Edgar Filing: CAPITAL ONE FINANCIAL CORP

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Form 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

December 31, 2011 For the fiscal year ended December 31, 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

Securities registered pursuant to section 12(b) of the act:


Title of Each Class		Name of Each Exchange on Which Registered
Common Stock (par value $.01 per share)		New York Stock Exchange
Warrants (expiring November 14, 2018)		New York Stock Exchange
7.50% Enhanced Trust Preferred Securities (Enhanced TRUPS^®)		New York Stock Exchange

Securities Registered Pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act. Yes ¨ No x

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 Website, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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

The aggregate market value of the voting stock held by non-affiliates of the registrant as of the close of business on June 30, 2011.

Common Stock, $.01 Par Value: $23,504,061,823*

In determining this figure, the registrant assumed that the executive officers of the registrant and the registrant’s directors are affiliates of the registrant. Such assumption shall not be deemed to be conclusive for any other purpose. The number of shares outstanding of the registrant’s common stock as of the close of business on January 31, 2012.

Common Stock, $.01 Par Value: 459,408,409 shares

DOCUMENTS INCORPORATED BY REFERENCE

1.	Portions of the Proxy Statement for the annual meeting of stockholders to be held on May 8, 2012, are incorporated by reference into Part III.

TABLE OF CONTENTS


		Page
PART I			1
Item 1.	Business		1
	Overview		1
	Operations and Business Segments		3
	Supervision and Regulation		4
	Competition		14
	Employees		15
	Additional Information		15
	Forward-Looking Statements		16
Item 1A.	Risk Factors		18
Item 1B.	Unresolved Staff Comments		32
Item 2.	Properties		32
Item 3.	Legal Proceedings		32
Item 4.	Mine Safety Disclosure		32
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		33
Item 6.	Selected Financial Data		36
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)		41
	Introduction		41
	Executive Summary and Business Outlook		43
	Critical Accounting Policies and Estimates		48
	Consolidated Results of Operations		54
	Business Segment Financial Performance		63
	Consolidated Balance Sheet Analysis		77
	Off-Balance Sheet Arrangements and Variable Interest Entities		85
	Capital Management		86
	Risk Management		89
	Credit Risk Profile		96
	Liquidity Risk Profile		114
	Market Risk Profile		119
	Accounting Changes and Developments		122
	Supplemental Tables		123
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		130
Item 8.	Financial Information and Supplementary Data		134
	Consolidated Statements of Income		134
	Consolidated Balance Sheets		135
	Consolidated Statements of Changes in Stockholders’ Equity		136
	Consolidated Statements of Cash Flows		138
	Notes to Consolidated Statements		139
	Note 1—Summary of Significant Accounting Policies		139
	Note 2—Acquisitions and Restructuring Activities		157
	Note 3—Discontinued Operations		159
	Note 4—Investment Securities		160
	Note 5—Loans		168
	Note 6—Allowance for Loan and Lease Losses		184
	Note 7—Variable Interest Entities and Securitizations		187
	Note 8—Goodwill and Other Intangible Assets		195


		Page
	Note 9—Premises, Equipment and Lease Commitments		199
	Note 10—Deposits and Borrowings		200
	Note 11—Derivative Instruments and Hedging Activities		203
	Note 12—Stockholders’ Equity		209
	Note 13—Regulatory and Capital Adequacy		210
	Note 14—Earnings Per Common Share		211
	Note 15—Other Non-Interest Expense		212
	Note 16—Stock-Based Compensation Plan		212
	Note 17—Employee Benefit Plans		216
	Note 18—Income Taxes		221
	Note 19—Fair Value of Financial Instruments		225
	Note 20—Business Segments		235
	Note 21—Commitments, Contingencies and Guarantees		240
	Note 22—Significant Concentration of Credit Risk		251
	Note 23—Capital One Financial Corporation (Parent Company Only)		253
	Note 24—International Operations		256
	Note 25—Related Party Transactions		257
	Note 26—Subsequent Events		257
	Selected Quarterly Financial Information		259
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure		260
Item 9A.	Controls and Procedures		260
Item 9B.	Other Information		260
PART III
Item 10.	Directors, Executive Officers and Corporate Governance		261
Item 11.	Executive Compensation		261
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		261
Item 13.	Certain Relationships and Related Transactions, and Director Independence		261
Item 14.	Principal Accountant Fees and Services		261
PART IV
Item 15.	Exhibits, Financial Statement Schedules		262
SIGNATURES			263
EXHIBIT INDEX			264

INDEX OF MD&A TABLES AND SUPPLEMENTAL TABLES


Table	Description	Page
—	MD&A Tables:
1	Business Segment Results		42
2	Average Balances, Net Interest Income and Net Interest Yield (Reported Basis)		56
3	Average Balances, Net Interest Income and Net Interest Yield (Managed Basis)		58
4	Rate/Volume Analysis of Net Interest Income		59
5	Non-Interest Income		61
6	Non-Interest Expense		62
7	Credit Card Business Results		65
8	Consumer Banking Business Results		71
9	Commercial Banking Business Results		74
10	Investment Securities		77
11	Non-Agency Investment Securities Credit Ratings		79
12	Net Loans Held for Investment		79
13	Unpaid Principal Balance of Mortgage Loans Originated and Sold to Third Parties Based on Category of Purchaser		81
14	Open Pipeline All Vintages (all entities)		82
15	Changes in Representation and Warranty Reserve		84
16	Allocation of Representation and Warranty Reserve		85
17	Capital Ratios Under Basel I		87
18	Risk-Based Capital Components Under Basel I		87
19	Loan Portfolio Composition		98
20	Loan Maturity Schedule		99
21	Credit Card Concentrations		100
22	Consumer Banking Concentrations		101
23	Commercial Banking Concentrations		102
24	30+ Day Delinquencies		103
25	Aging of 30+ Day Delinquent Loans		104
26	90+ Days Delinquent Loans Accruing Interest		104
27	Nonperforming Loans and Other Nonperforming Assets		106
28	Net Charge-Offs		107
29	Loan Modifications and Restructurings		109
30	Summary of Allowance for Loan and Lease Losses		111
31	Allocation of the Allowance for Loan and Lease Losses		113
32	Liquidity Reserves		114
33	Deposits		114
34	Maturities of Large Domestic Denomination Certificates—$100,000 or More		115
35	Deposit Composition and Average Deposit Rates		115
36	Short-term Borrowings		116
37	Expected Maturity Profile of Short-term Borrowings and Long-term Debt		117
38	Contractual Obligations		118
39	Senior Unsecured Debt Credit Ratings		119
40	Interest Rate Sensitivity Analysis		122

—	Supplemental Tables:
A	Loan Portfolio Composition		123
B	Performing Delinquencies		125
C	Nonperforming Assets		126
D	Net Charge-Offs		127
E	Summary of Allowance for Loan And Lease Losses		128
F	Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures		129

iii

PART I

Item 1. Business

OVERVIEW

General

Capital One Financial Corporation, which was established in 1995, is a diversified financial services holding company headquartered in McLean, Virginia. Capital One Financial Corporation and its subsidiaries (the “Company”) offer a broad spectrum of financial products and services to consumers, small businesses and commercial clients through branches, the internet and other distribution channels. As of December 31, 2011, our principal subsidiaries included:

•

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 hereafter collectively referred to as “we”, “us” or “our.” CONA and COBNA are collectively referred to as the “Banks” in this report.

We had $135.9 billion in total loans outstanding and $128.2 billion in deposits as of December 31, 2011, compared with $125.9 billion in total loans outstanding and $122.2 billion in deposits as of December 31, 2010. We serve banking customers through branch locations primarily in New York, New Jersey, Texas, Louisiana, Maryland, Virginia and the District of Columbia. In September 2010, we rebranded Chevy Chase Bank, F.S.B. (“Chevy Chase Bank”), strengthening the Capital One brand in the Washington, D.C. region. In addition to bank lending, treasury management and depository services, we offer credit and debit card products, auto loans and mortgage banking in markets across the United States. As of December 31, 2011, we were the fourth largest issuer of Visa^® (“Visa”) and MasterCard^® (“MasterCard”) credit cards in the United States based on the outstanding balance of credit card loans.

In June 2011, we entered into a purchase and sale agreement with ING Groep N.V., ING Bank N.V., ING Direct N.V., and ING Direct Bancorp (collectively the “ING Sellers”), under which we would acquire substantially all of the ING Sellers’ ING Direct business in the United States (“ING Direct”). We closed the acquisition of ING Direct on February 17, 2012. Headquartered in Wilmington, Delaware, ING Direct is the largest direct bank in the United States. With the closing of the transaction and the addition of ING Direct’s deposits, which totaled approximately $83.0 billion as of December 31, 2011, we become the sixth largest depository institution.

