Capital One Financial Corp (COF) 2008 Q4 法說會逐字稿

Good day, everyone, and welcome to the Capital One fourth quarter 2008 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (Operator Instructions). Thank you. I would now like to turn the call over to Mr. Jeff Norris, managing Vice President of investor relations. Sir, you may begin.

Thank you, very much, Jamie. Welcome, everyone, to Capital One's fourth quarter 2008 earnings conference call. As usual, we are webcasting live over the internet. To access the call on the internet please log on to Capital One's website at capitalone.com and follow the links from there. In addition to the Press Release and financials, we have included a presentation summarizing our fourth quarter 2008 results. With me today is Mr. Richard Fairbank, Capital One's Chairman and Chief Executive Officer, and Mr. Gary Perlin, Chief Financial Officer and Principal Accounting Officer. Rich and Gary will walk you through this presentation To access a copy of the presentation and the press release please go to Capital One's website, click on investors, then click on quarterly earnings release.

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

With that I'll turn the call over to Mr. Fairbank. Rich?

Thanks, Jeff. I'll begin tonight on slide 3. Capital One's operating results before goodwill impairment were a net loss of $585 million, or negative $1.59 per share in the fourth quarter of 2008, and net income of $895 million, or $2.28 per share for the full year. Earnings from continuing operations, which include goodwill impairment, were negative in the quarter and slightly positive for the full year, and total Company earnings, which add in the impact of discontinued operations and restructuring costs, were negative for both the quarter and the year. All three views of earnings reflect significant declines in both sequential quarter and year-over-year comparisons. The declines were primarily driven by higher provision expense.

It comes as no surprise that credit performance and our credit outlook are the biggest drivers of fourth quarter and full-year results. Charge-offs increased across our lending businesses, as the broad-based economic downturn accelerated during the quarter. Additionally, our economic outlook for the next 12 months has deteriorated so we added just over $1 billion to our allowance for loan losses in anticipation of increasing charge-offs in 2009. I'll discuss credit performance and our outlook in just a moment.

The quarterly and annual results also include a noncash write-down of $811 million of the goodwill associated with our auto finance business, which Gary will discuss in more detail in a few minutes. Against the back drop of economic worsening and volatile markets our strong and transparent balance sheet positions us to navigate the increasing cyclical credit headwinds. On the asset side of our balance sheet we've avoided many of the significant exposures and risks that banks are now experiencing. For example, residential mortgage and home equity lending comprise only about 8% of our total managed loans, and construction lending comprises less than 2% of our total managed loans. We have no CDOs or SIVs in our investment portfolio.

Economic stress certainly impacts our lending businesses, causing rising charge-offs over time and periodic additions to the allowance for loan loss. But our assets do not create large, sudden, and unexpected mark-to-market write-downs; therefore the risks of our balance sheet are relatively transparent and we anticipate and take actions to mitigate the impact of expected future losses. We've increased our immediately available and committed liquidity to $40 billion. Total deposits at year end were $109 billion, up strongly for both the quarter and the full year. And despite higher charge-offs and the significant additions to our allowance in anticipation of future expected loan losses our tangible common equity to total managed assets, or TCE ratio, stood at 5.6% at year end.

Slide 4 summarizes delinquency and loss trends by business. Economic deterioration intensified during the fourth quarter, driving increasing delinquency and charge-off rates across all of our lending businesses. In short, we've been expecting economic worsening to become more evident in our own portfolio metrics for several quarters, and it appears the economic decline is, in fact, having a more direct impact on our portfolio trends in the fourth quarter.

In the US card business delinquencies and flow rates worsened in the fourth quarter. We also saw increasing severity, increasing bankruptcy filings, and declining recoveries performance in the quarter. The US card business includes about $12 billion of installment loans, point-of-sale loans, and unsecured closed-end small business loans. These unsecured closed-end loans are experiencing a greater degree of credit degradation than resolving credit card loans. Unsecured closed-end loans are more weighted toward recent origination vintages and the credit performance of recent vintages is worse of that of older vintages. While our unsecured closed-end loan customers are high FICO, they generally have higher indebtedness levels than credit card customers, and we've observed greater increases in the risk of unsecured closed-end loan customers in the boom-and-bust housing markets as compared to credit card customers in those geographies.

While unsecured closed in loans account for about 15% of the outstandings in our US card business, these loans drove about 45% of the allowance build for the US card business. This outsized allowance impact is the result of both the differentially worse credit performance and the fact that unsecured closed-end loans are predominantly on balance sheet. In our national lending segment we've stopped originating the vast majority of unsecured closed-end loans and we've exited small business closed-end loan origination. In fact we did that in early 2008. To be clear, we continue to originate small business credit cards nationally, and we continue to grow our relationship base small business loans and deposits in our local banking markets.

Fourth quarter charge-off rates in the US card business was 7.08%, in line with the expectations we conveyed last quarter. However, we now expect that the US card charge off rate for the first quarter of 2009 will be around 8.1% rather than the mid-7% range we previously communicated. Unsecured closed-end loans drove about 75% of this change, as a result of the denominator effect of declining balances and differentially worse credit performance. We expect the denominator impact and credit performance of unsecured closed-end loans will continue to have an adverse impact on the US card charge-off rates throughout 2009. We also expect continuing pressure on US card charge-off rates through 2009 from the implementation of the OCC minimum payment policies, which I discussed in some detail last quarter.

Credit trends in the international business reflect increasing economic deterioration in the UK, offset by relative stability in our Canadian business. Auto finance credit trends continue to show the impacts of seasonality, broad economic worsening, the denominator effect of the shrinking auto loan portfolio, and the impact of sharply falling used car auction prices. We expect these trends to continue into 2009. Our 2008 originations continue to show early but encouraging results in our auto business. As we retrenched and had repositioned the business we've been able to originate loans with lower LTVs to customers with higher FICO scores.

At the same time we've been able to improve pricing and margins in the current competitive environment. As a result, we expect that the 2008 originations will yield adequate risk-adjusted return. Early delinquency and loss performance of 2008 originations are consistent with our expectations. While declining loan balances pressure the optics of delinquency rate, charge=off rate and other ratios with loans in the denominator, we expect that the shrinking auto portfolio and improving credit and profitability characteristics of the 2008 vintages will partially offset the negative impacts of the downturn and the continued seasoning of the more challenged 2006 and 2007 vintages.

Credit performance also worsened in our local banking business in the quarter, as the widening recession took hold in our local markets. Nonperforming loans, as a percentage of managed loans, and charge-off rates both increased in the quarter, primarily as a result of increasing economic stress in the metro New York City market and to a lesser degree in Louisiana and Texas. Our local banking consumer business also experienced an increase in severity, as residential real estate collateral values fell. Across our businesses increasing losses and significant allowance builds in anticipation of future losses drove sharp declines in profitability in the fourth quarter. Despite these significant credit pressures, our local banking and international businesses remained profitable for the full-year 2008, and our US card business delivered $1 billion in net income for the year.

Slide 5 summarizes our outlook for managed losses for 2009. For several quarters we've articulated the next 12 months credit outlook associated with our setting of allowance. Unemployment and home prices have been and continue to be the most important economic variables that factor into our outlook. Just three months ago the unemployment rate was 6.5% and we assumed that it would rise to around 7% by mid-2009. That assumption was consistent with the consensus estimate at the time. There are many data sources that look at home price trends and we use several sources. As one example, at the of the third quarter the Kay Shiller 20-city index had fallen 21% from its peak, and we assumed a further ten percentage points decline in home prices by mid-2009. With these economic assumptions we had an outlook for about $7.2 billion in managed losses for the 12 months covering the fourth quarter of 2008 through the third quarter of 2009.

