Capital One Financial Corp (COF) 2004 Q1 法說會逐字稿

Welcome to the Capital One first quarter 2004 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. If you would like to ask a question during this time, simply press the star key, then the number 1 on your telephone keypad. If you would like to withdraw your question, press star, then the number 2. Thank you. I would now like to turn the call over to Mr. Paul Paquin, Vice President Investor Relations. Sir, you may begin.

Thank you very much, Ramona. Welcome everyone, to Capital One's first quarter 2004 earnings conference call. As usual, we are webcasting live over the internet. For whose who would like to access the call on the internet, please log on to Capital One's website at www.capitalone.com, and follow the links from there. In addition to the press release and financials, we have released a group of slides summarizing the first quarter 2004 results. Rich Fairbank and Gary Perlin will walk you through these slides.

To access a copy of the slide preparation for the purpose of following along, please go to Capital One's website at www.capitalone.com, click on investors, and then click on quarterly earnings releases. The company generates earnings from its managed loan portfolio which includes both on balance sheet loans and off balance sheet securitized loans.

For this reason, the Company believes the managed financial measures and related metrics to be useful to stakeholders. In compliance with Regulation G of the Securities and Exchange Commission, the Company is providing a numerical reconciliation of managed financial measures to comparable measures calculated on a recorded basis using generally accepted accounting principles. For more information, please see the schedule titled Reconcilliations and GAAP financial measures, attached to the press release filed with the SEC on form 8-K earlier today.

The statements made in the course of this conference call that mentioned the Company's or Management's hopes, intentions, beliefs, expectations or projections of the future, are forward-looking statements. It is important to note that Company's actual results could differ materially from the results projected in our forward-looking statements.

Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements, is contained in the Company's SEC filings including, but not limited to, the Company's most recently filed report on form 10-K for the year ended December 31st, 2003. Our website contains all of our SEC filings, as well as our monthly asset backed securitization performance data. To access the information, please go to our website, at www.capitalone.com, click on investors, then click on SEC and Regulatory filings.

With me today on the conference call are Mr. Richard Fairbank, our Chairman and Chief Executive Officer, and Mr. Gary Perlin, our Executive Vice President and Chief Financial Officer. At this time I will pass the call over to Mr. Fairbank for his remarks. Rick?

Thank you, Paul, and welcome everyone. If you can please turn to page 3, we can get started. Our first quarter results position us very well for a successful 2004. We generated a record $1.84 in fully diluted earnings per share in the first quarter of 2004. Our charge-offs and delinquencies have continued to decline nicely. Our diversification business are gaining traction where it counts, on the bottom line, generating more than $80 million in profits in the quarter.

We continue to find growth opportunities in our U.S. card business even in the face of fierce competition. We have done this year in and year out by developing and testing break-through value propositions for our customers, such as the Rewards and Lifestyle products, that have powered much of the recent growth of markets.

We have utilized a match funding strategy for years that protects our earnings against a possible rising rate environment. Our funding spreads continue to be attractive and our liquidity and capital levels are at all-time highs. Our first quarter results are evidence that we are well on our way to becoming a diversified financial services company.

Turning to page 4, you can see that there are three underlying trends that continue to drive our metrics. Our mixed shift, the improving economy, and seasonality.

The first trend is our ongoing mix shift. As you know, we have been diversifying our loan portfolio beyond U.S. credit cards for many years. And in the last several years we have been moving up market within U.S. cards. We expect to continue shifting our mix in 2004 by growing our auto finance and GFS segments at a faster rate than U.S. cards, and by again shifting our U.S. card mix up market.

Our up-market products and most of our diversification products tend to have lower revenue margins than our current portfolio average. However, they also have lower charge-offs and lower costs as a percentage of assets.

The bottom line effect of this mix shift has been a relatively stable annual ROA, as declining charge-offs and costs have offset the declining revenue margin. This is a trend we expect to continue in 2004, although it should be clear looking at our first quarter numbers that our ROA will continue to have variability on a quarterly basis.

