Capital One Financial Corp (COF) 2006 Q4 法說會逐字稿

Good day, and welcome to the Capital One fourth quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS]

And at this time, I would like to turn the call over to Mr. Mike Rowen, Vice President of Investor Relations. Please go ahead, sir.

Thank you very much, Patty. Welcome, everyone, to Capital One's fourth quarter 2006 earnings conference call. As usual, we are webcasting live over the internet. For those of you 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 included a presentation summarizing our fourth quarter 2006 results. With me today is Mr. Richard Fairbanks, 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 and press release, please go to Capital One's website, click on investors, then click on quarterly earnings release.

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

At this time I will turn the call over to Mr. Gary Perlin, Capital One's Executive Vice President and Chief Exec -- Chief Financial Officer, for his remarks. Gary?

Thanks, Mike. I'll begin on slide 3 of the fourth quarter 2006 results presentation. Capital One achieved 13% earnings per share growth in 2006, while achieving a number of significant milestones, including the successful integration of Hibernia, the acquisition of North Fork, and a significant upgrade of our system's infrastructure. Capital One posted diluted earnings per share of $1.14 in the fourth quarter and $7.62 for the full year. Excluding a $0.32 dilutive impact from the North Fork acquisition, full-year EPS was $7.94. Managed loans ended the quarter at $146 billion, up 39% from a year ago. Excluding the $32 billion of loans from the North Fork acquisition, managed loans grew to $114 billion, in line with our expectation. Organic loan growth was 10% year over year.

We ended the year with $86 billion in deposits, which included $38.5 billion of deposits from the acquisition of North Fork. These deposits represent approximately 50% of our total managed liabilities at year-end 2006. Execution of our corporate strategies, including our bank acquisition, resulted in several credit rating upgrades during the year. Moody's upgraded Capital One to a two and a three at the bank and holding company, respectively. Two S&P upgrades now have Capital One rated A- at the bank entities and BBB+ at the holding Company. Both S&P and Fitch have us on positive outlook.

Before giving you a more detailed view of the fourth quarter and full-year 2006 results, let me share our expectations for 2007. Turning to slide 4, we expect diluted earnings per share between $7.40 and $7.80 in 2007. This guidance includes the expected impact of about $140 million in intangibles amortization and about $100 million of one-time integration expenses, both related to the acquisition of Hibernia and North Fork. As we did a year ago with Hibernia, we will in the first quarter of this year integrate the legacy North Fork businesses into Capital One's individual operating segments, and we will report future results on that basis.

At this point, however, we have the unique opportunity to share our expectations for the Capital One and North Fork entities on a stand-alone basis. And to give you a sense of how they are impacted by our planning assumptions, we assume that unsecured credit in the U.S. returns to more normal levels in 2007, which will obviously have a significant effect on the outlook of our credit card and other national lending businesses. Consistent with the forward curve, we expect that the yield curve will remain inverted early in 2007 and stay relatively flat through the balance of the year. Finally, we assume that the cyclical downturn in the residential mortgage market continues into 2007, and is likely to be further impacted by the recently issued federal regulatory guidance on nontraditional mortgages.

Taking these assumptions into account, we expect that Capital One, ex North Fork, will earn around $2.7 billion in after-tax income in 2007 compared with about $2.4 billion in 2006. Looking at North Fork on a stand-alone basis, we expect earnings of around $750 million to $780 million. This is a bit weaker than the run rate of about $800 million, at which North Fork was operating at the end of 2006. The mild decline in expected 2007 earnings reflects the inverted yield curve as we start the year, the resulting challenge to deposit margins, and the potential effect of regulatory developments on the level of near-term profitability at GreenPoint Mortgage.

Our 2007 results will also be impacted by the North Fork deal itself. By way of background, we are still targeting $275 million pretax in net synergies, consistent with our announcement of the deal last March. With respect to timing, however, we now expect that the full run rate synergies will be realized later in 2008 and there is a reduced level of opportunity to achieve cost and revenue synergies in 2007. This is partially due to the impact of the expected yield curve environment, a near-term balance sheet synergy. It also results from the scheduling of the conversion to a single deposit platform and brand in the first quarter of 2008, in the interest of a smooth and effective integration. The balance of North Fork deal-related impacts on 2007 earnings listed on slide 4 reflect our post close view of financing costs, purchase accounting, and integration plans.

Finally, the share count used to translate our expected GAAP NIAT net income after tax to earnings per share assumes that we begin our share buy back in the second quarter of 2007. Recall that we had planned to execute $3 billion in share buy backs, split evenly between the second half of 2007 and the first half of 2008. Starting the program in the second quarter increases the expected size of the share buy back, which will occur in 2007, to approximately $2.25 billion. Please turn now to pages 5 and 6 to see the full year and quarterly income statements.

Speaking to both of these slides, for the full year we saw reduced levels of both net interest and revenue margins as a result of our divish -- diversification into lower-risk, lower-margin businesses, and a number of factors specific to our individual businesses that Rich will address in a moment. In addition, it was a negative $0.07 EPS impact, as we rebalanced our investment securities portfolio at the end of the year. Operating expenses were up for the full-year. In large part this reflects the impact of a full-year of Hibernia compared to only six weeks in 2005. However, as we've described in recent calls, there was also a pickup in second half infrastructure investment, including the conversion of our core card holder system and investments in new branch openings. The year-over-year tax rate declined primarily as the result of the resolution of several federal and state tax matters.

Now specific to the fourth quarter, we did see a typical decline in both net interest and revenue margins in the credit card and other consumer-lending businesses. In addition, the conversion to total systems and the associated change in the timing of charges for over-limit fees created a one-time impact resulting in a decline in revenue margin. The inclusion of North Fork's December results also impacted fourth quarter Capital One results, which are not yet attributal to any of our existing business segments. Details on the effect of North Fork can be found in a special schedule attached to press release.

Now, please turn to pages 7 and 8 to look at credit and its impact on our allowance for loan losses. On a managed basis, the addition of North Fork assets drove a decline in our overall chargeoff and delinquency rates for the fourth quarter. Without the addition of the North Fork loans, however, both our chargeoff and delinquency rates would have increased in the quarter to 3.25% and 3.68%, respectively. Compared to the third quarter, we experienced the usual fourth quarter increase in losses, as well as the continuation of the normalization of credit.

As we have discussed in prior quarters, this normalization has occurred at slower rate than we had anticipated earlier this year. As a result, the chargeoff rate for the full-year 2006 has remained at historically low levels. The allowance, which reserves for future losses, increased by $114 million in the fourth quarter. This reflects our expectation of the continued normalization of losses in our national lending businesses, partially offset by reduction in allowance associated with our Banking segment loans from the hurricane-impacted areas. The impact of the normalization of credit, as well as the growth in the finance charge and fees assessed in the quarter, led to an increase in the finance charge and fee suppression amount.

With that, let me turn it over to Rich to discuss each of our lines of business. Rich?