Economic conditions and consensus estimates of 2009 unemployment rate have deteriorated rapidly during the fourth quarter. Today the unemployment rate is 7.2%, already higher than the three-month-old consensus for mid-2009. There is a wide range of economist estimates for unemployment rate in 2009, ranging from about 8% to 9% and in a few cases above. We're currently assuming that unemployment rate reaches 8.7% by the end of 2009. We're using this assumption to set the loss outlook associated with our allowance and for our internal planning, but to be clear, we continue to underwrite to a more severe unemployment assumption, and we continue to conduct resilience testing to a variety of unemployment and economic scenarios, many of which are well in excess of our planning assumption.

We're also assuming that home prices continue to fall. At year end the Kay Shiller 20-city index was down about 25% from its peak, and we're assuming it will decline by another ten percentage points by the end of 2009. With our current economic assumptions assumption we have outlook for $8.6 billion of managed losses over the next 12 months, which happens to be the full year of 2009. Gary will discuss how our managed loss outlook factors into our allowance for loan losses later in this call.

On slide 6 you can see that the mix of our earning assets shifted in 2008. While we originated several billion dollars of new loans in the fourth quarter, ending loan balances did not grow in the quarter and declined modestly from the prior year. Several factors had a negative impact on ending loan balances in the fourth quarter of 2008. These factors include rising charge-offs, normal amortization and attrition, declining purchase volumes, and tightened underwriting in the midst of the economic downturn. Together these factors offset loan originations in the fourth quarter.

We've grown our investment portfolio throughout 2008. In the fourth quarter we purchased over $6 billion of high-quality investment securities backed by mortgage and consumer loans. With fixed income securities trading at historically wide spreads we've seen compelling investment opportunities. In the current economic and market environment investing our deposit funding in high-quality, short-duration securities provides appropriate risk-adjusted returns for our shareholders and supports the recovery and stabilization of secondary markets that are critical to consumer lending and the economy. Gary will discuss the characteristics of the investment portfolio in a few moments.

Fourth quarter loan growth in the US card business was weaker than usual on the heels of weak holiday spending. Managed loans grew by $1.6 billion, or about 2% in the quarter. Fourth quarter balance growth resulted from the continuation of trends we experienced in the third quarter, including weak but still positive seasonal balance growth, a decline in payment rates, and fewer balance transfers away from Capital One. Managed loans in the auto finance business declined by approximately $800 million in the quarter as a result of our ongoing repositioning of the business. Originations in the fourth quarter were about $1.5 billion, down more than 50% compared to the fourth quarter of 2007 and relatively flat compared to the third quarter of this year. Managed loans in the international business declined by about $1.5 billion as a result of foreign exchange rate impacts, as well as lower originations in the UK, as the economy there continues to weaken.

Local banking managed loans grew by about $420 million. Just as in prior quarters expected run off of residential mortgage loans partially offset growth in our middle market commercial franchise. In 2009 we expect that charge-offs, normal amortization and attrition, and weaker spending and loan demand from credit-worthy customers will more than offset originations, driving a decline in managed loans. We expect that the decline in earning assets will be more modest, resulting in a continuing mix shift from loans to high-quality investment securities backed by mortgage and consumer loans.

As you can see on slide 7, total deposits grew 10% quarter over quarter and 31% year over year to $109 billion. We achieved this deposit growth while maintaining pricing discipline and margins. Ending deposits in our local banking business were $79 billion, up $3.8 billion, or 5% from the third quarter, and up $5.8 billion, or 8% from the prior year. Local banking deposit growth accelerated in the quarter, as our deposit strategies, which focus on strong customer relationships and new products like our rewards checking and our well-known brand gained traction. Local banking deposit margins were stable in 2008. Gary will discuss our significant liquidity position in a few moments.

In addition to our strong local banking deposit growth, we also leveraged our other deposit gathering channel, brokered CDs, to build our liquidity in 2008. We continued our strategy of pricing below market leaders and setting prices to attract longer-term deposits. The weighted average maturity of the brokered CDs we originated in the fourth quarter was about 27 months, and pricing discipline in this deposit channel helped to us achieve an improvement in overall deposit rates over the year. We drove significant deposit growth with disciplined pricing and margins in 2008, a year in which competition for deposits increased dramatically. We expect to grow local banking deposits in 2009. Growth in total deposits is expected to be somewhat slower than growth in local banking deposits. We also expect to maintain disciplined pricing and deposit margins in 2009.

While we're on the subjects of deposits I'd like to briefly mention our agreement to acquire Chevy Chase Bank, which we announced in the fourth quarter. Slide 8 provides an overview of the acquisition. Because of our strong balance sheet, we were able to realize a rare opportunity to acquire a leading local banking franchise in one of the best local banking markets in the United States. Frank Saul and all of the leaders and employees of Chevy Chase Bank built a truly excellent local bank with exceptional customer relationships and technology capabilities. Adding Chevy Chase to our local banking business will expand our portfolio of attractive local banking franchises and further improve our core deposit funding base. Credit risk is mitigated by a $1.75 billion net mark, which is incident consistent with a 75% default rate and 45% severity on the Chevy Chase portfolio of out-of-footprint option-arm mortgages. And the close proximity of Chevy Chase's local market to the Capital One headquarters reduces integration risk and enables synergies. We've had a chance to learn even more about the people and capabilities of Chevy Chase as we've begun our integration efforts and based on what we've seen so far we're even more excited about the prospects of combining Chevy Chase with our local banking business.

Slide 9 summarizes margin trends. Revenue margin, net interest margin, and risk-adjusted margin all decline on both the sequential quarter and year-over-year basis. Deteriorating credit and credit outlook drove declines in revenue margin and risk-adjusted margin. The outlook for higher losses was the primary driver of a negative $131 million valuation adjustment to our interest-only strip in the fourth quarter. The value of the interest-only strip at the end of the quarter was $141 million. As our credit outlook worsens, the amount of finance charge and fee revenue deemed uncollectible increases. We don't recognize revenue on finance charges and fees we don't expect to collect. In the fourth quarter of 2008, billed but unrecognized revenue was $591 million. This compares to $446 million in the third quarter of 2008 and $379 million in the fourth quarter of 2007. Revenue margin also declined as a result of lower purchase volumes in US card.

Fourth quarter net interest margin declined as a result of prime LIBOR dislocation in the quarter, as well as the mix shift from loans to investment securities I discussed earlier. While the prime LIBOR spread has returned to normal levels the mix shift in earnings assets is expected to continue into 2009. We expect a modest decline in full-year 2009 revenue margin compared to full-year 2008, with quarter-to-quarter variability. As you can see on slide 10 our efficiency ratio for the fourth quarter was 47.9%, up over 500 basis points from the third quarter. The increase in the quarter resulted from lower revenue dollars and an expected seasonal increase in expenses. Efficiency ratio for the full-year 2008 was 43.1%, an improvement of 416 basis points year over year. The improvement in annual efficiency ratio resulted from the efficiency actions we've taken over the course of the year. These actions also resulted in a $447 million annual improvement in operating expenses in 2008.

Well, now Gary will pick up the discussion, beginning with our allowance for loan losses. Gary?

Thanks, Rich, and good evening to everyone joining us on the call tonight. Clearly the economic environment has been and will continue to be challenging for some time of. But despite the materially worse economic outlook we factored in, we have record levels of liquidity, our investment portfolio is transparent and low risk, and our capital levels are amongst the strongest in the industry. Indeed, our balance sheet is the financial bed rock of our Company and will provide the necessary stability to operate through this challenging economy. I'll start my complents on slide 11 by discussing how our assumptions on key economic indicators and our outlook for materially-weaker credit described by Rich are driving the steep increase in allowance coverage ratios.