We also offer products outside of the United States principally through Capital One (Europe) plc (“COEP”), an indirect subsidiary of COBNA organized and located in the United Kingdom (U.K.), and through a branch of COBNA in Canada. COEP has authority, among other things, to provide credit card and installment loans. Our U.K. operations transitioned to an Authorized Payment Institution (“API”) effective December 1, 2010. As a result, we are no longer authorized to accept deposits in the U.K. Prior to November 19, 2010, COEP was referred to as Capital One Bank (Europe) plc (“COBEP”). Our branch of COBNA in Canada has the authority to provide credit card loans.

Recent Acquisition and Disposition Activity

We regularly explore and evaluate opportunities to acquire financial services companies and financial assets, including credit card and other loan portfolios, and enter into strategic partnerships as part of our growth strategy.

As part of our evaluation, we analyze the values of, and regularly submit bids for, the acquisition of customer accounts and other liabilities and assets of financial institutions and other businesses. We also regularly consider the potential disposition of certain of our assets, branches, partnership agreements or lines of businesses. We may issue equity or debt in connection with acquisitions, including public offerings, to fund such acquisitions. Recent completed or pending acquisitions are discussed below.

Hudson’s Bay Company—Credit Card Portfolio

On January 7, 2011, we acquired the existing credit card loan portfolio of Hudson’s Bay Company (“HBC”), one of the largest retailers in Canada, from GE Capital Retail Finance. The acquisition included outstanding credit card loan receivables with a fair value of approximately $1.4 billion and the transfer of approximately 400 employees directly involved in managing HBC’s loan portfolio. 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.

Kohl’s—Credit Card Portfolio

In August 2010, we entered into a private-label credit card partnership agreement with Kohl’s Department Stores (“Kohl’s”). In connection with the partnership agreement, we acquired Kohl’s existing private-label credit card loan portfolio from JPMorgan Chase & Co. on April 1, 2011. The existing portfolio, which consists of more than 20 million Kohl’s customer accounts, had an outstanding principal and interest balance of approximately $3.7 billion at acquisition. Under the terms of the partnership agreement and in conjunction with the acquisition, we began issuing Kohl’s branded private-label credit cards to new and existing Kohl’s customers on April 1, 2011. The partnership agreement has an initial seven-year term and an automatic one-year renewal thereafter unless either party delivers notice of an intent to terminate.

ING Direct

On June 16, 2011, we entered into a purchase and sale agreement with the ING Sellers to acquire ING Direct. On February 17, 2012, we closed the acquisition of ING Direct, which included (i) the acquisition of the equity interests of ING Bank, fsb (“ING Bank”), (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 other assets and the assumption of certain other liabilities of ING Direct Bancorp. The aggregate consideration was 54,028,086 shares of common stock and approximately $6.3 billion in cash. The ING Direct acquisition consists of assets, which include cash and cash equivalents, investment securities and loans with a total estimated fair value of $92.2 billion as of December 31, 2011 and deposits of approximately $83.0 billion as of December 31, 2011.

HSBC—U.S. Credit Card Business

In August 2011, we entered into a purchase agreement with HSBC Finance Corporation, HSBC USA Inc. and HSBC Technology and Services (USA) Inc. (collectively, “HSBC”), to acquire substantially all of the assets and assume liabilities of HSBC’s credit card and private-label credit card business in the United States for a premium estimated at $2.6 billion as of June 30, 2011. We expect the acquisition of the HSBC U.S. credit card business to significantly expand and enhance our Credit Card franchise. We currently expect the HSBC acquisition to close in the second quarter of 2012, subject to customary closing conditions, including certain governmental clearances and approvals. Pursuant to the purchase agreement, we have the option, subject to certain conditions, to pay up to $750 million of the consideration to HSBC in the form of our common stock (valued at $39.23 per share).

Additional Information

Our common stock is listed on the NYSE and is traded under the symbol “COF.” As of January 31, 2012, there were 15,242 holders of record of our common stock. Our principal executive office is located at 1680 Capital One Drive, McLean, Virginia 22102 (telephone number (703) 720-1000). We maintain a Web site at www.capitalone.com. Documents available on our Web site include: (i) our Code of Business Conduct and Ethics

for the Corporation; (ii) our Corporate Governance Principles; and (iii) charters for the Audit and Risk, Compensation, Finance and Trust Oversight, and Governance and Nominating Committees of the Board of Directors.

These documents also are available in print to any shareholder who requests a copy. In addition, we make available free of charge through our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports as soon as reasonably practicable after electronically filing or furnishing such material to the Securities and Exchange Commission (“SEC”).

OPERATIONS AND BUSINESS SEGMENTS

Our revenues are primarily driven by lending to consumers and commercial customers and by deposit-taking activities, which generate net interest income, and by activities that generate non-interest income, such as fee-based services provided to customers and merchant interchange fees with respect to certain credit card transactions. 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 expect expenses associated with the integration of the ING Direct and the pending acquisition of the HSBC U.S. credit card business to represent a significant portion of our expenses in 2012.

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

•

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

•

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

•

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

Customer usage and payment patterns, credit quality, levels of marketing expense and operating efficiency all affect our profitability. In our Credit Card business, we experience fluctuations in purchase volumes and the level of outstanding loan receivables due to higher seasonal consumer spending and payment patterns around the winter holiday season, summer vacations and back-to-school periods. Although there is some seasonal impact to purchase volumes and credit card loan balances in our Credit Card business, these seasonal trends have not caused significant fluctuations in our results of operations. No individual quarter in 2011 or 2010 accounted for more than 30% of our total revenues in either of these fiscal years. Delinquency rates in our consumer lending businesses also have historically exhibited seasonal patterns, with delinquency rates generally tending to decrease in the first two quarters of the year as customers use income tax refunds to pay down outstanding loan balances.

See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)—Executive Summary and Business Outlook,” “MD&A—Business Segment Financial Performance” and “Item 8. Financial Information and Supplementary Data—Notes to Consolidated Financial Statements” for additional information about our business segments.

SUPERVISION AND REGULATION

General

Capital One Financial Corporation is a bank holding company (“BHC”) under Section 3 of the Bank Holding Company Act of 1956, as amended (12 U.S.C. § 1842) (the “BHC Act”) and is subject to the requirements of the BHC Act, including its capital adequacy standards and limitations on our nonbanking activities. We are also subject to supervision, examination and regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve”).

Permissible activities for a BHC include those activities that are so closely related to banking as to be a proper incident thereto, such as consumer lending and other activities that have been approved by the Federal Reserve by regulation or order. Certain servicing activities are also permissible for a BHC if conducted for or on behalf of the BHC or any of its affiliates. Impermissible activities for BHCs include activities that are related to commerce such as retail sales of nonfinancial products. Under Federal Reserve policy, we are expected to act as a source of financial and managerial strength to any banks that we control, including the Banks and ING Bank, and to commit resources to support them.

On May 27, 2005, we became a “financial holding company” under the Gramm-Leach-Bliley Act amendments to the BHC Act (the “GLBA”). The GLBA removed many of the restrictions on the activities of BHCs that become financial holding companies. A financial holding company, and the nonbank companies under its control, are permitted to engage in activities considered financial in nature (including, for example, insurance underwriting, agency sales and brokerage, securities underwriting and dealing and merchant banking activities), incidental to financial activities or complementary to financial activities if the Federal Reserve determines that they pose no risk to the safety or soundness of depository institutions or the financial system in general.

Our election to become a financial holding company under the GLBA certifies that the depository institutions we control meet certain criteria, including capital, management and Community Reinvestment Act (“CRA”) requirements. Effective July 21, 2011, under amendments to the BHC Act enacted under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), Capital One Financial Corporation also must be “well capitalized” and “well managed.” If we were to fail to continue to meet the criteria for financial holding company status, we could, depending on which requirements we failed to meet, face restrictions on new financial activities or acquisitions or be required to discontinue existing activities that are not generally permissible for bank holding companies.

The Banks are national associations chartered under the laws of the United States, the deposits of which are insured by the Deposit Insurance Fund (the “DIF”) of the Federal Deposit Insurance Corporation (the “FDIC”) up to applicable limits. ING Bank is a federal savings bank chartered under the laws of the United States, the deposits of which are also insured by the DIF. In addition to regulatory requirements imposed as a result of COBNA’s international operations (discussed below), the Banks and ING Bank are subject to comprehensive regulation and periodic examination by the Office of the Comptroller of the Currency (“OCC”), the FDIC and, effective July 21, 2011, by the Consumer Financial Protection Bureau (the “CFPB”).

