Capital One Financial Corp (COF) 2010 Q3 法說會逐字稿

Welcome to the Capital One third quarter 2010 earnings conference call. As a reminder, today's call is being recorded. All lines have been place on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. (Operator Instructions) I would now like to turn the call over to Mr, Jeff Norris, managing Vice President of Investor Relations. Sir, you may begin.

Thanks very much, Stacy. Good morning and welcome everyone to Capital One's third quarter 2010 earnings conference call. As usual we are webcasting live over the internet. To access the call on the internet, please logon 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 third quarter 2010 results. With me today are Mr. Richard Fairbank, Capital One's Chairman and Chief Executive Officer and Mr. Gary Perlin, Capital One's 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 results to differ material from those described in forward-looking statements. For more information on these factors, please see section titled "forward-looking information" in the earnings release presentation and the risk factors section in our annual and quarterly reports, which are accessible at the Capital One website and filed with the SEC. Now I will turn the call over to Mr. Perlin. Gary?

Thanks, Jeff and good morning to everyone listening on the call. Let me go straight to the income statement on slide three. Capital One earned $803 million or $1.76 per share in the quarter up 32% from the prior quarter. This bottom line improvement was driven by a 6% increase in pre-provision earnings, as well as a $189 million after-tax improvement in discontinued operations. Revenue increased in the quarter by $112 million or nearly 3%, despite a 1.5% decrease in average loans. Debt interest margin improved 12 basis points in the quarter, benefiting from the impact of improving credit on finance charge reversals as well as from lower funding costs. The majority of the improvement in revenue came from non-interest income, as the $16 million of continuing operations rep and warranty expense in the quarter was $79 million less than the prior quarter. I'll provide additional color on our rep and warranty position in a moment. Non-interest expenses were down slightly in the linked quarter as a modest increase in marketing expense was more than offset by an improvement in operating expenses, which you may recall, were inflated last quarter due to several non-recurring items. Finally underlying credit performance continues to improve across our businesses with charge-offs down almost $200 million in the quarter. Overall provision expense however was up $144 million as the third quarter allowance release of $624 million was some $382 million lower than the prior quarter.

Turning to slide four, I will discuss our rep and warranty reserve. There have been several questions about our rep and warranty reserves and so I would like to spend some time this morning discussing how we establish reserves and how we think about our risks. First, let me explain how we have approached our rep and warranty reserves conceptually. In the aggregate, we have set up reserves with respect to our entire rep and warranty risk for all probable and reasonably estimable contingencies. We include both litigation and non-litigation rep and warranty risks within these reserves. To give you more transparency into how we determine probable and reasonably estimable risk, I will walk you with how we approach reserves with respect to three groups of counter-parties. First the GSEs, as purchasers of whole loans. Second, securitization trusts wrapped by monoline bond insurers and three, everything else.

For the GSEs as purchasers of whole loans, we have established reserves that represent our best estimate of our total future liability -- what I will call lifetime reserves. We have established these reserves based on our lifetime loss estimates for the underlying loans we sold to the GSEs and our history of dealing with the GSEs in terms of the percentage of loans that turn into repurchase requests and the percentage of those requests that ultimately lead to actual repurchases. For the GSEs, the process involves a loan by loan negotiation that has developed a rhythm over time that lends itself nicely to predictive models. That is not to say there is no risk to our GSE reserve number. The GSEs could change their approach to repurchase requests and our estimate of the lifetime losses for the loans at issue are, of course, subject to macro economic trends such as employment and home prices, but we think the risk of large movements within the GSE reserve is relatively small.

For the monoline bond insurers we have established lifetime reserves for transactions currently subject to repurchase requests. These reserves are based on our lifetime loss estimates of the loans in the securitization trusts at issue and our anticipated buyback rate. Although we have established lifetime reserves for this group, there is more uncertainty here than with the GSEs. This is because the monoline requests will largely be resolved through the judicial system. If the insurers have been active in suing both mortgage loan originators and our MBS securitizers after making what we believe are aggressive repurchase requests. In addition, bond insurers may pursue repurchases in the future with respect to transactions not currently subject to repurchase requests, and for which we have not established lifetime reserves. Their decision about whether to make repurchase requests on those transactions may depend on whether they expect to take losses.

Before we discuss the third category on slide four -- the sold to unwrap securitizations and other whole loan sales -- or the everything else category -- it's helpful to understand why monoline insurers have been very active in the rep and warranty space as compared to investors within the non-wrap deals. Securitization trust wrapped with bond insurance often allow the bond insurer to act independently of the investors. Bond insurers typically have indemnity agreements directly with both the mortgage originators and the securitizers and they often have super majority rights within the trust documentation that allow them to force trustees to pursue mortgage buybacks. By contrast, investors in non-wrap securitizations often face a number of legal and procedural hurdles before they can force the deal trustees to pursue mortgage buybacks including the need to coordinate with 25% to 50% of the securities holders, indeed, often 25% to 50% of each affected tranche and to indemnify the trustee for any litigation. We have faced very little repurchase activity from public securitizations not wrapped by bond insurers in the past year.

We estimate that about half of our everything else category consists of securitizations not wrapped with bond insurance and because we have seen virtually no repurchase activity from this group in the past year, a very small amount of our reserve is held against this category. But, to be clear, we have established reserves for all probable and reasonably estimable risks with respect to this everything else category. If we began to experience -- or begin to expect increased repurchase or litigation activity in this category -- and if those risks become probable and reasonably estimable, we would reevaluate our reserves to reflect those risks. You should also know that, except for a limited amount of Chevy Chase originated loans, our subsidiaries did not act as securitizers of mortgage loans. Instead, they largely sold whole mortgage loans to others who securitized them. So the legal risks around the securitization process itself are relatively small for us.

