued tightening and particularly the tightening that's going on is less around the origination side and more about the timing, just the size of lines and the timing of line increases under the philosophy let's continue to really book the customers, take advantage of the window of opportunity. In our own time, we can choose when and how much to extend the credit lines that's more of a kind of stored energy that we get there. So and by the way in the marketplace is no doubt the marketplace become more competitive, so that's also contributed to our slowdown as well. But all of that said I think that we have high expectations for 2017 coming in as a very strong vintage.

Right. As a follow-up what kind of card growth year-over-year are you comfortable with while still maintaining your 2017 guide and obviously your the outlook for 2018 in terms of growth math diminishing, is it more in line with industry growth how do you think about kind of the range there versus the kind of the industry average growth year-over-year?

Well we're specifically not giving guidance year-over-year for card growth but I think you're asking what card growth, do we need to kind of be able to maintain our EPS guidance was that were you linking those two.

Yes.

Well because the reason I say that is the amount of card growth is look I think at this point for the rest of the year the amount of card growth is not that bigger driver on the EPS, it will have quite a bit of impact on next year's EPS and other things. But across the reasonable range of card growth that we would look at for the rest of the year, anything in that range probably wouldn't have that much impact on the EPS. Relative to next year's card growth we're not going to give guidance on that but I want to come back to my point that we're -- we continue to be all-in in terms of capitalizing on growth opportunities that are out there, they've gone from -- the growth opportunities have gone from exceptional to good.

Next question please.

And our next question comes from Sanjay Sakhrani with KBW.

Hi this is Steven actually filling in for Sanjay. Just wanted to see if you can elaborate around the issues that's pointed out in the CCAR planning process and how comfortable should we be that the problem will be remediated?

Yes, hey thanks for asking the question and as you might expect, we're not really in a position to talk about kind of the Fed process around CCAR, that's all guarded by confidential supervisor information that we're not have liberty to disclose, so the things that I can tell you if you want to have the most that we can tell you is really to point you to the Fed CCAR report and they're going to give you the best description of kind of the issues that they thought that there were. I will only just reiterate the point that Rich made which is we are fully committed to meeting the requirements and resubmitting our capital plan within the timeframes that the Fed has established for us.

Got it. And then the follow-up question is just around the sub-prime consumer behavior, have you guys seen any changes around the behavior of them?

I would say generally no. I -- we certainly note that the growth in revolving debt in sub-prime is higher than that in prime. By the way the last few months that's kind of settled down a little bit but it's still higher than prime. So we certainly have our eye on that. Of course that is also in the context of coming off of a base of a pretty big retraction -- retrenchment since the Great Recession. So we will keep an eye on the data about the consumer I mean the economic -- economy metrics. But beyond that we have not seen a lot of behavioral change, we have talked in prior conversations about the fact that there is some normalization generally going on that can have some in second quarter of 2016, we saw some as an industry effect not just the Capital One effect a little gapping out of some vintage performance that that all would be consistent with the marketplace moving along and getting a little more competitive and consumers getting a little bit more indebted. But beyond that, we haven't seen anything unique to the sub-prime space and that's why our strategy pretty much continues we've just been a little cautious around the edges.

Next question please.

And we'll take our next question from Betsy Graseck with Morgan Stanley.

Two questions one on how you were thinking about recoveries. We heard from some others recently that there's some pressure on pricing in recoveries and I know you're not using third parties as much as some other folks or may be if you can give us a sense to what you're seeing in the marketplace and how you anticipate that impacting you?

Betsy, yes, we don't sell as much of our charge-off debt as other people do but we still do participate in that market. But just pulling up overall on recoveries it's interesting recovery we always tend to look at that independently of other metrics but I've certainly seen over the years how recoveries move in tandem with a lot of other dynamics going on. So for example in this journey that we've talked about of the industry credit normalization some of the things were even our own expectations about credit performance we've found things were came in a little higher than, than we had expected. Recoveries was right in there as one of the little culprits in that. So we have seen generally some softening of recovery rates beginning in the third quarter of 2016 which continued into early 2017 they were stable in the second quarter but we'll have to keep an eye on recoveries and in many ways I think they will go in many ways as the overall credit market place goes.