We are also registered as a financial institution holding company under Virginia law and, as such, we are subject to periodic examination by Virginia’s Bureau of Financial Institutions. We also face regulation in the international jurisdictions in which we conduct business (see below under “Regulation of International Business by Non–U.S. Authorities”).

Regulation of Business Activities

The activities of the Banks and ING Bank as consumer lenders also are subject to regulation under various federal laws, including the Truth-in-Lending Act, the Equal Credit Opportunity Act, the Fair Credit Reporting

Act (the “FCRA”), the CRA and the Servicemembers Civil Relief Act, as well as under various state laws. Depending on the underlying issue and applicable law, regulators are often authorized to impose penalties for violations of these statutes and, in certain cases, to order banks to compensate injured borrowers. Borrowers may also have a private right of action for certain violations. Federal bankruptcy and state debtor relief and collection laws also affect the ability of a bank to collect outstanding balances owed by borrowers. These laws may affect the ability of banks to collect outstanding balances.

New Regulations of Consumer Lending Activities

The Credit CARD Act (amending the Truth-In-Lending Act) enacted in May 2009, and related changes to Regulation Z, impose a number of restrictions on credit card practices impacting rates and fees and update the disclosures required for open-end credit. Overlimit fees may not be imposed without prior consent, and the number of such fees that can be charged for the same violation is constrained. The amount of any penalty fee or charge must be “reasonable and proportional” to the violation. The Credit CARD Act also significantly restricts the ability of a card issuer to increase rates charged on pre-existing card balances. Card issuers are generally prohibited from raising rates on pre-existing balances when generally prevailing interest rates change. Moreover, the circumstances under which a card issuer can raise the interest rate on pre-existing balances of a customer whose risk of default increases are restricted. Payments above the minimum payment must be allocated first to balances with the highest interest rate. The amount of fees charged to credit card accounts with lower credit lines is limited. A consumer’s ability to pay must be taken into account before issuing credit or increasing credit limits.

State Consumer Financial Laws

The Dodd-Frank Act created a new independent supervisory body, the CFPB that is the primary regulator for federal consumer financial statutes. State attorneys general will be authorized to enforce new regulations issued by the CFPB. State consumer financial laws will continue to be preempted under the National Bank Act under the existing standard set forth in the Supreme Court decision in Barnett Bank of Marion County, N.A. v. Nelson, which preempts any state law that significantly interferes with or impairs banking powers. OCC determinations of such preemption, however, must be on a case-by-case basis, and courts reviewing the OCC’s preemption determinations will now consider the appropriateness of those determinations under a different standard of judicial review. These laws may affect the ability of the Banks and ING Bank to collect outstanding balances.

Mortgage Lending

The Dodd-Frank Act prescribes additional disclosure requirements and substantive limitations on our mortgage lending activities. Most of these provisions require the issuance of regulations by the CFPB or other federal agencies before they become effective. Though we do not expect the resulting regulations to have a material impact on our operations, one new requirement under the Dodd-Frank Act, the requirement for mortgage loan securitizers to retain a portion of the economic risk associated with certain mortgage loans, could impact the type and amount of mortgage loans we offer, depending on the final regulations.

Debit Interchange Fees

The Dodd-Frank Act requires that the amount of any interchange fee received by a debit card issuer with respect to debit card transactions be reasonable and proportional to the cost incurred by the issuer with respect to the transaction. In June 2011, the Federal Reserve adopted a final rule and an interim final rule implementing the portion of the Dodd-Frank Act that limits interchange fees received by a debit card issuer. The final rule limits interchange fees per debit card transaction to $.21 plus five basis points of the transaction amount and provides, through the interim final rule, for an additional $.01 fraud prevention adjustment to the interchange fee for issuers that meet certain fraud prevention requirements.

Dividends, Stock Repurchases and Transfers of Funds

In November 2011, the Federal Reserve finalized capital planning rules applicable to large bank holding companies like us (commonly referred to as Comprehensive Capital Analysis and Review or CCAR). Under the rules, bank holding companies with consolidated assets of $50 billion or more must submit capital plans to the Federal Reserve on an annual basis and must obtain approval from the Federal Reserve before making most capital distributions. The purpose of the rules is to ensure that large bank holding companies have robust, forward-looking capital planning processes that account for their unique risks and capital needs to continue operations through times of economic and financial stress. As part of its evaluation of a capital plan, the Federal Reserve will consider the comprehensiveness of the plan, the reasonableness of assumptions and analysis and methodologies used to assess capital adequacy and the ability of the bank holding company to maintain capital above each minimum regulatory capital ratio and above a Tier 1 common ratio of 5% on a pro forma basis under expected and stressful conditions throughout a planning horizon of at least nine quarters.

Traditionally, dividends to us from our direct and indirect subsidiaries have represented a major source of funds for us to pay dividends on our stock, make payments on corporate debt securities and meet our other obligations. There are various federal law limitations on the extent to which the Banks and ING Bank can finance or otherwise supply funds to us through dividends and loans. These limitations include minimum regulatory capital requirements, federal banking law requirements concerning the payment of dividends out of net profits or surplus, Sections 23A and 23B of the Federal Reserve Act and Regulation W governing transactions between an insured depository institution and its affiliates, as well as general federal regulatory oversight to prevent unsafe or unsound practices. In general, federal and applicable state banking laws prohibit, without first obtaining regulatory approval, insured depository institutions, such as the Banks and ING Bank, from making dividend distributions if such distributions are not paid out of available earnings or would cause the institution to fail to meet applicable capital adequacy standards.

Capital Adequacy

The Banks and ING Bank are subject to capital adequacy guidelines adopted by federal banking regulators. For a further discussion of the capital adequacy guidelines, see “MD&A—Capital Management” and “Note 13—Regulatory and Capital Adequacy.” The Banks and ING Bank exceeded minimum regulatory requirements under these guidelines as of December 31, 2011.

FDICIA and Prompt Corrective Action

In general, the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) subjects banks to significantly increased regulation and supervision. Among other things, FDICIA requires federal banking agencies to take “prompt corrective action” for banks that do not meet minimum capital requirements. FDICIA establishes five capital ratio levels: well capitalized; adequately capitalized; undercapitalized; significantly undercapitalized; and critically undercapitalized. Under applicable regulations, a bank is considered to be well capitalized if it maintains a total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital ratio of at least 6%, a Tier 1 leverage capital ratio of at least 5% and is not subject to any supervisory agreement, order or directive to meet and maintain a specific capital level for any capital measure. A bank is considered to be adequately capitalized if it maintains a total risk-based capital ratio of at least 8%, a Tier 1 risk-based capital ratio of at least 4%, a Tier 1 leverage capital ratio of at least 4% (3% for certain highly rated institutions), and does not otherwise meet the well capitalized definition. The three undercapitalized categories are based upon the amount by which a bank falls below the ratios applicable to adequately capitalized institutions. The capital categories are determined solely for purposes of applying FDICIA’s prompt corrective action provisions, and such capital categories may not constitute an accurate representation of the Banks’ or ING Bank’s overall financial condition or prospects. As of December 31, 2011, each of the Banks and ING Bank met the requirements for a well-capitalized institution.

As an additional means to identify problems in the financial management of depository institutions, FDICIA requires regulators to establish certain non-capital safety and soundness standards. The standards relate generally to operations and management, asset quality, interest rate exposure and executive compensation. The agencies are authorized to take action against institutions that fail to meet such standards.

Enhanced Prudential Standards and Other Requirements under the Dodd-Frank Act

With the enactment of the Dodd-Frank Act, because we are a bank holding company with consolidated assets of $50 billion or greater (a “covered company”), we are subject to certain enhanced prudential standards, including requirements that may be recommended by the Financial Stability Oversight Council (the “Council”) and implemented by the Federal Reserve and other regulators. As a result, we expect to be subject to more stringent standards and requirements than those applicable for smaller institutions, including risk-based capital requirements, leverage limits and liquidity requirements. The Council also may issue recommendations to the Federal Reserve or other primary financial regulatory agency to apply new or heightened standards to risky financial activities or practices. In December 2011, the Federal Reserve released proposed rules beginning to implement the enhanced prudential standards. If finalized as proposed, we will be subject to new requirements regarding liquidity management, risk management, single-counterparty credit limits and annual stress tests conducted by the Federal Reserve, and we will be required to conduct our own semiannual stress tests. The proposal also implements an early remediation framework, under which a covered company could be subject to enforcement actions, growth limits, prohibitions on capital distributions and other consequences if a triggering event were to occur. The Federal Reserve also indicates in the proposal that it intends to implement the Basel III capital surcharge framework, although the extent to which that would apply to the Company is unclear. Under rules proposed by the OCC in January 2012, each of the Banks and ING Bank would be required to conduct semiannual stress tests. In addition, in 2011, the Federal Reserve finalized rules requiring the Company to implement resolution planning for orderly resolution in the event of material financial distress or failure of the Company (often referred to as “living wills”). The FDIC has issued similar rules regarding resolution planning applicable to the Banks and ING Bank.