Now for the numbers. Our reserve in the third quarter stayed roughly flat at $836 million, down from $853 million. Our rep and warranty loss expense including settlements for the quarter was $16 million to $17 million. As you can see on slide four, between 2005 and 2008, our subsidiaries sold to non-affiliates about $111 billion in original principal balance mortgage loans. Our second-quarter estimate of $122 billion in originations included some sales to our affiliates which, of course, do not create rep and warranty risk, so $111 billion is the number we should start with. Of this amount about $29 billion was sold either to GSEs or into wrap securitizations, $11 billion to the GSEs, $13 billion into wrap deals currently making repurchase requests and another $5 billion to wrap deals where the bond insurers are not currently active in seeking repurchase requests. In this last category, we believe bond insurers are not making repurchase requests because in general, they are not experiencing significant insurance losses.

Almost all of our $836 million reserve is based on risks, from the $24 billion in loans sold to GSEs and active wrap securitizations. And almost all the repurchase requests we have received in the past year are from these two groups. You'll also see from the slide, a sizable build of the rep and warranty reserve in the second quarter when we almost doubled the reserve as we moved to capture expected lifetime losses in our reserving methodology. The build, based on lifetime loss estimates last quarter, helps explain why you are not seen a large build this quarter. Because we don't service most of the loans we sold to others, we don't have complete visibility into where the remaining $82 billion of loans landed. But we know from proprietary databases that about half landed in unwrapped public securitizations. As we have discussed we have seen virtually no repurchase activity from this $82 billion, either from the identified unwrapped securitizations or the remainder which explains why only a small amount of our reserves is held against those originations.

Now let's quickly move to the balance sheet on slide five. End of period loans were down less than 1% in the quarter, the slowest pace of contraction since the second quarter of 2009. Excluding the impact of our runoff portfolios, total loan balances would have been up modestly in the quarter. Our domestic card portfolio is down approximately $800 million or 1.4%, driven largely by $750 million in continued runoff from our installment loan portfolio. The commercial banking loan portfolio remained essentially flat in the quarter at $29.5 billion as we are seeing some signs of stabilization in CRE, particularly in the New York metro area. Consumer banking assets were stable in the quarter as $442 million of auto finance growth, largely offset $559 million of expected runoff in our home loans business. We grew our securities portfolio by approximately $500 million in the quarter with the bulk of growth in agency MBS and floating rate ABS. The portfolio performed in line with the broader market and our unrealized gain position is now $833 million, down $97 million in the second quarter level.

On the liability side we continued to leverage our banking platforms to take advantage of strong demand for deposits with total deposits up $1.9 billion in the quarter. We drove down our cost of funds by another five basis points in the quarter to 1.64% by replacing over $2 billion of term wholesale funding with cheaper deposits. We continue to expect securitized assets to end 2010 at around $27 billion which represents a 44% decline from year-end 2009. And our loan to deposit ratio is now 1.06, the lowest point in our Company's history. As we turn to slide six, I will discuss the allowance. The Company's charge-off rate fell 54 basis points in the quarter to 4.82% while delinquencies fell 10 basis points to 3.71%. The continued improvement in credit drove a $624 million release in the allowance which now stands at $6.2 billion or 4.89% of loans. $569 million of the reduction in the allowance was in the card business driven by lower than anticipated losses, declining delinquencies and a modest decline in loan balances. Given the underlying credit trends we are experiencing it's not unreasonable to assume that our corporate allowance levels will likely continue to decline.

Let me now finish my section by covering capital on slide seven. Strong earnings in the quarter led to a 50 basis point increase to our tangible common equity to tangible managed assets ratio which now stands at 6.6%. It is worth noting that this level is higher than our TCE ratio prior to the implementation of FAS 167. And taking into account the allowance our total risk-bearing capacity is now at 10%, well above the year end 2009 level, even as credit performance has improved materially. Strong earnings also bolstered our Tier 1 risk-based capital ratio by 130 basis points. While onboarding of risk-weighted assets due to consolidation of securitizations which existed as of January 1 was due to begin regulatory phase-in in the third quarter, we effectively spread this effect over the first three quarters of this year by paying down our securitization liability. However, because the balance of the phase-in of risk-weighted assets will occur in the first quarter of 2011, we have modeled our expected capital trajectory for 2011 on slide eight.

We modeled expected future capital levels using analysts' consensus earnings and reasonable balance sheet assumptions consistent with current expectations to provide an illustrative expected capital trajectory. It's important to note that we are neither endorsing consensus estimates nor providing capital guidance, and we do not intend to provide updates to this model in future periods. However, we thought it would be helpful to illustrate the expected near-term capital trajectory. In the upper left-hand corner you can see that our TCE experienced a temporary dip in the first quarter of 2010 as we build $4.3 billion of allowance associated with the implementation of FAS 167. Strong earnings and a decline in tangible assets over subsequent quarters have helped drive that ratio above where it was at the end of last year. Because TCE only includes GAAP equity in the numerator and total assets in the denominator, it remains unaffected by changes in regulatory definitions. Its future trajectory will only be impacted by underlying business performance and balance sheet growth.

On both the Tier 1 Common and Tier 1 Risk-Based Capital graphs, you can see how those ratios fell along with the TCE in the first quarter of 2010 due to the allowance build upon GAAP consolidation. However unlike TCE, those ratios will likely experience one more dip in the first quarter of 2011 as the result of two factors that affect regulatory ratio definitions. First, the remaining risk-weighted asset phase-in will affect the denominator, and second we will likely see an increase in the amount of DTA disallowed in the numerator of regulatory capital ratios. This disallowance is cyclical, owing to a two-year carryback limitation that now coincides with the period of recessionary losses. As loss levels abate, the extinguishment of disallowed DTA accelerates our regulatory capital accretion since allowance release will flow to regulatory capital on a pre-tax basis.