The second trend is the improving economy. Once again we are pleased with the credit performance of our portfolio in the quarter. This strong performance is primarily driven by our mix shift, and secondarily by an improvement in customer payment performance.

The combination of higher tax refunds and an improving job market has added an extra boost to our portfolio performance recently, as it has enabled more of our customers to pay us back, thereby further lowering both our charge-offs, and delinquency rates. The final trend is seasonality, which has given us an extra boost in our first quarter performance.

All of the typical first quarter seasonal affects materialized as expected. The usual paydown in card balances, strong improvements in collections and recovery rates, and an uptick in used car prices, for cars that we sold in auctions. As the year unfolds, we expect these seasonal tail winds to subside, and then reverse into the normal seasonal head winds later in the year. This will result in higher provision expenses in the coming quarters, and thus lower EPS.

All told our mix shift, the improving economy, and seasonality have combined to drive $100 million reduction in our first quarter allowance for loan losses, following $125 million reduction in 2003, giving a nice boost to earnings.

Before I turn the presentation over to Gary, I want to make a few comments on why we are leaving our 2004 earnings guidance at 5.30 to 5.60. First, while the allowance reduction driving our EPS momentum is clearly good news, it is also unsustainable over time. As one of -- as one or more of the trends I described begin to subside, we will begin building allowance again, resulting in lower EPS than we experienced in the first quarter.

Second, for a variety of seasonal and timing reasons, we expect our earnings this year, like last year, to be heavily front loaded into the quarter. We expect the remaining quarters will have lower EPS than the $1.84 we reported in the first quarter.

Finally as always, we will be looking for opportunities to grow and invest in building our business for success in the long-term. And so despite delivering $1.84 of EPS in the first quarter, we are leaving our 2004 earnings guidance unchanged $5.30 to $5.60 still represents our best estimate of where we think EPS will end up at the end of the year. At this time I'll turn it over to Gary for a review of our financial performance in the quarter. Gary?

Thanks very much, Rich. I'm going to cover four topics in six slides. First, a high level overview of the key drivers of quarterly performance. I'll specifically highlight the financial impacts of the credit improvement described by Rich. Second, I'll place these quarterly financial metrics into the context of longer term trends and bottom line returns. Third, I'll address the question which was undoubtedly on the minds of many participants on today's call, regarding the potential impact of rising interest rates on Capital One's future financial performance. And finally, I'll provide a brief update on the strength of Capital One's balance sheet, by our strong liquidity position.

Turning first to Slide 6, we highlight those financial metrics which drive and explain our bottom line including first quarter EPS of $1.84. The first box covers loan loss provision expense, which declined $178 million in the first quarter, not far from the $185 million increase in net income during the same time period. Produced provisioning reflects both declining charge-offs, as well as a reduction in the allowance for loan losses, which is is driven by continued strength in our credit performance. More on this critical element of earnings in a moment.

The second box includes our non-credit expenses. Marketing expense was down $35 million in the first quarter, compared to the fourth quarter of 2003. This timing is not unusual. Marketing expense was up modestly in the first quarter of '04 compared to the first quarter a year ago, and we continue to expect that for the year as a whole, 2004 marketing spend will be higher than the 2003 level.

Operating expenses were also down from the fourth quarter of both 2003 as well as from the first quarter of '03. You'll recall that the fourth quarter of 2003 was effected by a number of year-end as well as non-recurring expense items such as site consolidations, which could occur later in 2004, as we continue to look to invest and improving our operating efficiency.

The final box notes that the first quarter ROA was at 2.11%, up from 1.3% in the fourth quarter of 2003, and 1.77% in the first quarter a year ago. I'll discuss both annual ROA trends, and quarterly ROA variability in a moment.

But first, let's turn to Slide 7, and focus briefly on the loan loss allowance which was the single biggest earnings driver in the first quarter. The allowance release resulted from the substantially improved credit outlook, which clearly outweighed the effect of a modest growth in on balance sheet loans. Looking at the two underlying variables which drive our formulaic approach to estimating expected future credit losses, on balance sheet loans grew about 1%, or $320 million in the first quarter of 2004, which all other things being equal would lead to a modest increase in the allowance.

