Edgar Filing: CAPITAL ONE FINANCIAL CORP

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Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No. 1-13300

CAPITAL ONE FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)


Delaware		54-1719854
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

1680 Capital One Drive, McLean, Virginia		22102
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code:

(703) 720-1000

(Former name, former address and former fiscal year, if changed since last report)

(Not applicable)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a Shell Company (as defined in Rule 12b-2 of the Exchange Act) Yes ¨ No x

As of July 31, 2012, there were 580,850,895 shares of the registrant’s Common Stock, par value $.01 per share, outstanding.

TABLE OF CONTENTS


		Page
PART I—FINANCIAL INFORMATION			1
Item 1.	Financial Statements		64
	Condensed Consolidated Balance Sheets		64
	Condensed Consolidated Statements of Income		65
	Condensed Consolidated Statements of Comprehensive Income		66
	Condensed Consolidated Statement of Changes in Stockholders’ Equity		67
	Condensed Consolidated Statements of Cash Flows		68
	Notes to Condensed Consolidated Financial Statements		69
	Note 1—Summary of Significant Accounting Policies		69
	Note 2—Acquisitions		71
	Note 3—Discontinued Operations		76
	Note 4—Investment Securities		77
	Note 5—Loans		87
	Note 6—Allowance for Loan and Lease Losses		108
	Note 7—Variable Interest Entities and Securitizations		111
	Note 8—Goodwill and Other Intangible Assets		120
	Note 9—Deposits and Borrowings		123
	Note 10—Derivative Instruments and Hedging Activities		126
	Note 11—Stockholders’ Equity		132
	Note 12—Earnings Per Common Share		132
	Note 13—Fair Value of Financial Instruments		133
	Note 14—Business Segments		148
	Note 15—Commitments, Contingencies and Guarantees		151
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)		1
	Summary of Selected Financial Data		1
	Introduction		5
	Executive Summary and Business Outlook		6
	Critical Accounting Policies and Estimates		10
	Consolidated Results of Operations		11
	Business Segment Financial Performance		18
	Consolidated Balance Sheet Analysis and Credit Performance		31
	Off-Balance Sheet Arrangements and Variable Interest Entities		35
	Capital Management		35
	Risk Management		38
	Credit Risk Profile		39
	Liquidity Risk Profile		52
	Market Risk Profile		55
	Supervision and Regulation		58
	Accounting Changes and Developments		59
	Forward-Looking Statements		59
	Supplemental Tables		62
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		163
Item 4.	Controls and Procedures		163
PART II—OTHER INFORMATION			164
Item 1.	Legal Proceedings		164
Item 1A.	Risk factors		164
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		164
Item 3.	Defaults upon Senior Securities		164
Item 5.	Other Information		164
Item 6.	Exhibits		164
SIGNATURES			165
EXHIBIT INDEX			166

INDEX OF MD&A TABLES AND SUPPLEMENTAL TABLES


Table	Description	Page
—	MD&A Tables:
1	Consolidated Financial Highlights (Unaudited)		2
2	Business Segment Results		6
3	Average Balances, Net Interest Income and Net Interest Yield		12
4	Rate/Volume Analysis of Net Interest Income		14
5	Non-Interest Income		15
6	Non-Interest Expense		17
7	Credit Card Business Results		20
7.1	Domestic Card Business Results		22
7.2	International Card Business Results		24
8	Consumer Banking Business Results		25
9	Commercial Banking Business Results		28
10	Investment Securities		31
11	Non-Agency Investment Securities Credit Ratings		33
12	Net Loans Held for Investment		33
13	Changes in Representation and Warranty Reserve		35
14	Capital Ratios Under Basel I		36
15	Risk-Based Capital Components Under Basel I		37
16	Loan Portfolio Composition		40
17	30+ Day Delinquencies		42
18	Aging and Geography of 30+ Day Delinquent Loans		43
19	90+ Days Delinquent Loans Accruing Interest		43
20	Nonperforming Loans and Other Nonperforming Assets		44
21	Net Charge-Offs		46
22	Loan Modifications and Restructurings		47
23	Summary of Allowance for Loan and Lease Losses		50
24	Allocation of the Allowance for Loan and Lease Losses		51
25	Liquidity Reserves		52
26	Deposits		53
27	Expected Maturity Profile of Short-term Borrowings and Long-term Debt		54
28	Senior Unsecured Debt Credit Ratings		55
29	Interest Rate Sensitivity Analysis		57

—	Supplemental Tables:
A	Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures		62

PART I—FINANCIAL INFORMATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)

This MD&A should be read in conjunction with our unaudited condensed consolidated financial statements and related notes in this Report and the more detailed information contained in our 2011 Annual Report on Form 10-K (“2011 Form 10-K”). This discussion contains forward-looking statements that are based upon management’s current expectations and are subject to significant uncertainties and changes in circumstances. Please review “Forward-Looking Statements” for more information on the forward-looking statements in this Report. Our actual results may differ materially from those included in these forward-looking statements due to a variety of factors including, but not limited to, those described in this Report in “Part II—Item 1A. Risk Factors,” in our 2011 Form 10-K in “Part I—Item 1A. Risk Factors.”

SUMMARY OF SELECTED FINANCIAL DATA

Below we provide selected consolidated financial data from our results of operations for the three and six months ended June 30, 2012 and 2011, and selected comparative consolidated balance sheet data as of June 30, 2012, and December 31, 2011. We also provide selected key metrics we use in evaluating our performance.

On February 17, 2012, we completed the acquisition of substantially all of the ING Direct business in the United States (“ING Direct”) from ING Groep N.V., ING Bank N.V., ING Direct N.V. and ING Direct Bancorp “ (the “ING Direct acquisition”). The ING Direct acquisition resulted in the addition of loans of $40.4 billion, other assets of $53.9 billion and deposits of $84.4 billion as of the acquisition date. On May 1, 2012, pursuant to the agreement with HSBC Finance Corporation, HSBC USA Inc. and HSBC Technology and Services (USA) Inc. (collectively, “HSBC”), we closed the acquisition of substantially all of the assets and assumed liabilities of HSBC’s credit card and private-label credit card business in the United States (other than the HSBC Bank USA, National Association consumer credit card program and certain other retained assets and liabilities) (the “HSBC U.S. card acquisition”). The HSBC U.S. card acquisition included (i) the acquisition of HSBC’s U.S. credit card portfolio, (ii) its on-going private label and co-branded partnerships, and (iii) other assets, including infrastructure and capabilities. At closing, we acquired approximately 27 million new active accounts, approximately $27.8 billion in outstanding credit card receivables designated as held for investment and approximately $327 million in other net assets. The ING Direct and HSBC U.S. card acquisitions had a significant impact on our results and selected metrics for the three and six months ended June 30, 2012 and our financial condition as of June 30, 2012.

We use the term “acquired loans” to refer to a limited portion of the credit card loans acquired in the HSBC U.S. card acquisition and the substantial majority of consumer and commercial loans acquired in the ING Direct and Chevy Chase Bank (“CCB”) acquisitions, which were recorded at fair value at acquisition and subsequently accounted for based on expected cash flows to be collected (under the accounting standard formerly known as “Statement of Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer,” commonly referred to as “SOP 03-3”). HSBC U.S. card loans accounted for based on expected cash flows consisted of loans with a fair value at acquisition of $651 million that were deemed to be credit impaired because they were delinquent and revolving cardholder privileges had been revoked. Because the fair value recorded at acquisition and subsequent accounting for these loans takes into consideration future credit losses expected to be incurred, there are no charge-offs or an allowance associated with these loans unless the estimated cash flows expected to be collected decrease subsequent to acquisition. In addition, these loans are not classified as delinquent or nonperforming even though the customer may be contractually past due because we expect that we will fully collect the carrying value of these loans. The accounting and classification of these loans may significantly alter some of our reported credit quality metrics. We therefore supplement certain reported credit quality metrics with metrics adjusted to exclude the impact of these acquired loans.

Of the $27.8 billion in outstanding HSBC U.S. card loans that we acquired that were designated as held for investment, $26.2 billion had existing revolving privileges at acquisition and were therefore excluded from the accounting guidance applied to the loans described above. These loans were recorded at fair value of $26.9 billion at acquisition, resulting in a net premium of $705 million at acquisition. Under applicable accounting guidance, we are required to amortize the net premium of $705 million over the contractual principal amount as an adjustment to interest income over the remaining life of the loans. In the second quarter of 2012, we recorded provision expense of $1.2 billion to establish an allowance primarily related to these loans. The provision expense of $1.2 billion is included in the provision for credit losses of $1.7 billion recorded in the second quarter of 2012. For additional information, see “Credit Risk Profile” and “Note 5—Loans—Acquired Loans.”

Table 1: Consolidated Financial Highlights (Unaudited)


	Three Months Ended June 30,									Six Months Ended June 30,
(Dollars in millions)	2012			2011			Change			2012			2011			Change
Income statement
Net interest income	$	4,001		$	3,136			28	%	$	7,415		$	6,276			18	%
Non-interest income⁽¹⁾		1,054			857			23			2,575			1,799			43

Total net revenue⁽²⁾		5,055			3,993			27			9,990			8,075			24
Provision for credit losses		1,677			343			389			2,250			877			157
Non-interest expense		3,142			2,255			39			5,646			4,417			28

Income from continuing operations before income taxes		236			1,395			(83	)		2,094			2,781			(25	)
Income tax provision		43			450			(90	)		396			804			(51	)

Income from continuing operations, net of taxes		193			945			(80	)		1,698			1,977			(14	)
Loss from discontinued operations, net of taxes⁽³⁾		(100	)		(34	)		(194	)		(202	)		(50	)		(304	)

Net income		93			911			(90	)		1,496			1,927			(22	)
Dividends and undistributed earnings allocated to participating securities		(1	)		—			**			(8	)		—			**

Net income available to common shareholders	$	92		$	911			(90	)%	$	1,488		$	1,927			(23	)%

Common share statistics
Earnings per common share:
Basic earnings per common share	$	0.16		$	2.00			(92	)%	$	2.74		$	4.24			(35	)%
Diluted earnings per common share		0.16			1.97			(92	)		2.72			4.18			(35	)
Weighted average common shares outstanding:
Basic earnings per common share		577.7			455.6			27			543.3			454.9			19
Diluted earnings per common share		582.8			462.2			26			548.0			461.3			19
Dividends per common share		0.05			0.05			—			0.10			0.10			—
Average balances
Loans held for investment⁽⁴⁾	$	192,632		$	127,916			51	%	$	172,767		$	126,504			37	%
Interest-earning assets		265,019			174,113			52			237,667			173,779			37
Total assets		295,306			199,229			48			270,786			198,612			36
Interest-bearing deposits		195,597			109,251			79			173,611			108,944			59
Total deposits		214,914			125,834			71			192,586			125,001			54
Borrowings		35,418			39,451			(10	)		35,706			39,991			(11	)
Stockholders’ equity		37,533			28,255			33			35,258			27,636			28


	Three Months Ended June 30,									Six Months Ended June 30,
(Dollars in millions)	2012			2011			Change			2012			2011			Change
Selected performance metrics
Purchase volume⁽⁵⁾	$	45,228		$	34,226			32	%	$	79,726		$	62,023			29	%
Total net revenue margin⁽⁶⁾		7.63	%		9.17	%		(154	)bps		8.41	%		9.29	%		(88	)bps
Net interest margin⁽⁷⁾		6.04			7.20			(116	)		6.24			7.22			(98	)
Net charge-offs	$	738		$	931			(21	)%	$	1,518		$	2,076			(27	)%
Net charge-off rate⁽⁸⁾		1.53	%		2.91	%		(138	)bps		1.76	%		3.28	%		(152	)bps
Net charge-off rate (excluding acquired loans)⁽⁹⁾		1.96			3.03			(107	)		2.17			3.42			(125	)
Return on average assets⁽¹⁰⁾		0.26			1.90			(164	)		1.25			1.99			(74	)
Return on average stockholders’ equity⁽¹¹⁾		2.06			13.38			(1132	)		9.63			14.31			(468	)
Non-interest expense as a % of average loans held for investment⁽¹²⁾		6.52			7.05			(53	)		6.54			6.98			(44	)
Efficiency ratio⁽¹³⁾		62.16			56.47			569			56.52			54.70			182
Effective income tax rate		18.2			32.3			(1410	)		18.9			28.9			(1000	)