Recent announcements from the Basel committee will also impact future regulatory capital definitions and requirements. But, because Capital One is not materially impacted by two of the largest changes to the regulatory capital calculations, namely the exclusion of mortgage servicing rights and capital and an increased need to hold capital related to trading books. Our expected regulatory capital trajectory after the first quarter of 2011 is fundamentally upward. And, we expect to reach the 7% Basel III Tier 1 Common minimum, plus base conservation buffer level in 2011, using the fully phased-in Basel III definitions. With that I will turn the call over to Rich to discuss the performance of our businesses. Rich?

Thanks, Gary. Good morning everyone. I will begin with margins on slide nine. Net interest margin improved in the quarter. Modest funding cost improvements continued and asset yields benefited from a higher day count in the third quarter. Revenue margin increased as the result of the lower reps and warranty reserve build that Gary discussed, as well as higher domestic card revenue margins. Domestic card revenue margin increased to about 16.8% for the third quarter. Favorable credit drove most of the increase. Improving credit means that more of our finance charge and fee billings will be collectible. This enabled us to recognize revenue for a greater portion of third quarter billings. In other words, we had lower revenue suppression in the third quarter than the second quarter. Improving credit and collectibility also allowed us to recognize revenue for prior finance charge and fee billings that had been suppressed from revenue in earlier quarters. In other words, third quarter revenues included a release of prior suppressions consistent with improving results.

Purchase volume in our domestic card business increased due in part to seasonal patterns. The purchase volumes were also up strongly from the prior year quarter. Strong purchase volumes drove higher interchange revenue in the quarter. These positive forces were partially offset by the expected decline in late fee revenues with the mid-quarter implementation of the new CARD Act rules and by modest attrition of higher margin loans. We have been indicating that we expect quarterly domestic revenue margin in the card business to decline to a more normal historical level of around 15% by the end of this year as the revenue impacts of the CARD Act play out. CARD Act revenue impacts have played out largely as we expected and with the full quarter effect of reduced late fees next quarter, we expect that the CARD Act revenue impacts will be fully absorbed in the revenue margin.

But the revenue margin has remained higher than 15% driven by two factors. Revenue benefits from improving credit have proved more persistent than we had expected. And, weak demand has resulted in few than expected new balances at promotional rates. We expect both of these factors to normalize over time, causing revenue margin to decline from its current level. Looking forward, domestic card revenue margin trends will be determined predominately by market pricing, the competitive environment and credit results. Purchase volume in loan growth will also impact revenue margins, whether growth comes through increasing originations portfolio acquisitions or partnerships like the expected addition of Kohl's. We continue to expect that domestic card revenue margin will remain at a level consistent with very healthy overall returns for the card business.

Slide ten shows credit results for our consumer businesses. Charge-offs and delinquencies were stable or improving across our consumer businesses with the exception of an expected seasonal uptick in auto delinquencies and charge offs. Auto finance credit remains exceptionally strong with significant improvements year over year. This is largely driven by the high quality of recent vintages which now represent over two-thirds of our auto portfolio. The overall economic recovery remains modest and fragile which is consistent with the assumptions we have been applying in our provisioning and underwriting for some time now. Recent labor market statistics show continuing stagnation. We continue to see risks in the housing market as well as the shadow inventories of homes in foreclosure over severely delinquent mortgages remains very high. And the foreclosure crisis is disrupting housing markets which is likely to extend the time it takes to begin a clear recovery.

Our credit results have continued to improve even as the pace of economic recovery has faulted a bit over the last couple of quarters. Some of the improvement is due to the benefits of portfolio turnover, which as I noted a moment ago, is particularly important in our auto business. Some of the improvement is due to consumer deleveraging although one shouldn't overstate this effect. Most of the actual deleveraging especially in card is due to charge-offs. That said new borrowing is still very low by historical standards and that's likely to help improved credit quality albeit at the expense of growth. Much of the improvement in credit, particularly in card, is due to the nature of the labor market problems. Simply put, people who have been unemployed for a long time we think have already charged off. Therefore we would expect that long-term unemployment which is unusually high right now, would have a smaller impact on credit performance than short-term -- shorter-term unemployment. In fact shorter-term unemployment has started to fall in the last couple of quarters and seems to be more correlated to our delinquencies than overall unemployment.

Slide 11 shows credit results for our commercial banking businesses. Commercial banking credit metrics remain elevated and somewhat uneven. But are showing signs of improvement for the second quarter in a row. Non-performing asset rates improved except for a slight uptick in our middle-market C&I business. In addition to the improvement in non-performing assets rates, we experienced the second consecutive quarter over quarter decline in the dollar amount of criticized loans reflecting stabilization across our commercial banking businesses. During the quarter we saw some continuing improvement in the CRE market. For the second quarter in a row, leasing activity increased and vacancies declined in New York where we have our largest CRE exposure. Traditional CRE investors continue to reenter the market providing needed liquidity and sponsors are investing new equity into troubled transactions which has allowed us to right-size many of our troubled loans. We believe that the worst is behind us but we expect a few more quarters of uncertainty and choppiness in commercial charge-offs and non-performing loans.

Slide 12 outlines continuing uncertainties and our expected near-term trends. Capital One continues to show considerable resilience through the great recession and ongoing legislative and regulatory changes. But, economic and regulatory uncertainties remain high. While the modest economic recovery continues, recent labor and housing market data showed stagnation and uncertainty. Foreclosure issues are further disrupting housing markets. As Gary discussed, uncertainty around reps and warranties remains elevated. Consumer demand remains weak. The banking industry faces the development of hundreds of regulatory rules over the next couple of years to actually implement new laws and new capital standards. Our businesses and our business model are relatively less impacted by many aspects of the Dodd-Frank Act as we are a Main Street bank rather than a Wall Street bank. Like all banks we will be subject to changing capital requirements that will evolve as US and international regulators work to coordinate the capital aspects of the Dodd-Frank Act and the ongoing Basel III discussions. As Gary discussed we are well positioned for these emerging capital definitions and requirements.

