Edgar Filing: CAPITAL ONE FINANCIAL CORP

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Form 10Q

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, 2011

¨	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, 2011, there were 459,374,369 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		66
	Condensed Consolidated Statements of Income		66
	Condensed Consolidated Balance Sheets		67
	Condensed Consolidated Statements of Changes in Stockholders’ Equity		68
	Condensed Consolidated Statements of Cash Flows		69
	Notes to Condensed Consolidated Financial Statements		70
	Note 1—Summary of Significant Accounting Policies		70
	Note 2—Acquisitions		72
	Note 3—Discontinued Operations		74
	Note 4—Investment Securities		74
	Note 5—Loans		82
	Note 6—Allowance for Loan and Lease Losses		100
	Note 7—Variable Interest Entities and Securitizations		102
	Note 8—Goodwill and Other Intangible Assets		110
	Note 9—Deposits and Borrowings		113
	Note 10—Derivative Instruments and Hedging Activities		116
	Note 11—Stockholders’ Equity		122
	Note 12—Earnings Per Common Share		122
	Note 13—Fair Value of Financial Instruments		123
	Note 14—Business Segments		134
	Note 15—Commitments, Contingencies and Guarantees		138
	Note 16—Subsequent Events		148
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		1
	Summary of Selected Financial Data		1
	Introduction		4
	Executive Summary and Business Outlook		6
	Critical Accounting Policies and Estimates		11
	Consolidated Results of Operations		13
	Business Segment Financial Performance		20
	Consolidated Balance Sheet Analysis and Credit Performance		32
	Off-Balance Sheet Arrangements and Variable Interest Entities		50
	Risk Management		51
	Liquidity and Capital Management		51
	Market Risk Management		58
	Supervision and Regulatory Developments		60
	Accounting Changes and Developments		62
	Forward-Looking Statements		62
	Supplemental Tables		64
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		149
Item 4.	Controls and Procedures		149
PART II—OTHER INFORMATION			150
Item 1.	Legal Proceedings		150
Item 1A.	Risk Factors		150
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		150
Item 3.	Defaults upon Senior Securities		150
Item 5.	Other Information		150
Item 6.	Exhibits		150
SIGNATURES			151
INDEX TO EXHIBITS			152

INDEX OF MD&A TABLES AND SUPPLEMENTAL TABLES


Table	Description	Page
—	MD&A Tables:
1	Consolidated Financial Highlights (Unaudited)		1
2	Business Segments Results		5
3	Average Balances, Net Interest Income and Net Interest Yield		14
4	Rate/Volume Analysis of Net Interest Income		16
5	Non-Interest Income		17
6	Non-Interest Expense		19
7	Credit Card Business Results		22
7.1	Domestic Credit Card Business Results		24
7.2	International Credit Card Business Results		25
8	Consumer Banking Business Results		27
9	Commercial Banking Business Results		30
10	Investment Securities		32
11	Loan Portfolio Composition		34
12	30+ Day Delinquencies		36
13	Aging of 30+ Day Delinquent Loans		37
14	90+ Day Delinquent Loans Accruing Interest		37
15	Nonperforming Loans and Other Nonperforming Assets		38
16	Net Charge-Offs		39
17	Loan Modifications and Restructurings		40
18	Allowance for Loan and Lease Losses Activity		43
19	Allocation of the Allowance for Loan and Lease Losses		44
20	Unpaid Principal Balance of Mortgage Loans Originated and Sold to Third Parties Based on Category of Purchaser		46
21	Open Pipeline All Vintages (all entities)		47
22	Changes in Representation and Warranty Reserve		49
23	Allocation of Representation and Warranty Reserve		50
24	Liquidity Reserves		51
25	Deposits		52
26	Expected Maturity Profile of Short-term Borrowings and Long-term Debt		53
27	Borrowing Capacity		54
28	Senior Unsecured Debt Credit Ratings		55
29	Capital Ratios Under Basel I		56
30	Risk-Based Capital Components Under Basel I		57
31	Interest Rate Sensitivity Analysis		60

—	Supplemental Tables:
A	Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures		64

PART I—FINANCIAL INFORMATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“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 2010 Annual Report on Form 10-K (“2010 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 2010 Form 10-K in “Part I—Item 1A. Risk Factors” and in Exhibit 99.5 to our Current Report on Form 8-K filed on July 13, 2011.

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, 2011 and 2010, and selected comparative consolidated balance sheet data as of June 30, 2011, and December 31, 2010. We also provide selected key metrics we use in evaluating our performance.

Table 1: Consolidated Financial Highlights (Unaudited)


	Three Months Ended June 30,									Six Months Ended June 30,
(Dollars in millions)	2011			2010			Change			2011			2010			Change
Income statement
Net interest income⁽¹⁷⁾	$	3,136		$	3,097			1	%	$	6,276		$	6,325			(1	)%
Non-interest income		857			807			6			1,799			1,868			(4	)

Total revenue		3,993			3,904			2			8,075			8,193			(1	)
Provision for loan and lease losses⁽¹⁷⁾		343			723			(53	)		877			2,201			(60	)
Non-interest expense		2,255			2,000			13			4,417			3,847			15

Income from continuing operations before income taxes		1,395			1,181			18			2,781			2,145			30
Income tax provision		450			369			22			804			613			31

Income from continuing operations, net of taxes		945			812			16			1,977			1,532			29
Loss from discontinued operations, net of taxes⁽¹⁾		(34	)		(204	)		83			(50	)		(288	)		83

Net income	$	911		$	608			50		$	1,927		$	1,244			55

Common share statistics
Earnings per common share:
Basic earnings per common share	$	2.00		$	1.34			49	%	$	4.24		$	2.75			54	%
Diluted earnings per common share		1.97			1.33			48			4.18			2.73			53
Weighted average common shares outstanding:
Basic earnings per common share		455.6			452.1			1			454.9			451.6			1
Diluted earnings per common share		462.2			456.4			1			461.3			455.9			1
Dividends per common share		0.05			0.05			—			0.10			0.10			—
Stock price per common share at period end		51.67			40.30			28			51.67			40.30			28
Total market capitalization at period end		23,551			18,228			29			23,551			18,228			29


	Three Months Ended June 30,									Six Months Ended June 30,
(Dollars in millions)	2011			2010			Change			2011			2010			Change
Average balances
Loans held for investment	$	127,916		$	128,203			**	%	$	126,504		$	131,222			(4	)%
Interest-earning assets		174,143			174,672			**			173,844			178,296			(2	)
Total assets		199,229			199,357			**			198,612			203,159			(2	)
Interest-bearing deposits		109,251			104,163			5			108,944			104,083			5
Total deposits		125,834			118,484			6			125,001			118,011			6
Borrowings		39,451			50,404			(22	)		39,991			55,162			(28	)
Stockholders’ equity		28,255			24,526			15			27,636			24,091			15
Performance metrics
Purchase volume⁽²⁾	$	34,226		$	26,570			29	%	$	62,023		$	50,494			23	%
Revenue margin⁽³⁾⁽¹⁷⁾		9.17	%		8.94	%		23	bps		9.29	%		9.19	%		10	bps
Net interest margin⁽⁴⁾⁽¹⁷⁾		7.20			7.09			11			7.22			7.09			13
Net charge-off rate⁽⁵⁾⁽¹⁷⁾		2.91			5.36			(245	)		3.28			5.69			(241	)
Risk-adjusted margin⁽⁶⁾		7.03			5.01			202			6.90			5.00			190
Return on average assets⁽⁷⁾		1.90			1.63			27			1.99			1.51			48
Return on average equity⁽⁸⁾		13.38			13.24			14			14.31			12.71			160
Non-interest expense as a % of average loans held for investment⁽⁹⁾		7.05			6.24			81			6.98			5.86			112
Efficiency ratio⁽¹⁰⁾		56.47			51.23			524			54.70			46.95			775
Effective income tax rate		32.26			31.24			102			28.91			28.58			33

(Dollars in millions)	June 30, 2011			December 31, 2010			Change
Balance sheet (period end)
Loans held for investment	$	128,965		$	125,947			2	%
Interest-earning assets		174,302			172,024			1
Total assets		199,753			197,503			1
Interest-bearing deposits		109,278			107,162			2
Total deposits		126,117			122,210			3
Borrowings		37,735			41,796			(10	)
Total liabilities		171,072			170,962			**
Stockholders’ equity		28,681			26,541			8
Tangible common equity (“TCE”)⁽¹¹⁾		14,675			12,558			17
Credit quality metrics (period end)
Allowance for loan and lease losses⁽¹⁷⁾	$	4,488		$	5,628			(20	)%
Allowance as a % of loans held of investment		3.48	%		4.47	%		(99	)bps
30+ day performing delinquency rate⁽¹²⁾		2.90			3.52			(62	)
30+ day delinquency rate		3.57			4.23			(66	)
Capital ratios
Tier 1 common equity ratio⁽¹³⁾		9.4	%		8.8	%		40	bps
Tier 1 risk-based capital ratio⁽¹⁴⁾		11.8			11.6			—
Total risk-based capital ratio⁽¹⁵⁾		15.0			16.8			(200	)
Tangible common equity ratio (“TCE ratio”)⁽¹⁶⁾		7.9			6.9			100

**	Change is less than one percent.

⁽¹⁾	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.

⁽²⁾	Consists of credit card purchase transactions for the period, net of returns. Excludes cash advance transactions.

⁽³⁾	Calculated based on annualized total revenue for the period divided by average interest-earning assets for the period.

⁽⁴⁾	Calculated based on annualized net interest income for the period divided by average interest-earning assets for the period.

⁽⁵⁾	Calculated based on annualized net charge-offs for the period divided by average loans held for investment for the period. Average loans held for investment include purchased credit-impaired loans acquired as part of the Chevy Chase Bank acquisition.

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

⁽⁷⁾	Calculated based on annualized income from continuing operations, net of tax, for the period divided by average total assets for the period.

⁽⁸⁾	Calculated based on annualized income from continuing operations, net of tax, for the period divided by average stockholders’ equity for the period.

⁽⁹⁾	Calculated based on annualized non-interest expense, excluding restructuring and goodwill impairment charges, for the period divided by average loans held for investment for the period.

⁽¹⁰⁾	Calculated based on non-interest expense, excluding restructuring and goodwill impairment charges, for the period divided by total revenue for the period.

⁽¹¹⁾

Tangible common equity is a non-GAAP measure consisting of total assets less assets from discontinued operations and intangible 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.

⁽¹²⁾	See “Consolidated Balance Sheet Analysis and Credit Performance—Credit Performance—Nonperforming Assets” for our policies for classifying loans as nonperforming by loan category.

⁽¹³⁾

Tier 1 common equity ratio is a non-GAAP measure calculated based on Tier 1 common equity divided by risk-weighted assets. See “Liquidity and Capital Management—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 and non-GAAP reconciliation.

⁽¹⁴⁾

Tier 1 risk-based capital ratio is a regulatory measure calculated based on Tier 1 capital divided by risk-weighted assets. See “Liquidity and Capital Management—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.

⁽¹⁵⁾

Total risk-based capital ratio is a regulatory measure calculated based on total risk-based capital divided by risk-weighted assets. See “Liquidity and Capital Management—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⁾

Tangible common equity ratio (“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.