Thanks, Gary. I'll start with US Card on slide 9. Our US Card business had another great year in 2006. Net income for the year was $1.8 billion, up $214 million or 13% from the prior year. Net income for the quarter was $337 million, up $100 million or 42% from the fourth quarter of last year. Strong credit was a key driver of US Card results. Throughout 2006, chargeoffs remained at historically low levels following the change in bankruptcy legislation in the fourth quarter of 2005. In the quarter, both chargeoff and delinquency rates rose modestly. This rise resulted from both expected seasonality and the normalization of credit that Gary discussed.

We ended 2006 with just under $54 billion in managed loans, up 8.4% from the end of 2005. Our growth in the quarter and in the full year results from a combination of new customer acquisitions, as well as growth and retention of balances from existing customers. For the full year, purchase volume was up 13% from 2005, primarily as a result of continued growth in our rewards business. Quarterly purchase volume was up 7.5% from a particularly strong fourth quarter in 2005, which was driven by a significant purchase stimulation program at the end of '05. Revenue margin for our card business was down 105 basis points in the quarter and a 191 basis points from the fourth quarter of 2005. For the full year, revenue margin declined by 118 basis points. There are two primary factors behind the decline in revenue margin on both the sequential quarter and the year-ago quarter basis. And these two primary factors are product strategy and one-time effect. On a sequential quarter basis, the biggest driver of the margin decline is some one-time effects related to the conversion to TSIS and also a true-up to our rewards program.

On a year-over-year basis, changes to our product strategy are the more dominant factor, with one-time effects being secondary. Let me discuss our product strategy in a bit more detail to help you understand its impact on margin. For several years now, we have been particularly laser focused on marketing products that build long-term customer loyalty. Rewards cards have been a core part of this product strategy for several years. These products have relatively high acquisition costs, build balances relatively slowly, and have thinner revenue margins. However, they also have low servicing costs, very low chargeoff rates, and tend to stay around for many years. From a P&L perspective, rewards accounts put pressure on revenue margins. Rewards accounts also bring expense and credit leverage resulting in strong bottom-line profitability, while enhancing our brand and creating enduring customer relationships. We continue to be very bullish on the rewards business.

Another significant part of our product strategy has been our shift-up market within subprime. Our strategy in the upper end of subprime involves products increasingly with no annual fees and very competitive rates. The payoff in this strategy comes from lower servicing costs, lower credit costs, and lower attrition rates. From a P&L perspective, the shift-up market in subprime causes revenue margin pressure, but like the rewards business, it also brings expense and credit leverage, resulting in strong bottom-line profitability, while enhancing our brand and creating enduring customer relationships. Like the rewards business, we continue to be very bullish on our subprime strategy.

A third important aspect of our product strategy, which cuts across most of our card segments, is our selective use of teaser rates. While modest compared to the industry, the proportion of our loan balances at introductory rates was higher on both the sequential and year-ago quarter basis, contributing to the margin pressure you see in our results. But unlike many competitor offers, our products are not dependent on aggressive penalty repricing to achieve profitability. And as such, these promotional programs are effectively bringing in customers that stick around for a long time relative to deep discount teaser programs. Overall our product strategy is paying off, and we continue to experience strong profitability while our attrition rates have reached historic lows at Capital One.

Finally, marketing expense in the quarter declined from the fourth quarter of 2005, as we accelerated marketing ahead of the systems conversion to TSIS. Operating expenses increased over the same time frame as a result of our platform conversion implementation activities. The moves we made over the last several years continue to position the US Card business to deliver sustainable bottom-line returns through lower credit losses, stickier customer relationships, diversified revenue streams and improving operating efficiency. Our US Card business remains well-positioned for continued success going forward.

Turning to slide 10, I'll discuss our Global Financial Services, or GFS segment. Domestically GFS includes small business, installment lending, home loans, and point-of-sale healthcare finance. Internationally, GFS includes our UK and Canadian credit card and consumer lending business. GFS net income for 2006 increased $88 million or 47% from 2005. Similar to last year, net income for the quarter declined to $2 million. The variability in the fourth quarter net income resulted from several factors. Small business installment lending in Canada all increased marketing in the quarter to take advantage of favorable marketing opportunities. Net provisions increased as a result of strong loan growth and our assumptions for normalization of bankruptcies in the U.S. And operating expenses increased in the quarter, as we implemented new servicing platforms in small business and in installment lending.

Managed loans in GFS grew $3.6 billion or 15% in 2006. All of our growth came from our GFS businesses in North America. Revenue margin declined modestly from both the prior-year quarter and the sequential quarter. Margin trends in the UK drove the decline. In the challenging credit environment, we focused our UK marketing efforts on building lower loss balances and we pulled back on subprime markets. As a result, managed loans continue to decline modestly, and we've shifted our asset mix toward loans with higher credit quality, but correspondingly lower margins. Fourth quarter revenue margin also includes a full quarter of impact from the industry-wide 12-pound penalty fee guidelines issued by the Office of Fair Trading, which we implemented in September. Strength in revenue margin and net interest margin trends in our North American GFS businesses partially offset the decline in the comparable markets in the UK.

The lower graph shows GFS credit performance. The fourth quarter chargeoff rate includes the benefit from a sale of chargeoff debt in the UK, which reduced chargeoffs by 33 basis points. Without this debt sale, GFS chargeoff rates for the quarter would have been 4.22%, reflecting expected seasonality, normalization of consumer credit in the U.S., and continued credit pressure in the UK. In the UK, credit challenges continue across the unsecured consumer lending industry. Although adverse trends moderated somewhat in the second half of 2006, we don't see any fundamental change in the underlying consumer credit environment. Debt service ratios remain high. And more importantly, the steep rise in installment fees is likely, we believe, to continue, given the large stock of highly indebted households and the aggressive marketing of individual voluntary arrangements, or IVAs, by debt management companies. This outlook is included in our fourth quarter provision for GFS.

While UK credit charges continue, all of our North American businesses delivered strong performance in the third quarter. Small business posted strong growth in profits and managed loans in 2006 and credit is stable. Our installment loan business was the largest contributor to overall GFS loan growth in 2006. The flat yield curve actually helps installment loan growth, as our fixed rate installment loan products are an attractive alternative to variable rate home equity lines of credit. Very low credit losses and stable margins helped the business to post higher profits for the year, as well. Capital One home loans posted another record quarter of origination with continued strong profitability. And our Canadian credit card business also posted strong growth in profits and loans, as well as a strong and stable credit performance in 2006. Overall, our GFS segment is on a solid trajectory, and it continues to drive diversification and growth of both loans and profit.

Slide 11 shows results for our Auto Finance segment. Auto Finance profits for 2006 were $233 million, up $101 million for 2005. Net income for the quarter was $34 million, down $2 million from the third quarter, but up strongly from the fourth quarter of last year. The growing scale of our Auto Finance businesses allows us to maintain solid profitability despite expected quarter-to-quarter variability. Managed loans of $22 billion are up nearly $600 million from the third quarter, driven by $3.1 billion in origination in the quarter. Loans are up $5.4 billion from the year-ago quarter, resulting from the inclusion of Hibernia's auto loan portfolio and organic growth in our dealer and direct channels.