(Dollars in millions)	June 30, 2012			December 31, 2011			Change
Balance sheet (period end)
Loans held for investment	$	202,749		$	135,892			49	%
Interest-earning assets		264,331			179,878			47
Total assets		296,572			206,019			44
Interest-bearing deposits		193,859			109,945			76
Total deposits		213,931			128,226			67
Borrowings		35,874			39,561			(9	)
Total liabilities		259,380			176,353			47
Stockholders’ equity		37,192			29,666			25
Credit quality metrics (period end)
Allowance for loan and lease losses	$	4,998		$	4,250			18	%
Allowance as a % of loans held of investment		2.47	%		3.13	%		(66	)bps
Allowance as a % of loans held of investment (excluding acquired loans)⁽⁹⁾		3.08			3.22			(14	)
30+ day performing delinquency rate		2.06			3.35			(129	)
30+ day performing delinquency rate (excluding acquired loans)⁽⁹⁾		2.59			3.47			(88	)
30+ day delinquency rate		2.43			3.95			(152	)
30+ day delinquency rate (excluding acquired loans)⁽⁹⁾		3.06			4.09			(103	)
Capital ratios⁽¹⁴⁾
Tier 1 common ratio⁽¹⁵⁾		9.9	%		9.7	%		20	bps
Tier 1 risk-based capital ratio⁽¹⁶⁾		11.6			12.0			(40	)
Total risk-based capital ratio⁽¹⁷⁾		14.0			14.9			(90	)
Tangible common equity ratio (“TCE ratio”)⁽¹⁸⁾		7.4			8.2			(80	)
Associates
Full-time equivalent employees (in thousands)		37.4			30.5			23	%

**	Change is less than one percent or not meaningful.

⁽¹⁾

Includes a bargain purchase gain of $594 million attributable to the ING Direct acquisition recognized in non-interest income in the first quarter and first six months of 2012. The bargain purchase gain represents the excess of the fair value of the net assets acquired from ING Direct as of the acquisition date over the consideration transferred. See “Note 2—Acquisitions” for additional information.

⁽²⁾	Total net revenue was reduced by $311 million and $112 million for the three months ended June 30, 2012 and 2011, respectively and $434 million and $217 million for the six months ended June 30, 2012 and 2011, respectively, for the estimated uncollectible amount of billed finance charges and fees.

⁽³⁾	Discontinued operations reflect ongoing costs related to the mortgage origination operations of GreenPoint’s wholesale mortgage banking unit, GreenPoint Mortgage Funding, Inc. (“GreenPoint”), which we closed in 2007.

⁽⁴⁾

Loans held for investment includes loans acquired in the HSBC U.S. card, ING Direct and Chevy Chase Bank acquisitions. The carrying value of acquired loans accounted for subsequent to acquisition based on expected cash flows to be collected was $41.7 billion and $4.7 billion as of June 30, 2012 and December 31, 2011, respectively. The average balance of loans held for investment, excluding the carrying value of acquired loans, was $150.5 billion and $122.8 billion for the three months ended June 30, 2012 and 2011, respectively, and $140.1 billion and $121.3 billion for the six months ended June 30, 2012 and 2011, respectively. See “Note 5—Loans” for additional information.

⁽⁵⁾	Consists of credit card purchase transactions for the period, net of returns. Excludes cash advance transactions.

⁽⁶⁾	Calculated based on annualized total net revenue for the period divided by average interest-earning assets for the period.

⁽⁷⁾	Calculated based on annualized net interest income for the period divided by average interest-earning assets for the period.

⁽⁸⁾	Calculated based on annualized net charge-offs for the period divided by average loans held for investment for the period.

⁽⁹⁾

Calculation of ratio adjusted to exclude from the denominator acquired loans accounted for subsequent to acquisition based on expected cash flows to be collected. See “Business Segment Financial Performance,” “Credit Risk Profile” and “Note 5—Loans—Credit Quality” for additional information on the impact of acquired loans on our credit quality metrics.

⁽¹⁰⁾	Calculated based on annualized income from continuing operations, net of tax, for the period divided by average total assets for the period.

⁽¹¹⁾	Calculated based on annualized income from continuing operations, net of tax, for the period divided by average stockholders’ equity for the period.

⁽¹²⁾	Calculated based on annualized non-interest expense, excluding goodwill impairment charges, for the period divided by average loans held for investment for the period.

⁽¹³⁾	Calculated based on non-interest expense, excluding goodwill impairment charges, for the period divided by total revenue for the period.

⁽¹⁴⁾	Regulatory capital ratios as of June 30, 2012 are preliminary and therefore subject to change.

⁽¹⁵⁾

Tier 1 common ratio is a regulatory capital measure calculated based on Tier 1 common capital divided by risk-weighted assets. See “Capital Management” and “Supplemental Tables—Table A: Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures” for additional information, including the calculation of this ratio.

⁽¹⁶⁾

Tier 1 risk-based capital ratio is a regulatory measure calculated based on Tier 1 capital divided by risk-weighted assets. See “Capital Management” and “Supplemental Tables—Table A: Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures” for additional information, including the calculation of this ratio.

⁽¹⁷⁾

Total risk-based capital ratio is a regulatory measure calculated based on total risk-based capital divided by risk-weighted assets. See “Capital Management” and “Supplemental Tables—Table A: Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures” for additional information, including the calculation of this ratio.

⁽¹⁸⁾

TCE ratio is a non-GAAP measure calculated based on tangible common equity divided by tangible assets. See “Supplemental Tables—Table A: Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures” for the calculation of this measure and reconciliation to the comparative GAAP measure.

INTRODUCTION

We are a diversified financial services holding company with banking and non-banking subsidiaries that offer a broad array of financial products and services to consumers, small businesses and commercial clients through branches, the internet and other distribution channels. Our principal subsidiaries include Capital One Bank (USA), National Association (“COBNA”), Capital One, National Association (“CONA”) and ING Bank, fsb. The Company and its subsidiaries are hereafter collectively referred to as “we,” “us” or “our.” CONA and COBNA are hereafter collectively referred to as the “Banks.” We continue to deliver on our strategy of combining the power of national scale lending and local scale banking.

The closing of the ING Direct acquisition in the first quarter of 2012 resulted in the addition of loans of $40.4 billion and other assets of $53.9 billion at acquisition. The ING Direct acquisition, which added over seven million customers and approximately $84.4 billion in deposits to our Consumer Banking business segment as of the acquisition date, strengthens our customer franchise. With the ING Direct acquisition, we have grown to become the sixth largest depository institution and the largest direct banking institution in the United States. The closing of the HSBC U.S. card acquisition in the second quarter of 2012 added approximately 27 million new active accounts and approximately $27.8 billion in outstanding credit card receivables as of the acquisition date that we designated as held for investment. Period-end loans held for investment increased to $202.7 billion and deposits increased to $213.9 billion as of June 30, 2012, up from period-end loans of $135.9 billion and deposits of $128.2 billion as of December 31, 2011.

Our revenues are primarily driven by lending to consumers and commercial customers and by deposit-taking activities, which generate net interest income, and by activities that generate non-interest income, such as fee-based services provided to customers, merchant interchange fees with respect to certain credit card transactions, gains and losses and fees associated with the sale and servicing of loans. Our expenses primarily consist of the cost of funding our assets, our provision for credit losses, operating expenses (including associate salaries and benefits, infrastructure maintenance and enhancements and branch operations and expansion costs), marketing expenses and income taxes.

Our principal operations are currently organized, for management reporting purposes, into three primary business segments, which are defined primarily based on the products and services provided or the type of customer served: Credit Card, Consumer Banking and Commercial Banking. The operations of acquired businesses have been integrated into our existing business segments. The acquired HSBC U.S. card business is reflected in our Credit Card business, while the acquired ING Direct business is primarily reflected in our Consumer Banking business. Certain activities that are not part of a segment are included in our “Other” category.

•

Credit Card: Consists of our domestic consumer and small business card lending, national small business lending, national closed end installment lending and the international card lending businesses in Canada and the United Kingdom.

•

Consumer Banking: Consists of our branch-based lending and deposit gathering activities for consumers and small businesses, national deposit gathering, national auto lending and consumer home loan lending and servicing activities.

•

Commercial Banking: Consists of our lending, deposit gathering and treasury management services to commercial real estate and commercial and industrial customers. Our commercial and industrial customers typically include companies with annual revenues between $10 million to $1.0 billion.

In the first quarter of 2012, we re-aligned the reporting of our Commercial Banking business to reflect the operations on a product basis rather than by customer type. Table 2 summarizes our business segment results, which we report based on income from continuing operations, net of tax, for the three and six months ended June 30, 2012 and 2011. We provide additional information on the realignment of our Commercial Banking business segment below under “Business Segment Results” and in “Note 14—Business Segments” of this

Report. We also provide a reconciliation of our total business segment results to our consolidated U.S. GAAP results in “Note 14—Business Segments.”

Table 2: Business Segment Results


	Three Months Ended June 30,
	2012												2011
	Total Net Revenue⁽¹⁾						Net Income (Loss)⁽²⁾						Total Net Revenue⁽¹⁾						Net Income (Loss)⁽²⁾
(Dollars in millions)	Amount			% of Total			Amount			% of Total			Amount			% of Total			Amount			% of Total
Credit Card	$	3,121			62	%	$	(297	)		(154	)%	$	2,509			63	%	$	618			66	%
Consumer Banking		1,681			33			438			227			1,245			31			287			30
Commercial Banking		509			10			228			118			450			11			159			17
Other⁽³⁾		(256	)		(5	)		(176	)		(91	)		(211	)		(5	)		(119	)		(13	)

Total from continuing operations	$	5,055			100	%	$	193			100	%	$	3,993			100	%	$	945			100	%


	Six Months Ended June 30,
	2012										2011
	Total Net Revenue⁽¹⁾					Net Income (Loss)⁽²⁾					Total Net Revenue⁽¹⁾						Net Income (Loss)⁽²⁾
(Dollars in millions)	Amount		% of Total			Amount		% of Total			Amount			% of Total			Amount			% of Total
Credit Card	$	5,711		57	%	$	269		16	%	$	5,124			63	%	$	1,261			64	%
Consumer Banking		3,145		32			662		39			2,414			30			502			25
Commercial Banking		1,025		10			438		26			897			11			321			16
Other⁽³⁾		109		1			329		19			(360	)		(4	)		(107	)		(5	)

Total from continuing operations	$	9,990		100	%	$	1,698		100	%	$	8,075			100	%	$	1,977			100	%

⁽¹⁾	Total net revenue consists of net interest income and non-interest income.

⁽²⁾	Net income for our business segments is reported based on income from continuing operations, net of tax.

⁽³⁾	Includes the residual impact of the allocation of our centralized Corporate Treasury group activities, such as management of our corporate investment portfolio and asset/liability management, to our business segments as well as other items as described in “Note 14—Business Segments.”

EXECUTIVE SUMMARY AND BUSINESS OUTLOOK

With the close of the HSBC U.S. card acquisition on May 1, 2012, we have now completed both of the acquisitions announced in 2011, and we are devoting significant effort to the integration of ING Direct and HSBC’s U.S. card business. While we expect that the combined Capital One, ING Direct and HSBC businesses will deliver attractive financial results and strong capital generation, the HSBC U.S. card acquisition had a significant impact on our second quarter 2012 results, primarily due to the post-acquisition impact of a number of purchase accounting adjustments and the establishment of an allowance for loan and lease losses and finance charge and fee reserve for HSBC loans as of the end of the quarter.

Financial Highlights

The post-acquisition impact of purchase accounting adjustments and other charges related to the HSBC U.S. card acquisition, coupled with charges associated with other items, reduced our net income to $92 million ($0.16 per diluted share) for the second quarter of 2012 on total net revenue of $5.1 billion. In comparison, we reported net income of $1.4 billion ($2.72 per diluted share) for the first quarter of 2012 on total net revenue of $4.9 billion,

and net income of $911 million ($1.97 per diluted share) for the second quarter of 2011 on total net revenue of $4.0 billion. Net income totaled $1.5 billion ($2.72 per diluted share) for the first six months of 2012, compared with net income of $1.9 billion ($4.18 per diluted share) for the first six months of 2011.

The primary post-acquisition charges relative to the HSBC U.S. card acquisition that affected our results for the second quarter of 2012 included a provision for credit losses of $1.2 billion, which was primarily related to the $26.2 billion in outstanding HSBC U.S. credit card receivables recorded at a fair value of $26.9 billion and designated as held for investment that had existing revolving privileges at acquisition and were therefore accounted for based on contractual cash flows, a charge of $174 million to establish a reserve for estimated uncollectible billed finance charges and fees for these loans and merger-related expenses, including transaction costs, of $106 million.