In addition to the provisions described throughout this Supervision and Regulation section, the Dodd-Frank Act imposes new, more stringent standards and requirements with respect to bank and nonbank acquisitions and mergers, affiliate transactions, and proprietary trading (the “Volcker Rule”). It is also possible that CONA will be designated as a “swap dealer” under the Dodd-Frank Act due to its derivative activities associated with commercial lending, which would result in oversight by the Commodity Futures Trading Commission and more requirements for our current and future derivative transactions. The Dodd-Frank Act also prohibits conflicts of interest relating to securitizations and generally requires securitizers to retain a 5% economic interest in the credit risk of assets sold through the issuance of asset-backed securitizations, with an exemption for traditionally underwritten residential mortgage loans. In addition, the Dodd-Frank Act includes provisions related to corporate governance and executive compensation and new fees and assessments, among others.

The federal agencies have significant discretion in drafting the implementing rules and regulations of the Dodd-Frank Act. 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. However, the full impact of the Dodd-Frank Act will not be known for many months or, in some cases, years. In addition, the Dodd-Frank Act requires various studies and reports to be delivered to Congress, which could result in additional legislative or regulatory action.

Basel II

U.S. Federal banking regulators finalized the “Advanced” version of Basel II in December 2007 and they issued a Notice of Proposed Rulemaking for the “Standardized” version in June 2008. The rules are mandatory for those institutions with consolidated total assets of $250 billion or more or consolidated total on-balance-sheet foreign exposure of $10 billion or more. We expect to become subject to these rules at the end of 2012 as a result of the ING Direct acquisition.

Prior to full implementation of the Basel II framework, organizations must complete a qualification period of four consecutive quarters, known as the parallel run, during which they must meet the requirements of the rule to the satisfaction of their primary U.S. banking regulator. Based on current growth estimates, we would expect to enter parallel run January 1, 2015. This will require completing a written implementation plan and building processes and systems to comply with the rules. Compliance with the Basel II rules will require a material investment of resources.

The Collins Amendment within the Dodd-Frank Act and the U.S. banking regulators’ implementing final rules establish a risk-based capital floor so that organizations subject to Basel II rules may not hold less capital than would be required using Basel I capital calculations. Our current analysis suggests that our risk-weighted assets will increase under the Basel II framework, and therefore we would need to hold more regulatory capital in order to maintain a given capital ratio. We will continue to monitor regulators’ implementation of the new rules with respect to the institutions that are subject to them and assess the potential impact to us.

Basel III

In December 2009, the Basel Committee on Banking Supervision (the “Basel Committee”) released proposals for additional capital and liquidity requirements, which have been clarified and amended in recent pronouncements (“Basel III”). In September 2010, the Basel Committee announced a package of reforms that included detailed capital ratios and capital conservation buffers, subject to transition periods through 2018. In December 2010, the Basel Committee published a final framework on capital and liquidity, consistent in large part with the prior proposals. The liquidity framework included two standards for liquidity risk supervision, each subject to observation periods and transitional arrangements. One standard promotes short-term resilience by requiring sufficient high-quality liquid assets to survive a stress scenario lasting for 30 days; the other promotes longer-term resilience by requiring sufficient stable funding over a one-year period, based on the liquidity characteristics of assets and activities.

How U.S. banking regulations will be modified to reflect these international standards remains unclear, particularly given the capital surcharge regulations that the Federal Reserve intends to implement under the Dodd-Frank Act and the current Prompt Corrective Action framework. U.S. regulators have not yet implemented any portion of the Basel III framework, although we expect them to do so in the future. We expect that minimum capital and liquidity requirements for us and other institutions will increase as a result of Basel III, the Dodd-Frank Act and related activity. We will continue to monitor regulators’ implementation of the new rules with respect to the institutions that are subject to them and assess the potential impact to us.

Deposits and Deposit Insurance

Each of CONA, COBNA and ING Bank, as an insured depository institution, is a member of the DIF maintained by the FDIC. Through the DIF, the FDIC insures the deposits of insured depository institutions up to prescribed limits for each depositor. The DIF was formed on March 31, 2006, upon the merger of the Bank Insurance Fund and the Savings Association Insurance Fund in accordance with the Federal Deposit Insurance Reform Act of 2005 (the “Reform Act”). The Reform Act permits the FDIC to set a Designated Reserve Ratio (“DRR”) for the DIF. To maintain the DIF, member institutions may be assessed an insurance premium, and the FDIC may take action to increase insurance premiums if the DRR falls below its required level.

Prior to passage of the Dodd-Frank Act, the FDIC had established a plan to restore the DIF in the face of recent insurance losses and future loss projections, which resulted in several rules that generally increased deposit insurance rates and purported to improve risk differentiation so that riskier institutions bear a greater share of insurance premiums. The Dodd-Frank Act reformed the management of the DIF in several ways: raised the minimum DRR to 1.35% (from the former minimum of 1.15%) and removed the upper limit on the DRR; required that the reserve ratio reach 1.35% by September 30, 2020 (rather than 1.15% by the end of 2016); required that in setting assessments, the FDIC must offset the effect of meeting the increased reserve ratio on

small insured depository institutions; and eliminated the requirement that the FDIC pay dividends from the DIF when the reserve ratio reaches certain levels. The FDIC has set the DRR at 2% and, in lieu of dividends, has established progressively lower assessment rate schedules as the reserve ratio meets certain trigger levels. The Dodd-Frank Act also required the FDIC to change the deposit insurance assessment base from deposits to average consolidated total assets minus average tangible equity. In February 2011, the FDIC finalized rules to implement this change that significantly modified how deposit insurance assessment rates are calculated for those banks with assets of $10 billion or greater.

Banks may accept brokered deposits as part of their funding. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), as discussed in “MD&A—Liquidity Risk,” only “well-capitalized” and “adequately-capitalized” institutions may accept brokered deposits. Adequately-capitalized institutions, however, must first obtain a waiver from the FDIC before accepting brokered deposits, and such deposits may not pay rates that significantly exceed the rates paid on deposits of similar maturity from the institution’s normal market area or, for deposits from outside the institution’s normal market area, the national rate on deposits of comparable maturity.

The FDIC is authorized to terminate a bank’s deposit insurance upon a finding by the FDIC that the bank’s financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices or has violated any applicable rule, regulation, order or condition enacted or imposed by the bank’s regulatory agency. The termination of deposit insurance for a bank could have a material adverse effect on its liquidity and its earnings.

Overdraft Protection

The Federal Reserve amended Regulation E in November 2009 to limit the ability to assess overdraft fees for paying ATM and one-time debit card transactions that overdraw a consumer’s account, unless the consumer opts in to such payment of overdrafts. The rule does not apply to overdraft services with respect to checks, ACH transactions, or recurring debit card transactions, or to the payment of overdrafts pursuant to a line of credit or a service that transfers funds from another account. We are required to provide to customers written notice describing our overdraft service, fees imposed and other information, and to provide customers with a reasonable opportunity to opt in to the service. Before we may assess fees for paying discretionary overdrafts, a customer must affirmatively opt in, which could negatively impact our deposit business revenue.

Source of Strength and Liability for Commonly-Controlled Institutions

Under the regulations issued by the Federal Reserve, a bank holding company must serve as a source of financial and managerial strength to its subsidiary banks (the so-called “source of strength doctrine”). The Dodd-Frank Act codified the source of strength doctrine, directing the Federal Reserve to require bank holding companies to serve as a source of financial strength to its subsidiary banks.

Under the “cross-guarantee” provision of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”), insured depository institutions such as the Banks and ING Bank may be liable to the FDIC with respect to any loss incurred, or reasonably anticipated to be incurred, by the FDIC in connection with the default of, or FDIC assistance to, any commonly controlled insured depository institution. The Banks and ING Bank are commonly controlled within the meaning of the FIRREA cross-guarantee provision.