Our allowance now stands at $4.5 billion after building an additional $1 billion in the fourth quarter. Please recall that we only hold allowance for on balance sheet loans so this $4.5 billion is consistent with the expectation for $8.6 million -- billion of managed losses in 2009 described by Rich. As a result of this build our allowance as a percentage of reported loans, as well as the allowance as a percentage of reported delinquencies in each of our national lending subsegments, materially increased in the quarter. As consumers continue to feel increasing pressure we not only expect a higher percentage of those currently delinquent to charge off, but also a higher percentage of our customers who are currently paying their bills to become delinquent. Whenever we begin to see stabilization of losses in consumer lending, and in our closed-end lending products in particular, I would expect our coverage ratios to begin stabilizing, as well.

Moving on to another balance sheet item that had a material impact on our income statement in the quarter, I'll discuss goodwill on slide 12. We completed our annual goodwill testing in the fourth quarter and as a result of our analyses we recognized an $811 million noncash impairment to the value of goodwill in the auto subsegment. Such an impairment has no effect on our tangible capital ratios. We had $12.8 billion of goodwill on our balance sheet at the beginning of the year, most of which was created in association with our acquisitions of Hibernia and North Fort banks. Goodwill was allocated to each of our major business lines in recognition of the fact that the benefits of lower cost funding and an overall reduced risk profile of the Company from those acquisitions would accrue to each of our business lines.

A starting balance of $1.4 billion of goodwill was in the auto subsegment, resulting largely from the banks but also from our auto-related acquisitions of Summit Acceptance Corporation, People First and Onyx Acceptance Corporation. Our decision to scale back origination volume by some 50% has led to an expectation that our auto business will remain smaller than our previous estimates, and therefore, it's fair value has been reduced. After recognizing the $800 million -- $811 million noncash impairment auto now carries $619 million of goodwill. After conducting similar analyses for the other subsegments we concluded that goodwill impairment was not required.

You've now heard from Rich about credit margins and noninterest expense and I've just described our allowance build and goodwill impairment, so turning to slide 13 I'll tie them all together to discuss our overall financial performance for the year. By all accounts the economic pressures of 2008 created numerous challenges for the financial performance of Capital One. However, controlling for the impact of credit and noncash impairments on our financial results the underlying earnings power of our Company remained quite strong. At a time when the economy is contracting, our revenue actually rose by 6%, prior to the impact of the change in our I/O strip valuation and the suppression of finance charges and fees.

Even taking into account the $1 billion impact of those factors, which are largely driven by the same credit expectations which determine our allowance build, our revenue was stable year over year. As Rich discussed earlier, we began taking purposeful steps to right size our cost structure nearly 18-months ago, well ahead of the economic pressures we're now experiencing. By implementing many of those efficiency actions in 2007 and early 2008, and as a result of reduced marketing spend this past year, we were able to manage our full-year 2008 noninterest expense down by 8% while revenue remained stable. Looking ahead we will continue to benefit from our cost actions, and we'll pursue additional efforts to achieve sustainable efficiency by reducing costs without taking actions that sacrifice our future, including realizing synergies from the Chevy Chase acquisition while ensuring a smooth and successful integration. Clearly, provision was the primary driver of our operating earnings, with the increased losses and degradation in our outlook causing a 66% increase in our provision expense in 2008. But even after factoring in nearly $4.2 billion of combined credit-related worsening across revenue and provision in 2008 we still earned approximately $2 per share of operating earnings before the noncash goodwill impairment.

As we look forward, we can't be certain how much or for how long these economic headwinds will continue to impact our credit performance and outlook. While we will maintain focus on taking disciplined and decisive steps to manage our income statement, however, our primary source of strength in the near term will continue to be our rock solid balance sheet, which I will describe in more detail beginning on slide 14. We believe it's prudent to maintain a robust liquidity position given current market conditions, and our continued strong deposit growth contributed to an $8 billion increase in the quarter, resulting in our ending the year with $40 billion in readily available liquidity. It's also worth noting that, with the closing of the Chevy Chase Bank acquisition our readily available liquidity position will be further enhanced by approximately $6 billion.

While we are comforted by the absolute size of our liquidity portfolio, the true strength of our liquidity position is best evaluated by assessing its ability to support our balance sheet growth and refinancing needs. Even including the costs related to the Chevy Chase acquisition, our holding company liquidity would be sufficient to meet all its obligations and pay our current level of common stock dividend for well over three years without the need for dividends to be upstreamed from our bank subsidiaries. More over, our readily available liquidity is equal to six times our 2009 debt refinancing needs.

But solely looking to our stock pile understates our liquidity strength, as it does not consider our capacity to raise liquidity beyond the modest amount of planned 2009 funding. As in 2008 we expect deposit growth to be the predominant source of funding in 2009, continuing the trend of reducing the importance of securitization and other capital market funding to our Company. As Rich noted, deposits in our bank channels are rising and margins are stable, despite an increasingly competitive environment. At these levels bank deposits are more attractive than the various government liquidity programs for which we are eligible or any other source of funds. You'll note that the growth in readily available liquidity came mainly in the form of increased cash and unencumbered investments funded by deposits. The high quality nature of this portfolio has always served as an important source of liquidity to us. Recently we've taken advantage of the dislocation in the capital markets to acquire relatively short duration, high credit quality securities. These include government backed TLGP bank issued debt, agency mortgage backed securities, as well as asset backed securities in classes we know very well, all with extremely attractive risk adjusted returns.

Turning to slide 15 I'll discuss that investment portfolio in more detail. We continue to maintain our longstanding approach of holding highly-liquid, low-risk investments in our portfolio rather than taking excessive credit risk to generate incremental returns. This investment approach can be attributed to our heritage of capital markets-based funding. Years ago Capital One needed to invest in highly liquid securities because they had to be available to sell or pledge to raise liquidity at a moment's notice if the capital markets weren't available to us. Despite becoming a deposit-rich bank over the past few years we've largely maintained this investment philosophy.

As Market participants are well aware, the value of many fixed income securities fell materially in the fourth quarter in response to dislocation across the capital markets, despite the good intentions embodied in nascent government programs. As a consequence, investment portfolio valuations have declined for many banks, in turn pressuring tangible capital ratios. Accordingly, I'd like to provide a detailed view of our investment portfolio, its fourth quarter performance and its impact on our capital.

At the end of the year we had $32 billion in our investment portfolio, comprising about 15% of our managed balance sheet with an average duration of about 3.5 years. Much of this portfolio was built in 2008, including some $4 billion in the fourth quarter when high-quality securities faced a dearth of ready buyers. $23 billion, or about 73% of the portfolio, is comprised of treasury's agencies and agency-backed MBS. Despite the continued dislocation in market liquidity from fixed income securities in the fourth quarter, the fair market value of the total portfolio was approximately 97% of its book value as of the end of the year. The portfolio had a net unrealized pretax loss, which will appear in other comprehensive income, or OCI, of approximately $1.1 billion.

The largest contributor to the net unrealized loss in the portfolio, as you can see, was our $3.8 billion nonagency-backed MBS, which had an unrealized loss of just over $1 billion. 99% of these securities carry at least one AAA rating. They are backed by prime jumbo mortgage collateral with an average FICO score over 730 and have an average life of under two years. Two-thirds of these AAA securities are considered super senior AAA since they were structured with at least two times the credit enhancement necessary for a AAA rating. Given these enhancement levels, on average they could sustain cumulative collateral losses in excess of 950 basis points before they would start to suffer a principle loss. As referenced, on average cumulative losses in this portfolio -- or on the collateral backing this portfolio is currently ten basis points.

So despite the deeply discounted prices of these securities resulting from the lack of liquidity in the secondary markets, we continue to expect to be fully repaid principle, a reasonable assumption given the credit enhancement levels and short remaining life. In fact, over the first few weeks of January we have actually sold $68 million of this portfolio, which we had marked as of December 31, 2008 at a substantial discount to our amortized costs, for a slight gain. As has been the case, we still do not own any SIVs, CDOs or leveraged loans nor do we have exposure to equity, hybrids or securities backed by option arms. As a result of the relative lack of high risk securities we recognized only $5 million of other than temporary impairment marks in the fourth quarter, or about 50 basis points of the total unrealized loss relating to -- related to our remaining $26 million in subprime mortgage bonds.