Our second quarter results also reflect the unfavorable impact of charges related to certain other items, including $60 million for civil penalties and $41 million for expected customer refunds related to regulatory settlements pertaining to cross-sell activities in our Domestic Card business, a $180 million provision for repurchase losses related to mortgage representations and warranties, of which $154 million was recorded in discontinued operations, and $98 million for legal costs related to interchange and other settlements during the quarter. For more information on these regulatory settlements and related matters, please see “Supervision and Regulation— Required Enhancements to Compliance and Risk Management Programs.”

The HSBC U.S. card acquisition and related purchase accounting adjustments resulted in a significant increase in risk-weighted assets and a reduction in our regulatory capital ratios at the end of the second quarter. Our Tier 1 common ratio was 9.9% as of June 30, 2012, compared with 11.9% as of March 31, 2012 and 9.7% as of December 31, 2011. Our Tier 1 risk-based capital ratio was 11.6% as of June 30, 2012, compared with 13.9% as of March 31, 2012 and 12.0% as of December 31, 2011. The increases in our regulatory capital ratios during the first quarter of 2012 were largely due to equity issuances during the quarter.

Below are additional highlights of our performance for the second quarter and first six months of 2012. These highlights generally are based on a comparison to the same prior year periods, except as otherwise noted. The changes in our financial condition and credit performance are generally based on our financial condition and credit performance as of June 30, 2012, compared with our financial condition and credit performance as of December 31, 2011. We provide a more detailed discussion of our financial performance in the sections following this “Executive Summary and Business Outlook.”

Total Company

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Earnings: Our net income of $92 million for the second quarter of 2012 decreased by $819 million, or 90%, from the second quarter of 2011, while our net income of $1.5 billion for the first six months of 2012 decreased by $439 million, or 23%, from the first six months of 2011. The decrease in net income in the second quarter of 2012 was driven primarily by the post-acquisition charges related to the HSBC U.S. card acquisition and the other charges discussed above. The decrease in net income in the first six months of 2012 was also driven by the post-acquisition charges related to the HSBC U.S. card acquisition and other charges recorded in the second quarter of 2012 discussed above as well higher operating expenses related to our recent acquisitions and higher infrastructure costs from our continued investments in our home loan business and growth in auto originations. The impact from these items was partially offset by the favorable impact from the bargain purchase gain of $594 million attributable to ING Direct acquisition recorded in the first quarter of 2012 and higher revenue from our legacy businesses.

•

Total Loans: Period-end loans held for investment increased by $66.8 billion, or 49%, during the first six months of 2012, to $202.7 billion as of June 30, 2012, from $135.9 billion as of December 31, 2011. The increase was primarily attributable to the additions of the acquired ING Direct loan portfolio of $40.4 billion and the $27.8 billion in outstanding HSBC U.S. card loans that we acquired and classified as held for

investment. Excluding the impact of the addition of the acquired ING Direct and HSBC U.S. card loan portfolios designated as held for investment, period-end loans held for investment decreased by $1.2 billion, or 1%. The decrease was largely due to normal seasonal credit card pay downs and the continued run-off of installment loans in our Credit Card business, which was partially offset by auto loan growth that outpaced the expected home loan run-off in our Consumer Banking business.

•

Charge-off and Delinquency Statistics: The net charge-off rate decreased to 1.53% in the second quarter of 2012, from 2.04% in the first quarter of 2012, and 2.91% in the second quarter of 2011. The 30+ day delinquency rate decreased to 2.43% as of June 30, 2012, from 2.69% as of March 31, 2012 and 3.95% as of December 31, 2011. Our credit trends remain relatively stable at historically strong levels, with normal seasonal patterns and some continued improvement across our legacy card portfolio. The addition of the acquired ING Direct and HSBC loan portfolios and related accounting has contributed to some of the improvement in our net charge-off and delinquency metrics. We provide information on our credit quality metrics, excluding the impact of acquired loans accounted for based on estimated cash flows expected to be collected, below under “Business Segments” and “Credit Risk Profile.”

•

Allowance for Loan and Lease Losses: We increased our allowance by $938 million in the second quarter of 2012 and by $748 million in the first six months of 2012 to $5.0 billion as of June 30, 2012. The increase was primarily driven by the establishment of an allowance for HSBC U.S. card loans of $1.2 billion for estimated incurred losses inherent in the portfolio as of the end of the quarter. Although the allowance increased, the coverage ratio of the allowance to total loans held for investment fell by 66 basis points to 2.47% as of June 30, 2012, from 3.13% as of December 31, 2011. The decrease in the allowance coverage ratio was largely due to the addition of the acquired HSBC U.S. card and ING Direct loans accounted for based on estimated cash flows expected to be collected. As discussed above, because the accounting for these loans takes into consideration future credit losses expected to be incurred, there are no charge-offs or an allowance associated with these loans unless the estimated cash flows expected to be collected decrease subsequent to acquisition. We did not have an allowance associated with these loans as of June 30, 2012.

•

Representation and Warranty Provision: We recorded a provision for mortgage repurchase losses of $180 million and $349 million in the second quarter and first six months of 2012, respectively, compared with a provision of $37 million and $81 million in the second quarter and first six months of 2011, respectively. The increase in the provision for repurchase losses was primarily driven by updated estimates of anticipated outcomes from various litigation and threatened litigation in the insured securitization segment based on relevant factual and legal developments and a first quarter settlement between a subsidiary and a GSE to resolve present and future claims. We provide additional information on the representation and warranty reserve in “Note 15—Commitments, Contingencies and Guarantees.”

Business Segments

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Credit Card: Our Credit Card business recorded a net loss from continuing operations of $297 million and net income from continuing operations of $269 million in the second quarter and first six months of 2012, respectively, compared with net income from continuing operations of $618 million and $1.3 billion in the second quarter and first six months of 2011, respectively. The results for our Credit Card business for the second quarter and first six months of 2012 were significantly impacted by the post-acquisition impact of purchase accounting adjustments and other charges related to the HSBC U.S. card acquisition, which more than offset an increase in total net revenue, due in part to the an increase in average loan balances and fees resulting from the addition of the HSBC U.S. card portfolio.

•

Consumer Banking: Our Consumer Banking business generated net income from continuing operations of $438 million and $662 million in the second quarter and first six months of 2012, respectively, compared with net income from continuing operations of $287 million and $502 million in the second quarter and first six months of 2011, respectively. The increase in earnings was attributable to growth in total net revenue, which was partially offset by higher non-interest expense and an increase in the provision for credit losses. Growth in revenue stemmed from higher average loan balances resulting from increased auto loan

originations over the past year and added home loans from the ING Direct acquisition. The increase in non-interest expense was largely due to operating expenses associated with ING Direct, higher infrastructure expenditures resulting from continued investments in our home loan business and growth in auto originations and modestly higher marketing expenditures in our retail banking operations. The increase in the provision for credit losses was largely due to increased loan balances due to growth in auto loan originations, as net charge-offs declined as a result of continued credit performance improvements.

•

Commercial Banking: Our Commercial Banking business generated net income from continuing operations of $228 million and $438 million in the second quarter and first six months of 2012, respectively, compared with net income from continuing operations of $159 million and $321 million in the second quarter and first six months of 2011, respectively. The improvement in results for Commercial Banking was attributable to an increase in revenues driven by increased average loan balances as well as loan spreads and a decrease in the provision for credit losses due to improving credit trends. These factors were partially offset by higher non-interest expense resulting from operating costs associated with the increased volume of loan originations in our commercial real estate and commercial and industrial business, increased infrastructure expenditures and the expansion into new markets.

Business Outlook

We discuss below our current expectations regarding our total company performance and the performance of each of our business segments over the near-term based on market conditions, the regulatory environment and our business strategies as of the time we filed this Quarterly Report on Form 10-Q. The statements contained in this section are based on our current expectations regarding our outlook for our financial results and business strategies. Our expectations take into account, and should be read in conjunction with, our expectations regarding economic trends and analysis of our business as discussed in “Part I—Item 1. Business” and “Part I—Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2011 Form 10-K. Certain statements are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those in our forward-looking statements. Forward-looking statements do not reflect: (i) any change in current dividend or repurchase strategies, (ii) the effect of any acquisitions, divestitures or similar transactions, except for the forward-looking statements specifically discussing the acquisition of ING Direct or of HSBC’s U.S. credit card business, or (iii) any changes in laws, regulations or regulatory interpretations, in each case after the date as of which such statements are made. See “Forward-Looking Statements” in this Quarterly Report on Form 10-Q for more information on the forward-looking statements in this report and “Item 1A. Risk Factors” in our 2011 Form 10-K for factors that could materially influence our results.

Total Company Expectations

Our strategies and actions are designed to deliver and sustain strong returns and capital generation through the acquisition and retention of franchise-enhancing customer relationships across our businesses. We believe that franchise-enhancing customer relationships produce strong long-term economics through low credit costs, low customer attrition and a gradual build in loan balances and revenues over time. Examples of franchise-enhancing customer relationships include rewards customers and new partnerships in our Credit Card business, retail deposit customers in our Consumer Banking business and primary banking relationships with commercial customers in our Commercial Banking business. We intend to grow these customer relationships by continuing to invest in our bank infrastructure to allow us to provide more convenient and flexible customer banking options, including a broader range of fee-based and credit products and services, by leveraging our direct bank customer franchise with national reach and by continued marketing investments to attract and retain credit card and auto finance customers and further strengthen our brand. The acquisitions of ING Direct and HSBC’s U.S. credit card business will strengthen and expand our customer base, and, over time, we expect to expand and deepen our customer relationships with new products and services.

We believe our actions have created a well-positioned balance sheet and capital and liquidity levels which have provided us with investment flexibility to take advantage of attractive organic growth opportunities and adjust, where we believe appropriate, to changing market conditions. We believe that combining the businesses of Capital One, ING Direct and the HSBC’s U.S. credit card business will deliver attractive financial results, strong capital generation and sustained shareholder value.

Business Segment Expectations

Credit Card Business

In Domestic Card, the closing of the HSBC U.S. card acquisition has impacted and will continue to affect quarterly trends in loan growth, revenue margin and credit metrics. We anticipate that the run-off of parts of the portfolios acquired in the HSBC Transaction will continue to offset the underlying growth trajectory in other parts of our Domestic Card business resulting in relatively flat loan balances. We anticipate that the credit mark on the non-revolving credit card loans acquired in the HSBC U.S. card acquisition will continue to absorb most of the HSBC credit losses in the third quarter of 2012, which will have the effect of temporarily lowering the overall charge-off rate of the Domestic Card segment. We expect that the Domestic Card charge-off rate will increase in the fourth quarter of 2012. Over time, we expect the charge-off rate on the combined card business to reach a level that is between 40 and 60 basis points higher than the stand-alone charge-off rate for Capital One’s stand-alone Domestic Card business. Once the acquisition-related impacts on the charge-off rate play out, we expect charge-off levels to remain relatively stable with normal seasonal patterns. When we announced the HSBC U.S. card acquisition, we planned to take certain actions to bring HSBC customer practices into alignment with our customer practices. All else being equal, we expect that they will put downward pressure on Domestic Card revenue margin over the next several quarters. We expect that Domestic Card revenue margin will be impacted by the competitive environment, the timing and pace of growth and runoff in Domestic Card loan balances, credit trends, and other factors, most of which are difficult to predict. We expect our Domestic Card business to deliver strong and resilient profitability and a strong customer franchise.

Consumer Banking Business

In our Consumer Banking business, we expect the ING Direct acquisition to continue to have a significant impact on Consumer Banking loan volumes as the acquired Home Loans portfolio runs off. We anticipate that the Consumer Banking business will continue to gain traction, with national scale auto lending, local scale in attractive local markets and growing national reach through ING Direct.

Commercial Banking Business

Our Commercial Banking business continues to grow loans, deposits, and revenues as we attract new customers and deepen relationships with existing customers. Although we anticipate some quarterly fluctuations in nonperforming loan and charge-off rates, we expect our Commercial Banking business to continue strong and relatively steady performance trends throughout 2012.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) requires management to make a number of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expenses in the consolidated financial statements. Understanding our accounting policies and the extent to which we use management judgment and estimates in applying these policies is integral to understanding our financial statements. We provide a summary of our significant accounting policies in “Note 1—Summary of Significant Accounting Policies” of our 2011 Form 10-K.