⁽¹⁷⁾

Interest income was reduced by $215 million in the second quarter and first six months of 2011 for amounts earned by Kohl’s. The reduction in the provision for loan and lease losses attributable to Kohl’s was $212 million for the second quarter and first six months of 2011. Loss sharing amounts attributable to Kohl’s reduced charge-offs by $42 million in the second quarter and first six months of 2011. The expected reimbursement from Kohl’s netted in our allowance for loan and lease losses was approximately $170 million as of June 30, 2011.

INTRODUCTION

Capital One Financial Corporation (the “Company”) is 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”), which currently offers credit and debit card products, other lending products and deposit products; and

•

Capital One, National Association (“CONA”), which offers a broad spectrum of banking products and financial services to consumers, small businesses and commercial clients.

The Company and its subsidiaries are collectively referred to as “we,” “us” or “our” in this Report. CONA and COBNA are collectively referred to as the “Banks” in this Report.

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, including the sale and servicing of loans and providing fee-based services to customers. Customer usage and payment patterns, credit quality, levels of marketing expense and operating efficiency all affect our profitability. Our expenses primarily consist of the cost of funding our assets, our provision for loan and lease losses, operating expenses (including associate salaries and benefits, infrastructure maintenance and enhancements and branch operations and expansion costs), marketing expenses and income taxes. We had $129.0 billion in total loans outstanding and $126.1 billion in deposits as of June 30, 2011, compared with $125.9 billion in total loans outstanding and $122.2 billion in deposits as of December 31, 2010.

Our principal operations are currently organized, for management reporting purposes, 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.

•

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 automobile 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 middle market customers. Our middle market customers typically include commercial and industrial companies with annual revenues between $10 million to $1.0 billion.

Certain activities that are not part of a segment are included in our “Other” category.

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, 2011 and 2010. We provide a reconciliation of our total business segment results to our consolidated U.S. GAAP results in “Note 14—Business Segments” of this Report.

Table 2: Business Segment Results


	Three Months Ended June 30,
	2011												2010
	Total Revenue⁽¹⁾						Net Income (Loss)⁽²⁾						Total Revenue⁽¹⁾						Net Income (Loss)⁽²⁾
(Dollars in millions)	Amount			% of Total			Amount			% of Total			Amount			% of Total			Amount			% of Total
Credit Card	$	2,509			63	%	$	618			66	%	$	2,636			67	%	$	568			70	%
Consumer Banking		1,245			31			287			30			1,097			28			305			38
Commercial Banking		395			10			142			15			379			10			77			9
Other⁽³⁾		(156	)		(4	)		(102	)		(11	)		(206	)		(5	)		(138	)		(17	)

Total from continuing operations	$	3,993			100	%	$	945			100	%	$	3,906			100	%	$	812			100	%


	Six Months Ended June 30,
	2011												2010
	Total Revenue⁽¹⁾						Net Income (Loss)⁽²⁾						Total Revenue⁽¹⁾						Net Income (Loss)⁽²⁾
(Dollars in millions)	Amount			% of Total			Amount			% of Total			Amount			% of Total			Amount			% of Total
Credit Card	$	5,124			63	%	$	1,261			64	%	$	5,467			67	%	$	1,057			69	%
Consumer Banking		2,414			30			502			25			2,309			28			610			40
Commercial Banking		787			10			290			15			733			9			28			2
Other⁽³⁾		(250	)		(3	)		(76	)		(4	)		(311	)		(4	)		(163	)		(11	)

Total from continuing operations	$	8,075			100	%	$	1,977			100	%	$	8,198			100	%	$	1,532			100	%

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

⁽²⁾	Net income (loss) for our business segments reflects 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

Financial Highlights

We reported net income of $911 million ($1.97 per diluted share) in the second quarter of 2011. In comparison, we reported net income of $1.0 billion ($2.21 per diluted share) in the first quarter of 2011 and net income of $608 million ($1.33 per diluted share) in the second quarter of 2010. Net income totaled $1.9 billion ($4.18 per diluted share) for the first six months of 2011, compared with net income of $1.2 billion ($2.73 per diluted share) for the first six months of 2010.

Our earnings in the second quarter of 2011 further bolstered our Tier 1 risk-based capital ratio under Basel I to 11.8% as of June 30, 2011, up 90 basis points from 10.9% as of March 31, 2011, and comfortably above the current minimum regulatory requirement of 4.0%. Our Tier 1 common equity ratio, a non-GAAP measure, rose to 9.4% as of June 30, 2011, up 100 basis points from 8.4% as of March 31, 2011. See “Supplemental Tables” below for a calculation of our regulatory capital ratios and a reconciliation of our supplemental non-GAAP capital measures.

We grew loans and deposits in the second quarter of 2011. Our strategies and actions are designed to deliver profitable long-term growth 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 transactor customers and new partnerships in our Credit Card business, long-term 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 further strengthen our brand. We believe our actions have created a well-positioned balance sheet and strong capital and liquidity levels which have provided us with investment flexibility to take advantage of attractive opportunities and adjust, where we believe appropriate, to changing market conditions.

Our recent investments and partnership alliances include our September 2010 acquisition of the $807 million Sony Card legacy portfolio associated with our partnership alliance with Sony Corporation of America (“Sony”) and our January 2011 acquisition of the existing $1.4 billion credit card loan portfolio of Hudson’s Bay Company (“HBC”), one of the largest retailers in Canada. In April 2011, we acquired the existing $3.7 billion private-label credit card loan portfolio of Kohl’s Department Stores (“Kohl’s”) from JPMorgan Chase & Co, which consists of more than 20 million Kohl’s customer accounts. In June 2011, we entered into a definitive agreement with ING Groep N.V., ING Bank N.V., ING Direct N.V., ING Direct Bancorp, collectively, the Sellers, under which we will acquire substantially all of the Sellers’ ING Direct business in the United States, for an estimated price of $9.0 billion at announcement. We expect the ING Direct transaction to close in late 2011 or early 2012, subject to customary closing conditions, including certain governmental clearances and approvals.

In conjunction with the announcement of the ING Direct acquisition, we announced that we expected to finance a portion of the cash consideration through a public equity raise prior to the close of the transaction. On July 19, 2011, we closed a public underwritten offering of 40 million shares of our common stock, subject to forward sale agreements. We also closed a public offering of our senior notes for total proceeds of approximately $3.0 billion. Each of these offerings is described in more detail below under “Recent Acquisitions and Related Developments—Equity and Debt Offerings.” In addition to these public offerings, we may seek to rebalance our investment portfolio prior to the close of the ING Direct acquisition.

Our financial strength and flexibility and our experience in the credit card and direct banking businesses are key factors that we believe have enabled us to take advantage of our recent investment opportunities. We believe these factors will help us deliver attractive financial results as well as compelling value creation over time.

Below are additional highlights of our performance for the second quarter and first six months of 2011. These highlights generally are based on a comparison to the same prior year periods. The changes in our financial condition and credit performance are generally based on our financial condition and credit performance as of June 30, 2011, compared with our financial condition and credit performance as of December 31, 2010. We provide a more detailed discussion of our financial performance in the sections following this “Executive Summary and Business Outlook.”

Total Company

•

Earnings: We reported earnings of $911 million in the second quarter of 2011 and $1.9 billion in the first six months of 2011. Our earnings increased by $303 million, or 50%, in the second quarter of 2011, and by $683 million, or 55%, in the first six months of 2011, compared with the same prior year periods. The increase in net income was attributable to lower credit costs and strong underlying credit improvement trends, including lower provision for loan and lease losses compared to the prior year periods, as well as a substantial reduction in the provision for mortgage repurchase losses for legacy mortgage related representation and warranty claims in the second quarter and first six months of 2011 as compared to the prior year periods. The impact of these factors was partially offset by higher operating expenses related to our recent acquisitions and increased marketing expenditures.

•

Total Loans: Period-end loans held for investment increased by $3.0 billion, or 2%, during the first six months of 2011, to $129.0 billion as of June 30, 2011, from $125.9 billion as of December 31, 2010. The increase was primarily attributable to the additions of the Kohl’s portfolio of $3.7 billion and the HBC portfolio of $1.4 billion. Excluding the impact of the addition of the Kohl’s and HBC portfolios, total loans decreased by $2.1 billion, or 2%, in the first six months of 2011, due to the continued expected run-off of installment loans in our Credit Card business and home loans in our Consumer Banking business, other loan paydowns and charge-offs. The impact from these factors more than offset the strong growth in purchase volume across the Domestic Card business.

•

Charge-off and Delinquency Statistics: Net charge-off and delinquency rates continued to improve during the second quarter of 2011. The net charge-off rate decreased to 2.91% from 3.66% in the first quarter of 2011 and 5.36% in the second quarter of 2010. The 30+ day delinquency rate decreased to 3.57% as of June 30, 2011, from 3.79% as of March 31, 2011, and 4.23% as of December 31, 2010.

•

Allowance for Loan and Lease Losses: As a result of the continued improvement in credit performance, we reduced our allowance by $579 million in the second quarter of 2011 and by $1.1 billion in the first six months of 2011 to $4.5 billion as of June 30, 2011. In comparison, we reduced our allowance by $1.0 billion in the second quarter of 2010 and by $1.6 billion in the first six months of 2010. The allowance as a percentage of our total loans held for investment decreased to 3.48% as of June 30, 2011, from 4.47% as of December 31, 2010.

•

Representation and Warranty Reserve: Our representation and warranty reserve totaled $869 million as of June 30, 2011, compared with $816 million as of December 31, 2010. This reserve relates to our mortgage loan repurchase exposure for legacy mortgage loans sold by our subsidiaries to various parties under contractual provisions that include various representations and warranties. The reserve reflects losses as of each balance sheet date that we consider to be both probable and reasonably estimable. We recorded a provision for this exposure of $37 million and $81 million in the second quarter and first six months of 2011, respectively, compared with a provision of $404 million and $628 million in the second quarter and first six months of 2010, respectively.

Business Segments

•

Credit Card Business: Our Credit Card business generated net income from continuing operations of $618 million and $1.3 billion in the second quarter and first six months of 2011, respectively, compared with net income from continuing operations of $568 million and $1.1 billion in the second quarter and first six months of 2010, respectively. Continued favorable credit performance was the primary driver of the improvement in our Credit Card business, resulting in a significant decrease in the provision for loan and lease losses. The provision decrease was partially offset by an increase in non-interest expense attributable to increased operating and legal costs related to the acquisitions of the private-label credit card loan portfolios of Sony, HBC and Kohl’s and increased marketing expenditures.

•

Consumer Banking Business: Our Consumer Banking business generated net income from continuing operations of $287 million and $502 million in the second quarter and first six months of 2011, respectively, compared with net income from continuing operations of $305 million and $610 million in the second quarter and first six months of 2010, respectively. The decrease in net income reflected the impact of a one-time pre-tax gain of $128 million recorded in the first quarter of 2010 from the deconsolidation of certain option-adjustable rate mortgage trusts and an increase in the provision for loan and lease losses due to growth in auto loans. These factors were partially offset by an increase in total revenue due to higher pricing for new auto loan originations and deposit growth resulting from our continued strategy to leverage our bank outlets to attract lower cost funding sources.