In total we held less than $70 million of securities with subprime collateral. Given the quality, size, and diversity of our liquidity portfolio and the ability to use many of these securities as collateral for borrowing at the fed, federal home loan Banks and other government-sponsored liquidity programs we are very confident we can hold temporarily depressed securities to maturity. With a low risk of either principle loss or the need to liquidate prematurely, we do not expect our unrealized loss to migrate into any material realized loss that would reduce our capital, which I'll now discuss further on slide 16.

For years we have told you that we manage the Company primarily to a tangible common equity to tangible managed assets ratio, largely because we believe it is the most appropriate and durable measure of capital adequacy. As you can see in the graph on slide 16, our TCE ratio decreased 90 basis points in the fourth quarter to 5.57%. About half, or 45 basis points of the decrease is attributable to the change in value of OCI, with the other half largely driven by our fourth quarter results. Given the variety of measures of capital now being used by other banks, we're providing a similar view of these other measures as a reference for analysts and investors. In light of the strength of any measurement of our TCE position, our regulatory capital ratios continue to be markedly above well-capitalized minimum.

You'll recall that at the time we announced our intent to acquire Chevy Chase Bank we stated that the transaction would decrease our TCE ratio by approximately 100 basis points upon closing. If we were to look at our current capital ratios pro forma with Chevy Chase we'd have a TCE ratio of 4.6%. Although this would put us below our long-term target for TCE we believe all our capital ratios, including TCE, would remain healthy. Please remember that the capital impact of Chevy Chase already incorporates the lifetime losses we expect to experience on the Chevy Chase portfolio, including an assumption of a 33% net loss on the option ARM portfolio, which is equivalent to a 75% default rate with 45% severity. We continue to believe that mark is appropriate, and net of these marked assets Chevy Chase's other assets are very low risk and will have the impact of lowering the overall risk profile of Capital One. After accounting for the Chevy Chase acquisition and despite the potential for earnings pressure, beyond the expected impact of economic weakness on our provision we believe that active management of our balance sheet will enable us to maintain stable capital ratios.

Putting it all together, our capital strength remains a key cornerstone of our Company. We will continue to maintain a strong TCE ratio and we have a material cushion above all regulatory capital ratios. Our relatively simple and transparent balance sheet minimizes the risk of large, unexpected losses. Looking ahead we are comfortable with our current and forecasted levels of TCE, assuming our current dividend level. Obviously we will actively manage our capital in conjunction with our evolving views of the economy and our portfolio.

Turning to the final slide, I'll summarize my thoughts of how the balance sheet will provide a strong foundation for our Company. As we look ahead at the new year we do so with the knowledge that we are in the midst of the most challenging part of the economic cycle for our Company. Charge-offs will almost certainly worsen in 2009. In fact, if our current outlook proves accurate we'll experience a similar year-over-year dollar degradation to that experienced in 2008. While I can't project changes to our allowance in 2009 without choosing among a wide range of possible loss and estimates in 2010, it's safe to say that our 2009 provision expense will be well above that of 2008.

With that said, our preprovision earnings remain healthy, as our Management Team takes disciplined and decisive steps to navigate this storm. But the real root of my confidence stems from the fact that our balance sheet remains transparent and solid. In the face of significant economic weakening we have substantially increased our allowance coverage ratios, grown our readily available liquidity to record levels, maintained our unwaivering commitment to manage our investment portfolio in a low-risk manner, and maintained healthy capital ratios even against the most conservative measurements. When taken together these factors will allow to us weather the storm and leverage our strength to deliver value over the cycle.

With that, Rich and I will welcome your questions. Jeff?

Thanks, Gary. We will now start the Q&A session. As a courtesy to other investors and analysts who may wish to ask a question, please limit yourself to one question plus a single follow-up question. If you have any follow-up questions after the Q&A session, the investor relations staff will be available after the call. Jamie, please start the Q&A session.

(Operator Instructions). We'll take our first question from Bob Napoli with Piper Jaffray.

Thank you. Good afternoon. My first question is just on digging into the spending a little bit more on the US card business, spending that you reported was down 10%. I was wondering if you could give more color around that, if that's a pure spending number or if that -- if you backed out balance transfers does that number change and what kind of trend are you seeing on spending in January so far? Is it worse? Is the trend worsened into January?

Bob, I don't have the January numbers right in front of me, but we certainly saw a notable decline in payment rates in the latter part of the year and they're down about 10% from a year ago. Basically what we see in our business is pretty consistent with what we see in the competitor data and consistent with the -- essentially what seems to be reported by retailers. So there's also -- we do see a trend in balance transfer out -- well, the pe -- our data is pure purchase volume, not balance transfer, not cash advance, so that's a clear number.

Okay. Follow up on -- just on pricing in the credit card market. A number of your competitors, I believe, have been pretty clear that they have implemented price increases that I think we'll see in the month of January. First of all, have you done similar? And given that the consumer's already under pressure do you expect that to have additional upward pressure on your credit losses?

Bob, I think the net impact for card issuers like ourselves and our competitors, the net impact of repricing economically is going to be a strong positive. Any of these repricings will have second order effects in terms of increasing to some -- can have some credit impacts, but that certainly factored in our own calculations. Dynamic price management is certainly a part of how we manage the business and this year is no exception to that, so we do have underway selected repricing in our portfolio. But the net effect, I think, will be unquestionably positive in terms of the P&L of our business, and I think that from extensive experience on repricing -- APR-based repricing we certainly, I think, are pretty well grounded on the relatively modest second order credit effects. And there are -- also are some -- of course, some attrition effects, as well, but we've got that all factored in.

Next question, please.

We'll go next to Mike Mayo with Deutsche Bank.

Good afternoon. I was just wondering if there's any noise in the numbers because linked quarter revenue is up 6%, expense is down 6%. Is there anything seasonal or not permanent? I'm sure you don't like to have that relationship or anything new that you might be doing to get expenses under control?

Hey, Mike, it is Gary. If you're taking a look at the linked quarters year over year remember that in the fourth quarter of '07 we had a significant increase in that one quarter because of some litigation expenses related to the Visa settlement. On the revenue side, if you'll remember, the fourth quarter of 2007 was pretty much the effigy of our revenue margin, particularly in the card business. You'll recall that we had not made significant changes to any of the pricing or fees in our credit card portfolio throughout much of 2006 while we were migrating our technology platform. A lot of those changes were introduced throughout the course of 2007 and they tended to peak in the fourth quarter of 2007. So you're right, there were unique things in the fourth quarter of '07 and so comparing it to fourth quarter of '08 I can understand what you're looking at.

I was looking a little bit more third quarter versus fourth quarter, and maybe you don't think that's a fair comparison with linked quarter, but looks like revenues were down a lot more than expenses were up?

Revenues -- remember, between the third quarter and fourth quarter there are a number of credit-related items in our revenue line item, Mike, so it's going to be the combination of what Rich was describing earlier, which was, say, a write-down of our I/O strip, which, of course, is highly credit related, although there is a little bit of downward pressure through the prime LIBOR spread, and also an increase to the amount of fees that are suppressed as a result of the new outlook for credit that we applied to our fourth quarter results. So simply take the I/O strip of $131 million write-down in the fourth quarter, suppression was up about $140 million between the third quarter and fourth quarter, that explains most of the movement in revenue.

As far as the expense side, fourth quarter we always tend to have a bit of a seasonal uptick in expenses, various sundry adjustments. We have an ongoing program of renewing our -- some of our technology platforms and so forth and that just tend to hit in the fourth quarter, so I would not read anything in terms of a shift in the run rate of either revenues or expenses into those numbers.

So maybe expenses go closer to the third quarter level going ahead or --?

I would take a look at the average spend rate over the course of 2008 and not focus on the particular movement in the fourth quarter. All right, thank you.