FDIC Orderly Liquidation Authority

The Dodd-Frank Act provided the FDIC with liquidation authority that may be used to liquidate a financial company if the Treasury Secretary, in consultation with the President, based on the recommendation of the Federal Reserve and another federal agency, determines that doing so is necessary to mitigate serious adverse effects on U.S. financial stability. Upon such a determination, the FDIC would be appointed receiver and must

liquidate the company in a way that mitigates significant risks to financial stability and minimizes moral hazard. The costs of a liquidation of a financial company would be borne by shareholders and unsecured creditors and then, if necessary, by risk-based assessments on large financial companies. The FDIC has issued rules implementing this authority, and may issue additional rules in the future.

FFIEC Account Management Guidance

On January 8, 2003, the Federal Financial Institutions Examination Council (“FFIEC”) released Account Management and Loss Allowance Guidance (the “Guidance”). The Guidance applies to all credit lending of regulated financial institutions and generally requires that banks properly manage several elements of their lending programs, including line assignments, over-limit practices, minimum payment and negative amortization, workout and settlement programs, and the accounting methodology used for various assets and income items related to loans.

We believe that our account management and loss allowance practices are prudent and appropriate and, consistent with the Guidance. We caution, however, the Guidance provides wide discretion to bank regulatory agencies in the application of the Guidance to any particular institution and its account management and loss allowance practices. Accordingly, under the Guidance, bank examiners could require changes in our account management or loss allowance practices in the future, and such changes could have an adverse impact on our financial condition or results of operation.

Privacy and Fair Credit Reporting

The GLBA requires a financial institution to describe in a privacy notice certain of its privacy and data collection practices and requires that customers or consumers, before their nonpublic personal information is shared, be given a choice (through an opt-out notice) to limit the sharing of such information about them with nonaffiliated third parties unless the sharing is required or permitted under the GLBA as implemented. We, the Banks and ING Bank have written privacy notices that are available either through our website, the website of the relevant legal entity, or both, and are delivered to consumers and customers when required under the GLBA. In accordance with the privacy notices, we, the Banks and ING Bank protect the security of information about our customers, educate our employees about the importance of protecting customer privacy and allow our customers to remove their names from the solicitation lists used and shared with others by us and the Banks or ING Bank to the extent they use or share such lists. We, the Banks and ING Bank require business partners with whom we share such information to have adequate security safeguards and to abide by the redisclosure and reuse provisions of the GLBA. To the extent that the GLBA and the FCRA require us or one or more of the Banks or ING Bank to provide customers and consumers the opportunity to opt out of sharing information, then the relevant entity or entities provide such options in the privacy notice. In addition to adopting federal requirements regarding privacy, the GLBA also permits individual states to enact stricter laws relating to the use of customer information. To date, at least California and Vermont have done so by statute, regulation or referendum, and other states may consider proposals which impose additional requirements or restrictions on us, the Banks or ING Bank. If the federal or state regulators of the financial subsidiaries establish further guidelines for addressing customer privacy issues, we, one or more of the Banks, or ING Bank may need to amend our privacy policies and adapt our internal procedures.

Under Section 501(b) of the GLBA, among other sources of statutory authority, including state law, we are required to observe various data security-related requirements, including establishing information security and data security breach response programs and properly authenticating customers before processing or enabling certain types of transactions or interactions. The failure to observe any one or more of these requirements could subject us to enforcement action or litigation.

Like other financial institutions, the Banks and ING Bank rely upon consumer reports for prescreen marketing, underwriting new loans and for reviewing and managing risks associated with existing accounts. In addition, the

Banks and ING Bank furnish customer account information to the major consumer reporting agencies. The use of consumer reports by the Banks and ING Bank and furnishing of account information to the consumer reporting agencies is regulated under the FCRA on a uniform, nationwide basis. This includes restrictions on the ability of the Banks and ING Bank to share consumer report information with affiliates and to use customer account information shared by affiliates for a marketing purpose. The Fair and Accurate Credit Transactions Act of 2003 (the “FACT Act”), extends the federal preemption of the FCRA permanently, although the law authorizes states to enact laws regulating certain subject matters so long as they are not inconsistent with the conduct required by the FCRA. The FACT Act also added new provisions to the FCRA designed to address the growing crime of identity theft and to improve the accuracy of consumer credit information. Generally, FCRA rulemaking and enforcement authority with respect to the Banks and ING Bank now resides with CFPB. In addition, the FCRA creates a limited private right of action for consumers to seek relief for certain violations for the FCRA.

Investment in the Company, the Banks and ING Bank

Certain acquisitions of our capital stock may be subject to regulatory approval or notice under federal or state law. Investors are responsible for ensuring that they do not, directly or indirectly, acquire shares of our capital stock in excess of the amount that can be acquired without regulatory approval. Each of the Banks and ING Bank is an “insured depository institution” within the meaning of the Change in Bank Control Act.

Consequently, federal law and regulations prohibit any person or company from acquiring control of us without, in most cases, prior written approval of the Federal Reserve or the OCC, as applicable. Control is conclusively presumed if, among other things, a person or company acquires more than 25% of any class of our voting stock. A rebuttable presumption of control arises if a person or company acquires more than 10% of any class of voting stock and is subject to any of a number of specified “control factors” as set forth in the applicable regulations. Additionally, COBNA and CONA are “banks” within the meaning of Chapter 13 of Title 6.1 of the Code of Virginia governing the acquisition of interests in Virginia financial institutions (the “Financial Institution Holding Company Act”). The Financial Institution Holding Company Act prohibits any person or entity from acquiring, or making any public offer to acquire, control of a Virginia financial institution or its holding company without making application to, and receiving prior approval from, the Virginia Bureau of Financial Institutions. Because ING Bank is a federal savings bank located in Delaware, acquisitions of interests in ING Bank are governed by Chapter 8 of Title 5 of the Delaware Code (the “Delaware Banking Code”). The Delaware Banking Code prohibits any person or entity from acquiring ownership or control of a federal savings bank located in Delaware, or its holding company if its holding company is located in Delaware, without making application to, and receiving prior approval from, the Delaware State Bank Commissioner.

USA PATRIOT Act of 2001

The USA PATRIOT Act of 2001 (the “Patriot Act”) contains sweeping anti-money laundering and financial transparency laws as well as enhanced information collection tools and enforcement mechanisms for the U.S. government, including: due diligence requirements for private banking and correspondent accounts; standards for verifying customer identification at account opening; rules to promote cooperation among financial institutions, regulators, and law enforcement in identifying parties that may be involved in terrorism or money laundering; reporting requirements applicable to the receipt of coins and currency of more than $10,000 in nonfinancial trades or businesses; and more broadly applicable suspicious activity reporting requirements.

The Department of Treasury, in consultation with the Federal Reserve and other federal financial institution regulators, has promulgated rules and regulations implementing the Patriot Act that prohibit correspondent accounts for foreign shell banks at U.S. financial institutions; require financial institutions to maintain certain records relating to correspondent accounts for foreign banks; require financial institutions to produce certain records upon request of the appropriate federal banking agency; require due diligence with respect to private banking and correspondent banking accounts; facilitate information sharing between government and financial institutions; require verification of customer identification; and require financial institutions to have an anti-money laundering program in place.

Non-Bank Activities

Our non-bank subsidiaries are subject to supervision and regulation by various other federal and state authorities. Our insurance agency subsidiaries, for example, are regulated by state insurance regulatory agencies in the states in which we operate. Capital One Agency LLC is a licensed insurance agency that provides both personal and business insurance services to retail and commercial clients and is regulated by the New York State Insurance Department in its home state and by the state insurance regulatory agencies in the states in which it operates.

Capital One Investment Services LLC, Capital One Southcoast Capital, Inc. and ING DIRECT Investment, Inc. are registered broker-dealers regulated by the SEC and the Financial Industry Regulatory Authority. Our broker-dealer subsidiaries are subject to, among other things, net capital rules designed to measure the general financial condition and liquidity of a broker-dealer. Under these rules, broker-dealers are required to maintain the minimum net capital deemed necessary to meet their continuing commitments to customers and others, and are required to keep a substantial portion of their assets in relatively liquid form. These rules also limit the ability of broker-dealers to transfer capital to parent companies and other affiliates. Broker-dealers are also subject to other regulations covering their business operations, including sales and trading practices, public offerings, publication of research reports, use and safekeeping of client funds and securities, capital structure, record-keeping and the conduct of directors, officers and employees.