But this effect was clearly swamped by the reduction in expected future losses , grounded in the substantial decline in the dollar value of loans 30 or more days delinquent. These dollar delinquencies, on on balance sheet loans fell by $300 million, or 20% in the first quarter. As Rich noted, this credit performance reflects the cumulative affect of shifting our portfolio up market and beyond U.S. card, and significant economic tail winds driving consumer payment patterns.

Now, in light of the duration and magnitude of this favorable trend in credit and allowance, let me make a couple of observations before moving on. First, significant changes in the allowance, such as the $100 million release in the first quarter of this year, are driven by changes in credit performance, as we project those changes forward, and not by the fact that losses simply remain at low levels. If losses become stable, then on balance sheet growth would be expected to generate moderate allowance builds.

Second, delinquencies are a clear indicator of likely future credit performance. At 3.82%, the ratio of reported delinquency dollars greater than 30 days, are near historic lows for Capital One. Because the changes in trend improvement in our credit outlook cannot continue indefinitely, however, allowance releases and the positive earnings impact from those releases cannot continue at the recent pace for sustained periods of time in the future.

As a result, when credit trends stabilize, we will no longer see the same sort of earnings boost from allowance releases such as that experienced in the first quarter. While our expectation for the balance of 2004 is for some net additional allowance release, we believe that positive allowance builds are possible in the second half of this year.

Now. lets turn to Slide 8, to look at longer term trends in bottom line ROA. We continue to sustain Capital One's earnings power as seen by relatively stable annual ROA in the graph on the right side of Slide 8. Within the year, however, we continue to expect quarterly ROA variability, as seen in the sharp rise during the first quarter, on the left hand graph of Slide 8. Indeed, the quarterly variability is more pronounced this year, owing to the allowance impacts I just discussed.

The seasonal impact on portfolio growth and credit performance, creates the sawtooth effect, as evidenced in the 2003 quarterly earnings pattern, which we would continue to expect will recur in 2004. This is why one cannot estimate full year earnings simply by multiplying the first quarter earnings by four.

While we're on the subject of ROA, let's turn a moment to observe the trends driving long-term stability in bottom line returns. These are reflected on Slide 9, where we show key P&L items as a percentage of managed loans. Rich has reminded you of the strategic shift towards more up-market and diversified lending assets.

This manifests itself in a declining revenue margin, as seen on the left graph on page 9. But equally, that same trend is reflected in lower provisioning expense, as seen in the solid line on the right graph, and as I discussed earlier, as well as in the cost of acquiring and servicing each additional dollar of up-market and diversified loans. We carefully manage all the levers in the ROA equation, to target healthy, stable bottom line growth over time.

Now, moving on to the question of interest rate sensitivity that many of you have asked. Let's turn to Slide 10.

Capital One's long standing policy is to hedge the interest rate risk inherent in our credit business. We do so quite simply by match funding our assets. This means funding fixed rate assets with fixed rate liabilities of the equivalent term, and factoring those costs into our product marketing decisions. Our interest rate risk management strategies are calibrated in several ways, as described in significant detail in our recently issued 10-K.

As many of you have been asking about earnings sensitivity to interest rates, however, Slide 10 offers a simple measure of the impact on the next 12 months of our net interest income of a300 basis point up front shock across the yield curve. Our policy is to limit the effect of such an interest rate shock to plus or minus 3% of the next 12 months of net interest income.

Using 2003 managed net interest income of $6 billion as a base, the maximum allowable impact of a 300 basis point shock would be $180 million pre-tax. But as Slide 10 shows, we remain comfortably within those limits. While the graph shows that we are slightly asset sensitive, meaning that more of our assets will reprice in the 12 months from liabilities, so that net interest income would actually benefit from an increase in rates. The real point here is not one of direction, but rather that our strict limits create a very minimal income exposure to interest rate movements in either direction.