•

Commercial Banking: Our Commercial Banking business generated net income from continuing operations of $142 million and $290 million in the second quarter and first six months of 2011, respectively, compared with net income from continuing operations of $77 million and $28 million in the second quarter and first six months of 2010, respectively. The improvement in results for our Commercial Banking business reflected an increase in revenues, a decrease in non-interest expense and a decrease in the provision for loan and lease losses due to the continued improvement in our Commercial Banking credit performance metrics. As a result of this improvement, we reduced our allowance for loan and lease losses and recorded a negative provision for loan and lease losses of $18 million and $33 million in the second quarter and first six months of 2011, respectively. In comparison, we recorded a provision for loan and lease losses of $62 million and $300 million in the second quarter and first six months of 2010, respectively, related to our Commercial Banking business.

Business Environment and Recent Developments

Recent Business and Regulatory Developments

During the second quarter, the operating environment continued to be challenging and uncertain given global macroeconomic concerns and fragile U.S. economic conditions. The banking industry continues to face a difficult and increasingly complex environment in which economic uncertainty, regulation and changes in customer and competitor behavior impact how we allocate resources and manage operations, as well as how we position ourselves for future earnings growth. Despite these challenges, our recent partnerships and acquisitions have contributed to new account originations and an increase in purchase volumes.

We are continuing to assess the potential impact of proposed rules promulgated by the agencies charged with implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), including rules relating to resolution plans and credit exposure reports, the FDIC’s orderly liquidation authority, derivatives, risk retention and other securitization matters. These rules may result in modifications to our business models and organizational structure and may subject us to escalating costs associated with any such changes.

Recent Acquisitions and Related Developments

During the past several years, we have explored opportunities to acquire financial services companies and financial assets and enter into strategic partnerships as part of our growth strategy. In the first six months of 2011, we acquired the existing credit card loan portfolios of HBC and Kohl’s and announced our planned acquisition of ING Direct. We continue to evaluate and anticipate engaging in additional strategic partnerships and selected acquisitions of financial institutions and other financial assets, including credit card and other loan portfolios. We may issue common stock or debt in connection with future acquisitions, including in public offerings, to fund such acquisitions.

Hudson’s Bay Company

On January 7, 2011, we acquired the existing $1.4 billion credit card loan portfolio of HBC, one of the largest retailers in Canada, from GE Capital Retail Finance. The acquisition and partnership with HBC significantly expand our credit card customer base in Canada, tripling the number of customer accounts, and provide an additional distribution channel. The acquisition included a transfer of approximately 400 employees directly involved in managing HBC’s loan portfolio.

Kohl’s

On April 1, 2011, we acquired Kohl’s existing $3.7 billion private-label credit card loan portfolio from JPMorgan Chase & Co., which consists of more than 20 million Kohl’s customer accounts. Under the related partnership agreement with Kohl’s, we share a fixed percentage of revenues, consisting of finance charges and late fees, with Kohl’s, and Kohl’s is responsible for reimbursing us for a fixed percentage of credit losses incurred. The revenue-sharing arrangement with Kohl’s has the effect of reducing our overall revenue margins for our Domestic Card business, while the loss-sharing arrangement has the effect of reducing the net charge-off rate. However, because we replaced lower yielding cash and other investments with the Kohl’s receivables, we do not expect that the addition of the Kohl’s portfolio will have a material impact on our total company revenue margin or net interest margin.

Interest income was reduced by $215 million in the second quarter and first six months of 2011 for amounts earned by Kohl’s. Loss sharing amounts attributable to Kohl’s reduced charge-offs by $42 million in the second quarter and first six months of 2011. In addition, the expected reimbursement from Kohl’s netted in our allowance for loan and lease losses was approximately $170 million as of June 30, 2011. The reduction in the provision for loan and lease losses attributable to Kohl’s for the second quarter and first six months of 2011 was $212 million.

ING Direct

On June 16, 2011, we entered into a purchase and sale agreement with ING Groep N.V., ING Bank N.V., ING Direct N.V., ING Direct Bancorp, collectively, the Sellers, under which we will acquire substantially all of the Sellers’ ING Direct business in the United States in exchange for $6.2 billion in cash and approximately 55.9 million shares of our common stock, subject to certain adjustments described in the purchase and sale agreement. We will effect the transaction through (i) the acquisition of the equity interests of ING Bank, fsb, (ii) the acquisition of the equity interests of each of WS Realty, LLC and ING Direct Community Development LLC and (iii) the acquisition of certain assets and the assumption of certain liabilities of ING Direct Bancorp. We expect the ING Direct transaction to close in late 2011 or early 2012, subject to customary closing conditions, including certain governmental clearances and approvals.

Equity and Debt Offerings

On July 19, 2011, we closed a public offering of shares of our common stock, subject to forward sale agreements that we entered into with certain counterparties acting as forward purchasers. The forward purchasers agreed to borrow and sell to the public, through the underwriters, 40 million shares of our common stock at a price per share of $50.00. After underwriter’s discounts and commissions, the net proceeds to the company will be at an initial forward sale price per share of $48.50. We did not receive any proceeds from this public offering of our shares of common stock. Under the terms of the forward sale agreements, we must settle the forward sale agreements on or before February 15, 2012. We expect to settle the forward sale agreements entirely by physical delivery of shares of common stock in exchange for cash proceeds from the forward purchasers of $1.9 billion based on the initial forward price. The forward sale price is subject to adjustment under the forward sale agreements. However, we may, subject to certain conditions, elect cash or net share settlement of all or a portion of our obligation to deliver shares of common stock. In addition, we granted the underwriters a 30-day option to purchase an additional 6 million shares of our common stock to cover any over-allotments, which shares are not subject to the forward sale agreements.

We also closed a public offering of four different series of our senior notes on July 19, 2011, for total proceeds of approximately $3.0 billion. The offering of senior notes included $250 million aggregate principal amount of our Floating Rate Senior Notes due 2014, $750 million aggregate principal amount of our 2.125% Senior Notes due 2014, $750 million aggregate principal amount of our 3.150% Senior Notes due 2016 and $1.25 billion aggregate principal amount of our 4.750% Senior Notes due 2021.

We expect to use the net proceeds of these offerings, along with cash sourced from current liquidity, to fund the $6.2 billion in cash consideration payable in connection with the ING Direct acquisition.

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 Report. 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 2010 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 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 Report “Item 1A. Risk Factors” in our 2010 Form 10-K and Exhibit 99.5 to our Current Report on Form 8-K filed on July 13, 2011, for factors that could materially influence our results.

Total Company Expectations

We continue to gain traction across all of our businesses as a result of our focus on franchise-enhancing customer relationships. We believe the recently announced ING Direct acquisition will deliver strong financial results in the near-term as well as compelling long-term value creation. As a result, we believe we are in a strong position to deliver attractive and sustainable results over the long-term, including moderate growth and attractive risk-adjusted returns on assets in our Credit Card and Auto Finance businesses, moderate growth in low-risk loans in our Commercial Banking business and strong growth in low-cost deposits and high-quality commercial and retail customer relationships. Based on recent trends and our targeted initiatives to attract new business and develop customer relationships, we expect modest year-over-year growth in ending loan balances in 2011. Although we expect growth in our period-end loan balances in 2011, we expect that our average loan balances for 2011 will be comparable to our average loan balances for 2010 given the lower starting point for our loan balances in 2011.

Business Segments Expectations

Credit Card Business

Based on the traction we are gaining in our Domestic Card business, we believe that our Domestic Card loan balances reached a low point in the first quarter of 2011. We expect modest loan growth in the second half of 2011, as the headwinds of elevated charge-offs and the run-off of the installment loan portfolio continue to diminish. We believe we are well positioned to gain market share in the new level playing field resulting from the CARD Act. We believe the credit performance improvement in our Credit Card business will continue despite elevated unemployment.

Consumer Banking Business

In our Consumer Banking business, we expect that auto originations and returns will remain strong and drive growth in auto loans in 2011. We expect that the continuing run-off of the mortgage portfolio will largely offset the growth in auto loans. While we expect that our Auto Finance business will continue to deliver strong credit performance and economic results, we believe that we have likely experienced the low point for the Auto Finance charge-off rate. We expect the Auto Finance charge-off rate will increase in the second half of 2011, driven by seasonal patterns, competitive factors and expected changes in auction prices for used vehicles. We

believe loan pricing in some loan portfolio categories is approaching historic highs and is likely to moderate or decline over time.

Commercial Banking Business

In our Commercial Banking business, we believe that the worst of the commercial credit downturn is behind us and there is positive trajectory. However, we continue to expect some quarterly uncertainty and volatility in commercial charge-offs and nonperforming loans. We have been growing commercial loans with lower credit risk and expect further modest growth to continue in 2011. Growth in treasury management and capital market services is driving higher fee revenues and deepening relationships with our commercial customers.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in accordance with U.S. 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 2010 Form 10-K.

We have 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. These critical accounting policies govern:

•

Fair value

•

Allowance for loan and lease losses

•

Asset impairment

•

Representation and warranty reserve

•

Revenue recognition

•

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. The use of fair value to measure our financial instruments is fundamental to the preparation of our consolidated financial statements because we account for and record a significant portion of our assets and liabilities at fair value. Accordingly, we provide information below on financial instruments recorded at fair value in our consolidated balance sheets. Management has discussed our critical accounting policies and estimates with the Audit and Risk Committee of the Board of Directors.

Fair Value

Fair value is defined as the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date (also referred to as an exit price). The fair value accounting guidance provides a three-level fair value hierarchy for classifying financial instruments. This hierarchy is based on whether the inputs to the valuation techniques used to measure fair value are observable or unobservable. Fair value measurement of a financial asset or liability is assigned to a level based on the lowest level of any input that is significant to the fair value measurement in its entirety. The three levels of the fair value hierarchy are described below:


Level 1:		Quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2:		Observable market-based inputs, other than quoted prices in active markets for identical assets or liabilities.

Level 3:		Unobservable inputs.

The degree of management judgment involved in determining the fair value of a financial instrument is dependent upon the availability of quoted prices in active markets or observable market parameters. When quoted prices and observable data in active markets are not fully available, management judgment is necessary to estimate fair value. Changes in market conditions, such as reduced liquidity in the capital markets or changes in secondary market activities, may reduce the availability and reliability of quoted prices or observable data used to determine fair value.

We have developed policies and procedures to determine when markets for our financial assets and liabilities are inactive if the level and volume of activity has declined significantly relative to normal conditions. If markets are determined to be inactive, it may be appropriate to adjust price quotes received. When significant adjustments are required to price quotes or inputs, it may be appropriate to utilize an estimate based primarily on unobservable inputs.

Significant judgment may be required to determine whether certain financial instruments measured at fair value are included in Level 2 or Level 3. In making this determination, we consider all available information that market participants use to measure the fair value of the financial instrument, including observable market data, indications of market liquidity and orderliness, and our understanding of the valuation techniques and significant inputs used. Based upon the specific facts and circumstances of each instrument or instrument category, judgments are made regarding the significance of the Level 3 inputs to the instruments’ fair value measurement in its entirety. If Level 3 inputs are considered significant, the instrument is classified as Level 3. The process for determining fair value using unobservable inputs is generally more subjective and involves a high degree of management judgment and assumptions.