Chargeoff rates improved by 47 basis points from the fourth quarter of 2005, reflecting the favorable credit environment and the higher proportion of prime loans in our portfolio. Chargeoffs and delinquencies both rise in the quarter, exhibiting expected seasonal moods and bankruptcy normalization. We also experienced a modest increase in chargeoff and delinquency rates in some newer originations, as a result of targeted risk [extension] in our nonprime business. The Auto Finance market remained highly competitive in the quarter, and we continue to see aggressive pricing across the credit spectrum. While used car prices remain near recent highs, they softened somewhat in the fourth quarter. Our Auto Finance business posted another solid quarter, and it continues to gain momentum and scale.

Turning to slide 12, I'll discuss our Banking segment results. For context, remember that this segment is not the same as Hibernia's legacy business in a number of ways. It excludes Hibernia-originated auto loans and the legacy Hibernia securities portfolio. It includes Capital One's branchless deposit business, as well as all integration costs and CDI amortization related to Hibernia. As Gary mentioned, North Fork results for the month of December are reflected in the other category and are not included in the Banking segment. The Banking segment posted net income of $178 million in 2006, including $36 million in the fourth quarter.

While net income for the quarter was relatively flat, the components changed in the fourth quarter. A decline in net interest income and an increase in operating expenses were largely offset by a release from the hurricane-related loss reserve. Net interest income fell $14 million in the quarter. The banking and yield curve environment that Gary described put pressure on net interest margins at the Bank, as the mix of our deposits shifted toward higher cost time deposits. Operating expenses increased $11 million from the third quarter, as we built more De Novo branches in the quarter. And finally, provision expense declined by $27 million, as actual credit losses and hurricane-impacted areas drove a $26 million release in the hurricane-related reserve in the Hibernia book in the third quarter of 2005.

Deposits decreased $380 million to $35.3 billion. Recall the customers deposited roughly $4.5 billion in the bank in the months following the Gulf Coast hurricanes in 2005. We've said before that we expected a significant portion of these deposits to run off, as customers use these funds for rebuilding and recovery efforts. This runoff began in the second quarter and it continued through 2006. In the fourth quarter, deposits continued to grow in Texas and the parts of Louisiana that were not significantly disrupted by the hurricane. Growth in these areas largely offset the runoff of deposits in the hurricane-impacted areas. Managed loans grew modestly in the quarter. But that loan growth was more than offset by $1.5 billion in mortgage sales, which were a part of our balance sheet downsizing in conjunction with the North Fork acquisition.

Similar to the deposit story, loan balances in the areas most impacted by the hurricane continue to decline, while loan balances continue to grow in other parts of Louisiana and in Texas. In the fourth quarter, we began to see encouraging signs of renewed growth in small business and commercial loans in the hurricane-impacted areas. We opened 20 new branches in the fourth quarter and in the first two weeks of January, bringing our 2006 total of De Novo openings to 39. Credit metrics for the Banking segment improved modestly in the fourth quarter. The integration of Hibernia is largely complete and we are on track to achieve the expected run rate synergy of $135 million in 2007.

Now that we've talked about each of our businesses, I want to pull up and look how Capital One is positioned for the future. As I strip away the current noise in our numbers resulting from the North Fork deal and assess the underlying strength of each of our businesses, I like how we are positioned, even though we have a lot of work to do in the short run. Our strategy has always been premised on working backwards from where we believe the world is headed. We believe that the winners in banking will bring together the best of national scale consumer lending and local scale banking. That's a vision we've been pursuing for many years, as we've diversified our Company and more recently entered banking with the acquisitions of North Fork and Hibernia. With these two bank franchises, we've established winning positions in growth platforms in attractive local markets.

We have also transformed our balance sheet and reduced long-term risks of our Company. You can see evidence of this transformation in the diversification of assets, liabilities and earnings. And you can see evidence of risk reduction in the positive trajectory in our debt ratings. Our focus now is on sure-footed execution, as we integrate these acquisitions and build the infrastructure to win long term. It is clear that the cyclical pressures in banking and in the mortgage industry, coming so close on the heels of our two transformational acquisitions, have put pressure on our ability to grow earnings per share.

Our shareholders have been patient, as we've made strategic moves that position our Company to win over the long run. I'm committed to making sure that our shareholders get paid for their patience. We recognize that, to truly succeed in the long term, we need to continue to deliver attractive returns to our shareholders. We believe that Capital One will emerge from the integration next year as a stronger Company. We will be well positioned to drive growth, generate capital, and deliver attainable and attractive shareholder returns well into the future. I look forward to further discussing our long-term strategy and how we expect to generate shareholder return at our annual investor conference next month.

With that, we'll turn to your questions. Mike?

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

[OPERATOR INSTRUCTIONS] We'll go first to David Hochstim from Bear Stearns.

Yes, thanks. Gary, I wondered if you could talk in more detail about the items on slide four. The financing cost, the expense restructuring charges and the purchase adjustment, and which of those things are one-time items, which if any are non-cash and what might be recurring in '08 or '09?

Sure, David, I'm happy to do that. Needless to say, most of the purchase accounting -- I'm working from the bottom and going up -- are non-cash items. The restructuring charges are obviously one time in nature, and will be seen both in 2007 and in 2008. You'll recall we assumed that it would take a couple of years complete this integration in a controlled and effective manner, and so you'll see those coming through.

Similar in '08 or --?

I'm sorry. What you're seeing here is the '07 estimate impact on after-tax income. You'll see a -- you know, an impact in '08, as well. We'll kind of update you on that as we go along, and we see how the pace of integration is going. The financing costs, of course, will continue on for a long period of time, and are not materially different from the financing costs that we had estimated at the time of the announcement, the deal last March, David. The synergies, as I described, are -- the 2007 expected synergies on a pretax basis, they're about $60 million on an after tax basis. As you see on the chart, it's about $40 million. That is net of any contra synergies related to some investments that we will need to make in North Fork. And again, we expect to see those synergies rise over time.

It might be helpful, David, for me just to repeat two numbers that I mentioned, perhaps very briefly as I went through my opening comments. Because, again, what you're seeing here is just the impact of North Fork -- the expected impact of North Fork. So again, if you take the two items that I know many of you analysts and investors like to look at separately from GAAP earnings, we've got $140 million total in intangibles amortization. That's a combination of North Fork and Hibernia. And, again, most of the purchase accounting you see there for North Fork is CDI amortization. And we have about $100 million of one-time integration expenses for the two banks, and that's because we have effectively completed the integration of Hibernia. So the restructuring charges you see for North Fork at about $90 million and then some clean up of maybe $10 million at Hibernia will give you the total of the two banks. And we'll keep you posted as time goes along. The combined effect of those two items -- the one-timers and the non-cash items -- about $0.60 a share, and we'll make sure you have that information on an ongoing basis.

Okay. So the $140 million is in addition to the items that you've listed here for North Fork?

No, I'm sorry, David. The $140 million is a combination of the purchase accounting you see here related to North Fork, and about $40 million, thereabouts, from Hibernia. That's the continued amortization of intangibles there.