Finally I'd like to point out that this analysis assumes no changes to our asset profile either switching selected accounts to variable rates, or repricing of fixed rate accounts. Levers which could be used. Neither does it incorporate the potential for positive asset performance, as seen in our attrition experience the last time interest rates spiked up, nor does it assume any further improvement in credit related to the strengthening economy that may be associated with a rise in interest rates.

Turning to Slide 11, I'll end with a theme that's been quite common to our last two earnings calls. In other words, our buildup of liquidity. We believe it is prudent to carry cost effective liquidity using attractively priced funds acquired in 2003, and again in the first quarter of this year, to enhance our flexibility to respond to future market conditions. This slide shows how we build liquidity from the end of 2002 through 2003 and into this quarter.

For the first quarter of '04, the build is a bit exaggerated by virtue of the fact that we tend to fund evenly throughout the year, but experience relatively slower asset growth during the first quarter. Our available on and off balance sheet liquidity now stands at approximately $21 billion, which is several times our term debt maturities for the next 12 months.

Not shown on this slide is the fact that, owing to our issuance of dealing single A and triple B asset-backed securities, we could issue our next $11.1 billion in U.S. card funding in the form of triple A securities. Our solid first quarter financial results reflect outcomes of our purposeful strategies across the balance sheet. Now I'll hand the call over to Rich.

Thanks, Gary. If you will turn to the next slide, I'll take you through an update on the individual businesses. On page 13, you will see data on our loans outstanding by segments for this quarter in column 1 and the last quarter in column 2 and the year ago quarter in column 3.

In the two columns on the right you can also see the corresponding loan growth in the first quarter as well as the annualized growth in the quarter. Beginning at the top, you can see that by comparing the first two columns, the U.S. card loans fell by $1 billion in the quarter, and this is consistent with normal seasonal paydown patterns. Of the competitive environment remains tough, we continue to see ample growth opportunities in the business.

Powered by the success of Miles One, our new Go Rewards program, our lifestyles business, we see continued growth opportunities in up market card. Our subprime business which continues to perform very well is currently projected to have little to no loan growth in 2004. Net net therefore, we expectation an continuation in the U.S. card business in 2004.

Global financial services or GFS as we call it, grew by $1.2 billion in the quarter which equates to a 27% annualized rate. You can also see that each of the major businesses within GFS exhibited solid growth in the quarter. One quick aside of the $700 million in international loan growth, approximately $200 million of that was due to currency exchange rates. We continue to expect to grow our GFS loans at a higher rate than our U.S. card business.

Auto finance grew by $360 million versus the first quarter of 2003 which represents a 17% annualized growth rate. We continue to have success in the indirect channel where there is, of course, lots of competition. However it's our leadership in the direct channel that most differentiates our auto finance strategy.

And given the continuing attractiveness of our auto finance returns, we expect to continue growing our auto business at a higher rate than our U.S. card business. Overall the loan growth for the company was $572 million in the quarter, and we continue to expect that the overall loan growth rate for Capital One to be in the mid-teens in 2004.

Turning to slide 14, you can see the profitability of our three major businesses. U.S. card profits rose almost $80 million, or 26% to $387 million versus the first quarter of 2003, driven primarily by improved credit performance. Auto finance profits were 30.7 million in the first quarter of 2004, versus a loss of $6.5 million in the year ago quarter.

This reflects the steady improvements in operating scale and risk management that we have achieved over the years. GFS posted a $36 million increase in profits over the first quarter of 2003, generating almost $51 million in profits. GFS profits were also up $47.6 million over the fourth quarter of 2003, driven by several factors. An allowance reduction in our U.K. business, where we're also benefiting from an improved economy, strong revenue growth in the first quarter, and finally the absence of a uniquely heavily marketing investment in the U.K.during the fourth quarter of 2003.

