Capital One Financial Corp (COF) 2005 Q4 法說會逐字稿

Welcome to the Capital One fourth quarter 2005 earnings conference call. Today's call is being recorded. [OPERATOR INSTRUCTIONS] Thank you, I would now like to turn the call over to Mr. Mike Rowen, Vice President of Investor Relations. Sir, please go ahead.

Thank you very much, Deanna. Welcome, everyone, to Capital One's fourth quarter 2005 earnings conference call. As usual, we will be Webcasting live over the Internet. For those of you who would like to access the call on the Internet, please log onto Capital One's website at www.capitalone.com and follow the links from there.

In addition to the press release and financials, we have included a presentation, summarizing the fourth quarter 2005 results. With me today is Mr. Richard Fairbank, Capital One's Chairman and Chief Executive Officer; and Mr. Gary Perlin, Capital One's Executive Vice President and Chief Financial Officer, who will walk you through this presentation. To access a copy of this presentation, please go to Capital One's website, click on Investors, then click on Quarterly Earnings Release, and you will find the presentation in the fourth quarter 2005 earnings release.

Please note that this presentation may contain forward-looking statements. Information regarding Capital One's financial performance and any forward-looking statements contained in today's discussion and the materials speak only as of the particular day or dates indicated in the material. Capital One does not undertake any obligation to update or revise any of this information contained herein, whether as a result of new information, future events, or otherwise. To the extent any information in the presentation is forward-looking, you should be aware that numerous factors could cause our actual results to differ materially from those described in the forward-looking statements. For more information on these factors, please see the section titled Forward-Looking Information in the earnings release presentation accessible at the Capital One website and filed with the SEC.

Before I turn the call over to Rich and Gary, I wanted to mention that we will no longer be disclosing monthly managed statistics on our portfolio. Additionally, at the request of numerous investors, we are expanding our quarterly segment disclosures in order to provide you information that you -- should help you better understand our businesses as well as help you better model Capital One at the segment level. You can see some of these expanded segment disclosures in our fourth quarter earnings release schedule.

At this time, I will turn the call over to Mr. Gary Perlin. Gary?

Thanks, Mike, and good afternoon to everyone. I'll begin with Slide 3 of the presentation, entitled Fourth Quarter 2005 Results. In 2005, Capital One delivered another year of strong results, while expanding our lending into positive businesses as well as our distribution channels.

The acquisition of Hibernia Bank was completed on November 16th. All results include the impact of the acquisition, unless otherwise indicated.

For 2005, Capital One posted diluted earnings per share of $6.73, including diluted earnings per share of $0.97 in the fourth quarter. Managed loans ended the quarter at $106 billion, up 32% from a year ago. Excluding the $16.3 billion of loans from the Hibernia acquisition, managed loans growed -- grew 12% in 2005, in line with our expectations.

Credit quality and margins remain strong. The charge-off rate for the quarter was 4.53%, including the impact of the October bankruptcy spike and the credit improvements that followed in November and December. Excluding Hibernia, quarterly managed charge-offs would have been 4.89%. Managed ROA for the year was 1.72%, also in line with our expectations. Going forward, we are well-positioned to continue delivering strong and stable results.

For 2006, we expect diluted earnings per share between $7.40 and $7.80. In addition, we expect managed loans to grow between 7 and 9%. We expect continued stability in annual ROA, consistent with the prior two years. We expect this to be driven by a decline in revenue margin, offset primarily by reductions in provision expense and also by reductions in operating costs as a percent of assets.

Turning now to Slide 4, I'll focus on a few items from the full year 2005 managed income statement. 2005 results show total revenue growth at 12%, as compared to 2004, which was primarily a result of the increase in average loans outstanding and, to a lesser extent, acquisitions. Of course, acquisitions also had an effect on operating expenses. For the full year 2005, net income after taxes was up 17% over 2004, while earnings per share was up 8%. The EPS calculation reflects the impact of shares issued in May in conjunction with the conversion of a mandatory convertible security and shares issued in completing the Hibernia transaction in November.

For a year in which we experienced significant growth, continued diversification, and made a number of acquisitions, our key performance metrics remain quite stable. You can see this stability in the box at the bottom of the slide. Managed ROA moved by only 1 basis point, as mildly declining revenue margins were offset by efficiency gains.

Please turn to Slide 5 and we'll look at the quarterly managed income statement. Fourth quarter net income was up 44% from a year-ago quarter, driven by strong revenue growth and lower marketing expense, partially offset by higher provision and operating expenses at a higher tax rate.

Before taking a closer look at the allowance and other balance sheet measures, I think it would help to focus on two significant events in the fourth quarter and their impact on our financial metrics. First is the acquisition of Hibernia Bank and the second is the bankruptcy spike which occurred in October.

Please turn to Slide 6. As I address the financial impact of Hibernia, let me remind you that a schedule detailing these effects is included with our earnings press release, where you can see the impact of the acquisition on our fourth quarter and 2005 financial statements. Given that the acquisition was completed only six weeks before the close of calendar 2005, Hibernia had a relatively modest impact on earnings. Hibernia's contribution of $31 million in net income included $108 million in non-interest expenses in the period.

The acquisition of Hibernia naturally had a much larger impact on Capital One's balance sheet, as of December 31. Hibernia added $16.3 billion in loans and an additional $216 million to our loan loss allowance, relating to their performing loan portfolio, which was unaffected by the September hurricanes. Largely as a result of the $2.2 billion of cash deployed for the purchase of Hibernia, Capital One's tangible capital to tangible assets ratio ended the year at 7.72%.

We also issued 32.8 million shares in conjunction with the mid-quarter purchase of Hibernia. This added 16.1 million shares to the average share count for the fourth quarter. Looking forward, we expect to incur around $90 million of integration expenses throughout 2006.

For this quarter only, results of the Hibernia legal entity are reported in the Other category. Beginning with the first quarter of 2006, the banking business will be reported as its own segment. As we will explain then, results of our banking segment will be different than the legacy Hibernia entity, as we integrate some of Capital One's legacy lending and deposit businesses.

Slide 7 provides highlights of the impact of the other major event in the fourth quarter of 2005 -- the October bankruptcy spike. We saw $494 million of bankruptcy charge-offs in the fourth quarter. Because these charge-offs, including those relating to the unprecedented October spike, were fully anticipated, they had already been accounted for in previous periods. Consequently, there was no impact from the bankruptcy spike on our top-of-the-house P&L in the fourth quarter.

Although the full impact of the bankruptcy spike was recognized by the end of the third quarter, there was not sufficient time to allocate all related charges to our individual business segments. This allocation was completed in the fourth quarter, and you will see that impact in our segment results. Delinquencies also saw an impact, as the pull-forward of bankruptcies into October cleared out many accounts that had already been aging through past-due buckets. As a result, delinquencies dropped in November and December. As you will see on the next slide, this had an impact on the level of finance charges and fees billed but not recognized.