In the “MD&A—Critical Accounting Policies and Estimates” section of our 2011 Form 10-K, we identified the following accounting policies as critical because they require significant judgments and assumptions about highly complex and inherently uncertain matters and the use of reasonably different estimates and assumptions could have a material impact on our reported results of operations or financial condition.

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Loan loss reserves

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Representation and warranty reserve

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Asset impairment

•

Fair value

•

Derivative and hedge accounting

•

Income taxes

We evaluate our critical accounting estimates and judgments on an ongoing basis and update them as necessary based on changing conditions. Management has reviewed and approved these critical accounting policies and has discussed our judgments and assumptions with the Audit and Risk Committee of the Board of Directors. There has been no material changes in the methods used to formulate these critical accounting estimates from those discussed in the “MD&A—Critical Accounting Policies and Estimates” section of our 2011 Form 10-K.

CONSOLIDATED RESULTS OF OPERATIONS

The section below provides a comparative discussion of our consolidated financial performance for the three and six months ended June 30, 2012 and 2011. Following this section, we provide a discussion of our business segment results. You should read this section together with our “Executive Summary and Business Outlook” where we discuss trends and other factors that we expect will affect our future results of operations.

Net Interest Income

Net interest income represents the difference between the interest income and applicable fees earned on our interest-earning assets, which include loans held for investment and investment securities, and the interest expense on our interest-bearing liabilities, which include interest-bearing deposits, senior and subordinated notes, securitized debt and other borrowings. We include in interest income any past due fees on loans that we deem are collectible. Our net interest margin represents the difference between the yield on our interest-earning assets and the cost of our interest-bearing liabilities, including the impact of non-interest bearing funding. We expect net interest income and our net interest margin to fluctuate based on changes in interest rates and changes in the amount and composition of our interest-earning assets and interest-bearing liabilities.

Table 3 below presents, for each major category of our interest-earning assets and interest-bearing liabilities, the average outstanding balances, interest income earned or interest expense incurred, and average yield or cost for the three and six months ended June 30, 2012 and 2011.

Table 3: Average Balances, Net Interest Income and Net Interest Yield


	Three Months Ended June 30,
	2012								2011
(Dollars in millions)	Average Balance			Interest Income/ Expense⁽¹⁾		Yield/ Rate			Average Balance			Interest Income/ Expense⁽¹⁾		Yield/ Rate
Assets:
Interest-earning assets:
Consumer loans:⁽²⁾
Domestic	$	149,211		$	3,589		9.62	%	$	88,515		$	2,656		12.00	%
International		8,194			290		14.18			8,823			348		15.77

Total consumer loans		157,405			3,879		9.86			97,338			3,004		12.34
Commercial loans		35,227			376		4.27			30,578			363		4.75

Total loans held for investment		192,632			4,255		8.84			127,916			3,367		10.53

Investment securities		56,972			335		2.35			40,381			313		3.10
Other interest-earning assets		15,415			26		0.67			5,816			19		1.31

Total interest-earning assets	$	265,019		$	4,616		6.97	%	$	174,113		$	3,699		8.50	%

Cash and due from banks		2,245								1,870
Allowance for loan and lease losses		(4,065	)							(5,069	)
Premises and equipment, net		3,316								2,715
Other assets		28,791								25,600

Total assets	$	295,306							$	199,229

Liabilities and stockholders’ equity:
Interest-bearing liabilities:
Deposits	$	195,597		$	373		0.76	%	$	109,251		$	307		1.12	%
Securitized debt obligations		14,948			69		1.85			22,191			113		2.04
Senior and subordinated notes		11,213			87		3.10			8,093			63		3.11
Other borrowings		9,257			86		3.72			9,167			80		3.49

Total interest-bearing liabilities	$	231,015		$	615		1.06	%	$	148,702		$	563		1.51	%

Non-interest bearing deposits		19,316								16,583
Other liabilities		7,442								5,689

Total liabilities		257,773								170,974
Stockholders’ equity		37,533								28,255

Total liabilities and stockholders’ equity	$	295,306							$	199,229

Net interest income/spread				$	4,001		5.90	%				$	3,136		6.99	%

Impact of non-interest bearing funding							0.14								0.21

Net interest margin							6.04	%							7.20	%


	Six Months Ended June 30,
	2012								2011
(Dollars in millions)	Average Balance			Interest Income/ Expense⁽¹⁾		Yield/ Rate			Average Balance			Interest Income/ Expense⁽¹⁾		Yield/ Rate
Assets:
Interest-earning assets:
Consumer loans:⁽²⁾
Domestic	$	129,889		$	6,523		10.04	%	$	87,440		$	5,358		12.26	%
International		8,248			631		15.29			8,760			702		16.02

Total consumer loans		138,137			7,154		10.36			96,200			6,060		12.60
Commercial loans		34,630			756		4.37			30,304			724		4.78

Total loans held for investment		172,767			7,910		9.16			126,504			6,784		10.73

Investment securities		53,757			633		2.36			40,953			629		3.07
Other interest-earning assets		11,143			52		0.93			6,322			38		1.20

Total interest-earning assets	$	237,667		$	8,595		7.23	%	$	173,779		$	7,451		8.57	%

Cash and due from banks		7,141								1,912
Allowance for loan and lease losses		(4,200	)							(5,348	)
Premises and equipment, net		3,107								2,717
Other assets		27,071								25,552

Total assets	$	270,786							$	198,612

Liabilities and stockholders’ equity:
Interest-bearing liabilities:
Deposits	$	173,611		$	684		0.79	%	$	108,944		$	629		1.15	%
Securitized debt obligations		15,567			149		1.91			23,852			253		2.12
Senior and subordinated notes		10,740			175		3.26			8,091			127		3.14
Other borrowings		9,399			172		3.66			8,048			166		4.13

Total interest-bearing liabilities	$	209,317		$	1,180		1.13	%	$	148,935		$	1,175		1.58	%

Non-interest bearing deposits		18,975								16,057
Other liabilities		7,236								5,984

Total liabilities		235,528								170,976
Stockholders’ equity		35,258								27,636

Total liabilities and stockholders’ equity	$	270,786							$	198,612

Net interest income/spread				$	7,415		6.11	%				$	6,276		6.99	%

Impact of non-interest bearing funding							0.13								0.23

Net interest margin							6.24	%							7.22	%

⁽¹⁾	Past due fees included in interest income totaled approximately $369 million and $245 million for the three months ended June 30, 2012 and 2011, respectively, and approximately $652 million and $490 million for the six months ended June 30, 2012 and 2011, respectively.

⁽²⁾	Interest income on credit card, auto, home and retail banking loans is reflected in consumer loans. Interest income generated from small business credit card loans also is included in consumer loans.

Table 4 presents the variances between our net interest income for the three and six months ended June 30, 2012 and 2011, and the extent to which the variance was attributable to: (i) changes in the volume of our interest-earning assets and interest-bearing liabilities or (ii) changes in the interest rates of these assets and liabilities.

Table 4: Rate/Volume Analysis of Net Interest Income⁽¹⁾


	Three Months Ended June 30, 2012 vs. 2011									Six Months Ended June 30, 2012 vs. 2011
	Total Variance			Variance Due to						Total Variance			Variance Due to
(Dollars in millions)	Total Variance			Volume			Rate			Total Variance			Volume			Rate
Interest income:
Loans held for investment:
Consumer loans	$	875		$	1,572		$	(697	)	$	1,094		$	2,308		$	(1,214	)
Commercial loans		13			52			(39	)		32			98			(66	)

Total loans held for investment, including past-due fees		888			1,624			(736	)		1,126			2,406			(1,280	)
Investment securities		22			109			(87	)		4			170			(166	)
Other		7			20			(13	)		14			24			(10	)

Total interest income		917			1,753			(836	)		1,144			2,600			(1,456	)

Interest expense:
Deposits		66			187			(121	)		55			296			(241	)
Securitized debt obligations		(44	)		(34	)		(10	)		(104	)		(81	)		(23	)
Senior and subordinated notes		24			24			—			48			43			5
Other borrowings		6			1			5			6			26			(20	)

Total interest expense		52			178			(126	)		5			284			(279	)

Net interest income	$	865		$	1,575		$	(710	)	$	1,139		$	2,316		$	(1,177	)

⁽¹⁾	We calculate the change in interest income and interest expense separately for each item. The change in net interest income attributable to both volume and rates is allocated based on the relative dollar amount of each item.

Net interest income of $4.0 billion for the second quarter of 2012 increased by $865 million, or 28%, from the second quarter of 2011, driven by a 52% increase in average interest-earning assets, which was partially offset by a 16% decline in our net interest margin to 6.04%.

Net interest income of $7.4 billion for the first six months of 2012 increased by $1.1 billion, or 18%, from the first six months 2011, driven by a 37% increase in average interest-earning assets, which was partially offset by a 14% decline in our net interest margin to 6.24%.

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Average Interest-Earning Assets: The increase in average interest-earning assets reflects the addition of the ING Direct loan portfolio of $40.4 billion in the first quarter of 2012, the addition of the $27.8 billion in outstanding HSBC U.S. card loans that we acquired and designated as held for investment in the second quarter of 2012 and a significant increase in auto loan originations over the past twelve months.

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Net Interest Margin: The decrease in our net interest margin was attributable to a decline in the average yield on our interest-earning assets, due in part to lower yields in Domestic Card resulting from the establishment of a finance charge and fee reserve of $174 million for the acquired HSBC U.S. card loan portfolio and premium amortization expense related to the acquired loans of $63 million, which was partially mitigated by an improvement in our cost of funds. The decline in average yield also reflected the shift in the mix of our interest-earning assets as a result of the addition of ING Direct assets and temporarily higher cash balances from the recent equity and debt offerings, which had the effect of diluting the net interest margin. The ING Direct interest-earning assets generally have lower yields than our legacy loan and

the investment security portfolios. The decrease in the average yield on interest-earnings assets was partially offset by a reduction in our cost of funds. We have continued to benefit from the shift in the mix of our funding to lower cost consumer and commercial banking deposits from higher cost wholesale sources and a decline in deposit interest rates as a result of the continued overall low interest rate environment.

Non-Interest Income

Non-interest income primarily consists of service charges and other customer-related fees, interchange income (net of rewards expense) and other non-interest income. The servicing fees, finance charges, other fees, net of charge-offs and interest paid to third party investors related to our consolidated securitization trusts are reported as a component of non-interest income. We also record the provision for mortgage repurchase losses related to continuing operations in non-interest income. The “other” component of non-interest income includes gains and losses on derivatives not accounted for in hedge accounting relationships and gains and losses from the sale of investment securities, which we generally do not allocate to our business segments because they relate to centralized asset/liability and market risk management activities undertaken by our Corporate Treasury group.

Table 5 displays the components of non-interest income for the three and six months ended June 30, 2012 and 2011.

Table 5: Non-Interest Income


	Three Months Ended June 30,						Six Months Ended June 30,
(Dollars in millions)	2012			2011			2012			2011
Service charges and other customer-related fees	$	539		$	460		$	954		$	985
Interchange fees, net		408			331			736			651
Bargain purchase gain⁽¹⁾		—			—			594			—
Net other-than-temporary impairment (“OTTI”)		(13	)		(6	)		(27	)		(9	)
Other non-interest income:
Provision for mortgage repurchase losses⁽²⁾		(25	)		(4	)		(42	)		(9	)
Other		145			76			360			181

Total other non-interest income		120			72			318			172

Total non-interest income	$	1,054		$	857		$	2,575		$	1,799

⁽¹⁾	Represents the excess of the fair value of the net assets acquired in the ING Direct acquisition as of the acquisition date of February 17, 2012 over the consideration transferred.

⁽²⁾

We recorded a total provision for mortgage repurchase losses of $180 million and $37 million for the three months ended June 30, 2012 and 2011, respectively, and $349 million and $81 million for the six months ended June 30, 2012 and 2011, respectively. The remaining portion of the provision for repurchase losses is included, net of tax, in discontinued operations.

Non-interest income of $1.1 billion for the second quarter of 2012 increased by $197 million, or 23%, from non-interest income of $857 million for the second quarter of 2011. The increase was largely attributable to increased fees resulting from continued growth and market share from new account originations and our recent acquisitions. The partial quarter impact of the acquired HSBC U.S. card operations represented approximately $163 million of the increase in non-interest income. The increase in fees was partially offset by additional expense of $41 million recorded in the second quarter of 2012 for expected customer refunds related to regulatory settlements pertaining to cross-sell activities in our Domestic Card business and an increase in the provision for mortgage repurchase losses.