Turning to slide 15, you can see our monthly managed charge-off rate on the graph. Our quarterly charge-off rate along the bottom of the graph. Our charge-off rate declined from 5.32% in the fourth quarter of 2003, to 4.83 in the first quarter of 2004, our lowest charge-off rate in two years. This decline was driven by a number of factors. Our diversification success in moving beyond U.S. card in the lower risk asset classes such as auto loans, installment loans, and international. Our ongoing efforts to shift our portfolio mix up-market. Continued improvement in consumer behavior, and finally, the first quarter typically has seasonal tail winds and this year was no exception. Our collections and recoveries team put in a very strong performance yet again.

While we have certainly benefited recently from an improving economy in our shift up-market, it is unrealistic to expect these favorable trends to continue indefinitely. Nevertheless our current view is that our charge-off rates should remain in the fours for the remainder of 2004.

Turning to slide 16 you can see the charge-offs broken down by segment. You can see that all three segments have been experiencing excellent credit performance. U.S. card segment has the biggest decline, 75 basis points, for reasons I mentioned a few minutes ago.

Auto finance charge-offs fell 17 basis points, driven by a combination of seasonality, a mix shift up-market, and improvement in recovery rates at auctions. And finally GFS charge-offs continue to remain stable and well below our corporate average.

Turning to Slide 17, we can look at delinquency performance. You can see that our 30-plus delinquency rate fell from 4.46% at year end 2003, to 3.80% at the end of the first quarter of 2004. This delinquency rate is the lowest rate we have experienced since the third quarter of 1995.

The same factors that are driving our charge-off rate lower, are also driving our delinquency rate lower as well. Mix shift up-market and beyond U.S. cards, seasonality and improving consumer payment behavior.

Having said that, there's obviously a limit as to how low delinquencies can go, and as Gary mentioned a few minutes ago, it is the sharp drop in delinquency rates that we've experienced that caused a good portion of the allowance releases that we've enjoyed over the past five quarters. Once again, and as our delinquency rates begin to stabilize or ultimately reverse direction, then we'll build allowance again.

Turning to slide 18 you can see our delinquency performance by segment. The most interesting one is auto finance, which experienced a 211 basis points drop, due primarily to seasonal factors. You can see this by looking at the sharp drop in auto finance's delinquency rate in the first quarter of 2003, followed by an offsetting rise in the second quarter of 2003. Seasonality logic would suggest that we may see a similar rise in auto in the second quarter of this year as well. U.S. card delinquencies fell 61 basis points due to the factors we've already talked about, and GFS delinquencies are holding steady with a modest 7 basis point decline.

We go to the last slide, I'd like to close by pulling up and talking about the long-term strategy of Capital One. Capital One is on a path to become a world class diversified consumer financial services company. This is a journey as you all know that we began many years ago. It started with our domestic credit card business and has been built on a foundation of disciplined risk management that has become the hallmark of Capital One. Over the years we have expanded our product offerings within the card business to include a variety of lifestyles and reward programs, and we have also, to power it and all the rest of our business build a very strong brand, which is now widely recognized as standing for great value without the hassle.

We have been diversifying our business mix for years, entering the auto finance, installment loan, and small business lending markets, while also expanding internationally most notably in the U.K. and Canada. As you can see in our financial results over the past year, we are not just talking about asset diversification, which is the diversification which really matters, which is bottom line earnings diversification.

We've also continued to strengthen our balance sheet over time, and central to this strengthening is our expansion into the deposit business, where we have grown to $23 billion in deposits in only 6 years, making us the 34th largest depository institution in the United States. We have strengthened our liquidity and capital positions. Which enables us to weather storms that may emerge in the economy or in the funding markets. And gives us the flexibility to take advantage of business opportunities.

Finally, we strive to hedge away other risks, such as interest rate risks, which positions us well in a potential rising rate environment. And so, while our journey is certainly not done, we are well on our way to becoming a world class, rock solid, diversified consumer financial services company, and we believe that our first quarter results are testament to our progress.

Thank you all again for joining us on this conference call, and with that we'll open it up for questions.

Thank you, Rich. We'll start the Q & A session, if you have any follow up questions after this session, the investor relations staff will be available after the call. Ramona, please start the Q & A session.