Capital One Asset Management LLC, which provides investment advice to institutions, foundations, endowments and high net worth individuals, is a registered investment adviser regulated under the Investment Advisers Act of 1940. Capital One Financial Advisors LLC is a New York-state registered investment adviser. ShareBuilder Advisors, LLC is an SEC-registered investment adviser that provides investment advice to retail customers.

Regulation of International Business by Non—U.S. Authorities

COBNA is subject to regulation in foreign jurisdictions where it operates, currently in the United Kingdom and Canada.

United Kingdom

In the United Kingdom, COBNA operates through Capital One (Europe) plc (“COEP”), which was established in 2000. Effective December 1, 2010, COEP became an authorized payment institution regulated by the Financial Services Authority (the “FSA”) under the Payment Services Regulations 2009. COEP is a member of the Lending Code, which sets standards of good lending practice in relation to loans, credit cards and current account overdrafts. COEP is not a retail deposit-taker. COEP’s indirect parent, Capital One Global Corporation, is wholly-owned by COBNA and is subject to regulation as an “agreement corporation” under the Federal Reserve’s Regulation K.

In 2010, the U.K. Government announced plans to change the structure of financial regulation by the end of 2012. As part of this change, the FSA will cease to exist in its current form. The U.K. Government will create a new Prudential Regulatory Authority (the “PRA”), responsible for the day-to-day prudential supervision of financial institutions and a new Financial Conduct Authority (the “FCA”), responsible for the conduct of all financial services firms. The FSA commenced during 2011 the implementation of a “shadow” structure in preparation for these changes. In addition, a new Financial Policy Committee (the “FPC”) of the Court of Directors of the Bank of England will be established, which will look across the economy at the macroeconomic and financial issues that may threaten stability and address the risks it identifies. An Interim FPC was established in February 2011 and first met in June 2011.

In preparation for these changes, the U.K. Government conducted a range of related consultation work during 2011, in particular focusing on the respective roles and approach of the new regulatory bodies. The consultations included consideration of whether, in addition to the establishment of the FCA, PRA and FPC, the U.K.

consumer credit regime currently regulated by the Office of Fair Trading (“OFT”) should become the responsibility of a single regulator and/or whether the existing underlying legislative framework for consumer credit regulation (under the Consumer Credit Act 1974) should be replaced with a model similar to regulation of other retail financial services (under the Financial Services and Markets Act 2000). The consultations suggest that the U.K. Government intends that the FCA be a more engaged regulator, with involvement earlier in a product’s lifecycle. The U.K. Government has confirmed there is a consensus amongst consultation respondents in favor of transition to a single regulator of consumer credit (FCA being identified as the likely best regulatory body to perform this function). The U.K Government has also confirmed there was no clear consensus over potential changes to the underlying legislative framework regulating consumer credit. The U.K. Government has indicated that further policy development work is needed to enable it to make a determination on the future of consumer credit regulation.

Cross-border interchange fees are under scrutiny from the European Commission (“EC”) and the OFT. The timing of any final resolution of the matter by the EC or the OFT, which has suspended its own investigation into domestic interchange, is uncertain, but it is anticipated that the OFT will await the outcome of the EC court decision before concluding its own investigation, currently expected to be Spring 2012. If the EC decision is appealed to the European Court of Justice, we would expect the OFT to continue the suspension. An appeal to the European Court of Justice is unlikely to be decided before 2014.

In January 2012, the EC released a Green Paper that aims at identifying potential measures to create an integrated European market for card, internet and mobile payments. The current scope of the paper is broad and includes issues such as: market fragmentation; transparency and cost effective pricing of payment services; lack of standardization; interoperability between payment service providers; and security/privacy concerns of payment service users. The paper also looks at whether interchange arrangements create challenges for a fully integrated European market, which may increase the likelihood of further legislation in this area outside of the court process outlined above. The EC will review comments from interested parties, which are due April 2012, to decide next steps and what, if any, further regulation is required to create a single European market.

Following a referral by the OFT, the Competition Commission (the “CC”) launched a market investigation into the supply of Payment Protection Insurance (“PPI”) in the United Kingdom. The scope included PPI on mortgages, credit cards, unsecured loans (personal loans, motor loans and hire purchase) and secured loans. In October 2010, the CC published its final report on remedies, and the final Order was published in March 2011. Implementation of the main new remedies was split. The first phase was introduced in October 2011 and the second will be introduced in April 2012, with the April 2012 phase including a seven-day point of sale prohibition.

Following the dismissal of the British Bankers Association’s judicial review, firms, including COEP, have had to comply with new rules introduced by the FSA in December 2010 governing the handling of PPI complaints. The new rules have resulted in changes to the way that the industry handles PPI complaints and the associated media attention has led to a significant increase in PPI complaint volumes.

Canada

In Canada, COBNA operates as an authorized foreign bank pursuant to the Bank Act (Canada) (the “Bank Act”) and is permitted to conduct its credit card business in Canada through its Canadian branch, Capital One Bank (Canada Branch) (“Capital One Canada”). The primary regulator of Capital One Canada is the Office of the Superintendent of Financial Institutions Canada (“OSFI”). Other regulators include the Financial Consumer Agency of Canada (“FCAC”), the Office of the Privacy Commissioner of Canada, and the Financial Transactions and Reports Analysis Centre of Canada. Capital One Canada is subject to regulation under various Canadian federal laws, including the Bank Act and its regulations, the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and the Personal Information Protection and Electronic Documents Act.

In 2011, four new regulatory developments that affect credit cards issued by federally regulated financial institutions in Canada became effective. These amendments could increase our operational and compliance costs and affect the types and terms of products that we offer in Canada.

In January 2011, amendments to the Personal Investigations Act of Manitoba came into force (“Manitoba Amendments”). The Manitoba Amendments require credit grantors to take certain steps to verify a credit applicant’s identity before entering into or amending a credit agreement, following the placement of a security alert with a credit bureau.

In April 2011, the FCAC published its guidance on Consent for Increases in Credit Limits (“FCAC Guidance”). The FCAC Guidance sets out the FCAC Commissioner’s interpretation of the requirement under the Credit Business Practices (Banks, Authorized Foreign Banks, Trust and Loan Companies, Retail Associations, Canadian Insurance Companies and Foreign Insurance Companies) Regulations to obtain express consent from a borrower prior to increasing the credit limit on a credit card. The FCAC’s expectation is that credit card issuers obtain express consent from borrowers in each instance of a proposed credit limit increase by the issuer and that such consent is obtained at the time of the proposed credit limit increase. The FCAC Guidance became effective in July 2011.

In June 2011, the Bank Act was amended to allow for certain information that is to be provided in writing, to be satisfied by the provision of an electronic document. At the same time, the Electronic Documents (Banks and Bank Holding Companies) Regulations, which prescribe additional requirements for the provision of electronic documents, became effective. The additional requirements include obtaining customer consent to receive documents electronically and the provision of a notification to customers containing prescribed information. The amendments specify that customers may revoke consent at any time, and confirmations of such revocation must be provided without delay. The amendments also provide that if there is a reason to believe that a customer did not receive the electronic document, a paper document must be mailed.

In July 2010, amendments to the Financial Consumer Agency of Canada Act became effective, expanding the mandate of the FCAC to include monitoring and evaluating trends and consumer issues that may have an impact on consumers of financial products and services. In November 2011, the FCAC published a new Compliance Framework, which among other changes included amendments to the content, scope and frequency of existing reporting requirements and introduced a new requirement to self-report certain compliance issues. Some of the new reporting requirements were effective immediately, while others will be effective on April 1, 2012.

COMPETITION

Each of our business segments operates in a highly competitive environment, and we face competition in all aspects of our business from numerous bank and non-bank providers of financial services.

Our Credit Card business competes with international, national, regional and local issuers of Visa^® and MasterCard^® credit cards, as well as with American Express^®, Discover Card^® and, to a certain extent, issuers of debit cards. In general, customers are attracted to credit card issuers largely on the basis of price, credit limit and other product features, and customer loyalty is often limited.

Our Consumer Banking and Commercial Banking businesses compete with national and state banks and direct banks for deposits, auto loans, mortgages and trust accounts and with savings and loan associations and credit unions for loans and deposits. Our competitors also include automotive finance companies, mortgage banking companies and other financial services providers that provide loans, deposits, and other similar services and products. In addition, we compete against non-depository institutions that are able to offer these products and services. Securities firms and insurance companies that elect to become financial holding companies may acquire banks and other financial institutions. Combinations of this type could significantly change the competitive environment in which we conduct business. The financial services industry is also likely to become more

competitive as further technological advances enable more companies to provide financial services. These technological advances may diminish the importance of depository institutions and other financial intermediaries in the transfer of funds between parties. In addition, competition among direct banks is intense because online banking provides our customers the ability to rapidly deposit and withdraw funds and open and close accounts in favor of products and services offered by competitors.