Okay, thanks. And then the follow-up just on the tax exposure right now you provided us just a spreadsheet showing us the exposure but wanted to understand how you're thinking about that in particular given that the criticized performing loan rate increased quite a bit in the quarter does that suggest that you were preparing to just build the reserve further as, as time goes on here?

Yes, hey Betsy it's Scott thanks for the question. So a couple of thoughts here first of all as, we've been disclosing the details about the taxi portfolio for a few years because it's been an area that we want to make sure that our investors and others had a good insight into what our exposures where they're that’s on Slide 17 in the material. We've got about 580 million of taxi medallions on the balance sheet as of June 30, 17% allowance coverage ratio so well provided for their. Of that around 530 million is New York City taxi medallions and I think that, at this point, it's well understood that with the arrival of Uber and other competition that there's a lot of pressure in the value of these medallions and we've been seeing that pressure actually in revenues and in cash flows for several years. And as a consequence of that we've actually been carrying and writing down our loans to the lower fair value or carrying value for several years. So we've -- we're kind of well on our journey to making sure that we keep these loans marked at market prices. In Q2 we had a total provision of expense on taxi around 55 million which was primarily charge-offs but we also build allowance which was all based on kind of our view of the changes in the value of medallions that happened in the quarter. I will tell you that I've read the comments from other banks that have come out recently I feel very comfortable with our marks and where we are on our portfolio and I just say kind of in terms of what we might see going forward, right now, we're working aggressively with our borrowers to restructure loans where possible we're taking steps to make sure that we're protecting our collateral. I think the allowance and our charge-off levels are indicative of kind of where prices are today but there's certainly a risk that if this market doesn't stabilize that we could be subject to further write-downs if we see, kind of fair values and prices drift further south.

Next question please.

And we'll take our next question from Bill Carcache with Nomura.

Thank you. Can you remind us what percentage of the cards within your partnership business or store only versus also general purpose cards that have a Visa, Master Card logo on them? And can be used for out of store spend and then are you seeing any kind of difference in customer payment behavior between the cards that are good at the partner store only versus the cards that can be used for general purpose spending.

Hey Bill this is Scott we don't -- we don't actually breakdown in any detail kind of the partnership from our broader card portfolio that's not information that we're going to be able to provide you.

Okay, I guess may be perhaps just if you could comment at a high level from your experience whether there's any customer kind of taking order preference for you know whether they're going to pay that private label store card first versus the general purpose card if you can any color on that at a high level would be helpful.

Bill -- I, we were not in the great recession; we were not big players in the partnership business. We did an acquisition since then but of course we couldn't resist but peek back and see what we could observe of in the Great Recession and under stress. I carry around an intuitive view and I certainly have not seen anything to inconsistent with this that in general the -- these co-brand cards, a defining thing that I would put on the co-brand cards that have a lot of out of stores spend and become like a primary spending vehicle. These things are top of the line and I think that that we would believe that they would lead the league tables in terms of resilience. We've all had a lot of conversation both in our partnership business and frankly across our whole commercial business about the woes of retail and what does that mean and I think that if you look back at the Great Recession I think that the private label card did seem to get hit harder. But one thing I would say in their defense is you move from a position of sharing economics to having the entire economics and I still think most people are motivated by the desire to payoff and keep a good credit record. So look I carry around the intuitive belief that our private label business probably runs a little bit more risk than that -- than the high end co-brand programs but that I haven't seen anything to cause us to say that I feel I think we still believe in these programs you're going to get the vast majority of customers to repay but it certainly is a risk.

Next question please.

And we'll take our next question from Chris Donat with Sandler O'Neill.