At this time I would like to remind everyone if you wish to ask a question, simply press star and the number 1 on your telephone keypad now. We'll pause for just a moment to compile the Q&A roster. The first question is from Howard Mason from Sanford Bernstein.

Thank you. I noticed there was a reduction of $200 million in the reserve you hold for revenue that is billed but not collectable and I wondered if you could comment on that, where that amount would appear if it would appear in revenue and what your expectations are for that going forward.

Okay, Howard. I'll take that question. You do notice a big decrease in the amount of suppressed revenue coming from the finance charge and fee reserve, which is really a reflection of two things we've been discussing over the course of the day.

The first of which is that we are continuing our diversification into products that generally tend to generate fewer fees, and therefore the need to have a big reserve against those is reduced. But the bigger affect comes from the credit trends that rich and I have emphasized during the call.

As a result of the improvements of credit performance, we have had both a lower level of fees being accrued, and therefore against which we need to reserve, and for those charges that are being levied, the likelihood of payment is going up, along with the improvement in the performance of our portfolio.

There was a big decrease in this quarter as you note that that really is the result of the kind of movements that Rich and I have been talking about in the underlying portfolio of the company.

The next question is from Joel Houck of Wachovia.

On the graph of the interest rate sensitivity. If you take a scenario where the yield curve is flattening, two questions, one, would that change the variability or lack thereof which you've depicted and, second, would it change at all the direction of the sensitivity?

Joel, I'm assuming that when you talk about a flattening of the curve, you're probably assuming a move up in short-term rates, perhaps not.

Yes, exactly.

At the end of the curve. Actually the results would not be significantly different because as I indicated, the match funding strategy that we follow, is looking to match not only in terms of the interest rate properties but also the term of the liabilities used to match the fixed rate assets, so that we're also not exposed in any significant way to changes in the shape of the yield curve.

So you're right, the slide that we looked at here as it indicates on the bottom, assumes for the sake of ease, a shock that is equal across the yield curve but we would continue as well to see that we are very well hedged against any changes in the shape of the curve.

Your next question is from Chris Brendler, of Legg Mason.

Thanks, good evening. One thing starting a little bit is it looks like the gross revenue yield was actually up sequentially from the fourth quarter, and I would have thought with the improving credit performance the pressure on late fees, as well as the up-market shift would have continued pressure on that number.

Well, Chris, there are a number of different factors going into the revenue and you'll see again a shift from the non-interest income into the net interest income and you'll see that the net interest margin improved, and that is the source of the improvement.

Okay.

Your next question is from Bruce Harting of Lehman brothers.

Could you update us on your latest thinking on acquisitions and what you're doing in the bank area and, again, just remind us of the core strategy for doing that? Thanks.

Yes, Bruce. As we announced in the debt and equity conference last fall, we feel that buying a bank would in fact be a very natural extension of Capital One's diversification strategy, and we believe the combination of what we have built on the asset side of a series of national scale lending platforms, supported by local scale deposit gathering is a winning combination.

And the positives of this move for Capital One include sort of the obvious one of cheaper source funding, but also some other benefits, Bruce, as well. We see the opportunity to leverage Capital One's customer base. For example, in a typical geographic foot print, we are likely to have many times more customers than a typical regional bank. And we see also the ability to just fill out -- local distribution is kind of the one distribution channel that we do not have in our portfolio now of a lot of different distributions that can help market our products.

We also see the ability to leverage the combined capabilities of a bank and of Capital One to enhance certain businesses in ways that each of us cannot do as well on our own. Examples include small business. We have a very substantial small business business. Of course local banks do, too. Debit cards which is of course a natural for us, and lending products like home equities.

In the end, maybe one of the most important payoffs, this won't happen right away, is hopefully enhanced valuation from the reduced risk, in a sense lower beta as the market grows to appreciate the risk reduction in a combination like we are talking about. That being the strategy that we have laid out very explicitly, Bruce, and we continue to, you know, go down that path. We have also said and will say it again that timing, size, or specific company names in such a strategy is not something that we're going to talk about.

Next question, please.