Although we have now seen the full financial impact of those bankruptcy-related charge-offs that occurred through the fourth quarter of 2005, it remains unclear what pull-forward impacts the October bankruptcy spike will have for 2006 charge-offs. Our current expectation is that there will be a return to more normal levels of charge-offs during the course of the year.

Let's now turn to Slide 8 and look at allowance build in the quarter. Because managed net charge-offs, including those arising from the bankruptcy spike, were approximately equal to the amount of charge-offs anticipated as allowance was built in prior periods, net allowance build for the fourth quarter was driven largely by loan growth in legacy Capital One businesses. Amounts billed to customers but not recognized as revenue were down $28 million in the quarter. This was largely driven by the October bankruptcy spike, which cleared out non-paying accounts from our delinquency buckets at a faster-than-normal pace. As these accounts were pulled forward to charge-off in October, they were not billed fees and finance charges, a significant portion of which would otherwise have been deemed uncollectible and, therefore, suppressed in our revenue calculations.

Please turn to Slide 9. On this page, we show monthly and quarterly managed net charge-offs on the left graph and the ratio of managed loans 30 days or more delinquent on the right graph. The fourth quarter managed net charge-off rate was 4.53%, including Hibernia. Excluding Hibernia, our charge-off rate would have been 4.89%. Continued credit strength reflects our continuing diversification, as well as the positive domestic consumer credit environment.

Moving to the delinquency graph on the right, you can see the decline in November and the December delinquencies, which resulted primarily from the consolidation of Hibernia and from the pull-forward effects of the bankruptcy filing spike. Without Hibernia, fourth quarter delinquencies would have been 3.68%.

Looking now at Slide 10. Capital One's profitable growth is complemented by the continued strength of our balance sheet. Our capital levels remain strong following the Hibernia acquisition. Our tangible capital ratio, which excludes goodwill, ended the year at a healthy 7.72%. We continue to maintain a solid liquidity profile. The increase in cash and securities is largely attributable to the consolidation of Hibernia's fast-growing investment portfolio. That growth has been fueled, in turn, by strong deposit growth in Hibernia's Louisiana franchise. This liquidity, coupled with the strong demand and attractive spreads for our asset-backed and other securities helps maintain the strength of our balance sheet.

With that, I'll now turn the call over to Rich.

Thanks, Gary. As usual, I will review the key trends, strategies and results for Capital One and for our business segment, beginning with U.S. Card on Slide 11. U.S. Card net income for 2005 was $1.8 billion, up 16% from 2004. The upper graph shows fourth quarter net income of $237 million, up 17% from the fourth quarter of 2004. Net income declined from the third quarter, reflecting seasonal patterns for the business and the segment level impact of the bankruptcy filing spike. Managed loans grew by 1.8% in 2005, in line with our expectations of low-single-digit loan growth. In contrast, annual purchase volume is up 15% in 2005, and fourth quarter purchase volume is up 19% from the prior-year quarter, reflecting our focus on rewards products through most of the year.

On the lower graph, you can see that credit remained strong through the year, with fourth quarter charge-offs and delinquencies showing the impact of the bankruptcy spike. Delinquencies, payment rates, and other key metrics continue to reflect a strong and rational consumer. The industry trends we've discussed for the last two quarters continued in the fourth quarter. Overall mail volumes are up from the prior year, although flat to slightly down from the third quarter. More importantly, many issuers in the prime revolver segment continue their heavy use of 0% balance transfer teaser offers with long teaser periods. These programs appear to rely on extensive penalty repricing, well beyond go-to rates, to achieve profitability.

In the fourth quarter, just as in prior quarters, we chose not to market in these segments, where we believe the prevailing pricing tactics compromise long-term customer loyalty for the sake of short-term loan growth. Our results reflect our strategic choices in U.S. Card. Our choice to focus on non-teaser segments, like rewards, kept our margins strong and helped to generate greater purchase volumes and interchange revenue. We also continued to drive improvements in operating expenses, and our disciplined underwriting and favorable consumer credit drove strong and stable credit performance. The U.S. Card business delivered another solid year in 2005 and is well-positioned to continue its success in 2006.

Slide 12 shows the results of our Global Financial Services, or GFS, business. For the third year in a row and for all of 2005, we've seen very solid performance across our North American business, led by small business, installment lending, Capital One Home Loans and the Canadian Card business. In the U.K., the industry-wide downturn in the consumer credit cycle continued to pressure results. GFS net income for the year was $186 million, a $27 million decline from 2004.

U.K. net income declined, as we addressed the challenging consumer environment head-on, by slowing loan growth and building appropriate reserves. Despite the decline in net income this year, our U.K. business is still profitable. 2005 net income also includes an $18 million after-tax write down of goodwill related to insurance services. In contrast, 2004 net income benefited from $51 million in after-tax gains on the sale of our businesses in France and South Africa. All of our North American businesses posted strong profit growth for the year.

The upper graph shows quarterly GFS net income. GFS is a portfolio of six distinct businesses in three geographies, as well as several development-stage businesses. In the fourth quarter of 2005, net income was down, due to seasonal patterns, the segment-level impact of the bankruptcy spike that Gary talked about, and the one-time goodwill write down I just mentioned.

Managed loans grew 10% in 2005 with strong growth in the North American businesses and modest growth in the U.K. Without foreign exchange impacts, 2005 growth would have been about 13%. You can see GFS credit metrics in the lower graph. In the fourth quarter, the downturn in the U.K. consumer credit cycle continued to pressure credit performance for both the industry and Capital One, although the pace of deterioration slowed somewhat. GFS charge-offs reflect the challenging U.K. environment and the bankruptcy filings spike in the U.S., partially offset by strong underlying credit performance across our North American businesses. Delinquencies remain relatively stable for the GFS segment as a whole. Despite near-term challenges in the U.K., the long-term trajectory of GFS remains strong.

Turning to Slide 13, you will see summary results for Capital One Auto Finance. Loan growth for the year was $6.4 billion, powered by strong originations and the acquisition of the Onyx and Key Bank businesses. Fourth quarter originations of $2.6 billion are down from the prior quarter, as the employee pricing discount programs from last summer pulled forward both auto sales and loan originations, as expected. Compared to the fourth quarter of 2004, originations are up strongly. The acquisitions I just mentioned expanded our origination platform and the reach and capability of our sales force. These enhancements drove increased origination volumes in 2005, and are expected to drive originations growth going forward.

For the full year, profits declined from 2004, but remained strong, at $132 million. On-balance sheet loan growth drove a significant allowance build in 2005, compared to a net release in 2004. Strong origination volumes and the integration of the Onyx and Key Bank businesses resulted in higher operating expenses for the year. You can see in the upper graph that these factors pressured earnings in the second half of the year, but we continue to build the long-term earnings power for the business by growing loans, building reserves and investing to integrate our full credit spectrum origination platform.