Hi, thanks for taking my questions. Wanted to shift a little bit to expenses first with marketing Richard you talked about going from an exceptionally good opportunity -- an exceptional opportunity to just a good opportunity should we expect you to continue with sort of this level of marketing spend or does it get harder to attract the customers you want now that you're no longer in the exceptional opportunity for U.S card.

Yes, well so a bunch of things to say to that great question. First of all notice what we said that our dialing back in many ways is the dialing back of growth the slowing of growth is in many ways driven by more conservative choices about the timing and magnitude of line increases, how much credit line is granted at the outset those kind of things none of which really have anything to do with marketing. So, we continue to be all in on the origination of accounts and I don't -- I don't see any change in that and even by the way in dialing around the edges, dialing around the edges, those edges tend to be around approvals in the context of the same marketing it's just when we get hundred customers in there, there might be a few more percent that that might not make it through the -- the filter kind of thing. So that that is kind of point number one so, so what of which is our quest for pretty sizable growth of accounts continues and we feel pretty bullish about the prospects. The other thing is and other thing that I've learned over the years of being in this business. There is some investors feel like okay well there's going to be less growth therefore you don't have to spend money on marketing usually it almost works sometimes the other way because other people step up the table stake go up. And unless we really say okay in a particular segment, we're just not going to compete, it sort of have to pay more to get to stay to stay in place kind of thing. Now there comes a point where things get so irrational we have from time to time just pulled out of things but my point about the card business I still would call it more, it's just something that's more competitive but generally rationale. So we -- I think our investors should carry around the assumption that we're going to continue to be aggressive in our marketing and I think it's while the marketing efficiency is compared with the last couple of years, last two or three years that have been in the exceptional category, marketing efficiency is little more in the "normal category" but we're still all in on this marketing and I think that will continue.

Okay. Thanks for that and then just a follow-up quickly with Scott on the salaries were down $88 million quarter-on-quarter was there anything elevated either in the first quarter or unusual in the second quarter?

Yes, in the first quarter we had a lot of just kind of the normal taxes and such that happens in the first quarter where that starts to run out into the second quarter, so that it doesn't carry through. So nothing unusual there and is more or less consistent with kind of the seasonal trends.

Next question please.

And we'll take our next question from Rick Shane with JPMorgan.

Hey guys thanks for taking my question this afternoon. Look we've had a interesting discussion about the impact of ride share on taxi medallion prices. How do you manage risk in the auto portfolio from ride share you’re probably in the next year or two start to get back a lot of cars with a ton of miles on them. And I’m curious if that’s something you're thinking about in terms of risks or how you sort of account for that in terms of underwriting?

Rick, look I think you make a good point I think the -- I think there are a number of factors that while I must admit, I don't think we have put a real focus on I don't remember being in a meeting where we're talking about your specific point. I think if you pull up and think about the auto business and some of the longer-term issues all the pressure from the tech companies on the things like the ride sharing, you’re talking about even looking further down the pike at what would be the impact of all the technology changes in automobiles and in the limit the driverless cars. But even on that, even before the day finally comes when we down the road we're all doing our work in the back seat and there is no driver long before that I think we all have to be very vigilant about what is the impact of technology change is there come to be I mean generally the quality of technology has sometimes allowed cars to last longer and has been a good guy in the auto business. But the question is will there be a tipping point where the old cars just don't cut it and the new ones are so much better. So this in fact I just want to pause for a second and just kind of seize the moment that one of the -- one of the things that I don't I think banks don't do that well I think Capital One did not do that well on things like Uber story is pull way up across all of our lending businesses and ask what is the impact given that industry after industry is being revolutionized, what is the impact especially I think in the commercial C&I business of the revolution that's going on in our clients' businesses and if we just go and make one loan at a time and do our nice underwriting standards we could wake up and have a lot of rude surprises like we did in the taxi kind of business. So I don't have a great answer for your specific question but one of the things that we put a lot of energy into Capital One is pulling way up and instituting not only I mean the conversation but instituting a kind of risk management process associated with the extraordinary revolution that's happening in our industries, in our clients' industries, and in some of our core businesses it's a great challenge.