Next question, please.

We'll go next to Rich Shane with Jefferies.

Hi, guys, couple quick questions. Historically what is the lag between the peak in unemployment and the peak in charge-offs just so we have a way of looking at this going forward?

Rick, I want to caution what I'm going to say is based on the extensive examination of two humps of a camel, so it's a little bit of a limited data set, but if you look particularly at the '90-'91 recession you can see a clear lag where unemployment actually lags charge-offs in the credit card business by something on the order of six months. In fact I was really struck the other day looking at -- I was looking at unemployment data back for many decades, it caught my eye that unemployment peaked in 1992, I believe it was -- I don't have it in front of me, but I believe it was June of 1992 that unemployment peaked at that time and we were way, many months into a raging aggressive rollout of our balance transfer product, and so I was reminded that our own view of the inflection point certainly preceded the peak of unemployment.

If you look at the 2001 to 2002 it doesn't appear to be as much of a lag, so our view is we have to manage under the assumption that there's no lag whatsoever. It will be an upside benefit if it turns out. And it's plausible that some of the worsening that we see in our own portfolio, which is a very real time measure of consumer behavior, that that could, in fact, precede certain unemployment performance. But we are making no assumption to that effect, and we are assuming, therefore, that all of the projected worsening in unemployment will directly show up as incremental charge-offs in our business.

Okay. And then the one follow up -- thank you for that answer. Of the $8.6 billion of loss guidance, or reserve guidance for the next twelve months, how much of that's in the next nine months?

In the next nine months basically $900 million of the $1.4 billion is in the next -- basically the next nine months and $500 million is -- comes from substituting the fourth quarter of last year for the fourth quarter of this year. So I really want to -- I think it's a very important point that you mentioned. So in some of the past -- last couple of times we've given you this 12-month window, we pretty much said all of the incremental outlook of charge-offs is coming from adding the forward quarter and taking away the trailing quarter. But it is noteworthy that $900 million is in the -- essentially the worsening outlook for the overlapping three quarters.

And just to comment on that, still sort of the question how much of that is what we see baking in our oven and how much is in a sense sort of has to happen if we assume the full worsening that would be implied by that -- the dramatically increased unemployment rate. It's got to show up pretty darn soon in our credit metrics, and I think the way I would describe it is that, while still a fair amount of the worsening is not necessarily baking in our numbers, but is sort of plausibly sort of mathematically needs to happen in order to get to the number, I think I would describe, though, that what we've seen in roll rates and delinquencies over the last couple of months at least plausibly gives us -- the uptick there gives us a way to connect the dots between a pretty high charge-off number that we're projecting is coming and what we see at this point in our own numbers.

Next question, please.

We'll go next to Ken Bruce with Merrill Lynch.

Thank you. Good afternoon. Could you give me some sense as to what you see the lower bound for the tangible common equity being I understand you've got strong capital base and looking at this on a range of metrics, but whether it be 4.6 or otherwise, and how are you thinking about what the downside can be there?

Yes, Ken, it is Gary. Glad to take that question again. We're very comfortable that where we are and where we will be after the Chevy Chase acquisition is a strong place to be in terms of PC, and as I suggested we're quite comfortable that even with the current outlook and some of the scenarios one might runaround it, that we can maintain a level that is stable in and around those levels. Again, it comes from the fact that most of our assets provide us a pretty good forward view of the loss that is are coming. We systematically are building allowance and therefore trying to stay current with the view there.

Our investment securities as I went into quite some detail, you know, do not hold a lot of risk of large and material unexpected losses, so if you take into account, which obviously we have, the current loss outlook that Rich just described, we bake those into our numbers. We run some stress scenarios, and keeping in mind the tools we have to manage our balance sheet growth, the mix of our balance sheet, the highly liquid nature of the increasingly liquid nature of our balance sheet and other levers we're quite confident we can maintain healthy capital ratios. That said, we're in a cycle where it is always hard to predict with absolute certainty where things are going and should our outlook materially change we'll evaluate the reasonableness of our position and what steps we need to take to maintain it.

Thank you. And when you look at the closed-end loans that are clearly under performing at this stage, what is it about either the underwriting or the characteristics of that group of loans which makes that different than, say, a normal revolving credit card or what would you suppose is maybe leading to the worse-than-expected performance at this point?

There are several factors involving the closed-end loans, Ken. From a credit point of view closed-end loans tend to attract -- just of by the nature of who -- the customer base that pursues an installment lean tends to attract a customer base that is a little more credit intense, if you will, relative to the broad swath of our credit card base, because credit cards, of course, is also a transactional product, as well as a borrowing product. These closed-end loans, in fact, were to really stri -- pretty darn strikingly high FICO customers, basically super prime customers by profile, but they certainly have a degraded a lot more quickly than the overall super prime -- equivalent super prime credit card customer. They tend to be -- a couple of things about the boom-and-bust market that we have seen, both they tend to perform -- they are performing worse in the boom-and-bust market, we can see that, than the credit cards and they have a higher concentration in boom-and-bust markets, as well. There's -- also at our particular portfolio there's just a higher percentage concentration of more recent vintages of closed-end loans so that's less a statement about closed-end loans and a little bit more about our own mix.

The other thing that is going to be, I think, probably maybe the biggest effect of closed-end loans on our portfolio over the next year will be the denominator effect of closed-end loans, which we have basically shut down the origination of the significant majority of our close-end installment loans that those things tend to amortize fairly rapidly and the denominator effect of that will materially impact our portfolio over the next year. Generally something in the neighborhood of 50 basis points the -- sort of their contribution, their relative contribution to our charge-off rate next year, that worsening will be in the neighborhood of 50 basis points. Actually the vast majority of that is really just the denominator effect, but as you cross calibrate versus other card businesses keep that one in mind. In fact, there are a couple of things we're going to need to lug around next year relative to our metrics because we do have the 50 basis point OCC effect, as well.

Next question, please.

We'll go next to Don Fandetti with Citi.

Sort of a broader question about your card business. Obviously the regulatory environment's more difficult, credit's tough, and funding's trickier, but just curious if you rethought the model longer term and how you look at the business today?

I assume you're talking about the credit card business?

That's right, the credit card business.

Okay, Don. We are junkies about strategic business structure and I certainly -- a lot of why we're in credit cards and in local banking is we believe they are tremendously advantaged businesses from a structural point of view relative to the average business in the broader commercial banking space. So the Fed rules, while we are very supportive of the vast majority of the Fed rules, and I think they will be in that good, I certainly do have a haunt with respect to one aspect of the Fed rules and that's the ban on retroactive repricing. It will probably reduce long-term resilience. It is likely to reduce longer-term resilience in the credit card business. Not probably for this downturn but more likely for the next one.

Now when I say probably, why is that? It's all a question of how the credit card industry responds in terms of pricing. If the industry and the structure of their pricing create a structure that enables the industry to have higher go-to rates accommodating the potential for the next downturn, that comes, then that would be -- the industry in a sense would have adapted fully to this. If the industry doesn't get there then I think there will be some reduced resilience. So I keep a very close eye on -- the things I'm keeping the close eye on, Ken, is, of course, the impact of Fed rules and it's hard to quantify because a lot depends on how competitors respond. We also are keeping a very close eye on the bankruptcy cramdown legislation, which I think could have significant collateral damage to unsecured lenders even though it's not the focus of the legislation, and and an eye on the interchange legislation, which I think has lost a little steam at this point.

I do -- where I stand now and for what I anticipate will be coming, might be coming, I still deeply believe that the credit card business is still, by a large margin, the structurally best lending business that I have seen. I think it has the very high likelihood to be able to generate structurally very advantage returns for as far out as we can see, and most importantly I continue to believe it will be the most -- by a large margin the most resilient consumer lending business in the downturn, and I think the billion dollars that our credit card business made this year despite the pressures of the downturn is testament to the fact that this is a pretty darn resilient business.Nothing's infinitely resilient, but I like where we are.