Turning to credit, charge-offs for 2005 improved from 2004, and the quarterly charge-off and delinquency rates, shown on the lower graph, reflect expected seasonal patterns. All in all, our auto business delivered outstanding growth in 2005 and continued to build our competitive advantages. As a result, the auto business is poised for continuing success as the auto lending market consolidates. Excuse me.

Slide 14 provides a brief summary on the integration and health of the Hibernia franchise. Hibernia's results continue to be shaped by the Gulf Coast hurricanes. Deposits totaled $21.7 billion at year-end, an increase of about $4 billion since Hurricane Katrina. The first wave of deposit growth appears to be driven by new account openings, as displaced consumers and businesses opened accounts with Hibernia outside of the heavily-impacted area. We believe the increase in new account -- in new deposit accounts was helped by Hibernia's market-leading branch network throughout Louisiana, and its ability to quickly resume normal operations. While it's too early to tell, we believe at least some of these first-wave deposits will stick, as some customers may choose to permanently relocate within the Hibernia footprint, or stay with Hibernia, even as they move back to New Orleans.

We are currently experiencing a second wave of deposit growth, which reflects the inflow of insurance and relief funds, coupled with the deferment of loan payments in the impacted areas. We expect many of these incremental deposits to run off as loan payments resume and as customers begin to deploy funds to recover and rebuild.

In contrast to the deposit growth, loan growth at Hibernia has been generally flat since the storms. Recovery and rebuilding is still at a very early stage, so loan activity is low, as expected. Also, we are taking a very cautious stance in the current environment. We're staying close to our existing customers and doing all we can to partner with them in the rebuilding process, but we're being appropriately conservative in booking new loans. Hibernia posted $31 million in net income in the quarter, including six weeks of operating results, integration, and closing costs.

Hibernia's associates and Capital One's integration team have done an amazing job of restoring operations and servicing customers. As I've said on many occasions, we remain tremendously impressed with their spirit, customer focus and effectiveness in the aftermath of these unprecedented storms. About 300 of Hibernia's 323 branches are open for business and are serving customers. We are evaluating what to do with the 23 branches that remain closed.

That said, we believe that lost business from these closed branches has been largely offset by increased business in other parts of the Hibernia network. All operational systems are up and running, and the business-recovery efforts have increased our resilience and left us better prepared for future storms. We're managing credit very closely following the hurricanes. As you recall, Hibernia provided for $175 million in the third quarter related to estimated hurricane loan losses.

Getting really grounded assessments of actual credit versus our expectations may take two years or more for parts of the portfolio, and we will continue to closely monitor and manage credit going forward. Based on a very early read, we continue to believe the provision is appropriate. We expect credit metrics like delinquencies, non-performing loans, and charge-offs to deteriorate and to be volatile in the short-term as a result of hurricane impact.

Finally, our integration efforts are on track, and we continue to have high confidence in our estimated costs and synergies. Beyond integration, we remain energized and optimistic about our banking opportunities. The Texas de novo strategy was largely unaffected by the hurricane, and we're developing plans to leverage the combined capabilities of Hibernia and Capital One to accelerate de novo growth in Texas and make market-leading -- our market-leading Louisiana franchise even better. As Gary mentioned, we'll have a new banking segment beginning next quarter, and we'll have more to say about our banking strategy and outlook at the debt and equity conference in February.

2005 was a pivotal year for Capital One. The strategic moves that we completed brought our vision of national scale lending and local scale banking to life. We discovered -- excuse me, we delivered another year of great results, and we are on track to deliver diluted earnings per share between $7.40 and $7.80 in 2006. More importantly, we remain well-positioned to execute our strategy and deliver strong results and shareholder value in the long-term.

With that, I will turn it over to Mike.

Thank you, Rich. Unlike previous quarters, this quarter, please note that we will be keeping the telephone line open after questions are asked in order to allow for any clarifying questions you may have. As a courtesy to investors and analysts who may want to ask a question after you, please limit yourself to only one clarifying question.

With that, we will now start the Q&A session. Deanna, first question, please?

Thank you. [OPERATOR INSTRUCTIONS] We'll go first to Bob Napoli of Piper Jaffray.

Good afternoon. Question which combines your outlook for loan growth with return on assets, I guess. And your loan growth outlook of 7 to 9%, together with a stable return on assets, I'd like to understand the mix -- or the Hibernia franchise ROA was about half that of the Capital One ROA. So, are you shrinking the Hibernia assets in that 7 to 9% loan growth outlook? Are you seeing stronger growth from the higher ROA credit card business? Maybe give me some color on those statements.

Hey, Bob, it's Gary.

Hey, Gary.

I will be glad to take that question. Certainly we've got a situation this year in most of our metrics, you'll have to remember, the impact of Hibernia, we've got loan growth at 7 to 9%, but that's based on our year-end balance of loans, which, of course, includes the entire Hibernia franchise, whereas the earnings target for the year, the earnings guidance we're giving you for the year is largely reflecting the growth that is coming from both franchises with Hibernia only having been 45 days' worth of income this year. I do not believe that the Hibernia ROA was as low as you suggest. The combination of the two is coming, as we have said, from the fact that the lower revenue margin we're going to have is going to be more than made up for by the lower provision expense that comes with the generally lower loss assets, that comes from Hibernia, as well as from the diversification businesses in legacy Capital One. We have improvements in the operating efficiency of Capital One, as well. The Hibernia transaction itself is very much on track to the originally-announced deal economics, and we believe that they are in store for a very strong year.

Okay. And the clarifying question is -- Can you give some color on the loan growth mix outlook for -- by segment?

Okay. Bob, this is Rich. We -- look to Hibernia to have a good, solid year in terms of loan growth. While they're being very cautious in the very directly-effected areas with respect to loan extension, in the outlying areas, there has been -- there has been a surge of activity. We expect Hibernia to be able to participate in some of the rebuilding that's going on. And our branch growth strategy in Texas is not only deposits oriented. There is considerable loan growth associated with that, as well. So, I think Hibernia is well-positioned actually to be a real contributor to Capital One's loan growth.

Our Credit Card business, Bob, we -- while we're not going to give segment-specific guidance, as a general sort of feel, I would say the Card business to me for next year has a feel very similar to the Card business of this year, mainly that there is tremendous competition. And the -- there's a lot of 0% teaser competition, particularly in the prime revolver segment. And we will continue to choose to sit on the sidelines with respect to some of those parts of the business that we think are not conducive to building a franchise. We see similar growth opportunities in the rest of the Card business that we saw this year. So, overall, again, we see a good year for our card business, but it won't be characterized by really big loan growth numbers.