Non-interest income of $2.6 billion for the first six months of 2012 increased by $776 million, or 43%, from non-interest income of $1.8 billion for the first six months of 2011. This increase reflected the combined impact of the bargain purchase gain of $594 million recognized in the first quarter of 2012 at acquisition of ING Direct,

income of $162 million recorded in the first quarter of 2012 from the sale of Visa stock shares, and the increased fees resulting from continued growth and market share from new account originations, due in part to our recent acquisitions. The favorable impact of these items was partially offset by cross-sell activities related to expected customer refunds of approximately $116 million recorded in the first six months of 2012, a mark-to-market derivative loss of $78 million recognized in the first quarter of 2012 related to the settlement of interest-rate swaps we entered into in 2011 to partially hedge the interest rate risk of the net assets associated with the ING Direct acquisition and an increase in the provision for mortgage repurchase losses.

We also recorded higher other-than-temporary impairment losses of $13 million and $27 million in the second quarter and first six months of 2012, respectively, compared with $6 million and $9 million in the second quarter and first six months of 2011, respectively. The impairment losses stemmed from deterioration in the credit quality of certain non-agency mortgage-backed securities due to the persistent weakness in the housing market. We provide additional information on other-than-temporary impairment recognized on our available-for-sale securities in “Note 4—Investment Securities.”

Provision for Credit Losses

We build our allowance for loan and lease losses and unfunded lending commitment reserves through the provision for credit losses. Our provision for credit losses in each period is driven by charge-offs and the level of allowance for loan and lease losses that we determine is necessary to provide for probable credit losses inherent in our loan portfolio as of each balance sheet date.

We recorded a provision for credit losses of $1.7 billion and $2.3 billion in the second quarter and first six months of 2012, respectively, compared with $343 million and $877 million in the second quarter and first six months of 2011, respectively. The significant increase in our provision for credit losses was primarily related to the addition of the $26.2 billion in outstanding HSBC U.S. card loans designated as held for investment that had existing revolving privileges at acquisition. These loans were recorded at a fair value of $26.9 billion, resulting in a net premium of $705 million at acquisition. Fair value was determined by discounting all expected cash flows (contractual principal, interest, finance charges and fees of $33.3 billion less those amounts not expected to be collected of $3.0 billion) at a market discount rate.

Under applicable accounting guidance, we are required to amortize the net premium of $705 million over the contractual principal amount as an adjustment to interest income over the remaining life of the loans. Given the guidance applicable to revolving loans, it is necessary to record an allowance through provision expense to properly recognize an estimate of incurred losses on the existing principal balances, which represents a portion of the total amounts not expected to be collected described above. In the second quarter of 2012, we recorded provision expense of $1.2 billion to establish an allowance primarily related to these loans. The allowance was calculated using the same methodology utilized for determining the allowance for our existing credit card loan portfolio. The provision expense of $1.2 billion is included in the total provision for credit losses of $1.7 billion recorded in the second quarter of 2012. The provision for credit losses, excluding the allowance build related to HSBC U.S. card loans, was $479 million and $1.1 billion in the second quarter and first six months of 2012, respectively. The increase in the provision also reflects higher auto loan originations.

We provide additional information on the provision for credit losses and changes in the allowance for loan and lease losses under the “Credit Risk Profile—Summary of Allowance for Loan and Lease Losses” and “Note 6—Allowance for Loan and Lease Losses.” For information on the allowance methodology for our credit card loan portfolio, see “Note 1—Summary of Significant Accounting Policies” in our 2011 Form 10-K.

Non-Interest Expense

Non-interest expense consists of ongoing operating costs, such as salaries and associated employee benefits, communications and other technology expenses, supplies and equipment and occupancy costs, and miscellaneous

expenses. Marketing expenses are also included in non-interest expense. Table 6 displays the components of non-interest expense for the three and six months ended June 30, 2012 and 2011.

Table 6: Non-Interest Expense


	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in millions)	2012		2011		2012		2011
Salaries and associated benefits	$	971	$	715	$	1,835	$	1,456
Marketing		334		329		655		605
Communications and data processing		203		162		375		326
Supplies and equipment		178		124		325		259
Occupancy		145		118		268		237
Merger-related expense		133		—		219		—
Other non-interest expense:
Professional services		313		302		607		551
Collections		141		144		277		295
Fraud losses		37		30		78		57
Bankcard association assessments		137		103		247		185
Amortization of intangibles		158		56		218		112
Other		392		172		542		334

Total other non-interest expense		1,178		807		1,969		1,534

Total non-interest expense	$	3,142	$	2,255	$	5,646	$	4,417

Non-interest expense of $3.1 billion for the second quarter of 2012 increased by $887 million, or 39%, from the second quarter of 2011. The increase was primarily due to higher operating expenses and merger-related costs related to our recent acquisitions, higher infrastructure costs from our continued investments in our home loan business and growth in auto originations, and increased amortization of intangibles. Our second quarter 2012 results also reflect the unfavorable impact of charges related to certain other items, including $60 million for civil penalties related to regulatory settlements pertaining to cross-sell activities in our Domestic Card business and $98 million for net legal costs related to interchange and other litigation activity during the quarter.

Non-interest expense of $5.6 billion for the first six months of 2012 increased by $1.2 billion, or 28%, from the first six months of 2011. The increase was primarily due to higher operating expenses and merger-related costs related to our recent acquisitions, increased marketing expenditures, higher infrastructure costs from our continued investments in our home loan business and growth in auto originations, and increased amortization on intangibles. Our results for the first six months of 2012 also reflect the unfavorable impact of the $60 million for civil penalties related to cross-sell activities and $98 million for net legal costs related to interchange and other litigation developments discussed above.

Income Taxes

Our effective tax rate on income from continuing operations varies between periods due, in part, to fluctuations in our pre-tax earnings, which affect the relative tax benefit of tax-exempt income, tax credits and other tax items.

We recorded an income tax provision of $43 million (18.2% effective income tax rate) for the second quarter of 2012, compared with an income tax provision of $450 million (32.3 % effective income tax rate) for the second quarter of 2011. The decrease in our effective tax rate in the second quarter of 2012 was primarily due to one-time deferred tax benefit of $25 million for changes in our state tax position resulting from the acquisition of the HSBC U.S. card assets and operations, and a net tax benefit of $7 million related to adjustments for the resolution of certain tax issues and audits, which together reduced our effective tax rate for the second quarter of 2012 by 13.6 percentage points.

We recorded an income tax provision of $396 million (18.9% effective income tax rate) for the first six months of 2012, compared with an income tax provision of $804 million (28.9% effective income tax rate) for the first six months of 2011. The decrease in our effective tax rate in the first six months of 2012 was primarily due to non-taxable ING Direct bargain purchase gain of $594 million recorded in the first quarter of 2012 at acquisition of ING Direct. In addition to the one-time deferred tax benefit discussed above, we recorded tax benefits of $12 million in the first six months of 2012 related to the resolution of certain tax issues and audits. In comparison, we recorded tax benefits of $45 million related to adjustments for the resolution of certain tax issues and audits in the first six months of 2011. Our effective income tax rate, excluding both the impact of the non-taxable bargain purchase gain and the benefits from these discrete tax issues and audits, was 28.9% and 30.5% in the first six months of 2012 and 2011, respectively.

We provide additional information on items affecting our income taxes and effective tax rate in our 2011 Form 10-K under “Note 18—Income Taxes.”

Loss from Discontinued Operations, Net of Tax

Loss from discontinued operations reflects ongoing costs, which primarily consist of mortgage loan repurchase representation and warranty charges, related to the mortgage origination operations of GreenPoint’s wholesale mortgage banking unit, which we closed in 2007.

We recorded a pre-tax provision for mortgage repurchase losses of $180 million in the second quarter of 2012, of which $154 million ($97 million, net of tax) was included in discontinued operations, and a pre-tax provision of $349 million in the first six months of 2012, of which $307 million ($194 million, net of tax) was included in discontinued operations. In comparison, we recorded a pre-tax provision for mortgage repurchase losses of $37 million in the second quarter of 2011, of which $33 million ($22 million, net of tax) was included in discontinued operations, and a pre-tax provision of $81 million in the first six months of 2011, of which $72 million ($51 million, net of tax) was included in discontinued operations.

The increase in the provision for repurchase losses in the second quarter and first six months of 2012 was primarily driven by updated estimates of anticipated outcomes from various litigation and threatened litigation in the insured securitization segment based on relevant factual and legal developments and an increased reserve associated with a first quarter settlement between a subsidiary and a GSE to resolve present and future claims.

We provide additional information on the provision for mortgage repurchase losses and the related reserve for potential representation and warranty claims in “Consolidated Balance Sheet Analysis—Potential Mortgage Representation and Warranty Liabilities.”

BUSINESS SEGMENT FINANCIAL PERFORMANCE

Our principal operations are currently organized into three major business segments, which are defined based on the products and services provided or the type of customer served: Credit Card, Consumer Banking and Commercial Banking. The operations of acquired businesses have been integrated into our existing business segments. Certain activities that are not part of a segment, such as management of our corporate investment portfolio and asset/liability management by our centralized Corporate Treasury group, are included in the “Other” category.

The results of our individual businesses, which we report on a continuing operations basis, reflect the manner in which management evaluates performance and makes decisions about funding our operations and allocating resources. Our business segment results are intended to reflect each segment as if it were a stand-alone business. We use an internal management and reporting process to derive our business segment results. Our internal management and reporting process employs various allocation methodologies, including funds transfer pricing,

to assign certain balance sheet assets, deposits and other liabilities and their related revenue and expenses directly or indirectly attributable to each business segment. Total interest income and net fees are directly attributable to the segment in which they are reported. The net interest income of each segment reflects the results of our funds transfer pricing process, which is primarily based on a matched maturity method that takes into consideration market rates. Our funds transfer pricing process provides a funds credit for sources of funds, such as deposits generated by our Consumer Banking and Commercial Banking businesses, and a funds charge for the use of funds by each segment. The allocation process is unique to each business segment and acquired businesses. See “Note 20—Business Segments” of our 2011 Form 10-K for information on the allocation methodologies used to derive our business segment results.

We may periodically change our business segments or reclassify business segment results based on modifications to our management reporting methodologies and changes in organizational alignment. In the first quarter of 2012, we re-aligned the reporting of our Commercial Banking business to reflect the operations on a product basis rather than by customer type. As a result of this re-alignment, we now report three product categories: commercial and multifamily real estate, commercial and industrial loans and small-ticket commercial real estate, which is a run-off portfolio. We previously reported four categories within our Commercial Banking business: commercial and multifamily real estate, middle market, specialty lending and small-ticket commercial real estate. Middle market and specialty lending related products are included in commercial and industrial loans. All tax-related commercial real estate investments, some of which were previously included in the “Other” segment, are now included in the commercial and multifamily real estate category of our Commercial Banking business. Prior period amounts have been recast to conform to the current period presentation.

We summarize our business segment results for the three and six months ended June 30, 2012 and 2011 in the tables below and provide a comparative discussion of these results. We also discuss changes in our financial condition and credit performance statistics as of June 30, 2012, compared with December 31, 2011. See “Note 14—Business Segments” of this Report for a reconciliation of our business segment results to our consolidated results. Information on the outlook for each of our business segments is presented above under “Executive Summary and Business Outlook.”

Credit Card Business

Our Credit Card business recorded a net loss from continuing operations of $297 million and net income from continuing operations of $269 million in the second quarter and first six months of 2012, respectively, compared with net income from continuing operations of $618 million and $1.3 billion in the second quarter and first six months of 2011, respectively. The primary sources of revenue for our Credit Card business are interest income and non-interest income from customers and interchange fees. Expenses primarily consist of ongoing operating costs, such as salaries and associate benefits, communications and other technology expenses, supplies and equipment, occupancy costs, as well as marketing expenses.

Table 7 summarizes the financial results of our Credit Card business, which is comprised of Domestic Card, including installment loans, and International Card operations, and displays selected key metrics for the periods indicated. The closing on May 1, 2012 of the HSBC U.S. card acquisition, which added approximately $27.8 billion in outstanding credit card receivables designated as held for investment to our Credit Card business, had a significant impact on the results of our Credit Card business for the second quarter and first six months of 2012.