Okay, thank you.

Next question, please.

We'll go next to Chris Brendler with Stifel Nicolaus.

Hi, thanks. Good evening. Can you talk at all about the international thing in a little more detail, the sharp run off in loans there, as well as the big sequential quarter-over-quarter drop off in fee income, do you expect that business to be profitable in 2009?

Chris, I'm a little reluctant -- I don't really want to be in the business of projecting annual profits in any of our businesses, but let me just talk about what's going on in that business. When you look at the metrics, by the way, of our business in the quarter, foreign exchange is really the dominant story, and the dramatic things happening with respect to pound sterling have created a significant decline in the size of that business. However, the actual decline that we expect to have in the business is not just a foreign exchange story because we -- as we looked at the UK business we --I've often described the UK business as it's got the structural advantages of credit cards, but it's inherently the UK market there and is not as strong and as robust as the US. Therefore, it's -- with a pretty watchful eye we have watched both the regulatory changes in that business and the mini recession they had even before this downturn a few years ago.

Our conclusion, Chris, what we feel is that our best choice at this point is to really hunker down and be very, very cautious about doing too many originations in the UK, so you're going to see a pretty steady decline in the size of this business even without any foreign exchange effects. And it's not a statement of giving up on the business. It's a statement of saying, given that this business is, we think, less resilient than the US card business we're going to really take the hunker down strategy. In fact, if I pull way up on this thing, let me comment just for a second about -- at Capital One we carefully chose the lending businesses we're in. We stayed away for years. We stayed away from mortgages and a lot of other things that I think have been tough during the downturn. You also noticed that we've taken aggressive actions on businesses that we think have less resilience than we think they need for a very bad downturn, and that's why on the closed-end installment loans -- we've kind of been featuring that today -- you've seen the dramatic dial back in auto, although I think we're to a very strong position there at this point, but we've got a very close eye on the UK.

A quick follow up if I could. The minimum payment change, have you got any early read? I guess my concern would be that the minimum payment change was tested in a very different economy, any early read on how that's going? And sort of related question, the $8.6 billion in losses, if you do hit an 8.7% unemployment rate and everything holds would that require a lot of additional reserve billings, because I don't think you're going to be growing the portfolio this year, can reserves hold relatively flat if you hit the $8.6 billion in losses this year?

Yes. Chris, let me say a few things. First of all, OCC min pay is coming in pretty much right in line with our expectations. We're kind of saying about a 50 to 60 basis points impact. As I recall, last quarter we said around ten in the first quarter and about 50-50-50 in the following quarters. That's not cumulative, that's just basically the delta the charge-off rate will carry around because of this. So we're kind of saying 50 to 60 to give ourselves a little bit of cushion for the fact that this is slightly untested waters, but basically everything we've seen about this, Chris, is coming in very consistent with our prior testing, so we're happy about that.

Let me make a comment about -- to your, I think, very good question. If the $8.6 billion of losses comes to pass and the unemployment scenario comes to pass and then things appear from an economic point of view to be stable looking out from there, will we need a significant allowance build and my answer would be generally conceptually no. One of the nice things about allowance build you get to front load your trip. It's the good and the bad news is the thing. You get to front load your trip into the downturn, so in that sense when stability comes the other things being equal we wouldn't need incremental allowance build. Now, one caution is because our card business still has a majority of -- off balance sheet obviously changes in terms of off and on balance sheet percentages can change and there are a number of other effects. And the other thing is, while the economy will be doing what it's doing of course a very big factor will be what we see cooking in our own oven of our credit performance as we get to the tail end of next -- I call it next year, this year. Thank you.

Next question, please.

We'll go next to Mike Taiano with Sandler O'Neill.

Hi. Thanks. Can you give us a sense as to what degree more proactively pursued loan modifications earlier in the delinquency stages relative to prior periods? And along with that maybe give us an idea of -- remind us of the accounting works. If you were to modify a loan and reduce the principle, how does that flow through in terms of charge offs and do those loans then go back as current?

Mike, it's Gary. Recently we've been doing loan modifications similar to the Fannie and Freddie programs, both for mortgages on our books and we're permitted on our service book. At the same time we continue to evaluate alternatives, particularly with respect to the best way to manage principle modifications. As Rich reminded you earlier, we have a relatively small mortgage portfolio. Most of it is still performing pretty well, so we may not be the best crucible for what's going on there. So our view generally is the traditional approach is to loan modifications. Do not maximize value in the conditions we face today. We believe that appropriate principle and other modifications for qualified borrowers will maximize value and help keep more people in their homes, so that's what we're going to looking for. As far as the accounting, since it's really not particularly material at this point I'd suggest you check in with our IR after the call and they'll walk you through the details on that.

Actually I meant with respect to the credit card business.

Mike, are you talking about --

I guess the question is I'm trying to get a sense of -- as customers go delinquent are you, in an attempt to increase the recovery rate, going to those customers and trying to work with them to reduce potentially balances in order to just improve what the ultimate loss will be?

We are -- we have a very, very substantial collections and recovery operation that does a lot of negotiating with our consumers. There is -- it's not focused really on loan modifications per se. Basically we just take each situation and try to figure out what is the ability of a customer to pay, and to try to work out something that will work for the consumer and will work for Capital One. But the -- so while I am kind of seizing your question and loan modifications is a subject right now that's near and dear to my heart because with the political focus on cramdowns, I think that I just want to saver that. There can be collateral damage to unsecured lenders.

If you compare in the case of someone walking away from their home versus someone going into bankruptcy -- well, let's compare three cases. Someone walks away from their home and some -- from the point of view of an unsecured lender would have, in a sense, the most incremental money still to pay, if there were a loan modification, that could also be helpful vis-a-vis an unsecured lender. We feel concerned about the recent proposed legislation about forced loan modifications in bankruptcy because what happens, in addition to all of the issues I think bankers feel about what that can do, losing control of that on the mortgage side and all the impact on mortgage backed security pricing, and potential mark-to-markets and so on, we're trying to get our voice out there to say that the -- as a bystander on the unsecured side if there's a big rush of folks to go bankrupt instead of normal loan mods that will have a damaging effect on unsecured lenders.

Next question, please.

We'll take our next question from Sanjay Sakhrani with KBW.

Thank you. Gary, you mentioned deposits will be the main source of funding in 2009. I guess how should we think about maturing securitizations? Will they be brought back on balance sheet and what is the total amount that will be maturing?

Sanjay, we're got about $5 billion worth of credit card securitizations that come due this year. The likelihood is that those will be refunded either with deposits, in which case they immediately will come on the balance sheet, or they will be funded perhaps through the drawdown of some of our committed conduits. It's a relatively small number and we'll look and see what makes the most sense at the time. So again, at this point, Sanjay, if you take a look at our investment portfolio that I showed you we're actually -- at these kind of levels that we're seeing in the asset-backed markets right now we're buyers, we're not sellers. So I'm sure we won't be bringing any public issues to market if we don't see any improvement in the level of rates, so again it'll either be refunded with deposits or drawdown of conduits, and we'll see how things play out over the course of the year.

Okay. And I guess just a follow up on the reserve adequacy, I just want to make sure I'm thinking about it correctly. When I look at the relationship between reserves to receivables that ratio should equal the owned charge-off rate, right, that's what you guys are targeting on a quarterly basis?

It tends to turn out that way or, in fact, the coverage is a little bit higher, Sanjay, but it's really done business by business, so remember in the slide that I showed you, the coverage ratios, you're really just taking a look at the reported balance sheet where as -- and there actually although the of coverage ratio that you're seeing on the slide that I showed you, which is about 4.5% allowance as a percent of reported loans, actually the reported loan loss rate is substantially below that, it's about 4.2%, and if you take a look at the managed level of loan losses it gets a little closer. So again, it's a good way to stand back and assess the reasonableness of the numbers, but by and large obviously we're going to go ahead and build that up business by business based on the trends we're seeing in each of those businesses.