Our financial instruments recorded at fair value on a recurring basis represented approximately 21% of our total assets of $199.8 billion as of June 30, 2011, compared with 22% of our total assets of $197.5 billion as of December 31, 2010. Financial assets for which the fair value was determined using significant Level 3 inputs represented approximately 2% of these financial instruments (less than 1% of total assets) as of June 30, 2011, and approximately 2% of these financial instruments (1% of total assets) as of December 31, 2010.

We discuss changes in the valuation inputs and assumptions used in determining the fair value of our financial instruments, including the extent to which we have relied on significant unobservable inputs to estimate fair value and our process for corroborating these inputs, in “Note 13—Fair Value of Financial Instruments.”

Key Controls Over Fair Value Measurement

We have a governance framework and a number of key controls that are intended to ensure that our fair value measurements are appropriate and reliable. Our governance framework provides for independent oversight and segregation of duties. Our control processes include review and approval of new transaction types, price verification and review of valuation judgments, methods, models, process controls and results. Groups independent from our trading and investing function, including our Valuations Group and Valuations Advisory Committee, participate in the review and validation process. The Valuation Advisory Committee includes senior representation from business areas, our Enterprise Risk Oversight division and our Finance division.

Our Valuations Group performs monthly independent verification of fair value measurements by comparing the methodology driven price to other market source data (to the extent available), and uses independent analytics to determine if assigned fair values are reasonable. The Valuations Advisory Committee regularly reviews and approves our valuation methodologies to ensure that our methodologies and practices are consistent with industry standards and adhere to regulatory and accounting guidance.

For additional information on our critical accounting policies and estimates, see “Part II—Item 7. MD&A—Critical Accounting Policies and Estimates” of our 2010 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, 2011 and 2010. 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 the average yield or cost for the three and six months ended June 30, 2011 and 2010.

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


	Three Months Ended June 30,
	2011								2010
(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⁽³⁾	$	88,777		$	2,658		11.98	%	$	91,243		$	2,815		12.34	%
International		8,823			349		15.82			7,427			296		15.94

Total consumer loans⁽³⁾		97,600			3,007		12.32			98,670			3,111		12.61
Commercial loans⁽³⁾		30,316			360		4.75			29,533			365		4.94

Total loans held for investment		127,916			3,367		10.53			128,203			3,476		10.85

Investment securities		40,381			313		3.10			39,022			342		3.51
Other interest-earning assets:
Domestic		5,148			16		1.24			6,933			17		0.98
International		698			3		1.72			514			—		0.00

Total other interest-earning assets		5,846			19		1.30			7,447			17		0.91

Total interest-earning assets	$	174,143		$	3,699		8.50	%	$	174,672		$	3,835		8.78	%

Cash and due from banks		1,870								2,413
Allowance for loan and lease losses		(5,069	)							(7,735	)
Premises and equipment, net		2,715								2,723
Other assets		25,570								27,284

Total assets	$	199,229							$	199,357

Liabilities and equity:
Interest-bearing liabilities:
Deposits	$	109,251		$	307		1.12	%	$	104,163		$	368		1.41	%
Securitized debt obligations:
Domestic		18,384			91		1.98			30,333			182		2.40
International		3,807			22		2.31			4,915			30		2.44

Total securitized debt obligations		22,191			113		2.04			35,248			212		2.41
Senior and subordinated notes		8,093			63		3.11			8,760			72		3.29
Other borrowings		9,167			80		3.49			6,396			86		5.38

Total interest-bearing liabilities	$	148,702		$	563		1.51	%	$	154,567		$	738		1.91	%

Non-interest bearing deposits		16,583								14,321
Other liabilities		5,689								5,943

Total liabilities		170,974								174,831
Stockholders’ equity		28,255								24,526

Total liabilities and stockholders’ equity	$	199,229							$	199,357

Net interest income/spread				$	3,136		6.99	%				$	3,097		6.87	%

Interest income to average interest-earning assets							8.50	%							8.78	%
Interest expense to average interest-earning assets							1.30								1.69

Net interest margin							7.20	%							7.09	%


	Six Months Ended June 30,
	2011								2010
(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⁽³⁾	$	87,687		$	5,364		12.23	%	$	93,975		$	5,795		12.33	%
International		8,761			703		16.05			7,619			601		15.78

Total consumer loans⁽³⁾		96,448			6,067		12.58			101,594			6,396		12.59
Commercial loans⁽³⁾		30,056			717		4.77			29,627			738		4.98

Total loans held for investment		126,504			6,784		10.73			131,221			7,134		10.87

Investment securities		40,953			629		3.07			38,525			691		3.59
Other interest-earning assets:
Domestic		5,698			32		1.12			7,942			39		0.98
International		689			6		1.74			608			1		0.33

Total other interest-earning assets		6,387			38		1.19			8,550			40		0.94

Total interest-earning assets	$	173,844		$	7,451		8.57	%	$	178,296		$	7,865		8.82	%

Cash and due from banks		1,912								2,338
Allowance for loan and lease losses		(5,348	)							(8,040	)
Premises and equipment, net		2,717								2,724
Other assets		25,487								27,841

Total assets	$	198,612							$	203,159

Liabilities and equity:
Interest-bearing liabilities:
Deposits	$	108,944		$	629		1.15	%	$	104,083		$	767		1.47	%
Securitized debt obligations:
Domestic		19,983			208		2.08			34,253			390		2.28
International		3,869			45		2.33			5,230			64		2.45

Total securitized debt obligations		23,852			253		2.12			39,483			454		2.30
Senior and subordinated notes		8,091			127		3.14			8,758			140		3.20
Other borrowings		8,048			166		4.13			6,921			179		5.17

Total interest-bearing liabilities	$	148,935		$	1,175		1.58	%	$	159,245		$	1,540		1.93	%

Non-interest bearing deposits		16,057								13,928
Other liabilities		5,984								5,895

Total liabilities		170,976								179,068
Stockholders’ equity		27,636								24,091

Total liabilities and stockholders’ equity	$	198,612							$	203,159

Net interest income/spread				$	6,276		6.99	%				$	6,325		6.89	%

Interest income to average interest-earning assets							8.57	%							8.82	%
Interest expense to average interest-earning assets							1.35								1.73

Net interest margin							7.22	%							7.09	%

⁽¹⁾	Past due fees included in interest income totaled approximately $245 million and $312 million for the three months ended June 30, 2011 and 2010, respectively, and approximately $490 million and $644 million for the six months ended June 30, 2011 and 2010, 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 cards also is included in consumer loans.

⁽³⁾

In the first quarter of 2011, we revised our previously reported interest income on interest-earning assets and average yield on loans held for investment for 2010 to conform to the internal management accounting methodology used in our segment reporting. The interest income and average loan yields presented reflect this revision. The previously reported interest income and average yields for the second quarter of 2010 were as follows: domestic consumer loans ($2,882 million and 12.63%); total consumer loans ($3,178 million and 12.88%); and commercial loans ($298 million and 4.04%). The previously reported interest income and average yields for the first six months were as follows: domestic consumer loans ($5,844 million and 12.44%); total consumer loans ($6,445 million and 12.69%); and commercial loans ($689 million and 4.65%).

Table 4 presents the variance between our net interest income for the three months ended June 30, 2011 and 2010, and for the six months ended June 30, 2011 and 2010, 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, 2011 vs. 2010									Six Months Ended June 30, 2011 vs. 2010
(Dollars in millions)	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	$	(104	)	$	(34	)	$	(70	)	$	(329	)	$	(325	)	$	(4	)
Commercial loans		(5	)		10			(15	)		(21	)		11			(32	)

Total loans held for investment, including past-due fees		(109	)		(24	)		(85	)		(350	)		(314	)		(36	)
Investment securities		(29	)		12			(41	)		(62	)		42			(104	)
Other		2			(4	)		6			(2	)		(11	)		9

Total interest income		(136	)		(16	)		(120	)		(414	)		(283	)		(131	)

Interest expense:
Deposits		(61	)		17			(78	)		(138	)		34			(172	)
Securitized debt obligations		(99	)		(70	)		(29	)		(201	)		(168	)		(33	)
Senior and subordinated notes		(9	)		(5	)		(4	)		(13	)		(11	)		(2	)
Other borrowings		(6	)		30			(36	)		(13	)		27			(40	)

Total interest expense		(175	)		(28	)		(147	)		(365	)		(118	)		(247	)

Net interest income	$	39		$	12		$	27		$	(49	)	$	(165	)	$	116

⁽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.

Our net interest income of $3.1 billion for the second quarter of 2011 increased slightly from the second quarter of 2010, driven by an 11 basis points expansion of our net interest margin to 7.20%, which was partially offset by a modest decline in average interest-earning assets.

Our net interest income of $6.3 billion for the first six months of 2011 decreased slightly from the first six months of 2010, driven by a 2% decrease in average interest-earning assets, which was offset by a 13 basis points expansion of our net interest margin to 7.22%.

The decrease in average interest-earning assets in the second quarter and first six months of 2011 reflected the continued run-off of businesses that we exited or repositioned, including our installment, home loan and small-ticket commercial real estate loan portfolios, which more than offset the impact of modest revolving credit card loan growth and the addition of the existing HBC credit card loan portfolio of $1.4 billion in the first quarter of 2011 and the addition of the existing Kohl’s private-label credit card loan portfolio of $3.7 billion in the second quarter of 2011.

The increase in our net interest margin in the second quarter of 2011 and first six months of 2011 was primarily attributable to an improvement in our cost of funds, which was partially offset by a decline in the yield on our interest-earning assets. Our cost of funds 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. In addition, the overall interest rate environment, combined with our disciplined pricing, contributed to the decrease in our average deposit interest rates.

The decrease in yield on interest-earning assets was attributable to a reduction in late payment fees resulting from the Federal Reserve guidelines regarding reasonable fees that went info effect in the third quarter of 2010 and the addition of the Kohl’s portfolio. Under our partnership agreement with Kohl’s, we share a fixed percentage of revenues, consisting of finance charges and late fees. We report revenues related to Kohl’s credit card loans on a net basis in our consolidated financial statements, which has the effect of reducing the yield on our average interest-earning assets. The impact of these factors was partially offset by the run-off of lower margin installment loans, a reduced level of new accounts with low introductory promotional rates and an increase in the recognition of billed finance charges and fees due to the improvement in credit performance.

Non-Interest Income

Non-interest income consists of servicing and securitizations income, service charges and other customer-related fees, interchange income and other non-interest income. We also record the provision for mortgage repurchase losses related to continuing operations in 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 net interest income.

Table 5 displays the components of non-interest income for the three and six months ended June 30, 2011 and 2010.