We have been able to absorb the existing and anticipated CARD Act impacts with our domestic card revenue margin and business model largely intact. Of course, there is ongoing regulatory uncertainty. But, as long as the impact of regulatory changes promote and preserve a truly level playing field for all banks and consumer lenders we believe that our underwriting and marketing capabilities, as well as our customer practices, will continue to be competitive advantages. Against that backdrop our near-term expectations remain consistent with what we have articulated throughout the year. We expect that quarterly pre-provision earnings will decline heading into 2011. As I discussed earlier we expect that the domestic card revenue margin will decline from its current level as the factors keeping it elevated normalize over time. We also expect marketing expense will continue to ramp toward more normal levels. We expect that loan balances will find a bottom over the next several quarters as charge-offs continued to improve, the decline in runoff portfolios abate, and seasonal patterns play out. We expect loan balances to stabilize and begin to grow modestly in 2011. As a result of these trends we expect pre-provision earnings to stabilize in 2011.

I will close tonight on slide 13. One of the biggest issues facing the banking industry is how to grow and create value if there is an extended period of deleveraging and weak loan demand. It's easy to focus on the growth pressures caused by deleveraging. But deleveraging also creates significant credit benefits and strong returns that help bridge the gap to resumption of loan growth. We are well positioned to pursue a broad set of growth opportunities even if consumer demand remains weak for an extended period of time. Many banks are reeling from the financial crisis and from poorly performing assets generated over the last decade. Others are struggling to address revenue and growth challenges resulting from legislative and regulatory reform and the new level playing field they create. As a result we are seeing opportunities to acquire businesses, asset portfolios, and origination platforms with attractive economics.

Our balance sheet remains strong and resilient. We've weathered the recession relatively well and our businesses are generating profits and capital. Credit losses are returning to more normal levels. We have a leading brand and advantage customer access across multiple channels, and we have invested to improve our infrastructure and expertise to support growth opportunities like partnerships and acquisitions. We have a strong and flexible card infrastructure platform. We've added talent and created deeper and more focused team to develop and manage our partnership strategy. Were building a scalable banking infrastructure and we continually -- continuously deepen the talent and bench strength of our banking leadership team.

Our investments are paying off. We've started new partnerships with Sony in the US and Delta Airlines in Canada. We expect to launch our partnership with Kohl's in early 2011. And we have completed the smooth and successful conversion to the Capital One Bank brand in our metro Washington DC franchise. As consumer demand returns were well positioned to take share organically as well. Our domestic card business is well-positioned to take share on the new level playing field created by the CARD Act. We continue to drive winning product innovations like the Venture Card and Rewards checking and we have seen the return of loan growth begin in our repositioned auto finance business. We remain well-positioned to take advantage of emerging opportunities and to deliver significant share holder value over the long-term. And now, Gary and I would be happy to answer your questions. Jeff?

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

Thank you. (Operator Instructions) We'll take our first question from Sanday, excuse me, Sanjay Sakhrani with KBW.

Good morning. I have two questions, I'll ask them upfront. First one on the rep and warranty side, I appreciate the added disclosure but I was wondering if we could get a greater breakdown of that $82 billion. I was wondering if we could get more color on the makeup -- maybe some details on the portfolio performance as in the delinquency and charge-off rates you have experienced to date and I don't know if you can give us specific reserves related to that. I know it's a small piece of the total but I was wondering if we could get a specific number.

And, the second question is so I understand the US card revenue yield guidance is it going to get to the 15% or is that not going to happen? And if it is going to get to the 15%, when that would happen. Thank you.

Good morning, Sanjay. It's Gary. Let me take your question on the rep and warranty. To the extent we could give you a lot more detail on the $82 billion of what we call the everything else category, I would. What I did say is that we believe based on the analysis we've done and again, remember we don't service a lot of these loans so we don't have complete visibility as to where these loans landed, but we believe that something around half ended up in unwrapped publicly issued private-label securitizations.

The other half has ended up perhaps in privately-placed securitizations. They may have stayed as hold loans on the books of the original purchasers or they may have been resold by those original purchasers once or many times over at various prices to other buyers. And so it is a more difficult universe to track. Certainly, we can make some broad assumptions about overall performance. But in order to come into the reserve we also need to take a look at a number of other factors that I described and it would be hard to really break that down for you any more than we have.

Sanjay, this is Rich. On the US revenue margin and I know we have been continually pointing to 15% with a lot of confidence in our voice and we seem to be having trouble getting there. The reason we went out for a number of quarters now pointing at 15% is really it was trying to focus on the impact of the CARD Act and the fact that we felt that there was a -- that that will take our revenue margin to 15% -- which strikingly is our equilibrium revenue margin we had before the great recession and all of the legislation began. The CARD Act has, in fact, played out very much as we would have expected. So the underlying economics of our business as reflected in our 15% that we were targeting is very much as we expected. The revenue margin has continued to be buoyed by the better-than-expected credit and to some extent by the weakness in originations and fewer than expected teaser rates.

Now that the CARD Act has half a quarter -- well, there is a half a quarter of the reasonable fees effect this quarter and the final affect now is to get a whole quarter of reasonable fees -- we are -- to say though that -- the Card Act. So, the card business has very much the octane we expected it to. The revenue margin I think will settle I would say though -- so the CARD business has very much the octave that we expected it to. The revenue margin I think we'll settle down off of its level right now because I think at some point we will not keep getting the boost from the fee and finance charge reserve effect. And at some point our growth is going to pick up and that means more use of introductory rates and so on.