Next question, please.

We'll go next to Steven Wharton with JPMorgan.

Hi. I was just trying to back into quarter earnings this quarter by adding back some of the stuff you pointed out like the I/O write-down and the reserve build, which is very substantial, and it looks like based on what you reported this quarter that headed in the next year and based on your guidance you're going to maybe be narrowly profitable, which is great considering we may be going through peak charge-offs and maybe plus or minus around the statement I just made. And then considering the fact your TCE ratio is being hit a little bit with the Chevy Chase deal -- which I think TCE to tangible gross assets is kind of ridiculous, but people seem to be focused on it -- how are you feeling about the dividend if you have an issue where you're getting to the point where you're either just covering it or barely covering it?

Yes. And remember -- Steve, it's Gary, thanks for the question. Remember this is really the first quarter since we instituted this dividend that the earnings as reported don't cover the dividend. Obviously when we set the dividend level 18 months ago we did so with the intent of making it sustainable, and the time in which we instituted it it was intentionally set lower compared to most of our banking peers because it was already clear at that point that there was some economic weakening on the horizon. So again, I told you just a few minutes ago that as we assess the adequacy of our capital we have certainly modeled in the continuation of the dividend.

As you say, the biggest factor that will determine our outlook for generating additional capital is going to be the economic outlook and we've taken into account what we can see and what we can imagine, but I suppose it could be even worse. But if you put it all together the dividend itself was designed to be sustainable through the cycle, and while we're comfortable with our current and forecasted levels of TCE, including the effect of Chevy Chase and the modeled impact that -- of all the puts and takes, we're comfortable with where we are on the capital and we'll obviously continue to manage the capital. We'll reassess all of the capital components of the strategy, including the dividend, and should will be a major change in our outlook for the portfolio or the economy, you can assume we'll continue to reassess. But I think you have a pretty good handle on things, Steve.

All right, thanks.

Next question, please.

We'll go next to Scott Valentine with FBR Capital Markets.

Good evening. Thanks for taking my call. Just a question regarding the bank net charge-offs. After three or four quarters of relative stability we saw a pretty big jump across most of the categories. Can you talk about maybe -- I assume that's a New York market, maybe it's Louisiana, but can you talk about maybe what you're seeing in terms of credit performance?

Yes. We've enjoyed, Scott, up to this point being in two of the geographies that were standout geographies relative to what's going on nationally, and I think what you see over this quarter was some of these things coming back, these markets coming back a little bit toward the main. New York is the -- I think we have a closer -- we have more concern with respect to the New York market than we do Louisiana. Maybe a quick comment about Louisiana. Obviously that's down in the oil patch. The oil patch has had a tremendous boom and with prices falling we, of course, have some concern. However, even in our energy lending that we do there we're very natural gas focused, more than oil, and that tends to be more robust, vis-a-vis the United States less volatile. So we actually feel very solid with respect to Louisiana, but we do believe that you will see some sort of worsening.

New York is always one. A week doesn't go by that I don't seek out our lending folks in New York and say, I just can't help but read the paper here every day and there's thousands of more jobs every day, and of course so many of you on the phone are living that every day. So we -- just to savor this, the unemployment rate in New York hit, I think hit 6.3%, which is about a 24% increase from a year to go -- a year ago, and obviously I think it is not fully captured the unemployment that is or will be coming there.

The one good thing that -- there's a couple of good things, though, that we feel about the New York situation. One is New York point, and one is a Capital One point. On the New York side, they enter the down -- New York enters the downturn in pretty good shape relative to the 90's recession. New York back then had huge over supply in the office and the residential markets and was a much less attractive market for international business and tourism. There's much -- particularly with respect to office and residential real estate there's dramatically tighter supply today and so I think it at least starts within a more robust position.

Probably the most important thing, though, to say to you is I think the way credit in the heritage of John Cannis and through what we're doing now, we have a -- I think a very conservative portfolio. Most importantly, the construction portfolio, which is about $1.3 billion, that's where the biggest deterioration certainly in our portfolio is and probably in others, as well. That's only $1.3 billion. It's only about 10% of what we do in New York. The New York multi-family business is about 40% of our New York commercial real estate business and that has been -- there's been a lot of structural reasons with that, that The housing there is particularly robust.

From an underwriting point of view, we have -- we haven't changed our underwriting in years, even as we watch CMBS sweep into the marketplace and lose a lot of business because of the looser underwriting there, so we've been underwriting to in place cash flows, not to aspirational rent increases, which, of course, I think has characterized the commercial mortgage-backed securities market. So I think what you should expect is that a fair amount of degradation in the New York marketplace. I think overall we're about as well positioned as we can be in our book of business, but I think we're preparing for some worsening here.

Thank you.

Next question, please.

We'll go next to [John Stillmore] with Suntrust Robinson Humphrey.

Good evening. Rich, I want to start off, you had certainly spoken about the resiliency potentially being impacted by the inability to reprice and it seems like, at least as current legislation stands, you have 2009, which allows you the ability to be a little more proactive with regards to managing your card portfolio. How do we think about the revenue sustainability of 2009 versus what may be in 2010, and can you give us some numerical sense -- guidepost with which how to think about revenue margins as we start moving through what is an obvious credit migration?

Okay, John. So I think the implementation of the Fed rules in the middle of 2010 obviously creates a very important window for the card industry to use dynamic account management in pricing during this very critical time, and that's very important thing, and I think Capital One will -- I think all the card issuers you will see a fairly similar kind of actions over the course of this year. Now, in the near term that can be and is likely to actually be beneficial vis-a-vis revenue margin, and wee the industry's pricing structure, not to change I think that from there I would expect revenue margins to go down. However, let me make two other points.

First of all, I think there's two types of adjustments that are going to need to happen related to two types of repricing. One thing that the industry has done, the thing that I think has created, certainly, the consternation that we have expressed over the years -- recent years about the card business is the automatic repricing that is based into the customer agreement based on a triggering event. And what happened with the card industry is that the extent of automatic repricing became, in my opinion, the dominant way that the card businesses made money in -- some of the card players made money in their business over the last few years. And the trigger now has been moved to 30-day delinquent, which is just -- and that as the only trigger, so that's pretty much going to eliminate automatic based repricing and for a number of players whose business model was very heavily dependent on that they're going to need to do a lot of retooling. For all of us in the industry, Capital One included, there will be -- on this and the payment allocation rules there will be some financial hit starting in the middle of 2010 on this particular -- on these effects. I think for some players they may be a lot bigger than for others.

The thing that makes it so hard to predict how big the overall net effect is, is the industry has a window here to restructure the way credit cards work. And in many ways I think going back to much more simple structures, the structures that used to exist I would guess you're going to see teaser rates and going to high go-to rates would be probably the structure of the industry, and a lot less complexity about how pricing goes. If you want to know how resilient the business is going to be in the long term and what's going to happen to margins, take a very close look at where the go-to rates come out, and that will gradually -- I don't see -- I haven't seen in the industry's pricing any apparent changes yet in how they structure their products and their pricing, knowing they still have a year-and-a-half to go. But I think it'll be very interesting to watch, and my view on how resilient the business is going to be, and therefore to your question of what the revenue margin trends are going to be, is going to be driven on the industry's choices over the next very critical year.

Great. And then -- first of all thank you for that. It certainly sheds some light on what is a complex topic. As I shift focus, one of the things that seems a little bit more novel about Capital One's themes this quarter is certainly the idea of reallocating capital away from consumer lending and into securities, and while on the surface it doesn't seem that irrational of a move, the question becomes what do we -- what are we to expect in terms of the balance sheet over the coming quarters and the year with regards to the allocation between the lending businesses as well as the securities business and how should we think about the balance sheet?