Okay. Thanks. And then can you just clear up how many shares you're assuming to get to your $7.40 to $7.80 or what the range is after the repurchases?

Well, again, I think you probably want to talk to IR about this, the specific assumptions about the share count., But again, the one change in assumptions that I wanted to draw to your attention is the assumption that we'll actually start the share buy back program in the second quarter of this year. And therefore, we will actually get about three-quarters of that $3 billion done, at least according to our current assumptions, in 2007. You can assume that that's pretty much done ratably $2.25 billion over the nine months starting in the -- at the begin of the second quarter.

Next question, please.

We will go to Bruce Harting from Lehman Brothers.

Gary, can you offer any -- as part of the guidance any granularity on margin and managing through the continued inverted yield curve? And I think last time I heard you back in December you said, with regard to the $14 billion to downsizing, you -- I could be wrong here, but I wrote down you were about a third of the way through that and on progress on that. and any other comments you want to make regarding margin? Thanks.

Sure, Bruce. Thanks. With respect to the downsizing, we are, at this point, effectively done with the downsizing. It's -- just to remind you, it was $14 billion out of the -- out of the combined balance sheet. We actually completed about $8.5 billion before the end of 2006. Since the beginning of the year we've priced about $5.5 billion worth of whole loan sales, which will be settling this quarter, but all of them have been priced at this point. Just to remind you, about $4.5 billion of the overall downsizing came out of Capital One, ex North Fork. That's about $3 billion worth of securities out of our investment portfolio, about $1.5 billion residential loans out of the legacy Hibernia portfolio. That was the most appropriate mix of assets. Out of legacy North Fork about $9.5 billion worth of sales. About -- just over $4 billion in residential whole loans and about $5.5 billion worth of securities, mostly mortgage securities in their portfolio. I know we've been talking over the course of the last year. Most of those securities were funded relatively short in the North Fork portfolio, which accounts for the deterioration in some of the margin over the course of 2006.

We don't give you our expected margins segment by segment, but I can certainly give you a -- a sense of our expectation that, when we take a look at the North Fork results in their final quarter as a company that was reporting its results, which was the third quarter of 2006, we feel that certainly their earnings were at more or less a run rate that would be representative of where they were going to come out of the year. Probably a little more compression in the fourth quarter. And then as we look at 2007, again, with an expectation just reading the forward curves that were going to start inverted and stay flat pretty much over the course of the year. we'd expect more or less some stabilization in the margins in all of our Banking business with respect to each of the different franchises. A lot of that will certainly depend upon the competitiveness of the deposit markets, always under pressure because of the curve. But certainly after the decline that all the banking companies in the country saw over the course of 2006, as did ours, we'll expect to see more stabilization in the course of 2007. We're much less exposed to any short-funded portfolios that might exacerbate that situation.

Next question, please.

We will take a question from David George from A.G. Edwards.

Thanks, good afternoon. Just a conceptual question about marketing expenses, both for fourth quarter and I guess some type of -- I do want to get some sense from you as to how you're thinking about marketing expenses in '07. Quarter to quarter marketing was up, but it was down about $50 million year-over-year. I just wanted to get a sense, is there anything extraordinary in last year's number that would point to the decline? And then it looks like marketing was up about 5% in '06, is that kind of a reasonable expectation for 2007? Thanks.

Okay. The -- as Gary mentioned, the marketing was a little depressed for us in the fourth quarter relative to sort of our normal surge in the fourth quarter because of the -- we front-loaded marketing in anticipation of the change over in our card production system, and so we accelerated basically fourth quarter marketing into the third quarter to be ahead of the conversion. So I think that the kind of trajectory that you see in our marketing overall is the kind of trajectory you'll see next year. I think that we're at a pretty kind of stable point in our marketing, are in many ways reflecting the fairly stable position most of our businesses are in. They have a nice full agenda of marketing opportunities and we want to make sure they get funded for that.

Next question, please.

We will go to Bob Napoli from Piper Jaffray.

Thank you. Two questions, one in the follow up, I guess. First of all, I was hoping you could quantify the one-time items in the noninterest income this quarter? The noninterest income typically increases in the fourth quarter as people spend more on their cards, I think, and you're down about $80 million quarter over quarter, so I was hoping you could quantify, Rich, some of the one-timers that you laid out? And is that behind us going into the fourth quarter? And then a follow up on the UK business.

Sure, Bob. Let me just review very quickly. The one timers that you might have seen. -- and again what Rich described in terms of the impact of the conversion of our core system affected all of our fees. The overlimit fees will effect the noninterest income. The late fees will effect the net interest income. As you know, that's how we define it. With that kind of as a background, the one-time effects on noninterest income, there was a loss on the sale of our investment portfolio, as I mentioned. We did some rebalancing in Capital One's investment portfolio at the end of the year -- our securities portfolio -- and recognized $35 million in losses on those securities as we rebalanced. You all are aware that we've had a hedged position on -- or did have a hedged position on over much of 2006 related to the fair value of the North Fork balance sheet to make sure we retained and maintained our capital ratios. Some of the expense of that hedge, that [swaption], actually was booked in the fourth quarter of '06. That was about $20 million.

Gary, I'm talking about US Card, in particular, and the US Card numbers, the segment numbers that you give us. The noninterest income was down $85 million from the third quarter to the fourth quarter, and I don't think those items were there, in that area.

Yes, that's -- that is correct, Bob. But if you take a look specifically at what -- which was -- was addressing, we had approximately $30 million worth of benefit in the third quarter from a reduction in the rewards liability. You know, every once in a while we kind of look at the behavior of our consumers and we true-up our rewards liability to reflect that, so that was a benefit in the third quarter. Obviously we didn't have that in the fourth, and so it came around. You know, the impact of the conversion of -- to total systems as a result of the -- you know, the different methodologies for recognizing fees, that amount, which would have shown up in the noninterest income with Card was about $20 million to $25 million. About two-thirds of the drop in noninterest income in the fourth quarter in Card would really be accounted for by those two big items, and then there's a whole bunch of small items.

Okay. Do you get that $20 million to $25 million back or is that just lost?

Yes, that's a timing thing, Bob. We'll get it back, but over a period of time.

Okay and then the UK bus --

I'm sorry, Bob. Next question, please.

We will go to Chris Brendler from Stifel Investment Banking.

Hi. This is interesting. Can I ask a question? If I look at the core business, the midpoint of your guidance for net income is 2700. You reported 2450 this year, so you're looking at about a 10% growth, and I haven't been able to take the one-timers out of there. But what I wanted to ask was what are you assuming for credit quality? And maybe if you could give us a little qualitative color on the pulse of the consumer. You did see a pretty sharp increase in your delinquencies in your auto business. The spending in your car business was down, I think pretty sharply sequentially, at least on a year-over-year basis. So what are you assuming in terms of where the consumer sits today and in your '07 guidance for your stand-alone Capital One? And then, I also wanted to see if you could talk about any benefit you might be getting, or might expect to get in the Card business from a normalization of credit on the revenue side?