The rest of our business, Auto and GFS, I think that we look for continued growth in those businesses, and I think they're well-positioned to continue to be consolidators in some rapidly consolidating environments. And the U.K. again, sometimes there's opportunity in growth in the context of credit issues, but, again, we're going to be pretty cautious there. But I think there'll be some loan growth in the U.K.

Thank you.

Next question, please.

Thank you. We'll go next to Jed Gore of Sunova Capital.

Hi. Thanks for taking my question. Great quarter. As I look at your guidance and your capital levels -- maybe my math is wrong -- but it strikes me that you'd be about 8.5% of tangible equity assets by the end of the year. What do you plan to do with your excess capital as the year progresses?

Thanks, Jed. And your numbers are certainly looking in the right direction. You'll remember that we started the year, 2005, with close to 10% capital -- or certainly on the trajectory to get there. That has come down, as you know, because of the result of the acquisition of Hibernia and the deployment of cash there. We're certainly comfortable with our current capital levels, in view of the state of our businesses and the desire for flexibility. So that said, we can't say where we're going to end up at the end of the year because we constantly review our uses of capital to be make sure that it's being deployed to the optimal best interest of the Company and shareholders. And we'll try to maintain that flexibility, but we'll keep our eye on that and keep you posted.

Can I ask a clarifying question on guidance? Is the 90 million of integration expenses included in your point estimate guidance or your EPS guidance?

Yes.

Thank you.

Next question, please.

Thank you. We'll go next to Kenneth Bruce of Merrill Lynch.

Good evening. I'd like to tackle the growth question, maybe a slightly different way. Obviously, the Auto Finance business is looking to be a real bright spot for Capital One in 2006 and, likely, going forward. And it looks like the origination volume slowed due to, possibly, a combination of season -- seasonality, as well as pullback in -- or maybe a pull-forward in overall auto loan financing volume. Can you give us some thoughts about, either in terms of specific targets, in terms of volume growth or maybe a feel for that market in terms of volume growth going forward?

Ken, we don't really have a specific guidance to you on that. Let me just say that I think your observations are correct as to -- as to the fourth quarter. I think we continue to be, though, very bullish about the auto business and its growth potential. First of all, in terms of the market structure, it is in that beautiful sweet spot of consolidation, where, something on the order of half the business is in the hands of the top 10 players. And I think that there is absolutely inexorable consolidation that's going on, but consolidation, most people think is a bad thing, because most people are on the receiving end of that. We have very carefully positioned ourselves to be a consolidator, and as such, I think, can get disproportional growth in that business.

Additionally, I think we're well positioned in Auto Finance by virtue of, now, a strong national dealer presence. We have a national brand, that you wouldn't intuitively think makes that much difference, particularly with indirect business, but we continue to hear from our sales force the benefit of the national brand. We are a -- increasingly, a full spectrum player and I think that when you think intuitively about anyone serving a customer base, the more can serve their full customer base, the more it's a winner, and I think that our penetration, particularly in the upmarket space, has a lot of, sort of, upside and just sort of share gains there.

We also are, by far, the nation's leading direct player in Auto Finance, leveraging the kind of unique position that we have on the Credit Card side. So we're looking also further to put a big push on further penetration per dealer, and that we've kind of -- the big growth wave has been getting a national presence. Now the next generation, I think, is to really drive further on the full credit spectrum, particularly upmarket growth and to really much deeper penetrate our -- the now broad dealer base. So it's a great place to be. And we look for a lot of upside for quite a few years.

A quick clarifying question, your penetration within the dealer market is roughly what percent? And, also, in terms of general share within your dealer relationships, do you have any estimates in terms of kind of where you stand today?

Yes, just kind of general -- I don't have the exact numbers with me, but our penetration of dealers in the nation is in the 70s, as I recall, and in the high 80s in terms -- if you measure by the amount of volume the dealers do. So in terms -- if you just look at the math, one of -- the growth wave of Capital One in terms of geographical expansion has mostly run its course. So, that's sort of the bad news. Now, the good news is we are in the early stages of building dealer relationships all across the United States.

So, when we benchmark ourselves, Ken, relative to competition in terms of business -- amount of volume per dealer, we see that we have a lot of growth upside, just comparing ourselves, for example, with Hibernia, who's had an established dealer relationship for a long period of time, and we, who are new to a lot of dealer relationships. We see Hibernia has a significant multiple per dealer than we have in terms of penetration. And we're -- this is one of the many things that we learn from Hibernia. And so, I think there's a lot of -- so the two big upsides in terms of Auto Finance -- the three big upsides in terms of growth are in terms of penetrating dealers now that we built these dealer relationships and just to get kind of the -- some industry average -- I think there's a lot of upside there -- the full credit spectrum penetration, as we now leverage more penetration in the prime business, and really riding the consolidation wave that is sweeping the country in Auto Finance.

Great. Thank you. Nice quarter, by the way.

Next question, please.

Thank you. We will go next to Michael Hodes of Goldman Sachs.

Yes, hi, good afternoon, guys. I wanted to press a little harder on Jed's question about capital. If I think back to '04, in particular, and early '05, you were building capital in anticipation to acquire, what ended up being Hibernia. And I just wanted to kind of ask you to put a little finer point on how you think about the appropriate capital level relative to your current mix of assets -- I mean, you don't have to commit to a buyback or anything here on the phone -- but I just want to get a better feel for your current complexion, what you think the capital level should be. You have to have some sense.

Right, Mike, it's Gary. Thanks. Certainly if you go back to 2004, as you just did, it was the first year in which Capital One had become capital accretive, because of a slowdown in the growth rate and an increase in the level of profitability. And so as that capital began to accrete, it was also the time where, as Rich described at the debt equity conference that year, that we had a very particular use for capital because of the transforming acquisition of a bank that was intended. Certainly Capital One's legacy business has continued to be capital generative. We have now acquired Hibernia Bank, which in and of itself, is capital generative. So in a sense, this is still pretty young territory for us to be in a position of growing our capital and, of course, we're doing so at a time where the overall risk in the business is coming down, which makes that capital even more powerful.

So, I think if you take a look at what we have done over the last several years, we've made some very selective investments, both in terms of acquisitions and in new business platforms. We are the Company that continues to look very carefully at the NPV of all of our investments, and we're selective with those. And, certainly, we want to make sure we're flexible enough to take advantage of those opportunities as the market structure evolves, as Rich has described. And, so from here on out, it's going to be balancing the desire for flexibility with maintaining an appropriate level of capital. And that is exactly the kind of trade-off that we'll continue to do, and I'm sure we'll remain in dialogue with you as we continue to look at it ourselves.

All right. And just a clarifying question on the guidance, I want to confirm that your guidance is inclusive of ESO expense?

Yes.

Okay, thank you. Next question, please.

Thank you. We'll go next to Meredith Whitney of CIBC World Markets.