Your next question is from Christina Clark, of Wachovia Securities.

Did you sell any auto loans during the quarter?

Yes, Christina. We sold some sub-prime auto loans in accordance with our forward flow agreement. The gains that we took on these sales were about $13 million, and like in the fourth quarter of '03 we did not have any super-prime auto loan sales.

Your next question is from Eric Wasserstrom of UBS.

Thank you. Can you spend a little time on the sub-prime growth strategy. You indicated both in the text and your comments that you were going to do no more sub-prime growth, but it was my understanding from the first quarter, that you were going to grow that in line with the overall growth of the balance sheet following a very low growth rate effectively zeroing. Did something change in the interim?

Okay, Eric. First of all, the guidance that we had given was that while we did not grow sub-prime in 2003, we expected a moderate growth of sub-prime in 2004, but at a lower rate than the up-market part of our business. The modification of that guidance is what you're picking up on here which is where we are seeing consistent with 2003, basically a flat picture for sub-prime growth in 2004.

Now I really want to stress that sub-prime is a great business for Capital One. It is very much down our power alley. In terms of a very sophisticated risk management business, we have had great and steady returns in that business. And you also know that we have pursued a diversification strategy to leverage a lot of other parts of the credit card business and a lot of other businesses to round out Capital One.

And as we look at the card business and the other opportunities that we have, we see sort of better growth opportunities right now, today, as we look at it in up-market cards, than we do in the sub-prime business Our strategy in sub-prime is to very selectively continue to cherry pick the very, very best customers within that marketplace. While we do not project significant growth in the market, it continues to be, of course, very good and a great performing part of our company.

Our next question is from Moshe Orenbuch of Credit Suisse First Boston.

Thanks. Rich, I wonder if you can give us a little update on the competitive environment, you seem to have pretty good results relative to peers this quarter, maybe a little bit more detail on what's kind of looking good as you look out into the balance of 2004. And in the same vein how you're going to invest the extra marketing you were talking about.

Okay, thank you, Moshe. The U.S. card business continues to be ferociously competitive. If you pull back, there's been a migration in the last two or three years from a more fragmented market with a lot of relatively less sophisticated players. Along with it came a number of blowups that we had to all weather.

But I think what we are really seeing now is a consistency of a small number of players. The good news is they are very rational players, but also they are very committed players, sophisticated players, and we see intensity not only in how they market but intensity literally in watching Capital One, and try to head us up at the pass, as we come out with other growth opportunities.

I think this is a reality that we have adapted to, and within the context of that, Moshe, we fill pretty bullish. In the face of mail volume that has actually, steadily increased in September of 2003, and also in the face of pricing out there where long-term pricing is still aggressive and, unfortunately, we've seen a return in the marketplace to long teasers, deeply discounted teaser rates, we have carefully crafted a strategy that, I think, seems now to be quite resilient to that.

A lot of focus, Moshe, is on unique reward programs that we are coming out with. We've seen some of that powered by national television advertising but we are increasingly rolling out a suite of various reward products that the customers, we are finding empirically are both generating strong response but also strong performance.

So again, while I think it's a tough environment, Moshe, I think that what I'm finding is that the up-market, that the market plays in many ways to the strength of Capital One, a combination of [IBS] to optimize in a thin margin environment, and the power of brand to back up everything that we market.

Next question, please. I believe we only have one more in the queue.

Yes, sir. Our final question is from Mike Hughes of Merrill Lynch.

Thank you. Back on the net interest margin for a second. The fee and finance charge reversal, I presume that that flows back through net interest income and that's the reason that the margin was up so strongly in spite of the buildup of cash during the quarter?

Yes, Mike, that's absolutely true, also. Do recall we did have some balance growth as well, so the combination of the higher margin, the bigger volume as well as the release of the finance charge and fee reserve all contributed to that.

Thank you, everyone. The Investor Relations staff will be here this evening to answer any questions you may have. Thank you for being on the call and thank you for your interest in Capital One. Have a good evening.

This concludes today's conference call. You may now disconnect.