Okay. Let me just quickly say the benefit from a normalization of credit on the revenue side. Normalization of credit that we're talking about is related to bankruptcy normalization. So bankruptcy -- one of the things about bankruptcy is not only are they hard to predict because they suddenly show up. They don't do their normal and,, frankly revenue-generating method of starting with the delinquency buckets and marching on their way to chargeoff. All normalization of bankruptcy directly, Chris, does not generate basically any revenue.

Now, part of this renormalization of bankruptcy that we're talking about is also a phenomenon we call a substitution effect. If you -- if you think about last year, remember we said at the -- back when we saw the bankruptcy spike, we predicted that that had pulled forward a significant number of bankruptcies. What happened in the bankruptcy lull, if we could call it that in 2006, that lull was a lot bigger than the spike that preceded it. Our view is there is, in a sense, a deferred inventory of otherwise bankruptcies in the making. While the running rate of bankruptcies we are assuming will go back nearly -- by the end of the year, go back nearly to the prespike running rate, we believe also, though, that we can't ignore this inventory of sort of extra bankruptcies that didn't happen. So we're assuming some of those turn into contractual chargeoffs over the course of 2007, and those will come along with the revenue characteristics associated with late fees.

Now, let me -- you also asked just generally how are we looking at -- at credit in our -- in our outlook for 2007. In US Card we -- you know, I think everything is pretty much a normal story of the vintages maturing in pretty predictable ways, and so on. The big news in the US Card business is basically -- the big story is the bankruptcy spike -- I mean return to normalization in bankruptcies. And I do want to stress that is a particularly unpredictable thing. This is not something we can be actuarial about. As I say, we'll know it as soon as you know it because they suddenly show up as bankrupt customers. But we believe strongly in this effect, but it's one that does create some uncertainty in our projection. In the auto business, we've assumed mild upward pressure on chargeoffs from the same bankruptcy normalization phenomenon, as well as small increase due to sort of a mild deterioration in underlying credit. And the bankruptcy normalization effect is smaller in auto than it is in the credit card business, because typically with secured products, the -- in effect the -- you know, with secured products there is security, even in the event of bankruptcy, so that's a smaller effect as it renormalized.

I want to make a comment for a second about this sort of mild deterioration that we look hard to observe in our auto business. We have noticed a number of competitors commenting that they see sort of some deterioration in their portfolios. This is seasonally a time when there is normally a significant increase in chargeoffs. So -- and we are, at the same time, going through somewhat of a return in terms of bankruptcy normalization. So, one has to use a little bit of -- sort of imagination as we look at these numbers. But I think, given the competitors have seen this effect and particularly as we have looked at some recent vintages in the auto business, I think that there is somewhat of a mild worsening effect in the auto business. This is, I think, honestly for Capital One and probably for the industry, as we look at the industry's behaviors over the last month, not really a phenomenon of economy-base worsening. I think it really reflects some risk expansion that we at Capital One have done and I think the industry has understood taken, as well.

and the Card spending in the quarter? Any read across on that?

Spending by consumers?

Yes. It was a little bit slower this quarter.

Yes. I mean, the -- generally we think the purchase rates are generally stable on our portfolio. If you notice, the increase in purchase volume was lower this quarter than any quarter that we've had in the last probably five, six or seven quarters. That was less about this quarter and really more about the year-ago quarter, where there was a particularly strong purchase stimulation program. For example, we did a significant line increase in the fourth quarter of 2005 right before the holiday season. That tends to get a nice surge in purchases. We did not have the equivalent line increase program this time. I think Capital One purchases are continuing to grow solidly. As we infer what it means for the consumer, I think we see, basically the same thing that you read in the paper. It certainly wasn't a robust holiday season for consumer spending. But on the other hand, I think overall the economy we look into for next year actually is one that looks pretty solid.

Next question, please.

And we will go back to Bob Napoli from Piper Jaffray.

Thank you. Just question on the UK Card business. I was hoping you might be able to quantify the net income out of that business in '05 and '06 and kind of a profitability outlook for that business in '07 so we can get a feel for how much that's hurt? Your profitability.

Sure, Bob. I'll try and give you a sense of that. If you take a look at our European business overall, we were -- we had a small loss in 2006. Actually, the UK Card business itself was marginally profitable in 2006 as a result of a number of things, largely some good expense management, as we responded to some of the challenges in that market. We had much lower marketing expense in 2006, as Rich said. We've been much more cautious on some of our marketing programs there. And as you know, that's been a -- a difficult market, so some of those benefits were offset by the increase in losses in that business. I know you'll recall that earlier this year we did have a write down in the IO strip related to the UK securitization that actually shows up, not in the UK segment, in the GFS segment. That shows up elsewhere, so in case you're kind of wondering where that might have gone.

I think as we go into 2007, assuming that credit follows our expected pattern, which would be some mild deterioration, even from the high levels at which we are starting because of some of the effects that Rich described in terms of the stock of households that have significant debt and the increase in capacity among those who are trying to help those folks move towards chargeoff in one way or another, we're going to see some challenges there. We're also going to see, as Rich said, the effects of the reduction in fees there that were mandated by the regulatory authorities. The 12-pound fee limit came in sometime in the third quarter of 2006. We'll see a full-year impact in 2007. So assuming that the credit outlook that we have is the one that actually plays through --one of mild degradation -- we'd expect, actually, to post a loss in that business in the course of 2007.

Next question, please.

We will go to Joel Houck from Wachovia.

Thanks. Gary, I'm wondering if you could give us any guidance in terms of the tangible capital ratio? It's 650 at the end of Q4, and in the context of the share buy back, what's the comfort level at that ratio as we move through 2007?

Sure, Joel, we don't have a public capital target. One thing you might want to do is remember that the 6.5% tangible capital ratio at the end of the year is equivalent to a tangible common equity ratio of about 5.6%. I just wanted to make that translation, because if you kind of true-back through our forward-looking view at the time of the deal announcement, we were referring there to tangible common equity. And, of course, like most banks, we're making better use of the full range of capital instruments available to us. So 6.5% tangible capital is about 5.6% in tangible common. And as you saw at the time we announced the deal, we expected that even with the share buy back, we would expect to see that tangible common ratio rebuild over a period of time. It's rebuilt a little bit faster over the course of the year that we might expect, a result of a variety of things, including slightly slower growth and taking into account the performance we've had and so forth.

So I believe the debt ratio will continue to rise towards more normal levels at the same time that we are executing against the share repurchase programs I defined. And frankly, I think that's a lot of our future, which is we'll be able to be managing the capital account much more actively because of the natural generative -- the capital generative nature of -- of our business, the derisking of the business which will bring our requirements down. We'll be generating that capital and using it in a way that best serves our shareholders. What you see this year is a precursor of what's to come.

Next question, please.

And we will go to Howard Mason from Stanford Bernstein.

Thank you very much. A basic question for you, Gary. First I wanted to thank you for breaking out Capital One without North Fork. I just wondered perhaps if you could complement the revenue number you gave on a reported basis and tell us what the revenue number Cap One without North Fork was on a managed basis, and perhaps the split between interest and noninterest income? Thank you.