Good afternoon. Relative to the regional banks of which you are a peer member, your numbers looked really good. I wanted to ask you a question about comments made by JPMorgan management yesterday, which were -- they estimated the impact of their adoption of minimum payment guidelines, to be almost as big as the impact of the change in bankruptcies. And I know you guys had a very different experience with this and a much more favorable experience with this in 2003, but can you talk about any type of derivative impact you expect to see in 2006 when JPMorgan and Citi adopt these guidelines?

Meredith, that is a subject of considerable discussion at Capital One. To be honest with you, it's hard for us to estimate this. I mean, we tried to take a conservative view of it as we make our own forecast into next year. It's -- from where we sit, we look at our own minimum payment practices and in our conversations with our regulators, feel that very comfortable that we're in compliance with FFIEC guidelines. And we have very little prolonged negative amortization. But, so there's two effects that we keep our eye out for. One is the one that you mentioned, just -- even with no changes on our part, there is, kind of, intuitively bound to be some downstream effect on our customers because we share some of the same customers that they do, by virtue of these -- the change in their own minimum payment policies. And it's just again, there would probably be some derivative effect, and we have put an estimate in that for next year.

The other thing we keep our eye out for is -- well, I mean, we are assuming we are not going to have to change our minimum payment practices because we -- in conversations with our regulators, I think they're comfortable where we are. If we were, Meredith, to do that, and go from very little prolonged negative amortization to absolutely none, even one month, more than a single month, there would also be some impact on our business. That is not something that we have budgeted at this time.

Okay. And then just -- if you could give me just a -- refresh my memory on previous guidance. I have a 770 number from the last time I think you guys gave guidance. Is that accurate? So is that -- are you widening the band with the 7.40, 7.80, is that relevant after Katrina? Could you just update me on that, please?

Meredith, this is the first time we're giving guidance for 2006. So, 7.40 to 7.80 is the only guidance we've given.

Brand-new guidance. Okay. Great. Thank you.

You bet.

Next question, please.

Thank you. We'll go next to David Hochstim of Bear, Stearns.

Thanks. I wondered if you could talk a little more about some of the line items in the Auto Finance financials -- the increase in charge-offs this past quarter and delinquencies? And, I guess, in the third quarter, we understood that there was an uptick in charge-offs and provisions for higher repossessions, some of which might have spilled over from the second quarter into the third. I wondered if that was still the case? And, then, it seems then that charge-offs are at a significantly higher level this quarter. And I just wonder if the acquisitions had an adverse effect on charge-offs, or, kind of, what's going on there? It seems that used car values have been moving up, which would I think would be a positive for charge-offs.

Right. Okay. David, let me make a comment. I'm not sure I've got an answer in terms of things right on the edge between the quarters, but let me just comment for a second on the charge-offs and delinquency effects you see on the picture -- on the slide that we had with Auto Finance.

Let me take charge-offs first. I think there are -- there're really, kind of, three effects leading to the rise in charge-offs -- of course, the bankruptcy spike being probably the most important one; secondly, the seasoning of a big surge in our mid-year originations. So, we had in May, June, and July and August, we went -- for the first time ever -- we broke the $1 billion a month barrier and had record originations. Now, this wasn't just greatness on Capital One's part, it was also the period of time when the big incentives were going on in this, sort of, pull-forward of volume that we talked about. But there is seasoning of the surge that comes some number of months downstream. So you have some of that going on.

There is also seasonality in the second half, especially, of the year, and especially more severe in the fourth quarter. Your comment about the Manheim Index, which values -- the value of used cars, that actually has been in decline of the wake of the big incentive surge in mid year, it's been declined until it turned in November and December is having a bit of a rally. So, with respect to the fourth quarter, it was a combination of a period in decline and a period that was rallying a little bit.

Let me talk about delinquencies. Delinquencies, it's sort of paradoxical. I remember when we looked at it, we said, well wait, why would delinquencies be going such a different way than Card, because Card, of course, had the significant reduction in delinquencies. And why in Auto Finance would it be going up? And I want to point out again that unlike Card, which has the immediate charging off of bankruptcies, in the Auto Finance business, they are charged off at 120 days. So these are customers who've already decided they are -- they already are going to charge off, but they actually -- between now and 120 days, they're actually just showing up as delinquencies. So, we have a bit of a different manifestation of the bankruptcy spike in Auto Finance than in the Card business, and you'll see that play out over a number of months here and going into next year.

Secondly, of course, seasonality. Now, if you look at the charts, there is, if you look back at last year, it looks like there wasn't a seasonal peak in the fourth quarter. Last year was actually the anomaly as we implemented a year ago, you may remember, we implemented the FFIEC change to go from 150 to 120 days in terms of charging off bankruptcies. So it actually cleaned out some delinquencies a year ago and masked the otherwise normal seasonal spike.

We also -- this quarter -- I mean, in the fourth quarter, as we brought Onyx on board and made a change in the collection practices at Onyx, that paradoxically raised our delinquencies. Onyx has had a practice of very aggressively managing early delinquencies. Of course, that sounds like a very good thing to do, it's just an issue of the amount of money one spends for how early you do it. We have found the same charge-off levels by a little bit less intense early managing of delinquencies. So in implementing our program at Onyx, it actually caused their delinquencies to go up. We believe, again, it's a good economic trade-off.

So, sorry it's kind of a large answer, but your question zeros right in on the very same things we were asking when we looked at the numbers at first, we say how does that make sense? So, beneath it, although nothing that I said has anything to do with worsening in any kind of substantive way, these are effects that are very explainable, and, again, we believe that we're enjoying very solid credit in the Auto Finance business and the strength of the credit performance is really an important part of why we have confidence to continue to grow at the kind of rates that we're talking about.

Okay, thanks. And for a clarification, could you just, or Gary, make clear what the total expenses related to Hibernia were in the fourth quarter? There's the 2.3 million in integration costs, where there closing costs or other charges that are in the P&L that relate to the purchase of Hibernia in the fourth quarter?

No, David, the total operating expenses for Hibernia, as I said, were approximately $108 million. Of that, just over $2 million were actually integration expenses. Again, we only had a -- six weeks of that acquisition in the numbers for the fourth quarter. So most of that would have been your typical Hibernia expenses.

But, so, that whole 108 was in the third -- in the fourth quarter?

It was in the last six weeks of the fourth quarter, yes.

Right, right. Okay, thanks.

Next question, please.

Thank you. We'll go next to Richard Shane of Jefferies & Company.

Good afternoon, guys. Thanks for taking my question. Last year at this time, you'd given guidance in terms of marketing spend. Can you give us an outlook headed into 2006? The other thing I would ask is -- Can you put this in a little bit of context on a business line basis, particularly in -- related to Rich's comment that it may be a time to stay on the sidelines in terms of U.S. Card growth? I realize that it's going to take a lot even to just tread water there, but can you help us understand how much of the -- what I assume is a $1 billion-plus number -- is going to be devoted to U.S. Card marketing?