Rick, one other thing I would just mention we definitely in part of our underwriting practice in assuming that auction prices continue to fall is taking into account the longer lives of cars that our allowance is only 12 months, so it certainly isn't going to capture the shift in that you're talking about in terms of ride share. But part of the reason why we continue to really pay close attention to auction prices is there's a variety of risk that can impact that over time and when we're originating these loans, we're thinking about kind of all those risks as we do that which is a reason why we continue to plan for auction prices to move lower from here.

Got it. And again my point is not are there going to be fewer cars on the road because we use them more densely or is there going to be a technology shift that basically makes old cars obsolete? I'm actually thinking about the more immediate which is that I'm assuming of a fair number of customers who are taking loans from you guys with the idea that they might be in the ride share business and if the economics don't work out for them, those are cars that are very, very likely to come back and have very high mileage and I'm curious if one of the things that we're seeing against you guys or so quantitative, if we're seeing higher mileage on the repos that are coming back in?

That I don't at the top of my head, I can’t I actually can’t give you an answer to that one, I can do some follow-up we can circle back with you but Rick overall we're taking into account all of those statistics and formulating kind of our expectations around auction prices and resale values. So I think that's kind of embedded in our assumption.

Next question please.

And we'll take our next question from Brian Foran with Autonomous.

Hi, I’ve got one question on fees and on technology and digitalization? On fees, it’s a pretty strong quarter and in particular service charges have been a drag for a long time that are now up year-over-year and Interchange revenues up a little faster than spend volume. Can you maybe just describe is this any kind of inflection point or is it more quarter-to-quarter noise just fees actually was a pleasant surprise this quarter to kind of figure out what drove that?

Yes, thanks Brian for the question. Non-interest income was up about 16% in the quarter. And there's a few things that are going on there, non-interest income per share is lumpier than net-interest income. It certainly doesn't move quite as consistently with loan volumes and so I just kind of go through and talk about a few of the drivers. So you're right that net Interchange was a large driver that contribute about $100 million in the quarter-over-quarter variance and if you think there we have the higher seasonal purchase volume which was favorable and then as usual we have kind of the normally quarterly adjustments to rewards liability expense those kinds of things that run-through there and can create some quarter-over-quarter volatility and we saw that this quarter. We also in the first quarter had some UKPPI expense that ramped through there, so that created just under $40 million of favorability when we look at the linked quarter and then kind of I just kind of also point out that in our commercial business that business has some lumpy fees that come in and we did see around $25 million of higher quarter-over-quarter fees. Those are businesses that that have a business model where they generate fees and normally we see them kind of a little bit there are some puts and takes at this quarter they just happened all kind of worked in our favor and so they all came in a positive way. But that's kind of the overall picture, I think they're all part of our business model but I would say that we would expect that that line item is going to continue to be a bit lumpy.

Brian I just want to add you asked if there's an inflection point in the Interchange thing. I think that we don't think that it bounces around a lot from quarter-to-quarter, this happened to be a quarter where there was strong Interchange but that's not necessarily a breaking point I think that we continue to expect Interchange growth in net Interchange revenues to be below growth in purchase volumes. And let us not forget last quarter, I think the growth was negative. So this thing is much better just quaint your eyes and look at like annual, annual trends in sort of the relationship between purchase volume growth and Interchange growth.

Maybe coming back to the closing remarks of the opening scripts, you made around digitalization, this is something really three years now you've been talking about in pretty organically and when you started it was kind of remember when you first said wrestle APIs, I had glue sounds like which call am I on but we've seen more and more banks come out and really start talking about, you’re talking about two or three years later, so if I'm going to talking to investors that helps make it like okay see I believe was talking for so long is important but still find it's hard for people to kind of put some tangible parameters around it, how does digitalization and APIs and Middleware actually translate to better revenue or better cost. So I’m sure there is some hesitance about telling your competitors everything you're doing but I wonder if there's are there one or two examples you could give backward looking, how this multi-year digital journey has started to produce benefits either greater revenue or less cost or a combination of both?