The other impact that will start to happen on our cards revenue margin will be things like the Kohl's portfolio coming in -- pound for pound, the Kohl's portfolio actually lowers revenue margin and lowers charge-off rates as it is a very high quality portfolio. So I think we are more really back into the equilibrium of a competitive environment that I think has a lot of opportunities for us to make good returns in the business. And I appreciate the spirit of the question.

Next question, please.

We will go next to Ken Bruce with Bank of America Merrill Lynch.

Thanks and good morning. I know you will probably get several questions on this, but can you provide a little bit more clarity as it relates to the margins -- US card margins specifically -- how much of the quarter over quarter benefit was say the full-forward -- or the release of fee suppression and how much of it was just better credit in the quarter. And any other details around that please.

Hi, Ken, it's Gary. We put forth the suppression number -- think of that as your overall -- the equivalent when it comes to fees and finance charges as the provision expense is for losses. The finance charge and fee reserve is going to be the equivalent, if you will, of the allowance. They both improved over the quarter. Both the actual experience of recoveries and lower reversals which would affect suppression as well as the finance charge and fee reserve but we don't break that out. Surely you can get some more color on that from the IR team over the course of the rest of the day.

And then separately I understand you don't want to necessarily be in the business of projecting revenue margins going forward but can you give us a little better clarity as to how much of the 15% at that point, how much would be promotional balances or how you thought the mix would look in the overall portfolio that got you the 15%.

So in other words, Ken, you are saying -- well, we have honestly our expectations that led us to the 15% were pretty darn modest origination levels. So just the fact that raised -- that artificially raised revenue margins, this origination is coming in a little lower than expected is a small effect in the revenue margin conversation. The swamping effect that is going on here is the credit affect. In making the numbers substantially bigger than 15%. There have been other affects, frankly just some good dynamics in the card business -- a few things where revenue itself has come in a little bit stronger frankly in the business than we had expected. Things turned slightly positive for us with respect to how the reasonable fee conversation came out. So there has some sustainably -- a number of small affects on the actually -- on the sustainable business aspects of the revenue margin as well. But, the biggest affect is credit and that will continue to be the biggest noise factor one quarter to the next.

Next question, please.

We will go next to Bill Carcache with Macquarie.

Good morning. Can you give us a sense for the percentage of loans out of the $82 billion that you described on slide four that were originated by GreenPoint and also could you clarify whether any of your subsidiaries received one of the 64 subpoenas issued by the FHFA last July.

Hi, Bill. Almost all of the $82 billion would have come from GreenPoint more or less. Remember we acquired them at the end of 2006. Close down the originations in the middle of 2007 and so just about all of those would have come from Greenpoint -- the rest to the extent there were any would have been either Chevy Chase or our own origination platform. So that gives you the breakdown of that.

Bill, yes our subsidiary GreenPoint received one of the FHFA subpoenas. The subpoena seeks information on fewer than 2000 GreenPoint mortgage loans that are part of some private-label securitizations in which a Freddie Mac is an investor. We're in the process of collecting responsive documents.

Okay, if I may with one follow-up -- is the probability in your view of a putback on all day loans -- would you view that as lower versus other loans with more documentation? And just trying to get a sense on whether the put back risk is lower there. And finally just trying to get my arms around this probable and reasonably estimable threshold. Basically, does that mean you have to see increase in claim activity to the extent that you start seeing bond holders organize -- like the example we see in the story today, in today's Wall Street Journal, a story about bond holders organizing -- provides a good example of that. But, that alone, those types of things wouldn't be sufficient to give rise to or provide a basis for you to build reserves. You would actually have to see increase in claim activity? And, that's it, thanks very much.

Bill with respect to your question about the all-day loan. I think in order to come up with a judgment about the risk, you need to take a look at multiple factors. Certainly what the nature of the loan is. May have an impact. You have to take a look at a variety of other things. You've got to look at the loan underwriting quality, the actual losses on the loans. You would have to take a look at the specific reps and warranties in the sales contracts. How they were assigned and so forth. So I think it would be wrong to believe that if you simply knew the nature of the structure of the loan that that would somehow give you some -- the decoder ring to figuring out where things go from there.

And in terms of the actual actions on behalf of potential claimants -- what I actually say is that that the actual claims that we receive are not a particularly terribly accurate measure of risk. Because activity can show up in a bunch of different ways. Discussions, file requests, litigations, saber-rattling, all sorts of things. I think it would be wrong to be able to point to any one item to identify what makes a claim and the potential loss -- either probable and estimable. But, no, there is no magic formula something needs to get over a particular hurdle of activity in order to become probable and estimable. It can reach that stage before hand, but there is a considerable amount of judgment that needs to be put into that.

Next question, please.

We will go next to Craig Maurer with CLSA.

Hi, good morning. Two questions. I'll give them to you upfront. First on the marketing spend. It was up until materially this quarter. I was hoping to get your expectations for that both in the coming quarter and over the next few years. Whether or not you expect to get back to historical levels of marketing or how you're thinking about that budget. Number two, I know that this is a moving target but if you could talk a little bit about how you're thinking about reserve methodology. Are you thinking about a specific percentage of loans, covering a specific level of forward-looking losses. Just a little bit of information on how that is discussion is going internally. Thanks.

Okay, Craig. The way I would describe Capital One is very ready for business across pretty much everything that we used to do in the card business and a few new things. So, it is really solely at this point a weak demand that is holding us back. I think unlike a lot of players haven't really had to significantly redo and rebuild our business model in some of these parts of the card business. So we are frustratingly in a sense ready for business. So demand just has been pretty weak. Now, it's not to say that it's not that picking up because in fact, in parts of the business we can see a -- more traction happening and the fact that there is more marketing is a reflection that there is -- we see both actual and the prospect for more traction here.