Table 5: Non-Interest Income


	Three Months Ended June 30,						Six Months Ended June 30,
(Dollars in millions)	2011			2010			2011			2010
Servicing and securitizations	$	12		$	21		$	23		$	(15	)
Service charges and other customer-related fees		460			496			985			1,081
Interchange		331			333			651			644
Net other-than-temporary impairment		(6	)		(26	)		(9	)		(57	)
Provision for mortgage repurchase losses⁽¹⁾		(4	)		(95	)		(9	)		(195	)
Other		64			78			158			410

Total non-interest income	$	857		$	807		$	1,799		$	1,868

⁽¹⁾	We recorded a total provision for mortgage repurchase losses of $37 million and $404 million in the second quarter of 2011 and 2010, respectively. The remaining portion of the provision for repurchase losses is included in discontinued operations.

Non-interest income of $857 million for the second quarter of 2011 increased by $50 million, or 6%, from non-interest income of $807 million for the second quarter of 2010. This increase was primarily due to a

reduction in the provision for mortgage repurchase losses and a decline in other-than-temporary impairment, which was partially offset by a decrease in service charges and other customer-related fees due to the reduction in penalty fees as a result of the CARD Act. In the second quarter of 2010, we significantly increased our reserve for mortgage representation and warranty claims for legacy mortgage loans sold by our subsidiaries to various parties. The increase was primarily attributable to a refinement we made in estimating our reserve for representation and warranty claims to extend the timeframe, in most instances, over which we estimated our repurchase liability to the full life of the mortgage loans sold by our subsidiaries. We provide additional information on our reserve for representation and warranty claims in “Consolidated Balance Sheet Analysis and Credit Performance—Potential Mortgage Representation and Warranty Liabilities.” The other-than-temporary losses recorded in the second quarter of 2010 were attributable to certain non-agency mortgage-backed securities that had deteriorated in credit quality due to the continued weakness in the housing market and elevated unemployment.

Non-interest income of $1.8 billion for the first six months of 2011 decreased by $69 million, or 4%, from non-interest income of $1.9 billion from the first six months of 2010. This decrease reflected the impact of a one-time pre-tax gain of $128 million recorded in the first quarter of 2010 as result of the deconsolidation of certain option-adjustable rate mortgage trusts and the reduction in penalty fees as a result of the CARD Act. The impact of these factors was partially offset by the decreases in the provision for mortgage repurchase losses and other-than-temporary impairment losses.

Provision for Loan and Lease Losses

We build our allowance for loan and lease losses through the provision for loan and lease losses. Our provision for loan and lease 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.

Our provision for loan and lease losses fell by $380 million to $343 million in the second quarter of 2011 and by $1.3 billion in the first six months of 2011 to $877 million, compared with the same prior year periods. The decrease in the provision was largely driven by a substantial decline in net charge-offs across all of our business segments, as underlying credit trends and credit performance continued to improve. The net charge-off rate was 2.91% and 3.28% for the second quarter and first six months of 2011, respectively, compared with 5.36% and 5.69% for the second quarter and first six months of 2010, respectively. As charge-offs declined, we recorded an allowance release of $579 million and $1.1 billion in the second quarter and first six months of 2011, respectively.

See “Consolidated Balance Sheet Analysis and Credit Performance—Allowance for Loan and Lease Losses” for a discussion of changes in our allowance for loan and lease losses and details of our provision for loan and lease losses and charge-offs by loan category for the three and six months ended June 30, 2011 and 2010.

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, occupancy costs and miscellaneous expenses. Marketing expenses also are included in non-interest expense. Table 6 displays the components of non-interest expense for the three and six months ended June 30, 2011 and 2010.

Table 6: Non-Interest Expense


	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in millions)	2011		2010		2011		2010
Salaries and associated benefits	$	715	$	650	$	1,456	$	1,296
Marketing		329		219		605		399
Communications and data processing		162		164		326		333
Supplies and equipment		124		129		259		253
Occupancy		118		117		237		237
Other⁽¹⁾		807		721		1,534		1,329

Total non-interest expense	$	2,255	$	2,000	$	4,417	$	3,847

⁽¹⁾	Consists of professional services expenses, credit collection costs, fee assessments and intangible amortization expense.

Non-interest expense of $2.3 billion for the second quarter of 2011 was up $255 million, or 13%, from the second quarter of 2010. Non-interest expense of $4.4 billion for the first six months of 2011 was up $570 million, or 15%, from the first six months of 2010. The increase was attributable to higher operating costs associated with increased purchase volumes and with the recent acquisitions of the Sony, HBC and Kohl’s loan portfolios, higher legal fees and increased marketing costs. We have expanded our marketing efforts to attract and support targeted customers and new business volume through a variety of channels.

Income Taxes

Our effective tax rate may vary between periods due, in part, to fluctuations in our pre-tax earnings, which affects the relative tax benefit of tax-exempt income, tax credits and permanent tax items.

We recorded an income tax provision based on income from continuing operations of $450 million (32.3% effective income tax rate) in the second quarter of 2011, compared with an income tax provision of $369 million (31.2% effective income tax rate) in the second quarter of 2010, and $804 million (28.9% effective income tax rate) for the first six months of 2011 compared with $613 million (28.6% effective income tax rate) for the first six months of 2010.

We recorded tax benefits of $45 million and $50 million for the first six months of 2011 and 2010, respectively, related to the resolution of certain tax issues and audits, which lowered our effective income tax rate for those periods. Our effective income tax rate excluding the benefit from these discrete tax items was 30.5% and 30.9% for the first six months of 2011 and 2010, respectively.

We provide additional information on items affecting our income taxes and effective tax rate in our 2010 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 loss from discontinued operations, net of tax, of $34 million and $50 million in the second quarter and first six months of 2011, respectively. In comparison, we recorded a loss from discontinued operations, net of tax, of $204 million and $288 million in the second quarter and first six months of 2010, respectively.

The decrease in the loss from discontinued operations in the second quarter and first six months of 2011 was attributable to a significant reduction in the provision for mortgage repurchase losses. 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. In comparison, we recorded a pre-tax provision for mortgage repurchase losses of $404 million in the second quarter of 2010, of which $309 million ($212 million, net of tax) was included in discontinued operations, and a pre-tax provision of $628 million in the first six months of 2010, of which $433 million ($309 million, net of tax) was included in discontinued operations.

In the second quarter of 2010, we significantly increased our reserve for mortgage representation and warranty claims for legacy mortgage loans sold by our subsidiaries to various parties. The increase was primarily attributable to a refinement we made in estimating our reserve for representation and warranty claims to extend the timeframe, in most instances, over which we estimated our repurchase liability to the full life of the mortgage loans sold by our subsidiaries. We provide additional information on our reserve for representation and warranty claims in “Consolidated Balance Sheet Analysis and Credit Performance—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.

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. 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. See “Note 20—Business Segments” of our 2010 Form 10-K for information on the allocation methodologies used to derive our business segment results.

We summarize our business segment results for the three and six months ended June 30, 2011 and 2010 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, 2011, compared with December 31, 2010. See “Note 14—Business Segments” of this Report for a reconciliation of our business segment results to our consolidated U.S. GAAP 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 generated net income from continuing operations of $618 million and $1.3 billion in the second quarter and first six months of 2011, respectively, compared with net income from continuing operations of $568 million and $1.1 billion in the second quarter and first six months of 2010, respectively. The primary sources of revenue for our Credit Card business are net interest income and non-interest income from customer and interchange fees. Expenses primarily consist of ongoing operating costs, such as salaries and associated benefits, communications and other technology expenses, supplies and equipment, occupancy costs and marketing expenses.

Table 7 summarizes the financial results of our Credit Card business, which is comprised of the Domestic Card and International Card operations, and displays selected key metrics for the periods indicated. Our Credit Card business results for 2011 reflect the impact of the acquisitions of the existing portfolio credit card loan portfolios of Kohl’s and HBC. The results related to the Kohl’s loan portfolio, which totaled approximately $3.7 billion at acquisition on April 1, 2011, are included in our Domestic Card business. The results related to the HBC loan portfolio, which totaled approximately $1.4 billion at acquisition on January 7, 2011, are included in our International Card business.

Under the terms of the partnership agreement with Kohl’s, we share a fixed percentage of revenues, consisting of finance charges and late fees, with Kohl’s, and Kohl’s is required to reimburse us for fixed percentage of credit losses incurred. Revenues and losses related to the Kohl’s credit card program are reported on a net basis in our consolidated financial statements. The revenue sharing amounts earned by Kohl’s are reflected as an offset against our revenues in our consolidated statements of income, which has the effect of reducing our net interest income and revenue margins. The loss sharing amounts from Kohl’s are reflected as a reduction in our provision for loan and lease losses in our consolidated statements of income. We also report the related allowance for loan and lease losses attributable to the Kohl’s portfolio in our consolidated balance sheets net of the loss sharing amount due from Kohl’s.

Interest income was reduced by $215 million in the second quarter and first six months of 2011 for amounts earned by Kohl’s. Loss sharing amounts attributable to Kohl’s reduced charge-offs by $42 million in the second quarter and first six months of 2011. In addition, the expected reimbursement from Kohl’s netted in our allowance for loan and lease losses was approximately $170 million as of June 30, 2011. The reduction in the provision for loan and lease losses attributable to Kohl’s was $212 million for the second quarter and first six months of 2011.

We provide additional information on the acquisition of the existing credit card loan portfolios of Kohl’s and HBC in “Note 2—Acquisitions.”

Table 7: Credit Card Business Results


	Three Months Ended June 30,									Six Months Ended June 30,
(Dollars in millions)	2011			2010			Change			2011			2010			Change
Selected income statement data:
Net interest income	$	1,890		$	1,977			(4	)%	$	3,831		$	4,090			(6	)%
Non-interest income		619			659			(6	)		1,293			1,377			(6	)

Total revenue		2,509			2,636			(5	)		5,124			5,467			(6	)
Provision for loan and lease losses		309			765			(60	)		759			1,940			(61	)
Non-interest expense		1,238			1,002			24			2,416			1,916			26

Income from continuing operations before income taxes		962			869			11			1,949			1,611			21
Income tax provision		344			301			14			688			554			24

Income from continuing operations, net of tax	$	618		$	568			9	%	$	1,261		$	1,057			19	%

Selected performance metrics:
Average loans held for investment	$	62,691		$	62,679				**%	$	61,644		$	64,292			(4	)%
Average yield on loans held for investment⁽¹⁾		13.83	%		14.67	%		(84	)bps		14.25	%		14.78	%		(53	)bps
Revenue margin⁽²⁾		16.01			16.82			(81	)		16.62			17.01			(39	)
Net charge-off rate⁽³⁾		5.06			9.36			(430	)		5.59			9.84			(425	)
Purchase volume⁽⁴⁾	$	34,226		$	26,570			29	%	$	62,023		$	50,494			23	%

(Dollars in millions)	June 30, 2011			December 31, 2010			Change
Selected period-end data:
Loans held for investment	$	62,705		$	61,371			2	%
30+ day delinquency rate⁽⁵⁾		3.60	%		4.29	%		(69	)bps
Allowance for loan and lease losses	$	3,093		$	4,041			(23	)%

**	Change is less than one percent.

⁽¹⁾

Average yield on loans held for investment is calculated by dividing annualized interest income for the period by average loans held for investment during the period. In preparing our Report on Form 10-Q for the first quarter of 2011 we determined that beginning in the second quarter of 2010, our management accounting processes excluded certain accounts that should have been included in the calculation of the average yield on loans held for investment. The mapping error was limited to the average yields on loans held for investment for our Credit Card business and had no impact on income statement amounts or the yields reported for any of our other business segments or for the total company. The revised average loan yields for our Credit Card business were 14.67%, 14.65%, 14.28% for the second quarter, third quarter and fourth quarter of 2010, respectively, and 14.78% for the six months ended June 30, 2010, 14.74% for the nine months ended September 30, 2010 and 14.63% for full year 2010. The previously reported average loan yields for our Credit Card business were 14.25%, 14.27%, 13.97% for the second quarter, third quarter and fourth quarter of 2010, respectively, and 14.57% for the six months ended June 30, 2010, 14.48% for the nine months ended September 30, 2010 and 14.36% for full year 2010.