Thanks, Howard. And let me just remind you, while we were happy to be able to give you the -- the breakout that we did, it's really kind of a unique opportunity for us to be able to do so simply because we're at that period of time where, although we've integrated our treasury and balance sheet function, we're just now, obviously, beginning the integration of North Fork, and so you'll start to see it coming somewhere else. In terms of the run rate coming out of the fourth quarter, you can kind of see what North Fork contributed compared to Capital One. I think if you're looking to break that out further, you'd be able to to see where that's going to come out. So I think if you want to get down to that level of detail, Mike and Jeff can help you after the call.

All right, thank you.

Next question, please.

And we will take a question from Ed Groshans from Fox Pitt Kelton.

Good evening, thank you for taking my question. Hello?

Yes.

Hello?

Go ahead, Ed.

Can you hear me? Sorry we just got a new phone system in. All right. My question is on -- just on the mortgage business that you picked up from North Fork, I guess the news the past few days has been a lot of weakness. And I know North Fork's maybe not in the subprime space, but they are an [inaudible] where [inaudible] player has some issues recently. Can you just address, are they seeing the trends that other players are out there seeing? Specifically with regards to even residual write downs or repurchase of sold loans?

Ed, you know, the effects that you are seeing other players an,ounce we are certainly seeing in our business. So let me just make a few comments about the mortgage market and its impoint -- impact on GreenPoint. As we know, in some sense there are a number of planets aligning adversely for the mortgage market. Volumes are down and credit performance generally is worsening, mostly in the subprime sector -- I'm speaking industry-wide now -- and spread income on warehouse loans is under pressure. And, of course, we've got the regulatory attention intensifying. So it's definitely a tough time in the mortgage space. Now, the impact on Capital One, and specifically GreenPoint, is -- in some ways is going to be somewhat different than we see in a number of the other participants. So, most importantly, we sell the vast majority of our loan productions in the capital market without retaining residual interest, so that obviously reduces our exposure to the credit environment worsening. Of course, we do -- our primary credit exposure is to early payment default, and as I mentioned we have seen repurchase activity go up. But our repurchase trends are more favorable than most other lenders in our produt -- in our product segment and also, I believe that we are conservatively reserved against repurchase liability.

Now, second, we originate very little in the way of subprime mortgage. And, in fact, GreenPoint does not originate subprime mortgages. And it is in subprime that both recent pricing pressure and recent credit deteriorations have been the most pronounced. And while subprime for the marketplace is as much as probably 20% of the overall market, it is roughly 5% of Capital One's production, and where that production is coming is out of our home loans business, which shows up in GFS, which is also an originate and sell business. And here, the subprime that we do, it's all done on a direct-to-consumer basis, and we're selling our subprime servicing release there. And again, exposure is pretty limited.

We also have very limited exposure to MSR volatility, which in general the mortgage industry has been a big issue over the last number of years. So -- but I do want to flag though, there's one area where, versus the broader industry, we're actually more exposed to market pressures. And that was with respect to the regulatory guidance on nontraditional mortgages, which was issued sometime around last September. And this, as you know, will force changes in how option arms and interest-only loans are marketed and underwritten. And given that GreenPoint mortgage focuses on nonconforming prime loans, our origination mix is a heavier concentration of nontraditional mortgages than the market as a whole. And so, to that extent, that's the one area where we have potentially more exposure. Obviously we're doing a lot of work to anticipate the impacts of the regulatory guidance. And already in the latter part of last year, that GreenPoint has made a number of changes there. But we do anticipate that that guidance will affect -- adversely affect our mortgage volumes in some of these specialty areas. But we also have other areas like a commercial small ticket, real estate lending, and fixed-rate loans that actually we think can make up a lot of the difference for next year.

So, you know, pulling way up in many ways. just philosophically. about GreenPoint and our approach to mortgages, there's a choice by GreenPoint to originate and sell. It creates an earnings volatility because of the big volume swings that sometimes come in the marketplace. But also this strategic choice avoids some of the deep down-side risks that exist in the business for a number of players in that portfolio and service these businesses. So, we're getting our head around this business, but while it's a little bit of a tough time for GreenPoint, I think we really feel good about their prospects, sort of on the other side of this market, a little perfect storm the industry's going through.

Next question, please.

And we will take a question from [Steven Warton] from JPMorgan.

Hi, how you doing? Hello?

Steven, yes.

Oh, yes. I just -- my question was partly asked, but I thought I'd follow up on it again. So you gave stand-alone guidance for Capital One, ex North Fork, of about -- midpoint of about $2.7 billion. And I know you have a lot of specials in the denominator and, of course, the fourth quarter is somewhat screwed up by the North Fork deal closing December 1st. So can you just be a little more explicit on a core basis what you're kind of contemplating for stand-alone Capital One? And then you mentioned a normalization of credit taking place. Can you give us any better parameter on the degree you -- to which you expect credit to normalize? I know your history is one of conservatism, but at the same time, you alluded to the fact that we've had this lull and it's been much longer and bigger than people expected. Do you expect kind of the extra good news that we had in 2006 to be completely reversed out by '07? And also, are you forecasting like a deterioration in say the unemployment rate in 2007, things along that line?

Steve, it's Gary. I'll try to take your first question with respect to the prospects for Capital One, ex North Fork. Let me remind you that any impact from the North Fork deal is not included in that number, and to the best of our capacity, again, we've tried to keep all of the North Fork stand-alone businesses out of there. Really, the only thing you would see in that Capital One. ex North Fork number, for 2007 that you might consider kind of one-time or nonoperating in nature is about $40 million impact from the intangibles amortization related to Hibernia, and maybe the clean up of about $10 million in one-time integration expense. So those are the only deal-related -- non North Fork deal-related numbers that show up in Capital One, ex North Fork. And again, other than some of the noise that we had in the fourth quarter, which really is not affecting this 2007 number, there may be some major trends going on, like the return to normalcy in credit that you asked Rich about, and I'm sure he's about to answer. But in the classic sense of one-timers, there's really not an unusual amount of that, either in 2006 or 2007, beyond that which I've already described. So hopefully that'll kind of give you a picture of how the businesses look from a pretty clean perspective. And with that, Rich, maybe on the normalization?

Steve, yes, this is -- the normalization of credit associated with bankruptcies returning to normal is, I think, one of the hardest things to predict. Again, it's not actuarial, it's not baking in the oven like our other chargeoffs do, so I don't think we have a great expertise or insight into this effect, frankly, more than you do or anybody else on the Street is. Let me explain how we're looking at it. You notice this year, we were declaring there would be a return to normalcy and it certainly surprised us how delayed that return has been and, therefore, the sort of unexplained windfall -- or the sustained windfall in bankruptcies is certainly a very significant effect. What we are assuming, Steven, is sort of go from where you are -- where we are right now, adjusted for seasonality, and sort of move fairly linearly over the course of next year to get by the -- this year, excuse me, to by the end of the year be most of the way to sort of prespike levels of bankruptcies.