It is our expectation that marketing will go up -- in successive quarters -- the fourth quarter has traditionally been a higher marketing level for us -- almost on a seasonal basis with all of our sponsorship and bowls and different things. Just if we look at the very good prospects we have to make money in the card business on new originations and that combined with the weak demand, it still is our expectation that originations are going to continue to increase quarter over quarter. And as that happens, partly as a leading indicator and partly following it, our marketing will continue to rise. But, it is still quite a bit lower level than the historical highs but it is our expectation we will return to pretty strong levels of marketing. But the demand needs to be there for that, we are not just going to go spend it. Ahead of the evidence in the demand.

And Craig, it's Gary. Just on the reserving philosophy and where we feel that we are at today. Here I am assuming you're talking about the reserving level against losses of loans on the books.

Yes.

Was that a yes, Craig?

Yes, well, I'm just trying to figure out how you're thinking about it more -- there's been question around whether banks are going to have to provide reserve for a specific amount of forward-looking losses or whether they will be held to a bogie of total loans. I am just curious how you are thinking about it.

Well, look through there has been a material change in that over the course of the quarter. Take a look, our charge-off rate fell 54 basis points in the quarter. Our allowance coverage ratio came down 46 basis points. The overall charge-off rate was 4.82% in the quarter. Our coverage ratio of allowance to loans is 4.89%. I think by and large we are reserving based on the trends that we observed. There is nothing in our allowance calculation that reflects any projected improvements in macroeconomic conditions going forward. As we move forward, provision levels will be based on the usual volumes of the actual credit performance and what we see going forward. Certainly we all know that FASB has [ap] for exposure -- its draft on accounting for financial instruments which would take people perhaps to a longer future view of losses. But at this point in most of our consumer businesses certainly in card we go out for 12 months of loss in our commercial business. It's well in excess of that. We think we are in a reasonable place and obviously we will have to see where the world goes in terms of any step changes that may occur in the future based on changing accounting standards.

Next question, please.

We will go next to Bruce Harting with Barclays Capital.

Yes. Thank you. Do you have any comments on the changes happening in interchange? In other words any special insights on merchant behavior with some of the pending changes if the Fed were to lower debit interchange considerably? Any thoughts on early indications from merchants steering customers between networks -- just like your insight on that . And maybe a comment on the Kohl's deal -- will that be the first of many? And are there any special attributes or features of that relationship in terms of cobranding or things that you might want to talk

Bruce, things are very early in terms of actual indications of how merchants are going to change their behavior. I am going to stick my neck out here a little bit. I would predict there may be less of an effect than some people imagine here. I guess I have been around this business for a long period of time plus believe it or not in a prior life in my consulting days I did extensive work in the gasoline retailing business ironically and the big thing everybody was studying was discount for cash. The big debate, what do you do about that and so on. Remember the phase everybody went through with discount for cash and finally it came back to -- the problem is with discounts for cash sounded to consumers like surcharge for paying with a credit charge and there was a lot of consumer resistance to that.

I don't want to go too far out on a limb here but what I would say is that I just add this to one of the many risk factors that we all have to keep an eye out over time. But I think the overall impact I would still expect it to be modest. However, I don't want to -- I just want to point out, of course, the macro trend of the success of debit cards in gaining a lot of share against cash and checks and other things and ultimately on some metrics -- passing the credit card business. I think is a macro trend that will continue and the card business is going to face a lot of competition from alternatives here. But, I think overall, Bruce, it's not in the top -- it's not at the top of our risk factors but we are certainly going to keep an eye on that.

With respect to Kohl's let me make a comment about partnerships. If you look at partnerships and just pull way back on partnership, co-brand private-label, partnerships in the credit card space, they have ranged in the industry from being smashingly successful to very big duds. So our conclusion on this thing it's all about the partner and it's all about the nature of the agreement with the partner and it's all about the commitment that the partner has. What is the partner trying to really get out of one of these partnerships? So take Kohl's as an example because I think Kohl's is a great example of a partnership where you have a very strong retailer -- you have a very strong retailer who is very committed to their private label business not a way to quote unquote, make a lot of money but really as a way to build a very deep loyalty. They are very committed to their partnership with their card player. It is extremely important to Kohl's and is extremely important to them that they get a partner that is going to be equally committed to them. So, this has all the makings of a very good deep relationship with the partner and the creation of positively selected credit on the private-label partnership side.

So all of that -- that is a classic Exhibit A of the kind of things we are going for. Along the way we look at a lot of partnerships and we show up but don't make the bids because they are at the other end of the spectrum. So what you will see out of Capital One at a time when the number of credit card issuers are struggling a little bit. And where the companies that they have partnered with are looking for something a little different. We are moving into this phase on a selective basis and I think it's the right conclusion, Bruce, to expect to be doing more of these over time but again it's going to be very selective.

Next question, please.

We will go next to Moshe Orenbuch with Credit Suisse.

Thanks. Not to beat to death the revenue impact of the finance charge reserve, but what is the approximate size of that reserve right now?

Moshe the size of that reserve now is about $250 million.

Yes, for the last five quarters, you've had revenue suppression of $190 million this quarter and up to $500 million five quarters ago. How should we think about what the normal amount would be? It was between mid-2s to mid-3s the last couple of quarters as credit was getting better, although at a slower pace than now. Is there a way we should think about what that right number is?

Obviously, Moshe, normal is always going to be in the eye of the beholder. If feel like we are getting pretty close to some normal levels. Obviously we have assessed far fewer fees but as Rich said we are pretty well through the implementation of the CARD Act so those levels are likely to normalize. The level of finance charges just may rise or have risen a bit. But chances are those are also relatively close to normal and then collectibility feels like has come back a lot closer to normal. Is very little room for improvement? Probably. But certainly it feels like we are closer to normal now than we have been certainly if you look back four to six quarters ago.