⁽²⁾	Revenue margin is calculated by dividing annualized revenues for the period by average loans held for investment during the period for the specified loan category.

⁽³⁾	The net charge-off rate is calculated by loan category 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⁾

The delinquency rate is 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 Banking business for the second quarter and first six months of 2011, compared with the second quarter and first six months of 2010 included the following.

•

Net Interest Income: Net interest income decreased by $87 million, or 4%, in the second quarter of 2011, reflecting the impact of a 4% decrease in the average yield on loans held for investment coupled with relatively stable average loan balances. The decrease in the average yield on loans was primarily driven by the impact from the addition of the Kohl’s portfolio. The expected run-off of the installment loan portfolio and seasonal credit card balance paydowns resulted in a decrease in loan balances, which was offset by the addition of the HBC and Kohl’s portfolios. Net interest income decreased by $259 million, or 6%, in the first six months of 2011, reflecting the impact of a 2% decrease in the average yield on loans held for investment and a 4% decrease in average loan balances. The decrease in the average yield in the first six months of 2011 was also due to a reduction in late fees and addition of the HBC and Kohl’s portfolios. The expected run-off of the installment loan portfolio was the primary driver of the decline in average loan balances in the first six months of 2011, more than offsetting the impact of modest revolving card loan growth and the addition of the HBC and Kohl’s portfolios.

•

Non-Interest Income: Non-interest income decreased by $40 million, or 6%, in the second quarter of 2011 and $84 million, or 6%, in the first six months of 2011. The decrease reflects the impact of contra-revenue amounts recorded in the second quarter of 2011, including a provision of $52 million for anticipated refunds to U.K. customers related to retrospective regulatory requirements pertaining to payment protection insurance (“PPI”) in our U.K. business and a provision of $21 million related to the periodic adjustment of our customer rewards points liability to reflect the estimated cost of points earned to date that are ultimately expected to be redeemed. These decreases were partially offset by higher interchange fees in the second quarter of 2011 resulting from increased purchase volume attributable to growth in our higher spend customer segments.

•

Provision for Loan and Lease Losses: The provision for loan and lease losses related to our Credit Card business decreased by $456 million in the second quarter of 2011, to $309 million and by $1.2 billion in the first six months of 2011, to $759 million. The significant reduction in the provision was primarily attributable to the continued improvement in underlying credit trends, including reduced delinquency rates, lower bankruptcy losses and higher recoveries. As estimated net charge-offs declined, we recorded an allowance release of $483 million and $948 million in the second quarter and first six months of 2011, respectively.

•

Non-Interest Expense: Non-interest expense increased by $236 million, or 24%, in the second quarter of 2011 and $500 million, or 26%, in the first six months of 2011. The increase was attributable to higher operating costs associated with increased purchase volumes and with the recent acquisitions of the Sony, HBC and Kohl’s loan portfolios, higher legal fees and increased marketing costs. We have expanded our marketing efforts to attract and support targeted customers and new business volume through a variety of channels.

•

Total Loans: Period-end loans in the Credit Card business increased by $1.3 billion, or 2%, in the first six months of 2011, to $62.7 billion as of June 30, 2011, from $61.4 billion as of December 31, 2010. The increase was primarily attributable to the acquisitions of the Kohl’s credit card portfolio of $3.7 billion and the HBC credit card portfolio of $1.4 billion, which were partially offset by the continued run-off of the installment loan portfolio and seasonal credit card balance paydowns.

•

Charge-off and Delinquency Statistics: Net charge-off and delinquency rates continued to improve in the second quarter and first six months of 2011. The net charge-off rate decreased to 5.06% and 5.59% in the second quarter and first six months of 2011, respectively, from 9.36% and 9.84% in the second quarter and first six months of 2010, respectively. The 30+ day delinquency rate decreased to 3.60% as of June 30, 2011, from 3.88% as of March 31, 2011 and 4.29% as of December 31, 2010. The improvement in net charge-off and delinquency rates reflects the impact of tighter underwriting standards since the recession.

Domestic Credit Card Business

Table 7.1 summarizes the financial results for Domestic Card and displays selected key metrics for the periods indicated. Domestic Card accounted for 87% of total revenues for our Credit Card business in the second quarter of 2011 and 86% in the first six months of 2011, compared with 87% in both the second quarter and first six months of 2010. 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.

Table 7.1: Domestic Card Business Results


	Three Months Ended June 30,									Six Months Ended June 30,
(Dollars in millions)	2011			2010			Change			2011			2010			Change
Selected income statement data:
Net interest income	$	1,607		$	1,735			(7	)%	$	3,258		$	3,600			(10	)%
Non-interest income		584			560			4			1,167			1,178			(1	)

Total revenue		2,191			2,295			(5	)		4,425			4,778			(7	)
Provision for loan and lease losses		187			675			(72	)		417			1,771			(76	)
Non-interest expense		1,008			869			16			1,998			1,678			19

Income from continuing operations before income taxes		996			751			33			2,010			1,329			51
Income tax provision		354			268			32			714			474			51

Income from continuing operations, net of tax	$	642		$	483			33	%	$	1,296		$	855			52	%

Selected performance metrics:
Average loans held for investment	$	53,868		$	55,252			(3	)%	$	52,884		$	56,672			(7	)%
Average yield on loans held for investment⁽¹⁾		13.52	%		14.49	%		(97	)bps		13.96	%		14.64	%		(68	)bps
Revenue margin⁽²⁾		16.27			16.61			(34	)		16.73			16.86			(13	)
Net charge-off rate⁽³⁾		4.74			9.49			(475	)		5.45			10.00			(455	)
Purchase volume⁽⁴⁾	$	31,070		$	24,513			27	%	$	56,094		$	46,501			21	%

(Dollars in millions)	June 30, 2011			December 31, 2010			Change
Selected period-end data:
Loans held for investment	$	53,994		$	53,849				**%
30+ day delinquency rate⁽⁵⁾		3.33	%		4.09	%		(76	)bps
Allowance for loan and lease losses	$	2,555		$	3,581			(29	)%

**	Change is less than one percent.

⁽¹⁾

Average yield on loans held for investment is calculated by dividing annualized interest income for the period by average loans held for investment during the period. As indicated above, in preparing our Report on Form 10-Q for the first quarter of 2011, we determined that beginning in the second quarter of 2010, our management accounting processes excluded certain accounts that affected the calculation of the average yield on loans held for investment for our Credit Card business. The revised average loan yields for our Domestic Credit Card business were 14.49%, 14.40%, 13.96% for the second quarter, third quarter and fourth quarter of 2010, respectively, and 14.64% for the six months ended June 30, 2010, 14.57% for the nine months ended September 30, 2010 and 14.42% for full year 2010. The previously reported average loan yields for our Domestic Credit Card business were 13.98%, 13.95%, 13.57% for the second quarter, third quarter and fourth quarter of 2010, respectively, and 14.39% for the six months ended June 30, 2010, 14.25% for the nine months ended September 30, 2010 and 14.09% for full year 2010.

⁽²⁾	Revenue margin is calculated by dividing annualized revenues for the period by average loans held for investment during the period for the specified loan category.

⁽³⁾	The net charge-off rate is calculated by loan category 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⁾

Our Domestic Card division generated net income from continuing operations of $642 million and $1.3 billion in the second quarter and first six months of 2011, respectively, compared with net income from continuing operations of $483 million and $855 million in the second quarter and first six months of 2010, respectively.

The primary factors affecting Domestic Card results for the second quarter and the first six months of 2011, compared with the second quarter and the first six months of 2010 include: (1) a decline in total revenue attributable to a decrease in average loan yields as a result of reduced fees and the impact of the addition of the Kohl’s loan portfolio and lower average loan balances; (2) a significant reduction in the provision for loan and lease losses due to the continued improvement in credit performance metrics, including decreases in delinquency and charge-off rates; and (3) an increase in non-interest expense attributable to increased operating costs associated with higher purchase volumes and with the acquisitions of the Sony and Kohl’s loan portfolios, higher legal expenses and increased marketing expenditures.

International Credit Card Business

Table 7.2 summarizes the financial results for International Card and displays selected key metrics for the periods indicated. International Card accounted for 13% of total revenues for our Credit Card business in the second quarter of 2011 and 14% in the first six months of 2011, compared with 13% in both the second quarter and first six months of 2010.

Table 7.2: International Card Business Results


	Three Months Ended June 30,									Six Months Ended June 30,
(Dollars in millions)	2011			2010			Change			2011			2010			Change
Selected income statement data:
Net interest income	$	283		$	242			17	%	$	573		$	490			17	%
Non-interest income		35			99			(65	)		126			199			(37	)

Total revenue		318			341			(7	)		699			689			1
Provision for loan and lease losses		122			90			36			342			169			102
Non-interest expense		230			133			73			418			238			76

Income from continuing operations before income taxes		(34	)		118			(129	)		(61	)		282			(122	)
Income tax provision		(10	)		33			(130	)		(26	)		80			(133	)

Income from continuing operations, net of tax	$	(24	)	$	85			(128	)%	$	(35	)	$	202			(117	)%

Selected performance metrics:
Average loans held for investment	$	8,823		$	7,427			19	%	$	8,760		$	7,620			15	%
Average yield on loans held for investment⁽¹⁾		15.77	%		16.00	%		(23	)bps		16.02	%		15.83	%		19	bps
Revenue margin⁽²⁾		14.42			18.37			(395	)		15.96			18.09			(213	)
Net charge-off rate⁽³⁾		7.02			8.38			(136	)		6.39			8.61			(222	)
Purchase volume⁽⁴⁾	$	3,156		$	2,057			53	%	$	5,929		$	3,993			48	%


(Dollars in millions)	June 30, 2011			December 31, 2010			Change
Selected period-end data:
Loans held for investment	$	8,711		$	7,522			16	%
30+ day delinquency rate⁽⁵⁾		5.30	%		5.75	%		(45	)bps
Allowance for loan and lease losses	$	538		$	460			17	%

⁽¹⁾

Average yield on loans held for investment is calculated by dividing annualized interest income for the period by average loans held for investment during the period. As indicated above, in preparing our Report on Form 10-Q for the first quarter of 2011, we determined that beginning in the second quarter of 2010, our management accounting processes excluded certain accounts that affected the calculation of the average yield on loans held for investment for our Credit Card business. The revised average loan yields for our International Credit Card business were 16.00%, 16.40%, 16.61% for the second quarter, third quarter and fourth quarter of 2010, respectively, and 15.83% for the six months ended June 30, 2010, 16.02% for the nine months ended September 30, 2010 and 16.16% for full year 2010. The previously reported average loan yields for our International Credit Card business were 16.21%, 16.62%, 16.82% for the second quarter, third quarter and fourth quarter of 2010, respectively, and 15.93% for the six months ended June 30, 2010, 16.16% for the nine months ended September 30, 2010 and 16.33% for full year 2010.