Now, if you -- you can't just exactly go back and grab a number from the past at Capital One, because also over time our mix of business changed a little bit too. But basically, assumption number one is that the bankrup -- that the bankruptcy levels will sort of linearly go back to prespike -- near prespike levels by the end of the year. Secondly we put in a substitution effect, and we believe that some -- a portion of these -- the excess windfall that can't be explained by the bankruptcy spike, that that also charges off through contractual chargeoffs over the course of this year. And, I -- I do want to say in terms of do we see this effect happening? If you adjust for seasonality, you definitely can see a kind of steady return over the last number of months. It is -- the bankruptcies have moved along the kind of trajectory that we've been projecting for sometime. The substitution effect doesn't come with labels, so it's something that's a little bit in the eye of the beholder.

But we certainly -- from my 18 years of being in the credit business, I just think when people accumulate a kind of, shall we say, inability to pay, they figure out how to not pay, including doing it the old fashioned way. I think that there will be a substitution effect that certainly I don't think would entirely clear out that windfall. When you say well, therefore in '07, will we completely reverse out the windfall in '06? Even if this effect goes exactly as I'm talking about, it will take the course of the year to do this. So in some sense, '08 is a year that would have the full-year effect of this return to normalization. So therefore, in our own thinking, we still, even for absolutely static environment, would assume higher levels of bankruptcy and substitution in '08 than -- and the full-year effect then in '07.

Now you ask are we using the -- what it seems that you say the classic old Capital One conservatism. Well, let me make a comment for a second about conservatism. because these are very significant effects and I want to give you a window into how we think about it. We are an incredibly conservative Company when it comes to underwriting, so every decision that we make, not only do we exhort people to do it, we hardwire us through our decision process a worsening as we look into the rearview mirror, which is an incredibly important thing to do when one is looking into the rearview mirror of things like credit windfalls and. frankly. the great economy we've had for a long period of time. So we have always been incredibly conservative about that. I've learned over the years with respect to setting our budget. and in the sense setting our guidance. that it is -- it is a sounder and probably better service to our investors to be much more fair way about how we look at these things.

So when we have had -- as you can imagine, there's been a lot of debate about this bankruptcy normalization, and you get ten guys in a room and they all have ten different views about what it could be. We think there's a bell curve of outcomes that is pretty flat across a pretty wide range. I would characterize our assumptions as not highly conservative, more reflective of as we've looked at Visa estimates and as we infer in many ways from the Street how they look in a window at the same thing. I want to say that, as this plays out, Steven, it's -- yes, we might have been too conservative, but on the other hand, this could also come faster and more significantly than we have projected.

And you asked one other question. Do we assume unemployment deteriorating over the next year? You know, unemployment in many ways is the economic lynch pin of our performance here at Capital One. It's been a very strong year, and as we look out over the horizon, despite all of the other economic noise that's out there on things like the housing market, we assume a pretty strong unemployment environment and, therefore, that is why, again, we -- I think we feel good about the economy. Obviously there is -- there is risk in that assumption. Thank you, Steve.

Next question, please.

We will go to Meredith Whitney from CIBC World Markets .

Evening, it's late so I'm going to ask a really simple question, which is a question I get from clients often. Wondering about the valuation, [inaudible] have one so cheap, but if you take the view that the regional banks really trade more off their yield and almost like electric utilities, because the earnings prospects have been so grim lately, why wouldn't you put more effort towards raising your dividend at the expense of share repurchase? And then theoretically, can you walk me through what your dividend policy will be over the next couple years, as more capital is available for you to maybe change your strategy there?

Meredith, thank you. We are clearly entering a new era of capital generation. And as we enter this new era, we expect that the way we deliver returns to shareholders will change over time. And, of course, we've committed our excess capital through the first half of 2008 to the $3 billion buy back, which, as Gary said, we've done some acceleration of. I'm committed, and I know I speak for Gary and our management team and our board, we are committed to making sure that our shareholders get paid for our patience. And we're going to examine our capital strategy, determine the best way to drive shareholder value following the buy back. It's not something, Meredith, that we're in a position to, at this point, really a whole year ahead of when excess capital will again be generated. It's something that, I think's a little early. But suffice it to say, this is subject -- making sure our shareholders get paid is something that we care a lot about.

Next question, please.

We will go to Richard Manual from Fidelity Investments.

Hi. Okay, a couple questions. Gary, could you explain how the purchase accounting adjustments work on the loans that were in the pipeline at GreenPoint that -- I guess some get marked up and you get the earnings over time? Could you explain how that works?

Sure. You know, Dick, very briefly, at the time of the deal close -- and obviously according to purchase accounting guidelines we fair valued the North Fork balance sheet -- that included all of the loans that were being held in the warehouse for GreenPoint to sell, and embedded in those loans, obviously, was a prospective gain on sale. They tended to have -- and still have something close to about three months worth of production kind of going through the warehouse. So if you think about it, on December 1st, when we closed the deal, we effectively took three months worth of profit that would normally show up in the bottom line as gain on sale, and that went to reduce good will. So for December, much of the first half of the first quarter of this year, as well, that is -- there will be no gain on sale recorded in the -- from North For -- from GreenPoint's production because it was already fair valued and hedged accordingly.

The 2007 impact of that, Dick, is included in the purchase accounting line on slide 4. It's a relatively small part of that number, but, again, in order to try and be as pure as we could about what was happening because of the deal and what was happening in North Fork stand-alone business, the actual gain on sale that would have been recorded is in the North Fork stand-alone, and the loss of that recognized income shows up in the purchase accounting. But by the end of the first quarter, we'll be back to normal and you'll see the gain on sale out of GreenPoint's production showing up, and you'll notice in our schedules, in fact, that we've created places where you can watch that happening.

Great. Thank you. One other quick question. Could you help me with where the $20 million cost of the hedge and the $45 mil -- $35 million loss on the balance sheet restructuring are? Is it to be assumed those are in other?

Yes, that's right, Dick. They'll both show up in other.

Next question, please.

Take Eric Wasserstrom from UBS.

Thanks. Actually just a point of clarification. Gary, just to go back to slide 4 on your response to David's question about some of the line items, did you indicate that there is going to be a total of $140 million intangible -- I'm sorry in tangible amortization from both the North Fork and Hibernia, of which $100 million is the purchase accounting item we see there and $40 million is from Hibernia, which is not included anywhere on this slide, is that correct?

That is correct. You know, Eric, more or less, again in the purchase accounting you see on the slide, there's a little bit of things other than CDI amortization, but 90% of that is CDI amortization. So what you've just described is correct. And again, Hiberni -- the impact of the intangible amortization from Hibernia shows up in Capital One, ex North Fork. And we'll -- again, we'll continue to give you those numbers so you can break it out any way that works for you going forward.

Thanks very much.

Next question, please.

We will go to Joseph Dickerson from Atlantic Equities.

Good evening, Gary. I just have a quick question on the -- this is just -- I just wanted to clarify on the $20 million [swaption] cost from the hedge. Was that included in the dilution figure of $0.32 that you gave?