Table 7: Credit Card Business Results


	Three Months Ended June 30,									Six Months Ended June 30,
(Dollars in millions)	2012			2011			Change			2012			2011			Change
Selected income statement data:
Net interest income	$	2,350		$	1,890			24	%	$	4,342		$	3,831			13	%
Non-interest income		771			619			25			1,369			1,293			6

Total net revenue⁽¹⁾		3,121			2,509			24			5,711			5,124			11
Provision for credit losses		1,711			309			454			2,169			759			186
Non-interest expense		1,863			1,238			50			3,131			2,416			30

Income from continuing operations before income taxes		(453	)		962			(147	)		411			1,949			(79	)
Income tax provision		(156	)		344			(145	)		142			688			(79	)

Income from continuing operations, net of tax	$	(297	)	$	618			(148	)%	$	269		$	1,261			(79	)%

Selected performance metrics:
Average loans held for investment	$	79,662		$	62,691			27	%	$	71,048		$	61,644			15	%
Average yield on loans held for investment⁽²⁾		13.42	%		13.83	%		(41	)bps		13.86	%		14.25	%		(39	)bps
Total net revenue margin⁽³⁾		15.67			16.01			(34	)		16.08			16.62			(54	)
Net charge-off rate⁽⁴⁾		3.13			5.06			(193	)		3.57			5.59			(202	)
Net charge-off rate (excluding acquired loans)⁽⁵⁾		3.14			5.06			(192	)		3.58			5.59			(201	)
Purchase volume⁽⁶⁾	$	45,228		$	34,226			32	%	$	79,726		$	62,023			29	%

(Dollars in millions)	June 30, 2012			December 31, 2011			Change
Selected period-end data:
Loans held for investment	$	88,914		$	65,075			37	%
30+ day delinquency rate⁽⁷⁾		2.97	%		3.86	%		(89	)bps
30+ day delinquency rate (excluding acquired loans)⁽⁵⁾		2.99	%		3.86	%		(87	)bps
Allowance for loan and lease losses	$	3,750		$	2,847			32	%

⁽¹⁾	Total net revenue was reduced by $311 million and $112 million for the three months ended June 30, 2012 and 2011, respectively and $434 million and $217 million for the six months ended June 30, 2012 and 2011, respectively, for the estimated uncollectible amount of billed finance charges and fees.

⁽²⁾	Calculated by dividing annualized interest income for the period by average loans held for investment during the period.

⁽³⁾	Calculated by dividing annualized total revenue for the period by average loans held for investment during the period for the specified loan category.

⁽⁴⁾	Calculated by dividing annualized net charge-offs for the period by average loans held for investment during the period for the specified loan category.

⁽⁵⁾

Calculation of ratio adjusted to exclude from the denominator acquired loans accounted for subsequent to acquisition based on expected cash flows to be collected. See “Summary of Selected Financial Data,” “Credit Risk Profile” and “Note 5—Loans—Credit Quality” for additional information on the impact of acquired loans on our credit quality metrics.

⁽⁶⁾	Consists of purchase transactions for the period, net of returns. Excludes cash advance transactions.

⁽⁷⁾

Calculated by loan category by dividing 30+ day delinquent loans as of the end of the period by period-end loans held for investment for the specified loan category. The 30+ day performing delinquency rate is the same as the 30+ day delinquency rate for our Credit Card business, as credit card loans remain on accrual status until the loan is charged-off.

Key factors affecting the results of our Credit Card business for the second quarter and first six months of 2012, compared with the second quarter and first six months of 2011 included the following:

•

Net Interest Income: Net interest income increased by $460 million, or 24%, in the second quarter of 2012 and by $511 million, or 13%, in the first six months of 2012. The increase in each period was primarily attributable to an increase in average loans held for investment, largely due to the partial quarter impact of the addition of the $27.8 billion in outstanding HSBC U.S. card loans classified as held for investment in the second quarter of 2012. The increase in average loans was partially offset by a decline in average loan yields, largely due to lower yields in Domestic Card resulting from the establishment of a finance charge and fee reserve for the acquired HSBC U.S. card loan portfolio and premium amortization expense related to the acquired loans.

•

Non-Interest Income: Non-interest income increased by $152 million, or 25%, in the second quarter of 2012 and by $76 million, or 6%, in the first six months of 2012. The increase was primarily driven by higher fees generated from the increased purchase volume and accounts associated with the HSBC U.S. card acquisition in the second quarter of 2012. The increase from fees was partially offset by charges of $75 million and $41 million in the first and second quarter of 2012, respectively, for expected refunds to customers affected by cross-sell activities in our Domestic Card business as well as the discontinuance of the recognition of revenue for any amounts billed for cross-sell customers affected.

•

Provision for Credit Losses: The provision for credit losses related to our Credit Card business increased by $1.4 billion to $1.7 billion in the second quarter of 2012 and by $1.4 billion to $2.2 billion in the first six months of 2012. The increase was primarily driven by provision expense of $1.2 billion recorded in the second quarter of 2012 to build an allowance for HSBC U.S. card loans. The provision for credit losses, excluding the allowance build related to HSBC U.S. card loans, was $513 million and $971 million in the second quarter and first six months of 2012, respectively, an increase for each period of approximately $200 million over the same prior year periods, reflecting a relative stabilization in credit performance improvement compared to significant credit performance improvement in the first half of 2011 that resulted in larger allowance releases than the first half of 2012.

•

Non-Interest Expense: Non-interest expense increased by $625 million, or 50%, in the second quarter of 2012 and by $715 million, or 30% in the first six months of 2012. The increase was largely due to the partial quarter impact of HSBC U.S. card operating expenses and expenses related to the HSBC U.S. card acquisition, including $85 million purchased credit card relationship (“PCCR”) intangible amortization expense and merger-related expenses associated with the acquisition. Other items contributing to the increase included expense of $60 million for regulatory fines related to cross-sell activities in the Domestic Card business, expense of $98 million for net litigation reserves to cover interchange and other settlements reached in the second quarter of 2012

•

Total Loans: Period-end loans in our Credit Card business increased by $23.8 billion, or 37%, to $88.9 billion as of June 30, 2012, from $65.1 billion as of December 31, 2011, primarily due to the addition of the $27.8 billion in outstanding HSBC U.S. card loans classified as held of investment, which was partially offset by the continued run-off of our installment loan portfolio.

•

Charge-off and Delinquency Statistics: The net charge-off rate decreased to 3.13% and 3.57% in the second quarter and first six months of 2012, respectively, from 5.06% and 5.59% in the second quarter and first six months of 2011, respectively. The 30+ day delinquency rate decreased to 2.97% as of June 30, 2012, from 3.86% as of December 31, 2011. The decreases in the net-charge off rates and 30+ day delinquency rate was largely due to the addition of the HSBC U.S. card portfolio to the denominator in calculating our reported charge-off and delinquency rates and the lag in the impact of charge-offs related to this portfolio, which was recorded at fair value at acquisition. In addition, our reported charge-off and delinquency rates reflect the absence of charge-offs for the acquired HSBC U.S. card loans accounted for based on expected cash flows. The credit quality metrics in our Credit Card business also reflected continued credit improvement across our legacy card portfolio.

Domestic Card Business

Domestic Card recorded a net loss from continuing operations of $264 million and net income from continuing operations of $251 million in the second quarter and first six months of 2012, respectively, compared with net income from continuing operations of $642 million and $1.3 billion in the second quarter and first six months of 2011, respectively.

Because our Domestic Card business currently accounts for the substantial majority of our Credit Card business, the key factors driving the results for this division are similar to the key factors affecting our total Credit Card business. The decrease in Domestic Card net income from continuing operations in the second quarter and first six months of 2012 compared with the second quarter and first six months of 2011 was driven by: (1) an increase in total net revenue largely due to the addition of the HSBC U.S. card portfolio, partially offset by expense for expected customer refunds related to cross-sell activities; (2) significant increase in the provision for credit losses resulting from an allowance build for the HSBC U.S. card loan portfolio; and (3) an increase in non-interest expense due to the partial quarter impact of HSBC U.S. card operating expenses, PCCR amortization expense related to the HSBC U.S. card acquisition and charges related to cross-sell activities and interchange litigation.

Table 7.1 summarizes the financial results for Domestic Card and displays selected key metrics for the periods indicated.

Table 7.1: Domestic Card Business Results


	Three Months Ended June 30,									Six Months Ended June 30,
(Dollars in millions)	2012			2011			Change			2012			2011			Change
Selected income statement data:
Net interest income	$	2,118		$	1,607			32	%	$	3,831		$	3,258			18	%
Non-interest income		708			584			21			1,205			1,167			3

Total net revenue		2,826			2,191			29			5,036			4,425			14
Provision for credit losses		1,600			187			756			1,961			417			370
Non-interest expense		1,634			1,008			62			2,686			1,998			34

Income from continuing operations before income taxes		(408	)		996			(141	)		389			2,010			(81	)
Income tax provision		(144	)		354			(141	)		138			714			(81	)

Income from continuing operations, net of tax	$	(264	)	$	642			(141	)%	$	251		$	1,296			(81	)%

Selected performance metrics:
Average loans held for investment	$	71,468		$	53,868			33	%	$	62,800		$	52,884			19	%
Average yield on loans held for investment⁽¹⁾		13.33	%		13.52	%		(19	)bps		13.67	%		13.96	%		(29	)bps
Total net revenue margin⁽²⁾		15.82			16.27			(45	)		16.04			16.73			(69	)
Net charge-off rate⁽³⁾		2.86			4.74			(188	)		3.32			5.45			(213	)
Purchase volume⁽⁴⁾	$	41,807		$	31,070			35	%	$	73,224		$	56,094			31	%

(Dollars in millions)	June 30, 2012			December 31, 2011			Change
Selected period-end data:
Loans held for investment	$	80,798		$	56,609			43	%
30+ day delinquency rate⁽⁵⁾		2.79	%		3.66	%		(87	)bps
Allowance for loan and lease losses	$	3,295		$	2,375			39	%

⁽¹⁾	Calculated by dividing annualized interest income for the period by average loans held for investment during the period.

⁽²⁾	Calculated by dividing annualized total revenue for the period by loans held for investment during the period for the specified loan category.

⁽³⁾	Calculated by dividing annualized net charge-offs for the period by average loans held for investment during the period for the specified loan category.

⁽⁴⁾	Consists of purchase transactions for the period, net of returns. Excludes cash advance transactions.

⁽⁵⁾

International Card Business

Our International Card business recorded a net loss from continuing operations of $33 million and net income of $18 million in the second quarter and first six months of 2012, respectively, compared with a net loss from continuing operations of $24 million and $35 million in second quarter and first six months of 2011, respectively.

The primary driver of the $9 million increase in net loss from continuing operations in the second quarter of 2012 from the net loss in the second quarter of 2011 was the recognition of expense of $82 million in the second quarter of 2012 for the costs associated with refunds to U.K. customers related to retrospective regulatory requirements pertaining to Payment Protection Insurance (“PPI”) in the U.K, compared with expense of $76 million in the second quarter of 2011.

The primary driver of the improvement in results in the first six months of 2012 compared with the first six months of 2011 was a decrease in the provision for credit losses, reflecting an allowance release of $17 million in the first six months of 2012 due to lower net-charge offs and improvement in the credit environment in Canada and the U.K, compared with an allowance build of $78 million in first six months of 2011. The allowance build was largely due to the addition of the Hudson’s Bay Company (“HBC”) loan portfolio in 2011.

Table 7.2 summarizes the financial results for International Card and displays selected key metrics for the periods indicated.

Table 7.2: International Card Business Results


	Three Months Ended June 30,									Six Months Ended June 30,
(Dollars in millions)	2012			2011			Change			2012			2011			Change
Selected income statement data:
Net interest income	$	232		$	283			(18	)%	$	511		$	573			(11	)%
Non-interest income		63			35			80			164			126			30

Total net revenue		295			318			(7	)		675			699			(3	)
Provision for credit losses		111			122			(9	)		208			342			(39	)
Non-interest expense		229			230			*	*		445			418			6

Income from continuing operations before income taxes		(45	)		(34	)		(32	)		22			(61	)		136
Income tax provision		(12	)		(10	)		(20	)		4			(26	)		115

Income from continuing operations, net of tax	$	(33	)	$	(24	)		(38	)%	$	18		$	(35	)		151	%

Selected performance metrics:
Average loans held for investment	$	8,194		$	8,823			(7	)%	$	8,248		$	8,760			(6	)%
Average yield on loans held for investment⁽¹⁾		14.18	%		15.77	%		(159	)bps		15.29	%		16.02	%		(73	)bps
Revenue margin⁽²⁾		14.40			14.42			(2	)		16.37			15.96			41
Net charge-off rate⁽³⁾		5.49			7.02			(153	)		5.51			6.39			(88	)
Purchase volume⁽⁴⁾	$	3,421		$	3,156			8	%	$	6,502		$	5,929			10	%

(Dollars in millions)	June 30, 2012			December 31, 2011			Change
Selected period-end data:
Loans held for investment	$	8,116		$	8,466			(4	)%
30+ day delinquency rate⁽⁵⁾		4.84	%		5.18	%		(34	)bps
Allowance for loan and lease losses	$	455		$	472			(4	)%

**	Change is less than one percent.

⁽¹⁾	Calculated by dividing annualized interest income for the period by average loans held for investment during the period.