⁽²⁾	Revenue margin is calculated by dividing annualized revenues for the period by average loans held for investment during the period for the specified loan category.

⁽³⁾	The net charge-off rate is calculated by loan category 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⁾

The delinquency rate is calculated by loan category by dividing 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.

Our International Card division generated a net loss from continuing operations of $24 million and $35 million in the second quarter and first six months of 2011, respectively, compared with net income from continuing operations of $85 million and $202 million in the second quarter and first six months of 2010, respectively.

The primary factors contributing to the International Card net losses in the second quarter and the first six months of 2011, compared with net income in the second quarter and the first six months of 2010 include: (1) a decrease in non-interest income due to the contra-revenue provision of $52 million recorded in the second quarter of 2011 for the anticipated refunds to U.K. customers related to retrospective regulatory requirements pertaining to PPI insurance in our U.K. business; (2) an increase in the provision for loan losses due to the addition of the HBC loan portfolio and lower allowance releases relative to the same prior year periods; and (3) an increase in non-interest expense attributable to increased operating costs associated with HBC associates who joined us as a result of the acquisition. These factors were partially offset by an increase in non-interest income attributable to higher loan balances.

Consumer Banking Business

Our Consumer Banking business generated net income from continuing operations of $287 million and $502 million in the second quarter and first six months of 2011, respectively, compared with $305 million and $610 million in the second quarter and first six months of 2010, 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.

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)	2011			2010			Change			2011			2010			Change
Selected income statement data:
Net interest income	$	1,051		$	935			12	%	$	2,034		$	1,831			11	%
Non-interest income		194			162			20			380			478			(21	)

Total revenue		1,245			1,097			13			2,414			2,309			5
Provision for loan and lease losses		41			(112	)		137			136			(62	)		319
Non-interest expense		758			735			3			1,498			1,423			5

Income from continuing operations before income taxes		446			474			(6	)		780			948			(18	)
Income tax provision		159			169			(6	)		278			338			(18	)

Income from continuing operations, net of tax	$	287		$	305			(6	)%	$	502		$	610			(18	)%

Selected performance metrics:
Average loans held for investment:
Auto	$	18,753		$	17,276			9	%	$	18,391		$	17,521			5	%
Home loan		11,534			13,573			(15	)		11,746			14,531			(19	)
Retail banking		4,154			4,811			(14	)		4,202			4,926			(15	)

Total consumer banking	$	34,441		$	35,660			(3	)%	$	34,339		$	36,978			(7	)%

Average yield on loans held for investment		9.51	%		8.99	%		52	bps		9.55	%		8.97	%		58	bps
Average deposits	$	86,926		$	77,082			13	%	$	85,413		$	76,104			12	%
Average deposit interest rate		1.00	%		1.18	%		(18	)bps		1.03	%		1.23	%		(20	)bps
Core deposit intangible amortization	$	34		$	36			(6	)%	$	68		$	74			(8	)%
Net charge-off rate⁽¹⁾⁽²⁾		1.01	%		1.47	%		(46	)bps		1.29	%		1.76	%		(47	)bps
Automobile loan originations	$	2,910		$	1,765			65	%	$	5,481		$	3,108			76	%

(Dollars in millions)	June 30, 2011			December 31, 2010			Change
Selected period-end data:
Loans held for investment:
Auto	$	19,223		$	17,867			8	%
Home loans		11,323			12,103			(6	)
Retail banking		4,046			4,413			(8	)

Total consumer banking	$	34,592		$	34,383			1	%

30+ day performing delinquency rate⁽¹⁾⁽³⁾		3.70	%		4.28	%		(58	)bps
30+ day delinquency rate⁽¹⁾⁽³⁾		5.26			5.96			(70	)
Nonperforming loan rate⁽¹⁾⁽⁴⁾		1.83			1.97			(14	)
Nonperforming asset rate⁽¹⁾⁽⁵⁾		2.00			2.17			(17	)
Allowance for loan and lease losses	$	598		$	675			(11	)%
Deposits		87,282			82,959			5
Loans serviced for others		19,226			20,689			(7	)

⁽¹⁾

Average loans held for investment used in the denominator in calculating net charge-off, delinquency and nonperforming loan and nonperforming asset rates includes the impact of loans acquired as part of the Chevy Chase Bank acquisition, which were considered purchased credit impaired (“PCI”) loans. However, we separately track and report PCI loans and exclude these loans from our net charge-off, delinquency, nonperforming loan and nonperforming asset rates.

⁽²⁾

The net charge-off rate is calculated by loan category by dividing annualized net charge-offs for the period by average loans held for investment during the period for the specified loan category. The net charge-off rate, excluding loans acquired from Chevy Chase Bank from the denominator, was 1.17% and 1.76% for the three months ended June 30, 2011 and 2010, respectively, and 1.50% and 2.10% for the six months ended June 30, 2011 and 2010, respectively.

⁽³⁾

The delinquency rate is calculated by loan category by dividing 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, excluding loans acquired from Chevy Chase Bank from the denominator, was 4.29% as of June 30, 2011 and 5.01% as of December 31, 2010. The 30+ day delinquency rate, excluding loans acquired from Chevy Chase Bank from the denominator, was 6.09% as of June 30, 2011 and 6.98% as of December 31, 2010.

⁽⁴⁾

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. The nonperforming loan rate is 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. The nonperforming loan rate, excluding the impact of loans acquired from Chevy Chase Bank from the denominator, was 2.12% and 2.30% as of June 30, 2011 and December 31, 2010, respectively.

⁽⁵⁾

Nonperforming assets consist of nonperforming loans and real estate owned (“REO”). 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 and REO for the specified loan category. The nonperforming asset rate, excluding loans acquired from Chevy Chase Bank from the denominator, was 2.32% and 2.54% as of June 30, 2011 and December 31, 2010, respectively.

Key factors affecting the results of our Consumer Banking business for the second quarter and first six months of 2011, compared with the second quarter of 2010 included the following:

•

Net Interest Income: Net interest income increased by $116 million, or 12%, in the second quarter of 2011, and $203 million, or 11%, in the first six months of 2011. The primary drivers of the increase in net interest income were improved loan margins, primarily resulting from higher pricing for new auto loan originations and lower interest expense associated with deposit growth resulting from our continued strategy to leverage our banking branches to attract lower cost funding sources. In addition, better than expected performance of PCI loans related to our Chevy Chase Bank acquisition resulted in an increase in the accretion of amounts into income. The favorable impact from these factors more than offset the decline in average loans held for investment resulting from the continued run-off of home loans.

•

Non-Interest Income: Non-interest income increased by $32 million, or 20%, in the second quarter of 2011 and decreased by $98 million, or 21%, in the first six months of 2011. The increase in non-interest income in the second quarter of 2011 from the same prior year period was primarily due to the absence of an impairment charge on mortgage servicing rights recorded in the second quarter of 2010. The decrease in non-interest income in the first six months of 2011 from the same prior year period was primarily attributable to the combined impact of the absence of a net gain of $128 million recorded in the first quarter of 2010 related to the deconsolidation of certain option-adjustable rate mortgage trusts that were consolidated on January 1, 2010 as a result of our adoption of the new consolidation accounting standards and the absence of the impairment charge on mortgage servicing rights recorded in the second quarter of 2010.

•

Provision for Loan and Lease Losses: The provision for loan and lease losses increased by $153 million in the second quarter of 2011, to $41 million and by $198 million in the first six months of 2011, to $136 million. Although we experienced continued improvement in credit performance in our Consumer Banking business, including reduced delinquency and net charge-off rates, we recorded a higher provision for loan and lease losses in the second quarter and first six months of 2011 relative to the same prior year periods due to a reduction in allowance releases and growth in our auto loan portfolio.

•

Non-Interest Expense: Non-interest expense increased by $23 million, or 3%, in the second quarter and by $75 million, or 5%, in the first six months of 2011. The increases over the same prior year periods were largely attributable to higher infrastructure expenditures due to increased headcount and increased marketing expenditures, primarily related to our retail banking operations.

•

Total Loans: Period-end loans in the Consumer Banking business increased by $209 million, or less than 1%, in the first six months of 2011, to $34.6 billion as of June 30, 2011, from $34.4 billion as of December 31, 2010, primarily due to growth in auto loans that was partially offset by continued run-off of home loans.

•

Deposits: Period-end deposits in the Consumer Banking business increased by $4.3 billion, or 5%, in the first six months of 2011, to $87.3 billion as of June 30, 2011, reflecting the impact of our strategy to replace maturing higher cost wholesale funding sources with lower cost funding sources and our increased retail marketing efforts to attract new business to meet this objective.

•

Charge-off and Delinquency Statistics: The net charge-off rate decreased to 1.01% and 1.29% in the second quarter and first six months of 2011, respectively, from 1.47% and 1.76% in the second quarter and first six months of 2010, respectively. The 30+ day delinquency rate was 5.26% as of June 30, 2011, compared to 4.96% as of March 31, 2011 and 5.96% as of December 31, 2010. The improvement in the net charge-off and delinquency rates reflects the impact from strong underlying credit performance trends and the higher credit quality of our more recent auto loan vintages, as well as current favorable benefits from elevated auction prices.

Commercial Banking Business

Our Commercial Banking business generated net income from continuing operations of $142 million and $290 million for the second quarter and first six months of 2011, respectively, compared with a net income from continuing operations of $77 million and $28 million in the second quarter and first six months of 2010, 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.