Got you. Then just a clarification. You talked a little bit about the risk-weighted assets. How much of the risk-weighted assets from the consolidation of the securitization trusts are actually in RWA right now?

In the RWA or the risk-weighted assets and people can see that on slide seven, Moshe. That is probably the easiest place for me to give a very slight lesson here looking back so you can tell what is coming going forward. As you can see on slide seven since the end of the fourth quarter, risk-weighted assets have gone up about $8 billion from $116 billion to $124 billion. We started out with about $48 billion of securitizations. And so you would think that about half of those -- or $24 billion -- would have been phased in by this point in time. As it turns out, we had paid down almost that amount of securitization -- liabilities over the nine months -- and so there was actually very little phase-in securitizations to do this quarter. And there has been, of course, shrinkage in -- just because of the attrition and the runoff in some of the rest of our portfolio that has caused risk-weighted assets to go down.

Looking forward, we have now to quarters to go until Q1 of 2011 when we have to phase in the balance of the securitizations. It looks to us as though with paydowns and so forth we will probably phase-in something like $18 billion or $19 billion worth of securitizations between now and then. But, I would be very surprised if the overall level of risk-weighted assets went up that much because again there's some natural attrition both in the card business and elsewhere in the portfolio. So I think the key thing to keep in mind is that because we have such a large amount of securitization paydown on our part over the course of the first three quarters of this year, you didn't see a big impact in the third quarter in terms of the onboarding. You will see a more pronounced impact of the onboarding of that last group of securitized assets in the first quarter of 2011 which is why you see the projected view of regulatory ratios taking the path that they do on slide eight.

Next question, please.

We will go next to Matthew Kelly with Morgan Stanley.

Hi, thanks for taking my question. I'm hoping you can give me an idea of which of your US credit cards have seen the most consumer demand. What your consumers are looking for in this market.

Matthew, that question is phrased from a product perspective. A lot of what we do is market similar looking products to a lot of different segments. So I would say back in terms of the major products, we have the Venture Card. The Venture Card is obviously something we advertise on TV and it's a very differentiated product. We are comfortable with the attraction we are getting there and we are committed to that product offering and our continued -- I think successful efforts to penetrate the upper end of the transactor market.

What we are doing is if we look at the marketplace there are -- consistent with our strategy for the last 20 years we tend to massively de-average the market and look for pockets of opportunity. And in some places the market is at price levels that are not sustainable on a risk-adjusted basis. And, we stay out of those. In other places price levels and our own unique, I think, insights into these markets have led us to be very successful so I want to go back to -- let me synthesize a few of the questions and get back to a thing that's a blend about growth comment and a revenue margin comment if I could.

So we -- I would say just about every meeting that I have with the card business I can feel more traction than the meeting before. And we have a lot of tests that have been tests that have been laid deep in the great recession that are starting to show insights about good business opportunities even in the context of frankly scared consumers and pretty dark times. So we are finding more and more of the things that we have been testing -- we are moving into rollout mode for. And, I think that is why we feel a bullishness about our growth opportunities and I think it will modestly show itself in the card business. Of course, when you watch the card business that's also the segment -- it has continued runoff of the installment loan business blended into the same thing so you have to keep that one in mind. So, we feel very good about that and even at the same time, while the partnership business opportunities are getting a lot of traction.

Let me make one more comment about the revenue margin. The revenue margin -- I think that and the credit effect has been the biggest thing that has caused this thing to be higher than 15%. But the net business -- the way things have broken on the business side have been on the positive side, outweighing the negative with respect to our revenue margin. I think it may take things like Kohl's which comes in a lot lower margin and a lot lower charge-offs to actually get a quote unquote normalized margin down towards the things that we pointed out which is -- so, which is -- I think a reflection of the fact that overall there has been a -- the developments on margins have been slightly positive I think relative to our expectations. But where we see our business unfolding, the amount of low risk business that we think we are going to pick up, it probably gets you to the same place.

Okay. And then if I can just ask one quick follow-up on one part of implementation of the CARD Act I wanted to get your take on is the look back feature on repricing of loans. Just wanted to see how you think about that internally and how much of an impact you think that might be.

Yes, thanks, Matthew. There is a requirement that market based -- or that price increases change in terms based price increases imposed between the beginning of 2009 and February 21, 2010 must compare pricing to similar accounts offered by the issuer to new applicants in evaluating the appropriate price level. In other words the concept is they don't want you to have your repriced back book to be running at a level very different from that which is being offered to the front book if you will -- to new customers. And this -- we have said for some time that we expect industry pricing to move higher after the CARD Act. This is important for the health of new originations but actually now interestingly with this particular requirement that's the last aspect of the CARD Act interpretation it becomes now doubly important. The price levels that issuers have for their new originations is doubly important.

Now, we have done as you can imagine, a lot of analysis of this and we are -- when we compare a segment of the back book versus a segment of the front book and how they are priced. We are comfortable that we are going to be in a good place with respect to this quote unquote un-repricing if you will. There will be segments of the business where we do some un-repricing but frankly dynamically we do that all the time. I think this is an important issue that the industry is going to have to come to terms with. We have been all over this at Capital One and frankly because we are so focused on making sure in a world where repricing is a lot more constrained than it was before, as you have been hearing me say, Matthew, for a long time -- it is very important that we underwrite the originations originally -- at price levels that are sustainable through the long-term and therefore it's not surprising at Capital One that those price levels would be consistent with how the back book is priced because it's really underwritten on the very same credit foundation.

Next question, please.

We will go next to Chris Brendler with Stifel Nicolaus.