⁽²⁾	Calculated by dividing annualized total revenue for the period by loans held for investment during the period for the specified loan category.

⁽³⁾	Calculated by dividing annualized net charge-offs for the period by average loans held for investment during the period for the specified loan category.

⁽⁴⁾	Consists of purchase transactions for the period, net of returns. Excludes cash advance transactions.

⁽⁵⁾

Consumer Banking Business

Our Consumer Banking business generated net income from continuing operations of $438 million and $662 million in the second quarter and first six months of 2012, respectively, compared with net income from continuing operations of $287 million and $502 million in the second quarter and first six months of 2011, respectively. The primary sources of revenue for our Consumer Banking business are net interest income from loans and deposits and non-interest income from customer fees. Expenses primarily consist of ongoing operating costs, such as salaries and associated benefits, communications and other technology expenses, supplies and equipment and occupancy costs.

On February 17, 2012, we acquired ING Direct, and the substantial majority of the lending and retail deposit businesses acquired are reported in the Consumer Banking segment. The acquisition resulted in the addition of loans with carrying value of $40.4 billion and deposits of $84.4 billion at acquisition.

Table 8 summarizes the financial results of our Consumer Banking business and displays selected key metrics for the periods indicated.

Table 8: Consumer Banking Business Results


	Three Months Ended June 30,									Six Months Ended June 30,
(Dollars in millions)	2012			2011			Change			2012			2011			Change
Selected income statement data:
Net interest income	$	1,496		$	1,051			42	%	$	2,784		$	2,034			37	%
Non-interest income		185			194			(5	)		361			380			(5	)

Total net revenue		1,681			1,245			35			3,145			2,414			30
Provision for credit losses		44			41			7			218			136			60
Non-interest expense		959			758			27			1,902			1,498			27

Income from continuing operations before income taxes		678			446			52			1,025			780			31
Income tax provision		240			159			51			363			278			31

Income from continuing operations, net of tax	$	438		$	287			53	%	$	662		$	502			32	%

Selected performance metrics:
Average loans held for investment^:(1)
Auto	$	24,487		$	18,753			31	%	$	23,535		$	18,391			28	%
Home loan		48,966			11,534			325			39,234			11,746			234
Retail banking		4,153			4,154			**			4,166			4,202			(1	)

Total consumer banking	$	77,606		$	34,441			125	%	$	66,935		$	34,339			95	%

Average yield on loans held for investment		6.17	%		9.51	%		(334	)bps		6.61	%		9.55	%		(294	)bps
Average deposits	$	174,416		$	86,926			101	%	$	152,166		$	85,413			78	%
Average deposit interest rate		0.70	%		1.00	%		(30	)bps		0.72	%		1.03	%		(31	)bps
Core deposit intangible amortization	$	42		$	34			24	%	$	79		$	68			16	%
Net charge-off rate⁽²⁾		0.48	%		1.01	%		(53	)bps		0.60	%		1.29	%		(69	)bps
Net charge-off rate (excluding acquired loans)⁽²⁾		1.02	%		1.17			(15	)		1.15			1.50			(35	)
Automobile loan originations	$	4,306		$	2,910			48	%	$	8,576		$	5,481			56	%


(Dollars in millions)	June 30, 2012			December 31, 2011			Change
Selected period-end data:
Loans held for investment:⁽¹⁾
Auto	$	25,251		$	21,779			16	%
Home loans		48,224			10,433			362
Retail banking		4,140			4,103			1

Total consumer banking	$	77,615		$	36,315			114	%

30+ day performing delinquency rate⁽⁴⁾		1.82	%		4.47	%		(265	)bps
30+ day performing delinquency rate (excluding acquired loans)⁽³⁾		3.82			5.06			(124	)
30+ day delinquency rate⁽⁵⁾		2.47			5.99			(352	)
30+ day delinquency rate (excluding acquired loans)⁽³⁾		5.19			6.78			(159	)
Nonperforming loan rate⁽⁶⁾		0.79			1.79			(100	)
Nonperforming loan rate (excluding acquired loans)⁽³⁾		1.66			2.03			(37	)
Nonperforming asset rate⁽⁷⁾		0.83			1.94			(111	)
Nonperforming asset rate (excluding acquired loans)⁽³⁾		1.75			2.20			(45	)
Allowance for loan and lease losses	$	669		$	652			3	%
Deposits		173,966			88,540			96
Loans serviced for others		16,108			17,998			(11	)

⁽¹⁾

Loans held for investment includes loans acquired in the ING Direct and Chevy Chase Bank acquisitions. The carrying value of consumer banking acquired loans accounted for subsequent to acquisition based on expected cash flows to be collected was $40.7 billion and $4.2 billion as of June 30, 2012, and December 31, 2011, respectively. The average balance of consumer banking loans held for investment, excluding the carrying value of acquired loans, was $36.2 billion and $29.8 billion for the three months ended June 30, 2012 and 2011, respectively and $35.0 billion and $29.6 billion for the six months ended June 30, 2012 and 2011, respectively.

⁽²⁾	Calculated by dividing annualized net charge-offs for the period by average loans held for investment during the period for the specified loan category.

⁽³⁾

⁽⁴⁾	Calculated by loan category by dividing 30+ day performing delinquent loans as of the end of the period by period-end loans held for investment for the specified loan category.

⁽⁵⁾	Calculated by loan category by dividing 30+ day delinquent loans as of the end of the period by period-end loans held for investment for the specified loan category.

⁽⁶⁾

Calculated by loan category by dividing nonperforming loans as of the end of the period by period-end loans held for investment for the specified loan category. Nonperforming loans generally include loans that have been placed on nonaccrual status and certain restructured loans whose contractual terms have been restructured in a manner that grants a concession to a borrower experiencing financial difficulty.

⁽⁷⁾	The nonperforming asset rate is calculated by loan category by dividing nonperforming assets as of the end of the period by period-end nonperforming assets. Nonperforming assets consist of nonperforming loans, real estate owned (“REO”) and other foreclosed assets.

Key factors contributing to the improvement in the results of our Consumer Banking business for the second quarter and first six months of 2012, compared with the second quarter and first six months of 2011 included the following:

•

Net Interest Income: Net interest income increased by $445 million, or 42%, in the second quarter of 2012 and by $750 million, or 37%, in the first six months of 2012. The increase was primarily attributable to an increase in average loans held for investment due to higher originations in auto loans over the past twelve months as well as the acquisition of ING Direct home loans in the first quarter of 2012. The favorable impact of the increase in average loans more than offset a decline in loan yields, attributable to the lower yielding ING Direct home loan portfolio.

•

Non-Interest Income: Non-interest income decreased by $9 million, or 5%, in the second quarter of 2012 and by $19 million, or 5%, in the first six months of 2012. The decrease was primarily attributable to reduced revenues resulting from the implementation of the Dodd-Frank amendment related to debit interchange fees in late 2011, which was partially offset by the addition of ING Direct deposits in the first quarter of 2012.

•

Provision for Credit Losses: The provision for credit losses increased by $3 million to $44 million in the second quarter of 2012 and by $82 million to $218 million in the first six months of 2012. The increase in the provision was largely due to higher auto loan originations, which more than offset the benefit from lower net charge-offs and continued credit performance improvement.

•

Non-Interest Expense: Non-interest expense increased by $201 million, or 27%, in the second quarter of 2012 and by $404 million, or 27% in the first six months of 2012. The increase was largely attributable to the on-going operating expenses of ING Direct, the associated merger-related expenses for the acquisition, higher infrastructure expenditure resulting from continued investments in the home loan business and growth in auto originations.

•

Total Loans: Period-end loans held for investment in our Consumer Banking business more than doubled, increasing by $41.3 billion to $77.6 billion as of June 30, 2012, from $36.3 billion as of December 31, 2011, primarily due to the acquisition of $40.4 billion of ING Direct home loans and increased originations in auto loans, partially offset by the continued run-off of our legacy home loan portfolios.

•

Deposits: Period-end deposits in the Consumer Banking business increased by $85.4 billion, or 96%, to $174.0 billion as of June 30, 2012, from $88.5 billion as of December 31, 2011, primarily due to the addition of ING Direct deposits of $84.4 billion and a slight increase in deposits in our retail branch franchise.

•

Charge-off and Delinquency Statistics: The improvement in the reported net charge-off and delinquency rates for our Consumer Banking business reflect the impact of the addition of the ING Direct home loan portfolio, the substantial majority of which is accounted for based on estimated cash flows expected to be collected over the life of the loans. As discussed above in “Summary of Selected Financial Data”, because the fair value recorded at acquisition and subsequent accounting for these loans takes into consideration future credit losses expected to be incurred, there are no charge-offs or an allowance associated with these loans unless the estimated cash flows expected to be collected decrease subsequent to acquisition. In addition, these loans are not classified as delinquent or nonperforming even though the customer may be contractually past due because we expect that we will fully collect the carrying value of these loans. The improvement in net-charge and delinquency rates, excluding acquired loans, reflects improved credit performance in our legacy loan portfolios.

Commercial Banking Business

Our Commercial Banking business generated net income from continuing operations of $228 million and $438 million in the second quarter and first six months of 2012, respectively, compared with net income from continuing operations of $159 million and $321 million in the second quarter and first six months of 2011, respectively. The primary sources of revenue for our Commercial Banking business are net interest income from loans and deposits and non-interest income from customer fees. Expenses primarily consist of ongoing operating costs, such as salaries and associated benefits, communications and other technology expenses, supplies and equipment and occupancy costs. Because we have some tax-related commercial investments that generate tax-exempt income or tax credits, we make certain reclassifications to our Commercial Banking business results to present revenues on a taxable-equivalent basis.

Table 9 summarizes the financial results of our Commercial Banking business and displays selected key metrics for the periods indicated.

Table 9: Commercial Banking Business Results


	Three Months Ended June 30,									Six Months Ended June 30,
(Dollars in millions)	2012			2011			Change			2012			2011			Change
Selected income statement data:
Net interest income	$	427		$	388			10	%	$	858		$	764			12	%
Non-interest income		82			62			32			167			133			26

Total net revenue		509			450			13			1,025			897			14
Provision for credit losses		(94	)		(19	)		395			(163	)		(35	)		366
Non-interest expense		251			222			13			512			434			18

Income from continuing operations before income taxes		352			247			43			676			498			36
Income tax provision		124			88			41			238			177			34

Income from continuing operations, net of tax	$	228		$	159			43	%	$	438		$	321			36	%

Selected performance metrics:
Average loans held for investment:⁽¹⁾
Commercial and multifamily real estate	$	15,838		$	13,859			14	%	$	15,676		$	13,720			14	%
Commercial and industrial		18,001			14,993			20			17,520			14,813			18

Total commercial lending		33,839			28,852			17			33,196			28,532			16
Small-ticket commercial real estate		1,388			1,726			(20	)		1,434			1,772			(19	)

Total commercial banking	$	35,227		$	30,578			15	%	$	34,630		$	30,304			14	%

Average yield on loans held for investment		4.27	%		4.75	%		(48	)bps		4.37	%		4.78	%		(41	)bps
Average deposits	$	27,943		$	24,371			15	%	$	27,756		$	24,302			14	%
Average deposit interest rate		0.33	%		0.52	%		(19	)bps		0.35	%		0.53	%		(18	)bps
Core deposit intangible amortization	$	9		$	10			(10	)%	$	18		$	21			(14	)%
Net charge-off rate⁽²⁾		0.19	%		0.50	%		(31	)bps		0.19	%		0.65	%		(46	)bps
Net charge-off rate (excluding acquired loans)⁽³⁾		0.19			0.50			(31	)		0.19			0.66			(47	)


(Dollars in millions)	June 30, 2012			December 31, 2011			Change
Selected period-end data:
Loans held for investment:⁽¹⁾
Commercial and multifamily real estate	$	16,254		$	15,736			3	%
Commercial and industrial		18,467			17,088			8

Total commercial lending		34,721			32,824			6
Small-ticket commercial real estate		1,335			1,503			(11	)

Total commercial banking	$	36,056		$	34,327			5	%

Nonperforming loan rate⁽⁴⁾		0.99	%		1.08	%		(9	)bps
Nonperforming loan rate (excluding acquired loans)⁽³⁾		1.00			1.10			(10	)
Nonperforming asset rate⁽⁵⁾		1.04			1.17			(13	)
Nonperforming asset rate (excluding acquired loans)⁽³⁾		1.05			1.18			(13	)
Allowance for loan and lease losses	$	535		$	715			(25	)%
Deposits		27,784			26,683			4

⁽¹⁾

Loans held for investment includes loans acquired in the ING Direct and Chevy Chase Bank acquisitions. The carrying value of commercial banking acquired loans accounted for subsequent to acquisition based on expected cash flows to be collected was $430 million and $479 million as of June 30, 2012, and December 31, 2011, respectively. The average balance of commercial banking loans held for investment, excluding the carrying value of acquired loans, was $34.8 billion and $34.2 billion in the second quarter and first six months of 2012, respectively and $30.1 billion and $29.8 billion in the second quarter and first six months of 2011, respectively.