John, it's Gary. Look, one of the benefits of our banking transformation is the much more dynamic way in which we can manage our balance sheet. Rich spoke very much to the growing value of our banking franchise, the organic growth and the growth of deposits in our banking channels. Obviously there is going to be cyclicality in the economy. Our first priority is to make loans to credit-worthy customers, but as we continue to grow our deposit franchise and maintain disciplined pricing there we will generate liquidity that if it can't be productively deployed in loans we'll find a way to utilize our capacity to make sure that is well managed.

Obviously we'll also have a very keen eye on capital and the risk adjusted returns that we can generate out of our investment portfolio. Right now those opportunities are quite substantial. If those opportunities were to go away, the lending volume weren't there, I expect what you'd see is we'd be managing more tightly our balance sheet growth. So I feel as though we now have all the tools on both sides of the balance sheet, as well as the mindset that we are going to truly try to optimized whatever part of the cycle we're in, and I'm sure when we're on the other side of this you'll probably see the investment portfolio coming down, the loan volume growing, and we'll look back and probably see a pattern that most banks have seen repeated many times over.

Next question, please.

And we'll go next to Brian Foran with Goldman Sachs.

Good afternoon, guys. Can you -- I guess first just coming back to the dividend question, I understand why you can pay it, but I guess I'm wondering why you would pay it from the standpoint of you never really paid a dividend for that long, it was part of a move to be more bank like in multiple, there's not a whole lot of multiple to be had at a bank right now, and capital is just so valuable right now. Why not just proactively suspend it or lower it just to conserve capital?

Yes. Brian, it's Gary and you're right. When we set the dividend level, we looked at our peers, our peers were increasingly banks. We -- again, we set it at what we believed to be quite a low level compared to most of the banks because we felt it was sustainable given our outlook for capital and obviously we'll keep reassessing what makes sense here. But over the long haul we believe that we'll have the capacity to generate good returns for our shareholders, which will include capital return and when and how much is going to be a matter of where we are in the cycle and the long-term expectations. And you can assume that we'll continue to reassess it, taking into account the comments from you and many of our investors and we'll do what makes sense.

And then if I could just ask a second one. We asked this question at our conference, and I realize it's only been a month so there's not that much more data to go on, but historically you've had a one-for-one relationship, the industry has give or take in recessions between unemployment and card losses, and we've seen a lot of other historical relationships break down. Is there anywhere in the book where you're seeing anything that would confirm that one-for-one or maybe in some of the states that have had more rapid increases in unemployment where you're seeing gap changes or a two-to-one or one-and-a-half to one or whatever it is relationship between unemployment and card losses this cycle?

Yes, Brian. That's a great question and of course we are trying to learn as much as we can from the past two downturns and the current one, and let me just say that even the one-to-one -- this loose one-to-on relationship we see in the past don't forget that there is a different denominator effect than what we may have this particular time because in each of the last two downturns growth slowed for the card issuers, but it was still positive growth. I think it's going to be -- you're going to see a lot less in the way of growth and maybe a fair amount of decline this time. So for starters there's a little normalizing for that effect. If you look -- so as we look in our models for the -- in the boom-and-bust markets where now unemployment data is coming out and we cross-sectionally look at all the different MSAs and their HPA effect and the unemployment effect, we certainly see a strong HPA effect. We see the unemployment effect. In fact, we've even seen unemployment effects in past modeling of HP -- specific HPAs -- the HPA effect in some prior downturns, as well.

We do see in our early data some evidence of an interactive effect, but I think that's very intuitive in the sense that I think consumers -- we have certainly believed intuitively in this that consumers ability to just absorb bad things is harder when there are multiple bad things. If we take our modeling -- if you net out all the modeling that -- the effect we have done from -- if you look at our projection of next year where we have this $8.6 billion up from the $7.2 billion, if you look at the credit card part of that and go backwards you find actually that it's net effect is pretty close to one-to-one plus the OCC min pay effect, but that's more by coincidence because actually in our own we would look at it as less than a one-to-one effect for unemployment. There is an HPA effect that did not exist in prior downturns but it's certainly is an important part of the losses for next year. We did add an interactive component to the best that we could and then, of course -- and that by coincidence creates a one-to-one ballpark and then there's an OCC min pay effect. So I don't think we -- I don't think that you're badly served by the one-to-one, but I think that there's a lot -- I think we're starting to get to the edges of where old rela -- who knows in a sense really what's beyond the frontier of the parameters that haven't been measured in the past, but certainly I think we feel as well grounded as we can be .

Next question, please.

And we'll go next to Craig Maurer with Calyon.

Hi, good evening. I wanted to return quickly to the purchase volume in your card business. I noticed in the card business there was a 9% declined in the number of accounts to go with the nearly 11% decline in purchase volume, so I was wondering if you could add any color around the impact that the closed accounts or treated accounts might have had on the decline and purchase volume because your decline was -- from a pure purchase perspective was far greater than what we've seen out of the other large banks?

I'm not sure that I've got any extra insight on that one. I do know that purchases per active account dropped about 5.7% year over year, quarter over prior year quarter, but I probably would be speculating.

Okay. Was that a -- that 5.7% decline was a volume number?

That was a purchase volume number, yes.

Okay. Thank you.

Next question, please.

We'll take our final question today from Bruce Harting with Barclays Bank.

Does the mark on the Chevy Chase mortgage portfolio cover what is expected to be all the troubled assets and will you likely utilize that mark to just sell down the mortgage portfolio before or after time of closing? And then with regard to ABS maturities -- and Gary you said you'd be funding those as they came off most likely with deposits, that would be linked into the other question I just asked -- would you likely use the Chevy Chase deposits and what's the closing on that? And then is there -- as I look across your -- the rates you're paying on your various liabilities, if you replace securitization liabilities with deposits are we likely to get any margin expansion in '09? Thanks.

Bruce, I'll see if I can make sure I cover all of those questions. We're still looking for a close of the Chevy Chase deal in the -- some time in the first quarter. Although there will be additional liquidity, I indicated $5 billion or $6 billion added as a result of that transaction, it's coming on top of $40 billion we already have, so it won't make a material difference as to how we refinance our maturing asset-backed securities again. We'll be looking for what is the best execution and if deposits are the way to go that's definitely what we'll do.

As far as the mark on the Chevy Chase portfolio, again, since that was done just about a month ago we obviously had the benefit of deep diligence on the performance of all of those assets. We also, because we were already into the beginning of December, were anticipating a significant decline in the outlook for the economy, so the outlook we have today is pretty much the outlook that we used, both in terms of unemployment and in terms of housing prices to come up with the mark, certainly on the mortgage-related portfolios, so those are, we think, appropriately marked.

As for the disposition of those assets, I think that will be based on the conditions of the market at the time. We certainly have no need to dispose of those assets to create liquidity. We are not planning to dispose of those assets to create liquidity. We'll go ahead and manage those to try and out perform the mark over time if we possibly can. That's pretty much what we will be looking to do. Hopefully with that I've covered all of your points there, Bruce.

Thanks, Gary.

Get them all? Okay, good.

Brian Foran, you asked an earlier question, I just wanted to make one clarification. You were asking about this eyeball one-to-one relationship between unemployment and credit card charge-offs. I think it's really important to decompose those things into dollars and charge-off rate, and I think there's going to be a lot of uncertainty for card players and a lot of -- about exactly what the whole denominator effect in the coming year, so as the comments I made are how we -- because we always decouple things between dollars and rates, those were dollar comments where, as we project over next year is less than a one-to-one for unemployment, the HPA effect, and sort of an interactive component get us very loosely in this one-to-one relationship.

For charge-off rate you're now adding another whole uncertainty for us and all the other players you look at with respect to in the end what are the balances that -- and that's something that will unfold over the course of the year in response to the environment. Thank you.

Thanks, Rich, and thanks to all of you for joining us on our conference call this evening. Thank you also 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 great evening.

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