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)	2011			2010			Change			2011			2010			Change
Selected income statement data:
Net interest income	$	333		$	319			4	%	$	654		$	631			4	%
Non-interest income		62			60			3			133			102			30

Total revenue		395			379			4			787			733			7
Provision for loan and lease losses		(18	)		62			(129	)		(33	)		300			(89	)
Non-interest expense		192			198			(3	)		369			390			(5	)

Income from continuing operations before income taxes		221			119			86			451			43			949
Income tax provision		79			42			88			161			15			973

Income from continuing operations, net of tax	$	142		$	77			84	%	$	290		$	28			936	%

Selected performance metrics:
Average loans held for investment:
Commercial and multifamily real estate	$	13,597		$	13,543				**%	$	13,472		$	13,629			(1	)%
Middle market		10,979			10,276			7			10,823			10,300			5
Specialty lending		4,014			3,654			10			3,989			3,632			10

Total commercial lending		28,590			27,473			4			28,284			27,561			3
Small-ticket commercial real estate		1,726			2,060			(16	)		1,772			2,067			(14	)

Total commercial banking	$	30,316		$	29,533			3	%	$	30,056		$	29,628			1	%

Average yield on loans held for investment		4.74	%		4.94	%		(20	)bps		4.77	%		4.99	%		(22	)bps
Average deposits	$	24,282		$	22,171			10	%	$	24,210		$	22,016			10	%
Average deposit interest rate		0.52	%		0.67	%		(15	)bps		0.53	%		0.71	%		(18	)bps
Core deposit intangible amortization	$	10		$	14			(29	)%	$	21		$	28			(25	)%
Net charge-off rate⁽¹⁾⁽²⁾		0.50	%		1.21	%		(71	)bps		0.64	%		1.29	%		(65	)bps

(Dollars in millions)	June 30, 2011			December 31, 2010			Change
Selected period-end data:
Loans held for investment:
Commercial and multifamily real estate	$	14,035		$	13,396			5	%
Middle market		11,404			10,484			9
Specialty lending		4,122			4,020			3

Total commercial lending		29,561			27,900			6
Small-ticket commercial real estate		1,642			1,842			(11	)

Total commercial banking	$	31,203		$	29,742			5	%

Nonperforming loan rate⁽¹⁾⁽³⁾		1.54	%		1.66	%		(12	)bps
Nonperforming asset rate⁽¹⁾⁽⁴⁾		1.66			1.80			(14	)
Allowance for loan and lease losses	$	730		$	826			(12	)%
Deposits		24,304			22,630			7

**	Change is less than one percent.

⁽¹⁾

⁽²⁾	The net charge-off rate is calculated by loan category by dividing annualized net charge-offs for the period by average loans held for investment during the period for the specified loan category. The net charge-off rate, excluding loans

acquired from Chevy Chase Bank from the denominator, was 0.51% and 1.24% for the three months ended June 30, 2011 and 2010, respectively, and 0.65% and 1.33% for the six months ended June 30, 2011 and 2010, respectively.

⁽³⁾

The nonperforming loan rate is 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. The nonperforming loan rate, excluding the impact of loans acquired from Chevy Chase Bank from the denominator, was 1.56% and 1.69% as of June 30, 2011 and December 31, 2010, respectively.

⁽⁴⁾

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 and REO for the specified loan category. The nonperforming asset rate, excluding loans acquired from Chevy Chase Bank from the denominator, was 1.68% and 1.83% as of June 30, 2011 and December 31, 2010, respectively.

Key factors affecting the results of our Commercial Banking business for the second quarter and first six months of 2011, compared with the second quarter and first six months of 2010 included the following:

•

Net Interest Income: Net interest income increased by $14 million, or 4%, in the second quarter of 2011, and by $23 million, or 4%, in the first six months of 2011. The primary drivers of the increase in net interest income from the same prior year periods were lower interest expense associated with strong deposit growth resulting from our continued strategy to shift our funding mix to lower cost commercial banking deposits from higher cost wholesale sources, more favorable deposit pricing resulting from the repricing of higher rate deposits to lower rates in response to the overall lower interest rate environment and commercial loan growth.

•

Non-Interest Income: Non-interest income increased by $2 million, or 3%, in the second quarter of 2011 and $31 million, or 30%, in the first six months of 2011. The increase in non-interest income from the same prior year periods was largely attributable to growth in fees in the middle market segment, as well as increased customer fees related to treasury management and public financing activities.

•

Provision for Loan and Lease Losses: The Commercial Banking business recorded a negative provision for loan and lease losses of $18 million and $33 million in the second quarter and first six months of 2011, respectively, compared with provision expense of $62 million and $300 million in the second quarter and first six months of 2010, respectively. The negative provision in the second quarter and first six months of 2011 was attributable to lower loss severities resulting from an improvement in underlying credit performance trends. As a result, we reduced the allowance related to the Commercial Banking business by $52 million and $96 million in the second quarter and first six months of 2011, respectively. In comparison, we reduced the allowance by $36 million in the second quarter of 2010 and increased the allowance by $97 million in the first six months of 2010.

•

Non-Interest Expense: Non-interest expense decreased by $6 million, or 3%, in the second quarter of 2011 to $192 million and by $21 million, or 5%, in the first six months of 2011 to $369 million. The decreases from the same prior year periods were attributable to a reduction in the integration costs related to the Chevy Chase Bank acquisition incurred in the first six months of 2010.

•

Total Loans: Period-end loans increased by $1.5 billion, or 5%, in the first six months of 2011 to $31.2 billion as of June 30, 2011, from $29.7 billion as of December 31, 2010. The increase was driven by stronger loan demand in the middle market and commercial real estate businesses, which was partially offset by attrition in our multifamily real estate portfolio and the run-off and sale of a portion of the small-ticket commercial real estate loan portfolio.

•

Deposits: Period-end deposits in the Commercial Banking business increased by $1.7 billion, or 7%, in the first six months of 2011, to $24.3 billion as of June 30, 2011, driven by our increased effort to build and expand commercial relationships and attract lower cost funding sources.

•

Charge-off and Nonperforming Loan Statistics: The net charge-off rate decreased to 0.50% and 0.64% in the second quarter and first six months of 2011, respectively, from 1.21% and 1.29% in the second quarter and first six months of 2010, respectively. The nonperforming loan rate decreased to 1.54% as of June 30, 2011, from 1.66% as of December 31, 2010. The improvement in the net charge-off and nonperforming loan rates was attributable to strong underlying credit improvement trends.

CONSOLIDATED BALANCE SHEET ANALYSIS AND CREDIT PERFORMANCE

Total assets of $199.8 billion as of June 30, 2011 increased by $2.3 billion, or 1%, from $197.5 billion as of December 31, 2010. Total liabilities of $171.1 billion as of June 30, 2011, increased by $110 million, or less than 1%, from $171.0 billion as of December 31, 2010. Stockholders’ equity increased by $2.1 billion during the first six months of 2011, to $28.7 billion as of June 30, 2011 from $26.5 billion as of December 31, 2010. The increase in stockholders’ equity was primarily attributable to our net income of $1.9 billion in the first six months of 2011.

Following is a discussion of material changes in the major components of our assets and liabilities during the first six months of 2011.

Investment Securities

Our investment securities portfolio, which had a fair value of $39.5 billion and $41.5 billion, as of June 30, 2011 and December 31, 2010, respectively, consists of the following: U.S. Treasury and U.S. agency debt obligations; agency and non-agency mortgage-backed securities; other asset-backed securities collateralized primarily by credit card loans, auto loans, student loans, auto dealer floor plan inventory loans and leases, equipment loans and home equity lines of credit; municipal securities; and limited Community Reinvestment Act (“CRA”) equity securities. Our investment securities portfolio continues to be heavily 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. Our investments in U.S. Treasury and agency securities, based on fair value, represented approximately 71% and 70% of our total investment securities portfolio as of June 30, 2011, and December 31, 2010, respectively.

All of our investment securities were classified as available for sale as of June 30, 2011 and December 31, 2010, and reported in our consolidated balance sheet at fair value. Table 10 presents the amortized cost and fair value of our investment securities, by investment type, as of June 30, 2011 and December 31, 2010.

Table 10: Investment Securities


	June 30, 2011				December 31, 2010
(Dollars in millions)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
U.S. Treasury debt obligations	$	301	$	311	$	373	$	386
U.S. Agency debt obligations⁽¹⁾		166		176		301		314
Collateralized mortgage obligations (“CMO”):
Agency⁽²⁾		12,104		12,412		12,303		12,566
Non-agency		953		889		1,091		1,019

Total CMOs		13,057		13,301		13,394		13,585
Mortgage-backed securities (“MBS”):
Agency⁽²⁾		14,344		14,733		15,721		15,983
Non-agency		630		573		735		681

Total MBS		14,974		15,306		16,456		16,664
Asset-backed securities (“ABS”)⁽³⁾		9,769		9,832		9,901		9,966
Other securities⁽⁴⁾		489		548		563		622

Total securities available for sale	$	38,756	$	39,474	$	40,988	$	41,537

⁽¹⁾	Consists of debt securities issued by Fannie Mae and Freddie Mac with an amortized cost of $165 million and $200 million, as of June 30, 2011 and December 31, 2010, respectively, and fair value of $175 million and $213 million, as of June 30, 2011 and December 31, 2010, respectively.

⁽²⁾

Consists of mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae with an amortized cost of $15.5 billion, $7.7 billion and $3.2 billion, respectively, and fair value of $15.9 billion, $7.9 billion and $3.3 billion, respectively, as of June 30, 2011. The book value of Fannie Mae, Freddie Mac and Ginnie Mae investments each exceeded 10% of our stockholders’ equity as of June 30, 2011.

⁽³⁾

Consists of securities collateralized by credit card loans, auto dealer floor plan inventory loans and leases, student loans, auto loans, equipment loans and other. The distribution among these asset types was approximately 71.0% credit card loans, 9.3% auto dealer floor plan inventory loans and leases, 6.9% student loans, 6.6% auto loans, 1.9% equipment loans, and 4.3% of other loans as of June 30, 2011. In comparison, the distribution was approximately 77.8% credit card loans, 5.6% auto dealer floor plan inventory loans and leases, 7.2% student loans, 6.7% auto loans, 2.5% equipment loans and 0.2% home equity lines of credit as of December 31, 2010. Approximately 91.7% of the securities in our asset-backed security portfolio were rated AAA or its equivalent as of June 30, 2011, compared with 90.1% as of December 31, 2010. Our asset-backed security portfolio also includes commercial mortgage-backed securities issued by Fannie Mae, Freddie Mac, and Ginnie Mae with an amortized cost of $8 million, $158 million and $55 million, respectively, and fair values of $9 million, $161 million and $56 million, respectively, as of June 30, 2011.

⁽⁴⁾	Consists of municipal securities and equity investments, primarily related to CRA activities.

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 $914 million and gross unrealized losses of $196 million on available-for-sale securities as of June 30, 2011, compared with gross unrealized gains of $830 million and gross unrealized losses of $281 million as of December 31, 2010. Of the $196 million in gross unrealized losses as of June 30, 2011, $124 million related to securities that had been in a loss position for more than 12 months.

We evaluate available-for-sale securities in an unrealized loss position as of the end of each quarter for other-than-temporary impairment (“OTTI”) based on a number of criteria, including the extent and duration of the decline in value, the severity and duration of the impairment, recent events specific to the issuer and/or industry to which the issuer belongs, the payment structure of the security, external credit ratings, the failure of the issuer to make scheduled interest or principal payments, the value of underlying collateral, our intent and ability to hold the security and current market conditions. We recognized net OTTI on investment securities of $6 million and $9 million in the second quarter and first six months of 2011, respectively. In comparison, we recognized net OTTI on investment securities of $26 million and $57 million in the second quarter and first six months of 2010, respectively, which was due in part to our decision to sell certain other securities before recovery of the impairment amount as well as the deterioration in the credit performance of certain non-agency mortgage-related securities resulting from weaknesses in the housing market and high unemployment.

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

Total Loans

Table 11 presents the composition of our total loan portfolio, by business segments, as of June 30, 2011 and December 31, 2010:

Table 11: Loan Portfolio Composition

June 30, 2011

December 31, 2010

(Dollars in millions)

Amount

% of
Total Loans

Amount

% of
Total Loans

Credit Card business:

Credit card loans:

Domestic credit card loans

51,236

39.7

49,979

39.7

International credit card loans

8,709

6.8

7,513

6.0

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company