⁽²⁾	Calculated by dividing annualized net charge-offs for the period by average loans held for investment during the period for the specified loan category.

⁽³⁾

⁽⁴⁾

⁽⁵⁾	The nonperforming asset rate is calculated by loan category by dividing nonperforming assets as of the end of the period by period-end loans held for investment, REO, and other foreclosed assets for the specified loan category.

Key factors affecting the results of our Commercial Banking business for the second quarter and first six months of 2012, compared with the second quarter and first six months of 2011 included the following:

•

Net Interest Income: Net interest income increased by $39 million, or 10%, in the second quarter of 2012 and by $94 million, or 12%, in the first six months of 2012. The increase was primarily driven by higher deposit balances and growth in commercial real estate and commercial and industrial loans.

•

Non-Interest Income: Non-interest income increased by $20 million, or 32% in the second quarter of 2012 and by $34 million, or 26% in the first six months of 2012, largely attributable to growth in fees from ancillary services provided to customers.

•

Provision for Credit Losses: The provision for credit losses decreased by $75 million to negative $94 million in the second quarter of 2012 and decreased by $128 million to negative $163 million in the first six months of 2012. The significant reduction in the provision for credit losses was attributable to lower charge-offs due to an improvement in underlying credit performance trends. As a result, we recorded allowance releases of $101 million and $180 million in the second quarter and first six months of 2012, respectively, compared with allowance releases of $53 million and $98 million in the second quarter and first six months of 2011, respectively.

•

Non-Interest Expense: Non-interest expense increased by $29 million, or 13% in the second quarter of 2012 and by $78 million, or 18% in the first six months of 2012. The increase was due to costs associated with higher originations in our commercial real estate and commercial and industrial businesses, expansion into new markets and infrastructure investments.

•

Total Loans: Period-end loans in the Commercial Banking business increased by $1.7 billion, or 5%, to $36.1 billion as of June 30, 2012, from $34.3 billion as of December 31, 2011. The increase was driven by stronger loan originations in the commercial and industrial and commercial real estate businesses, which was partially offset by the continued run-off of the small-ticket commercial real estate loan portfolio.

•

Deposits: Period-end deposits in the Commercial Banking business increased by $1.1 billion, or 4%, to $27.8 billion as of June 30, 2012, from $26.7 billion as of December 31, 2011, driven by our strategy to strengthen existing relationships and increase liquidity from commercial customers.

•

Charge-off Statistics: Credit metrics in our Commercial Banking business significantly improved in the second quarter and first six months of 2012, attributable to improving credit trends and strengthening of underlying collateral values. This improvement has resulted in lower loss severities and created opportunities for recoveries on previously charged-off loans. The net charge-off rate decreased to 0.19% in both the second quarter and first six months of 2012, from 0.50% and 0.65% in the second quarter and first six months of 2011, respectively.

CONSOLIDATED BALANCE SHEET ANALYSIS

Total assets of $296.6 billion as of June 30, 2012 increased by $90.6 billion, or 44%, from $206.0 billion as of December 31, 2011. Total liabilities of $259.4 billion as of June 30, 2012, increased by $83.0 billion, or 47%, from $176.4 billion as of December 31, 2011. Stockholders’ equity increased by $7.5 billion during the first six months of 2012, to $37.2 billion as of June 30, 2012 from $29.7 billion as of December 31, 2011. The increase in stockholders’ equity was primarily attributable to our net income of $1.5 billion in the first six months of 2012, and the $5.8 billion in equity issuances in the first six months of 2012.

Following is a discussion of material changes in the major components of our assets and liabilities during the first six months of 2012.

Investment Securities

Our investment securities portfolio, which had a fair value of $55.3 billion and $38.8 billion, as of June 30, 2012 and December 31, 2011, respectively, consists of the following: U.S. Treasury and U.S. agency debt obligations; agency and non-agency mortgage-backed securities; asset-backed securities collateralized primarily by credit card loans, auto loans, student loans, auto dealer floor plan inventory loans, equipment loans, commercial paper, and home equity lines of credit; municipal securities; foreign government/agency bonds; covered bonds; and Community Reinvestment Act (“CRA”) equity securities. Our investment securities portfolio continues to be concentrated in securities that generally have lower credit risk and high credit ratings, such as securities issued and guaranteed by the U.S. Treasury and government sponsored enterprises or agencies. Investments in U.S. Treasury, agency securities and other securities guaranteed by the U.S. Government, based on fair value, accounted for 68% of our total investment securities portfolio as of June 30, 2012, compared with 69% as of December 31, 2011.

All of our investment securities were classified as available for sale as of June 30, 2012 and reported in our consolidated balance sheet at fair value. Table 10 presents the amortized cost and fair value for the major categories of our investment securities as of June 30, 2012 and December 31, 2011.

Table 10: Investment Securities


	June 30, 2012				December 31, 2011
(Dollars in millions)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
U.S. Treasury debt obligations	$	1,559	$	1,562	$	115	$	124
U.S. agency debt obligations⁽¹⁾		381		388		131		138
Residential mortgage-backed securities (“RMBS”):
Agency⁽²⁾		30,013		30,616		24,980		25,488
Non-agency		3,800		3,671		1,340		1,162

Total RMBS		33,813		34,287		26,320		26,650

Commercial mortgage-backed securities (“CMBS”):
Agency⁽²⁾		4,740		4,811		697		711
Non-agency		1,264		1,298		459		476

Total CMBSs		6,004		6,109		1,156		1,187

Other asset-backed securities⁽³⁾		11,646		11,689		10,119		10,150
Other securities⁽⁴⁾		1,219		1,254		462		510

Total securities available for sale	$	54,622	$	55,289	$	38,303	$	38,759

⁽¹⁾

Includes debt securities issued by Fannie Mae and Freddie Mac with an amortized cost of $130 million as of both June 30, 2012 and December 31, 2011, and fair value of $135 million and $137 million, as of June 30, 2012 and December 31, 2011, respectively. The remaining balance consists of debt that is guaranteed by the U.S. Government.

⁽²⁾

Includes MBS issued by Fannie Mae, Freddie Mac and Ginnie Mae with an amortized cost of $15.1 billion, $10.3 billion, and $9.4 billion and $12.3 billion, $8.9 billion and $4.5 billion, respectively, as of June 30, 2012 and December 31, 2011, respectively, and fair value of $15.4 billion, $10.5 billion, and $9.5 billion and $12.6 billion, $9.1 billion and $4.5 billion, respectively, as of June 30, 2012 and December 31, 2011, respectively. The book value of Fannie Mae, Freddie Mac and Ginnie Mae investments individually exceeded 10% of our stockholders’ equity as of June 30, 2012 and December 31, 2011.

⁽³⁾

Includes securities collateralized by credit card loans, auto dealer floor plan inventory loans and leases, auto loans, student loans, equipment loans, and other. The distribution among these asset types was approximately 73% credit card loans, 13% auto dealer floor plan inventory loans and leases, 6% auto loans, 1% student loans, 2% equipment loans, 2% commercial paper, and 3% other as of June 30, 2012. In comparison, the distribution was approximately 75% credit card loans, 11% auto dealer floor plan inventory loans and leases, 6% auto loans, 4% student loans, 2% equipment loans, and 2% other as of December 31, 2011. Approximately 85% of the securities in our asset-backed security portfolio were rated AAA or its equivalent as of June 30, 2012, compared with 86% as of December 31, 2011.

⁽⁴⁾	Includes foreign government/agency bonds, covered bonds, municipal securities and equity investments, primarily related to CRA activities.

Our investment securities increased by $16.5 billion, or 43%, in the first six months of 2012. The increase was primarily attributable to the acquisition of ING Direct investment securities of $30.2 billion, which was partially offset by the sale of investment securities of approximately $14.3 billion. We recorded a total net gain of $41 million on the sale of these securities.

Unrealized gains and losses on our available-for-sale securities are recorded net of tax as a component of accumulated other comprehensive income (“AOCI”). We had gross unrealized gains of $880 million and gross unrealized losses of $213 million on available-for sale securities as of June 30, 2012, compared with gross unrealized gains of $683 million and gross unrealized losses of $227 million on available-for sale securities as of December 31, 2011. The substantial majority of the gross unrealized losses as of June 30, 2012 and December 31, 2011 related to non-agency residential MBS. Of the $213 million gross unrealized losses as of June 30, 2012, $119 million related to securities that had been in a loss position for more than 12 months.

We recognized net OTTI on investment debt securities of $13 million and $27 million in the second quarter and first six months of 2012. In comparison, we recognized net OTTI on investment debt securities of $6 million and $9 million in the second quarter and first six months of 2011, which was due in part to the deterioration in the credit performance and outlook of certain non-agency securities as a result of continued weakness in the housing market.

We provide additional information on our available-for-sale investment securities in “Note 4—Investment Securities.”

Credit Ratings

Our investment securities portfolio continues to be concentrated in securities that generally have lower credit risk and high credit ratings, such as securities issued and guaranteed by the U.S. Treasury and government sponsored enterprises or agencies. Approximately 89% and 91% of our total investment securities portfolio was rated AA+ or its equivalent, or higher, as of June 30, 2012 and December 31, 2011, respectively, while approximately 7% and 4% were below investment grade as of June 30, 2012 and December 31, 2011, respectively. We categorize the credit ratings of our investment securities based on the lowest credit rating as issued by the rating agencies S&P, Moody’s Investors Service (“Moody’s”) and Fitch Ratings (“Fitch”).

Table 11 provides information on the credit ratings of our non-agency residential MBS, non-agency commercial MBS and asset-backed securities, which accounted for the substantial majority of the unrealized losses related to our investment securities portfolio as of June 30, 2012 and December 31, 2011.

Table 11: Non-Agency Investment Securities Credit Ratings


	June 30, 2012											December 31, 2011
(Dollars in millions)	Amortized Cost		AAA			Other Investment Grade			Below Investment Grade or Not Rated			Amortized Cost		AAA			Other Investment Grade			Below Investment Grade or Not Rated
Non-agency residential MBS	$	3,800		1	%		6	%		93	%	$	1,340		—	%		3	%		97	%
Non-agency commercial MBS		1,264		94			6			0			459		92			8			—
Asset-backed securities		11,646		85			12			3			10,119		86			14			—

Loans Held-for-Investment

Table 12 summarizes loans held for investment, net of the allowance for loan and lease losses, as of June 30, 2012 and December 31, 2011.

Table 12: Net Loans Held for Investment


	June 30, 2012						December 31, 2011
(Dollars in millions)	Total Loans Held For Investment		Allowance		Net Loans Held For Investment		Total Loans Held For Investment		Allowance		Net Loans Held For Investment
Credit Card	$	88,914	$	3,750	$	85,164	$	65,075	$	2,847	$	62,228
Consumer Banking		77,615		669		76,946		36,315		652		35,663
Commercial Banking		36,056		535		35,521		34,327		715

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Accelerated filer

Non-accelerated filer

Smaller reporting company