Our businesses generally compete on the basis of the quality and range of their products and services, transaction execution, innovation and price. Competition varies based on the types of clients, customers, industries and geographies served. With respect to some of our products and geographies and products, we compete globally and with respect to others, we compete on a regional basis. Our ability to compete depends, in part, on our ability to attract and retain our professional and other associates and on our reputation. In the current environment, customers are generally attracted to depository institutions that are perceived as stable, with solid liquidity and funding.

We believe that we are able to compete effectively in our current markets. There can be no assurance, however, that our ability to market products and services successfully or to obtain adequate returns on our products and services will not be impacted by the nature of the competition that now exists or may later develop, or by the broader economic environment. For a discussion of the risks related to our competitive environment, please refer to “Item 1A. Risk Factors.”

EMPLOYEES

A central part of our philosophy is to attract and retain a highly capable staff. We had 31,542 employees, whom we refer to as “associates,” as of December 31, 2011. None of our associates are covered under a collective bargaining agreement, and management considers our employee relations to be satisfactory.

ADDITIONAL INFORMATION

Geographic Diversity

Our consumer loan portfolios, including credit cards, are diversified across the United States with modest concentration in California, Texas, New York, Florida, Louisiana and Illinois. We also have credit card loans in the U.K. and Canada. Our commercial loans are concentrated in New York, Texas, Louisiana and New Jersey. See “MD&A—Credit Risk Profile” and “Note 22—Significant Concentration of Credit Risk” for additional information.

Technology/Systems

We leverage information technology to achieve our business objectives and to develop and deliver products and services that satisfy our customers’ needs. A key part of our strategic focus is the development of efficient, flexible computer and operational systems to support complex marketing and account management strategies, the servicing of our customers, and the development of new and diversified products. We believe that the continued development and integration of these systems is an important part of our efforts to reduce costs, improve quality and provide faster, more flexible technology services. Consequently, we continuously review capabilities and develop or acquire systems, processes and competencies to meet our unique business requirements.

As part of our continuous efforts to review and improve our technologies, we may either develop such capabilities internally or rely on third party outsourcers who have the ability to deliver technology that is of higher quality, lower cost, or both. Over time, we have increasingly relied on third party outsourcers to help us deliver systems and operational infrastructure. These relationships include (but are not limited to): Total System Services Inc. (“TSYS”) for processing services for our North American and United Kingdom portfolios of consumer and small business credit card accounts, Fidelity National Information Services (“Fidelity”) for the Capital One banking systems and IBM Corporation for management of our North American data centers.

To protect our systems and technologies, we employ security, backup and recovery systems and generally require the same of our third-party service providers. In addition, we perform, or cause to be performed, a variety of vulnerability and penetration testing on the platforms, systems and applications used to provide our products and services in an effort to ensure that any attacks on these platforms, systems and applications are unlikely to succeed. To date, to our knowledge, we have not been targeted with a direct, material cyber attack. We do not believe that the direct attacks we have seen have resulted in outside entities successfully penetrating our security controls.

Intellectual Property

As part of our overall and ongoing strategy to protect and enhance our intellectual property, we rely on a variety of protections, including copyrights, trademarks, trade secrets, patents and certain restrictions on disclosure, solicitation, and competition. We also undertake other measures to control access to and distribution of our other proprietary information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use certain intellectual property or proprietary information without authorization. Our precautions may not prevent misappropriation or infringement of our intellectual property or proprietary information. In addition, our competitors and other third parties also file patent applications for innovations that are used in our industry. The ability of our competitors and other third parties to obtain such patents may adversely affect our ability to compete. Conversely, our ability to obtain such patents may increase our competitive advantage. There can be no assurance that we will be successful in such efforts, or that the ability of our competitors to obtain such patents may not adversely impact our financial results.

FORWARD-LOOKING STATEMENTS

From time to time, we have made and will make forward-looking statements, including those that discuss, among other things, strategies, goals, outlook or other non-historical matters; projections, revenues, income, expenses, capital measures, returns, accruals for claims in litigation and for other claims against us; earnings per share or other financial measures for us; future financial and operating results; our plans, objectives, expectations and intentions; the projected impact and benefits of the acquisition of ING Direct (the “ING Direct Transaction”) and the pending acquisition of HSBC’s U.S. credit card business (the “HSBC Transaction” and, with the ING Direct Transaction, the “Transactions”); and the assumptions that underlie these matters.

To the extent that any such information is forward-looking, it is intended to fit within the safe harbor for forward-looking information provided by the Private Securities Litigation Reform Act of 1995. Numerous factors could cause our actual results to differ materially from those described in such forward-looking statements, including, among other things:

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general economic and business conditions in the U.S., the U.K., Canada and our local markets, including conditions affecting employment levels, interest rates, consumer income and confidence, spending and savings that may affect consumer bankruptcies, defaults, charge-offs and deposit activity;

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an increase or decrease in credit losses (including increases due to a worsening of general economic conditions in the credit environment);

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the possibility that regulatory and other approvals and conditions to the HSBC Transaction are not obtained or satisfied on a timely basis or at all;

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the possibility that modifications to the terms of the HSBC Transaction may be required in order to obtain or satisfy such approvals or conditions;

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the possibility that we will not receive third-party consents necessary to fully realize the anticipated benefits of the HSBC Transaction;

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the possibility that we may not fully realize the projected cost savings and other projected benefits of the Transactions;

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changes in the anticipated timing for closing the HSBC Transaction;

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difficulties and delays in integrating the assets and businesses acquired in the Transactions;

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business disruption during the pendency of or following the Transactions;

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diversion of management time on issues related to the Transactions, including integration of the assets and businesses acquired;

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reputational risks and the reaction of customers and counterparties to the Transactions;

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disruptions relating to the Transactions negatively impacting our ability to maintain relationships with customers, employees and suppliers;

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changes in asset quality and credit risk as a result of the Transactions;

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the accuracy of estimates and assumptions we use to determine the fair value of assets acquired and liabilities assumed in the Transactions, and the potential for our estimates or assumptions to change as additional information becomes available and we complete the accounting analysis of the Transactions;

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financial, legal, regulatory, tax or accounting changes or actions, including the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the regulations promulgated thereunder;

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developments, changes or actions relating to any litigation matter involving us;

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the inability to sustain revenue and earnings growth;

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increases or decreases in interest rates;

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our ability to access the capital markets at attractive rates and terms to capitalize and fund our operations and future growth;

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the success of our marketing efforts in attracting and retaining customers;

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increases or decreases in our aggregate loan balances or the number of customers and the growth rate and composition thereof, including increases or decreases resulting from factors such as shifting product mix, amount of actual marketing expenses we incur and attrition of loan balances;

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the level of future repurchase or indemnification requests we may receive, the actual future performance of mortgage loans relating to such requests, the success rates of claimants against us, any developments in litigation and the actual recoveries we may make on any collateral relating to claims against us;

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the amount and rate of deposit growth;

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changes in the reputation of or expectations regarding the financial services industry or us with respect to practices, products or financial condition;

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any significant disruption in our operations or technology platform;

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our ability to maintain a compliance infrastructure suitable for our size and complexity;

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our ability to control costs;

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the amount of, and rate of growth in, our expenses as our business develops or changes or as it expands into new market areas;

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our ability to execute on our strategic and operational plans;

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any significant disruption of, or loss of public confidence in, the United States Mail service affecting our response rates and consumer payments;

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our ability to recruit and retain experienced personnel to assist in the management and operations of new products and services;

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changes in the labor and employment markets;

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fraud or misconduct by our customers, employees or business partners;

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competition from providers of products and services that compete with our businesses; and

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other risk factors listed from time to time in reports that we file with the SEC.

Any forward-looking statements made by us or on our behalf speak only as of the date they are made or as of the date indicated, and we do not undertake any obligation to update forward-looking statements as a result of new information, future events or otherwise. You should carefully consider the factors discussed above in evaluating these forward-looking statements. For additional information on factors that could materially influence forward-looking statements included in this Report, see the risk factors set forth under “Part I—Item 1A. Risk Factors” in this Annual Report on Form 10-K.

Item 1A. Risk Factors

Business Risks

This section highlights specific risks that could affect our business. Although we have tried to discuss all material risks of which we are aware at the time this Annual Report on Form 10-K has been filed, other risks may prove to be important in the future, including those that are not currently ascertainable. In addition to the factors discussed elsewhere in this Annual Report, other factors that could cause actual results to differ materially from our forward looking statements include:

The Current Business Environment, Including A Slow or Delayed Economic Recovery, May Adversely Affect Our Industry, Business, Results Of Operations And Capital Levels.