Gary, why don't you address just the issue of the guidance and marketing spend, and let me put in context in terms of the Card business. Go ahead.

Okay. And Rick, we aren't giving you a specific guidance on marketing. Obviously, the importance of marketing is what it does to the overall returns and, as I suggested earlier, most of the movements in ROA are going to be coming from provision coming down, operating expenses coming down. We expect, actually, a minimal -- relatively minimal impact of marketing on ROA, which means that it should grow more or less in line with the overall level of assets. I would also remind you that in the year 2006, there will be a significantly higher marketing spend with respect to Hibernia than you would have seen in that bank's history, simply because of the rebranding, marketing in new markets and so forth. The rest of that growth will be across some of our other businesses. And, Rich, maybe you want to pick it up from there?

Yes, Rick. We see a year of -- I mean, I think we anticipate pretty robust marketing at Capital One. When I make these comments about the Card business and the part of the business that we are staying out of, the irony is were we to pursue that, the choice pursue or not to pursue, it doesn't have that much impact on the marketing dollars because this is stuff that has way higher response than anything else that we do. So, it's very sensitive in terms of loan growth, because when you offer free money for 18 months, people tend to notice that and they come in droves. The problem is they leave in droves, later, which is a different issue. But we -- it doesn't cost a lot to get that business. It is just something we're not going to do.

Now, the rest of what we do in the Card business, we do the old-fashioned way, which is to really work hard to get customers with offerings that have a real consistency to them and -- take an example, the rewards program. It is very expensive per customer to book rewards customers, and we're putting a lot of emphasis on that. They also tend to be close to, if not the lowest attrition of business that we have probably ever seen in the Card business. And, so, I think that we still intend to invest significantly in the marketing and credit card business, and anticipate in our numbers, also, that there will be a continued tough competitive environment, and that it will cost a lot of money to book these accounts. But, again, what we love about the Card business, despite all of our lamenting about sometimes the competitiveness of it, what we book is not only above-hurdle, we love the way-above-hurdle performance of the Card business. So, that's a good thing.

Again, more marketing at Hibernia, as Gary mentioned, because of the -- particularly with the conversion here, and a lot of just continued marketing across the board at Capital One. One other thing I want to say about marketing, particularly if you look at our marketing expenditures relative to outstandings growth, just a little reminder here, again, not only are we avoiding the segment that is the most helpful in terms of response -- in terms of balance growth, which is the teaser-based revolver business, they not only respond quickly, they bring huge balances from day one. So, not only are we avoiding that, we are also pursuing businesses that just don't grow outstandings as much or at all, examples being the rewards business and also an increasing emphasis at Capital One in broker-based businesses, particularly, my case in point, is our home equity business that is growing like gangbusters, and we're putting a lot of effort into that. Everything, other than Hibernia's equity home business, everything is being sold. Therefore, you won't always show that show -- see that show up in the loan growth.

Got it. That's very helpful. Just to summarize, is it fair to say run rate for marketing for '06 will look pretty similar to combined Hibernia, Cap One for '05, sort of at those levels? And that in terms of how you will be targeting the U.S. Card business, it won't be as much a mail drop decline as just a program shift?

Just to be clear, I think the stability you should look for is marketing as a percentage of overall assets.

Okay.

For the entire franchise.

Great. Thank you, guys, very much for your time.

Thank you. Next question, please.

Thank you. We'll go next to Edwin Groshans of Fox-Pitt Kelton.

Good evening, gentlemen. Thanks for taking my call. I just wanted to get a sense of your -- in the U.S. -- your outlook for the U.S. consumer, and, then, specifically, the impact you're seeing on Capital One and how that relates to your expectation for lower provision costs in 2006?

Okay. Our outlook for the U.S. consumer, Ed -- it's a funny thing, I've often said that if you read the newspaper one can find lots of reasons to be pretty pessimistic about the U.S. consumer. And we take to heart all of the, sort of, concerns that -- that are potentially out there with respect to the U.S. consumer. The reality is we continue to see strong consumer credit in the U.S. and Canada. I think what's going on is the strong labor market in the U.S. appears to be sort of counterbalancing the effect of slow housing and interest rates rising and higher energy costs. And we are assuming in our guidance for next year a continued strong labor market and that the consumer and the economy will continue to absorb these other negative pressures.

So, again, we try to be cautious in our -- in our budgeting, but nonetheless, I did want to make it clear that we are assuming more or less a continuation of the -- of the strong consumer credit in the United States. In the U.K., consumer credit continues to be strained. And we expect it to continue to degrade. And while there's some early signs that the degradation is slowing, we have not really put those into our expectations. We're a little bit more the type that when we see bad things, we extrapolate them. When we see good things, we tend to wait for a little bit more proof. But those would be my primary comments there. Gary, you want to take the second part of that question?

Yes, just to be clear, Ed, when Rich and I have been talking about lower provision, again, that's a lower provision as a percent -- lower provision expense as a percent of assets. And that's coming about, not because of a strong view about a change in the macro environment, but because of the relatively faster growth of our non-Card businesses, which tend to have lower provision expenses. As far as our provisioning goes, as long as we believe that credit will be more or less stable in the macro environment, then you can expect to see the provision remain relatively stable.

Next question.

Thank you very much.

Next question, please.

Thank you. We'll go next to Laura Kaster of Sandler O'Neill.

Yes. Thank you. Ed pretty much asked my question, but can you speak to the inter-quarter volatility of your return on assets? I mean, I understand that now you're moving away from Card growth. You would -- we would probably expect to see less expenses in marketing in the fourth quarter and possibly correlated with less provisioning. Normally, we see return on assets lower in the fourth quarter and much higher in the first quarter. Would that tend to stabilize going forward due to the mix shift?

Laura, it's Gary. I think you certainly have the correct direction of what may happen in quarter-to-quarter variability, simply because of the math of the Credit Card business becoming a smaller percentage of our overall business. It's still, obviously, a significant part of our business to the extent that marketing opportunities and asset growth tend to come near the end of the year and we have a wind down in the first quarter. I think, to assume that that variability may go away quarter-to-quarter, would, obviously, be premature. But I think, in general, it may be muted somewhat over the course of time as a result of the changing mix of our overall business.

But I think the most important thing to remember, again, is the tremendous stability in the ROA, and you can look at it on an annual basis, you can look at it on a 12-month moving average basis. When you wash out the volatility that comes from being in a business -- being very selective and very disciplined about that business -- you will see that what we can produce in terms of long-term stability in ROA, we believe, is the winning combination.

Okay. And, then, just a follow-up on credit quality. We've a lot of moving parts here. Bob touched on mix shift, et cetera. We've got that mix shift, the, quote, unquote normalization of the Card portfolio due to the change in bankruptcy law, the volatility in the near-term at Hibernia. I'm going to assume that you think that charge-offs are going to go down correlated with your decline in provisioning expense, but can you speak to the seasonality of charge-offs? Do you think that they might be higher in the first half of the year, or would you be willing to discuss that further?