In fact, the entire cost of that, Joe, over the course of the year, because we expensed some of that in each of the second, third, and fourth quarter. So it's a total about $50 million over the course of the year. And that is included in the $0.32 of dilution, along with a little bit of operating dilution from the one month after the close, the first month of intangible amortization, all those other things. Everything is included in that $0.32. That is an annual impact, not a fourth quarter impact.

Okay. Okay. Thanks. And just on the securities -- or the mortgages that you sold, was there any loss on those that's not reflected, necessarily in the numbers were -- that will also be present in the first quarter numbers?

No. Remember, Joe, that those mortgages -- to the extent that they were on North Fork's balance sheet on the day of the close, those were fair valued. Any impact would have gone to goodwill. They were -- they were hedged and, therefore, not having a material impact on the -- on the bottom line. As I indicated, about $1.5 billion of the mortgages that we are in the process of selling -- they have been priced and haven't yet settled-- are coming from the legacy Hibernia portfolio. Those were, therefore, moved from held for investment to held for sale, and at that moment it did create a small couple of million dollar loss in our legacy business, but nothing more significant than that.

Next question, please.

W will go to Scott Valentin from Friedman, Billings, Ramsey.

Thanks for taking my question. Given the inverted yield curve and the strategy of opening De Novo branches, was curious of how it's going to interact and how it affects your strategy? I think you had opened 40 branches for Hibernia in 2006 and was just wondering, with the inverted yield curve and lower profitability of the branches, does that change your De Novo strategy at all?

Scott, yes. It's -- this is something we, of course, spend a lot of time debating. It's clearly less profitable. Building branches the in the near term less profitable in this rate environment than in the prior rate environments that we have been studying branch economics. Now, part of the debate is a branch that lasts many, many years isn't really built for the sake of the rate environment it's currently in. While that's the case, we still want to be cautious in our approach, so here's what we're doing, Scott. We're slowing down our Texas growth of branches a little bit. We'll probably do something in the neighborhood of say 20 to 25 in '07 in Texas versus 40 in '06.

But on the other hand, we're going to be stepping up some branch building in other places. In Louisiana, there's a few areas where people have moved post-hurricane where there's a really compelling need to put in some branches. We will be doing that. And in North Fork, where they were at a single-digit running rate, something in the neighborhood of three branches in '06. We're going to be building 15 to 20 in the New York area.

Now -- so let me comment, well why would we be so bullish to do this in the New York area? As you know, the most -- part of the business that's been most affected by intense the deposit competition and some of the yield curve effects have been in the retail business. In North Fork, we are putting in branches, especially in the commercial areas, where North Fork has had very strong success. Their deposit pricing is still really much better margins than in the -- on the retail side, and where the pay back -- there's faster line of sight to pay back. So overall, Scott, the trajectory of our branch building is very similar to 2006, but the mix is going to be more balanced across our geography.

Okay. Looks like we only have one more question in the queue, so we'll make this the last question. Next question, please.

And the last question will be from Moshe Orenbuch from Credit Suisse.

Thanks. I was just wondering, Rich or Gary, if you could talk a little bit about the North Fork earnings that back at the time of the deal thought to be over $900 million, now that is $750 million. How much of that is earnings that, because of repositioning, won't come back and how much of it could come back, as interest rates and competition normalizes? And also just a follow-up on the earlier statement that you made about substitution effective of bankruptcy, are you seeing any of that in your delinquency rates right now, do you think?

Moshe, It's Gary. Let me take that first question and, obviously, with the benefit of hindsight just kind of remind all of us where we were at kind of year ago and then walk you forward to our current expectations and how that may play through. If you go back to last March, at the time that we and North Fork announced the deal, North Fork was highly sensitive. Their bottom line was highly sensitive to the curve, as are many regional banks, but probably a little more sensitive because of the existence of a short-funded investment portfolio, as well. And so in looking at how to project forward nine months in advance to what we might expect for 2007 --recognizing that there was a lot of sensitivity in North Fork's earnings to what was going to happen to the curve -- that we used, as we often do, reasonable market estimates. And that meant for earnings we used IBIS, which was at the time $920 million for 2007, and for interest rates, we used the forward curve, which indicated a return to a more normally shaped curve over the course of the year. Now, had those assumptions borne out, then the second half for North Fork would have been stronger than it was at the beginning of the year. And if you take a look at where IBIS was at the time, there was simply an assumption that everything was going to start coming back stronger in 2007 and would simply grow from that.

We all know with the benefit of hindsight that in the third quarter that the yield curve inverted. Cyclical pressure in the mortgage market kind of increased. So we saw these effects show up in North Fork's third quarter earnings, where they reported an analyzed rate of over $800 million a year rather than the $860 million for 2006 that had been estimated by the Street earlier in that year. So, when we go forward into 2007, obviously we now have the benefit of knowing what's the run rate for North Fork was at the end of last year and, again, we peg that at round about $800 million. We believe that, if the curve remains inverted and then flat, that the best we can kind of look for is kind of a stable interest margin. We certainly would not expect if the curve were to normalize very quickly -- not that forward curve is telling us that or we're projecting it -- we have taken a substantial part of the interest rate sensitivity of North Fork out of that business by the downsizing of the portfolio and the removal of the short-funded investment portfolio.

So the impact of the curve on North Fork's interest margin over time is going to be more like what you would see in -- in many banks that follow similar business models. So it's going to be over time the benefit of less pressure on the deposit side and better loan margins going forward. So hopefully that'll kind of give you a sense of how we go from there to here, and how it is we've been able to kind of project going forward.

Let me answer your question about the substitution affect on bankruptcies in our -- especially in our US Card business, where this is primarily where we would see it. First of all, the substitution affect, how it will show up is it shows up in regular delinquencies. And, of course, as I said before, it doesn't really come with labels, so one has to sort of be creative in the interpretation of what one sees. Now the other thing that confounds trying to measure this right now is the significant seasonal effects that go on in this business at this time of year.

So here is the consensus view, Moshe, of the people who spend their whole days looking at our credit card portfolio. They say certainly -- I mean, the increase that you see in delinquency, which is still relatively modest from the -- it's up 21 basis points from -- excuse me, up 30 basis points from a year ago, where there was the tremendous credit performance. The view of our people is certainly the significant majority of the delinquency effects that they see are really seasonality. They do believe, though, that they are seeing a bit of this substitution effect. So what they see doesn't cause them to -- I guess what I was saying is, although it's a matter of creative interpretation, they feel what they're seeing is confirmation of their general outlook for next year, vis-a-vis, bankruptcies and bankruptcy substitution, as opposed to what I said to you we saw, sort of, through a lot of the course of '06, which is, we just couldn't see anything and we just kept pushing out our assumptions.

Okay. Thank you for joining us in this conference call today, and thank you for your interest in Capital One. I would like to remind our listeners of our upcoming annual investor conference will be held on Tuesday, February 13, 2007. The conference, which will be held at our McLean, Virginia headquarters, will also be webcast live via internet. More details will be forthcoming on our website at www.capitalone.com. The Investor Relations people will be here this evening to answer any questions you may have. Have a good evening.

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