I just want to follow up on that question with the consumer. Certainly you have not been a heavy user of teaser rates but some data I have suggest that you are leaning more towards teaser rates. It seems from the industry I have seen that consumers seem to be a little more turned off of teaser rate activity and we have a lot more mail this year, but not a lot of growth in the cash volumes at VISA and MasterCard. Is that true? Are consumers less responsive to teaser rates than they had been in the past? Has there been a psychological change in the way consumers view teaser rate offers? And I have a follow-up.

So I have several things to say Chris. First of all, when you said it seems that you are doing quite a bit more teasers than you were before. I just want to clarify something that Moshe put out a report that indicated -- and Moshe very correctly reading data -- the data from the source he was getting it was not an accurate reflection of Capital One. So, let me just actually just ground that for a second. It looked like Capital One was doing a dramatically increased amount of 0% balance transfer teasers. Moshe, when we saw your analysis, we went back and looked at the underlying data and so on. And I am not sure what happened with respect to the source data but we are not doing a lot of 0% balance transfer teasers. I just wanted to clarify that. We like the industry does for certain segments do 0% purchase teasers.

So, having clarified that let me talk about teasers. I think teasers are something that is something that is going to be with the card industry as a permanent fixture here. And in fact teasers have been very explicitly allowed in all of the legislative and regulatory work as well. I think it's no different from sales at Bloomingdale's which is how the business works. I think it will. I do not think consumers are really turned off by teasers, I think consumers are not buying a lot of credit card products right now. I think the other thing with teasers right now is that the teaser rates in an environment of very low interest rates are not nearly as costly for the card issuer so I have been predicting for some time you are going to see teaser rates as a fixture of the card business. What I have also said though is for those of you who analyze the business, judge it not by its 0% teasers -- purchased teasers in particular -- because rates are low right now and those by definition have limited time periods. Judge it by the go to rates. That is really the key.

And when we look at what's happened with respect to go to rates -- I have been talking to you in virtually every call -- about the trend in pricing out there so we can keep an eye on. Is the industry in a world where there is a lot less flexibility to do repricing? Is the industry building in appropriate margins here? The good news is that if you look at -- let's call it go to rate minus prime -- to adjust for what has happened to interest rates that has gone up although it's stabilized now -- but it has gone up about 200 basis points since basically the CARD Act was passed. So however I think the industry has done it the easy way because they basically have kept pricing where is while interest rates have gone down. So I am not as confident that the industry is as robust as in their pricing as they need to be when things go up. You had another question there, Chris?

Yes, my second question, related question is -- you've talked about consumer demands still being weak. You've seen a little bit of a pickup, it sounds like. Any thoughts or commentary by segments? Are you seeing any better signs of demand on the low end of the market or conversely in the high-end where it's so competitive for those high spenders. Are you seeing a pickup there as well?

I think we are seeing -- the pickup we are seeing is modest. This is modest with a small end. It's not a dramatic thing. But the sign is very important to us. The modest pickup we are seeing in most of the segments frankly that we compete in -- from the higher end down lower. It is a small affect. I wouldn't take it all the way to the bank. It matters a lot to us because we are really ready for business and I think have a lot of opportunity to have very attractively -- very attractive return originations.

Next question, please.

And, your last question comes from John Stilmar with SunTrust.

Good morning, hopefully these last two questions will be quick. Rich, I just wanted to put a finer point on your foray into the private label. You've always been quote as you have referenced, de-averaging the market for many years now. And, going into the nooks and kernels of the US consumer market. So, I find the move into what seems to be a little bit more of a commoditized product or an auction process a little more interesting. What am I missing about that market that is different today and how can Capital One given its [knitting] -- why is that market so attractive? And then I have a follow-up.

That is a very smart question, John because where companies that always go where auctions are held tend not to end up at the top of the performance list. So that is a core principle of ours. So let me make one structural point and one cyclical point. Let me start with the cyclical point. The auctions are happening but let's put it this way the pricing is radically different. We are talking about pricing that is in some cases in terms of premiums a fraction of what it was a couple of years ago for the same portfolios that turned some years ago. So I am okay with auctions if I understand the nature of what part of the cycle I'm playing in. And so there is a cyclical effect here.

The structural thing I want to talk about goes back to the point that some private label businesses are actually really attractive. I think for us there is a bit of a diversification benefit that also comes in a world where there is uncertainty about interchange, uncertainty about certain -- some of the core ways that business has been done in the past I think that although its not our primary motivation, I think there are benefits also just from the diversification that comes in the world of interchange risk. But primarily it's -- what we have done, what we try to do is take advantage of adversity and the great adversity we all can see here is the great recession. The great recession not only has changed supply and demand but has allowed us to get a phenomenal window into how credit risk works. So we've tried to be real students on how credit risk and positive and negative selection have worked in every part of the market. And, we are really on the hunt for the -- shall we say more positively selected partnership programs.

Thank you. And then my follow-up question, Gary, with regards to the consumer banking segment. Is this really a 13% revenue margin business? Clearly there is the positive mix that is influenced there given that auto is becoming a more dominant part of this. Can you help lay out for me what we should start expecting for this segment as it moves through time into 2011?

John, I do not want to go into great detail. I wouldn't read much into any given quarter. Remember in the consumer segment we have our home loans segment and a lot of that -- the back book is going to be moving quite a bit up and down. Auto is -- we've indicated we are seeing the -- some positive growth there at this point overall. But I think it's premature to try to identify what the long-run destination of that particular segment is and again it does reflect a lot of different businesses. And so if you take a look actually over the last couple of quarters we have seen a lot of puts and takes and I think we will see some movements for a while. But I wouldn't read any long-term trends into that. We will be talking to you about that over the next period of time.

Thanks everybody for joining us on the conference call today. Thank you for your continuing interest in Capital One. The investor relations team will be in today to answer your questions and everyone have a great day. Thanks.

Thank you. Once again, ladies and gentlemen, this does conclude today's conference. We thank you for your participation.