Yes, thank you, Brian. So first of all, we've been -- look I mean it was 20 some years ago that same phrase I use now it's a build I used it way back then which is build an information based technology company that happens to do banking competing against banks that happen to use information and technology. And I'm very struck that I've got the same battle cry 20 some years into that. But the other striking thing to me even though I think Capital One's pretty well positioned to do something like this is just how staggering the amount of change that that's going on and that will happen in the industry and the need to really transform ourselves across talent and infrastructure the way we work, how we develop software where really there's nothing that left unchanged. So where have we seen the -- where can you see the benefit, no one can disentangle, what -- no one can prove what happens when your customers are a lot more delighted. How that affects things like growth and retention and things like that but I just would say that and it's very easy Brian for you to I'm not going to rattle them all here there's a lot of various proof points associated with a dramatic increase in Capital One's the customer satisfaction, the go to the app store and look at the ratings on the App Store that between the digital experience, the customer experience go to our own -- go to our own website and look at the ratings that and reviews that people put up on our own account. There for a variety of reasons, one of which is our digital transformation we have had a tremendous momentum with customers that that, that is pretty linked to the kind of exceptional growth that we have seen look in the auto business I don't know if you've seen some of the technology that we're employing in the auto business associated with auto navigator, I would suggest take a look at that, that's pretty interesting. I can never prove to you what the contributions of delighted customers are on the growth front. Secondly on the marketing front there is there is an obvious and dramatic transformation going on in marketing and how it works and the growing role of digital marketing, digital marketing itself is got the word digital in it and it's about digital capabilities and in fact information based strategies that has been an important contributor to Capital One's success. The other thing that's going on is you've seen what's happening with our efficiency ratio, which got worse before it got better but the important thing is that it's getting better by a lot. And when I started on this journey I said that look I want to make one thing clear so, many banks are saying in there -- in their public statements we are going to sell fund our digital investment I say I've been saying to investors for years and it's really five years actually this -- this journey has been not the three that you necessarily refer to but that over this journey I said that I don't believe anyone can transform their company and be competitive in the future by self funding this transformation that is you've got to pay now and get benefits later. I also said that the biggest motivator of our digital investment is not the -- is not a cost objective it really is much better customer experience a -- building a way more dynamic well managed fast first to market better controlled all those other kind of benefits that come with this. All of that said it's very clear that we are increasingly reaping important sizable benefits and efficiency as a result of years of digital investment and the efficiency comes across the distribution channels of retail, call centers, operations, centers it also the transformation and how we work as long-term benefits many of which we've started to realize. So the interesting thing is a journey that was never motivated to be number one for the sake of cost savings something where it cost a lot that the costs were a lot higher than the than the benefits at the outset those relative meters are on their way to some significant change in position there and the -- so it is the efficiency ratio would be that the final place that I would point to.

Next question please.

And we'll take our next question from John Hecht with Jefferies.

Yes, hi thanks for taking my question and just one question. Going back year I think you're -- you were having better than industry card growth I think you were somewhat balanced between new accounts and line extensions. You now pulled that growth and I'm wondering has the composition of growth changed is it coming more from one of those aspects or the other and to the extent it's changing what does that mean to the risk characteristics going forward.

John, so we -- we had if you dial all the way back I may get my years slightly wrong here but I think around the well '13 timeframe we had what we called the brownout of line increase and that was driven by a new regulatory requirement that required you to obtain income -- customers income before we could actually do a line extension and implementing the whole way to obtain that data and so on led to a brownout in our line increases even as our originations were continuing at a reasonable level. Then what happened is the -- right around the time that we got the technology and the ability to address the regulatory requirement, that also coincided with sort of the big growth opportunity at Capital One it contributed to but also coincided with so that we had a surge in line increases and then a surge in young customers who are also eligible for line increases. So I flagged over the especially 2014, 2015 time period that we were having a more than probably normal level of line increases in the overall mix of our business. Over the past I'm getting my timeframes I'm only approximating here but something I would argue around to be around the beginning of 2016 we got into pretty much an equilibrium between line increases and originations themselves and we have generally been in that equilibrium ever since. To your point and to an earlier point that I said if anything our dial back more on the line increase side than the origination side of late so it is possible the mix between those two could move to the other side of equilibrium but I don't think these changes are big enough to call that out. But I think that the more -- the more important thing which is what we called out in the 2014-2015 timeframe that those were more than a the little bit more than their share of the line -- the normal share of line increases.