As I said, Laura, in my -- as I was going through the slide presentation earlier, we certainly that expect that charge-offs will return to a more normal level. But keep in mind that with a growing portfolio, with the changing mix of our business, it would really be hard for us to get out in front and say precisely when these impacts will occur. And so as we do our provisioning, we are simply looking forward to a more normal period over time. Obviously, we may see some volatility in the short run, and that will obvious -- be obvious to you as well as to us. But as long as it doesn't change the long-term prospects, it will not have a significant impact on our bottom line.

Okay. Thank you.

Next question, please.

Thank you. We'll go next to Chris Brendler of Stifel Nicolaus.

Hi, good evening. I have a related question, and it's probably been asked in different ways, but I just want to try to be make sure I'm clear here. It looks like you may have exacerbated the seasonality by putting more of the loans on the balance sheet, I'm talking about the seasonality and the provision expense. Is that just because of the temporary nature of the fourth quarter Credit Card loan growth? And, then, if you could also talk a little bit more detail about the provision for Auto Finance? I understand that you use a rather quantified model to provide for loan losses. And given the seasonal spike in deteriorating credit quality that usually happens in the fourth quarter in the Auto Finance business but then snaps back in the first two quarters of the year, it sounds like we're going to see some seasonality in your provision expense, despite the fact that you now own Hibernia. Is that a correct assessment?

It's certainly not -- going to go away simply by the acquisition of Hibernia. Chris, you're right. Let me just comment on the two parts of your question. The first was the fact that it is true that a much larger percentage of our loans tend to remain on the balance sheet in the fourth quarter, and it's for precisely the reason you assumed, which is that when we see the ramp-up in spending, the ramp-up in loan growth and the Card business in the fourth quarter, much of that tends to get drawn down very quickly, as people pay that back in the first quarter of the following year. And so we tend to securitize less in the fourth quarter.

In fact, if you take a look at the securitization rate of Capital One, excluding Hibernia, in the third quarter it was at around 54%. In the fourth quarter, it was down to 50.7%. And if you go back over the years, you will see that has occurred previously, as well. So, again, it does tend to exacerbate a bit of the variability in the reported metrics but it's what makes sense for the business. So, it certainly is a reasonable approach, we believe, and, obviously, educating you so that you know what to expect.

As far as the provision in the auto business, actually the provision expense in the fourth quarter was down a little bit from the third quarter. And that was due to the lower loan growth Rich described, the fact that a lot of volume build was pulled forward by a lot of manufacturers' incentives earlier in the year. That was, of course, offset to a considerable degree by the increased charge-offs that were due to the bankruptcy filings that hit the auto segment in the fourth quarter and the seasonality.

Okay, great, thanks.

Next question, please.

Thank you. We'll go next to Stephen Schulz of KBW.

Hi. Thanks for taking the question, guys. Gary, maybe if you could talk about Hibernia's deposit growth in the quarter, a little bit more detail. You had mentioned in the statement at the beginning of the call, it looked like deposits grew about 15% from the end of the third quarter of what Hibernia had reported as a stand alone. I'm just curious, does this change the way you think about some of the balance sheet synergies that you had discussed when you first announced the deal in the near-term as you have all of this excess deposit floating around.

Thanks, Stephen. It's a little early for us to revisit those synergies. And as we take a look at the deposit growth, and Rich described, sort of, two waves of deposit growth, some of which would typically tend to be relatively short-lived, if it has to do with insurance or relief payments, especially when the depositors have not been having to pay their bills at least through three months of 2005. So, we have kind of a watch and wait philosophy toward some of those deposits. Certainly with some of the other deposits that Rich described, those that were coming into the broader footprint of Hibernia over the course of the last several months, which may have a longer period of stickiness, to the extent that we believe that that, net of some of the loan growth that may occur in the Hibernia footprint, we'll, obviously, revisit those synergies, but I think it would be premature to count on those quite yet.

All right, great, thank you very much.

Next question, please.

Thank you. We'll go next to Bruce Harting of Lehman Brothers.

If I ask yes or no questions, can I ask more than one? I will give it a try. I'm kidding, but -- the -- just kind of plow through one. Is it safe to assume, then, in terms of your answering the questions about marketing spend that it's unlikely that you'll outgrow the U.S. Card growth -- organic rate of growth in the industry anymore, or is that not necessarily true? And is market share really not important anymore now that you have so many businesses you can fall back on in terms of both your marketing spend and the way you think about the business? And just a quickie, do you think anymore likelihood of signing a deal with AMEX? Seeming -- because they seem to be getting a lot more partners. Thanks.

Okay. Thank you, Bruce. I was hoping to answer you -- when you asked the question, can you ask more than one, I was hoping to answer no because Gary and I compete for the shortest answer, and he said yes to an earlier answer. So my only way to beat him was to say, no. But I actually say, yes, you can ask those two questions.

With respect to Card growth, U.S. Card growth, industry versus Capital One, I'm not sure we've got a good handle on what the industry card growth is going to be, in a sense that it's very clear that we are not participating in the sort of big -- the balance displacement game that is going on with these 0% teasers and that extensive repricing past the go-to rate. However, when I look at some of the competitors' numbers and see the -- some of their challenges in growth, despite very, very extensive marketing of these programs, I -- what I'm paused by is really how much growth potential over the longer run that strategy has. As you know, we don't worship at the altar of growth, and that's not why we do it. And we believe these things have economics that are questionable and franchise damage that is pretty clear. That's why we stay out of it.

But we feel really good, Bruce, about the growth opportunities where we are pursuing in the Card business. And we are as bullish about those as we were last year. So, I think that we are building -- I really like how we are building -- investing in franchise, enduring parts of the Card business. So, I think that should help in terms of long-term share. I think in terms of short-term share, whether we maintain it or shrink a little bit, I think, is probably not that important.

With respect to American Express, we have noticed a number of our competitors signing up for the American Express, and they're certainly a company with a tremendous franchise. We continually evaluate strategic opportunities for Capital One, including opportunities with American Express. As a matter of practice, we don't comment on strategic negotiations, discussions, or speculative possibilities.

Next question, please.

Thank you. We'll go next to Joel Houck of Wachovia Securities.

Thanks, he just asked my question.

Okay. Next question, please.

Thank you. We'll go next to Eric Wasserstrom of UBS.

Great, thank you. Can you just remind us on what the branch opening or branch expansion strategy -- or strategy is at Hibernia right now? And perhaps highlight how that's changed since the hurricane, if at all? Thank you.

Okay. As I mentioned in the introductory remarks, I think that the Texas branch expansion has been very -- really not materially affected by the hurricane. Hibernia, in fact, had organized well before the hurricane -- organized separately with respect to Texas and the branch expansion. And these people who are doing that have stayed very focused on the branch expansion while the Louisiana folks have certainly been very busy with the hurricane recovery. So, I think there's a nice, continuing trajectory to what Hibernia has been doing.

Now, Hibernia's original trajectory has sort of been along the 20 branches this year -- this year, meaning 20 branches last year, 20 branches in '06. And I think already we have seen enough, in terms of very positive performance of their early de novos and some evaluation of the attractiveness of branch banking, and some early projections of how we can work together to leverage some Capital One capabilities in to their branch play. So, right now we are looking at 40 in '06, up from 20.

And I think, though, that the key thing is that this year is going to be a defining year for us. We're going to be watching results, capturing and analyzing the data, and working to develop and test banking strategies that leverage the capability and experience of our combined Company. And during this kind of defining year, we will be able to determine whether there's a lot of acceleration above the kind of current trajectory, and we look forward to updating you as we -- as we get there.

Thank you.

Next question, please.

Thank you. We'll go next to Joseph Dickerson of Atlantic Equities.

Hi, I just had a question -- most of my questions have actually been asked and answered. But I just had a quick question on your interest rate strategy going forward. Historically, you've used match funding, but now -- and that's worked very well for you -- but now with Hibernia, are you going to change your interest rate strategy?

Hey, Joe, it's Gary. Yes, and, as you know, our interest rate risk tolerance has been very low. We've shared with you what our internal limits are, and we think that's for a very good reason, which is to devote our risk capital and our focus to where we believe we have a competitive advantage, which is in credit risk taking. We are currently reviewing our risk limits in light of the acquisition of Hibernia. But I would not expect that, although the limits themselves may change to some degree in one way or another, I don't believe the overall risk tolerance for interest rate risk in our Company is going to change materially. We believe that the opportunity to generate attractive returns in our businesses will not require us to aggressively seek out additional interest rate risk.

And can I get a follow-up?

Yes.

Just in terms of the rebranding of the branches and the new branches that you're building in Texas. I know at the time of the transaction, when you announced it, that rebranding was sort of a wait and see approach. Is that still the approach?

No, we are planning to go ahead and rebrand not only in Texas, but in Louisiana, as well. So, we are in the process right now of developing a very careful rebranding plan. In Louisiana, we know that the Hibernia has a tremendous reputation as a franchise. We want to be very, very careful to have people understand that we're not talking about big banks coming into town and changing everything. We're talking about continuity, plus the ability to leverage some of the special things that Capital One has.

On the Texas side, striking thing to me has always been with Hibernia's performance of their de novo branches, which, by the way, the most recent data continues to indicate that those branches are significantly outperforming the average of the de novos of the competition. What I marvel at is that has been done with a subscale presence by Hibernia and with a lack of a brand. I mean, I remember in our mystery shopping, we went into a 7-Eleven right next to a Hibernia branch and asked the folks have they heard of Hibernia, they had no idea what we were talking about, and was the thing next door. I mean, my point, lovingly, is these -- they have built something very special that I think -- and, by the way in Texas, they are very eager to move as quickly as they can in the rebranding, and I think they see some significant upside there.

Next question, please.

Thank you. We'll go next to Scott Valentin of Friedman Billings Ramsey.

Thanks for taking my question. A question about overall credit for Hibernia. Just wondering about provision rates on a go-forward basis. I know the provision this quarter, I think, was 214 million, and I think before Katrina, Hibernia had been running at somewhere in the mid-teens in terms of quarterly provision. I was wondering when you think it may start to normalize more at a lower level?

Yes, Scott, I think it's important to look at two aspects of Hibernia's business. One is that portion which was in the areas either affected directly by the hurricanes or indirectly. And for those, they are subject to some new account treatments, which actually came into effect very recently, and we're the first to have it. So in terms of a go-forward basis, any of Hibernia's loans that are in the impacted areas that were on the books as of the time of the storm, they've been brought over onto our balance sheet at fair value without a separate valuation allowance. So if there's any change in the estimate of that fair value over the course of the year, that would actually not even reach our bottom line, that would go through goodwill, as an adjustment to that fair value.

The balance of their loans, which are outside the affected area and performing, are what came over onto our balance sheet along with the $216 million worth of allowance that I described earlier. And we are maintaining those levels at approximately the same level that Hibernia had. Certainly as of this point in time, the experience we are seeing suggests that's the appropriate level to maintain.

Thank you.

Next question, please.

Thank you. We will go next to Moshe Orenbuch.

Thanks. Just kind of a variation on what's been asked before -- kind of taking the question, turning it around a little bit. What do you think it would take in the competitive environment to -- in the U.S. Card market to actually make you want to, kind of, be more aggressive in some of the segments that you've kind of vacated?

Moshe, I think it would take one of two things. It would take either the -- essentially, the elimination or significant reduction in the current practice that we don't really have an issue with aggressive introductory rates, after all, introductory rates were the invention of Capital One many years ago. It is the issue of the -- in the repricing, not just repricing to the go-to rate, but repricing large numbers of customers way past the go-to rate, and much of it happening, in fact, during the introductory period. And we -- so, and from a number of the dimensions, we think that -- we think it's probably long-term bad business, it leads to attrition issues, and it's just inconsistent with the brand franchise that we're trying to build.

There is -- there is one other way, however, that this opportunity will open up for us, and that is that the customers get fed up with this and really seek out what would turn out to really be superior offerings. And I think there's a life cycle in business, as you know, that there's an education process of customers. And I certainly think, over the longer haul, there's going to be more and more customer sentiment to really go toward the companies where people can really count on the offer that is being delivered. I believe that right now that the consumers are in a transitional stage of sort of understanding how this works. And we're looking for the opportunity to be sure to offer them the superior products as we see the evolution of their understanding unfold.

Okay. We have time for one more question. Next -- last question, please.

Thank you. We'll go, last, to Craig Maurer of Fulcrum.

Good afternoon, guys. I'm glad I got in. In respect to your transition to TSYS later in the year, which, as I understand, will take place in sort of three phases, should we expect to see any form of cost savings, or, alternatively, one-time expenses related to that transition?

Craig, the expenses are included in the regular operating expenses as we look forward, and they're, therefore, included in the numbers that I've suggested to you in terms of guidance, both overall earnings impact, as well as the impact on our ROA. And, certainly, we will expect that there will be a significant return to that investment over time, both in terms of operating efficiencies, but also in terms of significant expanse in the amount of innovation that we can do in the Card business to try and deliver on the promise that Rich described.

Okay. Thank you.

Okay. Thank you for joining us on this conference call today, and thank you for your interest in Capital One. The Investor Relations staff will be here this evening to answer any additional questions you may have. Have a good evening.

Thank you for your participation. That does conclude today's conference. You may disconnect at this time.