Next question please.

And our last question from tonight is from Ken Bruce with Bank of America.

Thanks, good evening. Nice quarter the first question I have is this really relates to losses and in the quarter for the U.S. credit card business is at 5.11 that was a pretty substantial improvement in the month of June just based on the monthly reporting is -- was there anything specific that impacted that June performance and had something on the order like close to 50 basis point improvement month over month.

Ken, no nothing that jumped out at us. One thing that were certainly were delighted to see the 47 basis point sequential quarter improvement in charge-offs but we always caution don't get too carried away with any one month. Because in fact as a point in the opposite direction that you obviously noticed the delinquencies after several months of going down actually went up a bit in the month. So they're kind of going in the opposite direction I think we looked at both of those, look we looked very carefully at every month worth of data but I think that we should all just squint our eyes a bit and look at a bit the bigger pattern and don't -- don't get too carried away with any one month of data. The big point is we still expect the growth math effects measured in terms of year-over-year increase in delinquencies and loss rates to moderate over the rest of 2017 to have a small tail in 2018 and in fact, we were just talking about this today that one of the quarters we're actually going to, say goodbye to the growth -- to growth math and it's and it's not going to really be newsworthy and we're going to be back and rising and our numbers rising and falling with the dynamics of the marketplace but we are growth math quarters are numbered here before we retire it which is a good thing. We look forward to that retirement party.

I'm sure. There was a similar small shift but one if it continues could be have a substantial impact on that growth math but there's a the slight shift in the above 660 credit scores versus the below 660 credit scores; is that something that is a specific strategy of Capital One to accelerate one versus the other or is that just kind of a by-product of what you discussed around the trimming around the underwriting and so forth and if I could just make that a two part question you kind of answered Betsy’s question around recoveries differently but have you seen a change in the charge-off debt prices that are in the market.

On the charge-off debt prices I do not have any reason. I haven't been in a conversation associated with that and I think that I would have heard about it if something was newsworthy there but I don't rely on me for a latest read on that. The -- let me talk about the sub-prime mix so, our sub-prime mix has been -- our first of all our strategy as a company is stayed very steady over the years and we've been going as you know right at the top of the market and all the way through to the higher end of the sub-prime market place and over the -- over the last couple of years basically during this growth surge you have seen our sub-prime mix grow from I'm doing this from memory but around 34% up to 37% last quarter and it dropped down to 36%. First of all I want to point out in the world of all the precision we all live by, these are rounded to the nearest integer. And sometimes the story is nothing more than a rounding story obviously when you go up several hundred basis points that that there's a trend there and what we've said is the -- the opportunity that we have seen in the sub-prime market place relative in and I'm now speaking in the -- in the years of 2014, 2015, also the lower competitor little bit lower competitive intensity there all of that contributed to sub-prime's share growing a little bit. The strategy is really the same, the number is settle down a little bit Cabela's is going to come along and hopefully everything works out perfectly there and it comes in and that will take a little bite out of the sub-prime mix as well. But the big story is I think we see the opportunity to be across the board you're probably right a little bit more of our trimming around the edges has been in the higher risk areas or higher loss areas so that that just brings the sub-prime thing in just a little bit but I, my main point is the more things change. The more they really stay the same.

Thanks Rich and thanks everybody for joining us on the conference call today. Thank you for your continuing interest in Capital One. Investor Relations team will be here this evening answer any further questions you may have. Have a great night.

And that does conclude today's conference. Thank you for your participation. You may now disconnect.