The recent global recession resulted in a general tightening in the credit markets, lower levels of liquidity, reduced asset values (including commercial properties), sharp and prolonged declines in residential home values and sales volumes, reduced business profits, increased rates of business and consumer repayment delinquency, increased rates of business and consumer bankruptcy, and increased and prolonged unemployment, some of which have had a negative impact on our results of operation. Although the overall economic recovery seems to be underway, it has remained modest and fragile. A recovery that is only shallow and very gradual, marked by continued elevated unemployment rates and reduced home prices, or another downturn, may have a material adverse effect on our financial condition and results of operations as customers default on their loans or maintain lower deposit levels or, in the case of credit card accounts, carry lower balances and reduce credit card purchase activity.

In particular, we may face the following risks in connection with these events:

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Adverse macroeconomic conditions may affect consumer confidence levels and may cause adverse changes in payment patterns, causing increases in delinquencies and default rates, which could have a negative impact on our results of operations. In addition, changes in consumer behavior, including decreased consumer spending and a shift in consumer payment behavior towards avoiding late fees, over-limit fees, finance charges and other fees, could have an adverse impact on our results of operations.

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Increases in bankruptcies could cause increases in our charge-off rates, which could have a negative impact on our results of operations.

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Our ability to recover debt that we have previously charged-off may be limited, which could have a negative impact on our results of operations.

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The processes and models we use to estimate inherent losses may no longer be reliable because they rely on complex judgments, including assumptions and forecasts of economic conditions which may no longer be capable of accurate estimation in an unpredictable economic environment, which could have a negative impact on our results of operations.

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Our ability to assess the creditworthiness of our customers may be impaired if the criteria or models we use to underwrite and manage our customers become less predictive of future losses, which could cause our losses to rise and have a negative impact on our results of operations.

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Significant concern regarding the creditworthiness of some of the governments in Europe has contributed to volatility in the financial markets and led to greater economic uncertainty worldwide. Sovereign debt concerns in Europe could diminish economic recovery and lead to further stress in the financial markets, both globally and in the United States, which could have a negative impact on our financial results.

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Our ability to borrow from other financial institutions or to engage in funding transactions on favorable terms or at all could be adversely affected by disruptions in the capital markets or other events, including actions by rating agencies and deteriorating investor expectations, which could limit our access to funding. The interest rates that we pay on our securities are also influenced by, among other things, applicable credit ratings from recognized rating agencies. A downgrade to any of these credit ratings could affect our ability to access the capital markets, increase our borrowing costs and have a negative impact on our results of operations. Increased charge-offs, rising LIBOR and other events may cause our securitization transactions to amortize earlier than scheduled, which could accelerate our need for additional funding from other sources.

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We have increased our reliance on deposit funding over the past several years, in particular with the acquisition of ING Direct, and an inability to accept or maintain deposits or to obtain other sources of funding could materially affect our liquidity position and our ability to fund our business. Many other financial institutions have also increased their reliance on deposit funding and, as such, we expect continued competition in the deposit markets. We cannot predict how this competition will affect our costs. If we are required to offer higher interest rates to attract or maintain deposits, our funding costs will be adversely impacted.

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Regulators, rating agencies or investors could change their standards regarding appropriate capital levels for banks in general or us in particular. If the new standards call for capital levels higher than the capital we have or that we anticipate, it could have negative impacts on our ability to lend or to grow deposits and on our business results.

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Interest rates have remained at historically low levels for a prolonged period of time, and the flat yield curve associated with current interest rates generally leads to lower revenue and reduced margins because it limits our opportunity to increase the spread between asset yields and funding costs. The continued presence of a flat yield curve for a sustained period of time could have a material adverse effect on our earnings and our net interest margin.

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The historically low interest rate environment also increases our exposure to prepayment risk, particularly with respect to the originated mortgage portfolio we acquired from ING Direct. Increased prepayments, refinancing or other factors would reduce expected revenue associated with mortgage assets and could also lead to a reduction in the value of our mortgage servicing rights, which could have a negative impact on our financial results.

Compliance With New And Existing Laws And Regulations May Increase Our Costs, Reduce Our Revenue, Limit Our Ability To Pursue Business Opportunities, And Increase Compliance Challenges.

There has been increased legislation and regulation with respect to the financial services industry in the last few years, and we expect that oversight of our business will continue to expand in scope and complexity. A wide and increasing array of banking and consumer lending laws apply to almost every aspect of our business. Failure to comply with these laws and regulations could result in financial, structural and operational penalties, including receivership, and could result in negative publicity or damage to our reputation with regulators or the public. In addition, establishing systems and processes to achieve compliance with these laws and regulations may increase our costs and limit our ability to pursue certain business opportunities.

In July 2010, President Obama signed into law the Dodd-Frank Act. The Dodd-Frank Act, as well as the related rules and regulations adopted by various regulatory agencies, could have a significant adverse impact on our business, results of operations or financial condition. The Dodd-Frank Act is a comprehensive financial reform act that requires, among other things, enhanced prudential standards (including capital and liquidity

requirements), enhanced supervision (including stress testing), recovery and resolution planning (often referred to as “living wills”), prohibitions on proprietary trading and increased transparency and regulation of derivatives trading. The Dodd-Frank Act also provides heightened expectations for risk management and regulatory oversight of all aspects of large financial institutions, including us. Many aspects of the law remain to be implemented under the rulemaking and regulatory authority of the SEC, the CFTC and federal banking regulators. Although it is clear that the Dodd-Frank Act will materially impact large financial institutions like us, the ultimate effect and scope of that impact may not be understood for years. Though some aspects of the Dodd-Frank Act will clearly have a significant impact on our financial condition or results of operations, other aspects of the law may not apply to us. Nevertheless, the law will increase our need to build new compliance processes and infrastructure and to otherwise enhance our risk management throughout all aspects of our business. The cumulative impact will include higher expectations for capital and liquidity, as discussed in more detail below under the header “We May Not Be Able to Maintain Adequate Capital Levels or Liquidity, Which Could have a Negative Impact on Our Financial Results,” and higher operational costs once regulators fully implement the law. In addition, U.S. government agencies charged with adopting rules and regulations under the Dodd-Frank Act may do so in an unforeseen manner, including ways that potentially expand the reach of the legislation more than as initially contemplated.

There are a number of other provisions in the Dodd-Frank act that will impact our business, including:

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The Dodd-Frank Act created a new independent supervisory body, the Consumer Financial Protection Bureau (the “CFPB”) that became the primary regulator for federal consumer financial statutes on July 21, 2011. Rule writing authority for specified consumer financial statutes transferred to CFPB from other federal regulators. In addition, supervisory authority for consumer compliance over various institutions, including us, was transferred to the CFPB. State attorneys general will be authorized to enforce new regulations issued by the CFPB. Although state consumer financial laws will continue to be preempted under the National Bank Act under the existing standard set forth in the Supreme Court decision in Barnett Bank of Marion County, N.A. v. Nelson, OCC determinations of such preemption must be on a case-by-case basis, and courts reviewing the OCC’s preemption determinations will now consider the appropriateness of those determinations under a different standard of judicial review. As a result, state consumer financial laws enacted in the future that might previously have been preempted may be held to apply to our business activities. The cost of complying with these additional laws could have a negative impact on our financial results.

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The Dodd-Frank Act requires that the amount of any interchange fee received by a debit card issuer with respect to debit card transactions be reasonable and proportional to the cost incurred by the issuer with respect to the transaction. On June 29, 2011, the Federal Reserve adopted a final rule and an interim final rule implementing the portion of the Dodd-Frank Act that limits interchange fees received by a debit card issuer. The final rule limits interchange fees per debit card transaction to $.21 plus five basis points of the transaction amount and provides, through the interim final rule, for an additional $.01 fraud prevention adjustment to the interchange fee for issuers that meet certain fraud prevention requirements. These rules will negatively impact revenue from our debit card business.

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Under the Dodd-Frank Act, many trust preferred securities will cease to qualify for Tier 1 capital, subject to a three year phase-out period expected to begin in 2013. Also, the Dodd-Frank Act will most likely subject us to the supervision of regulatory agencies that historically have not regulated our businesses, such as the Commodity Futures Trading Commission with respect to our derivatives activities. These provisions could have an adverse impact on our results of operations or financial condition by increasing our cost of funding, our cost of capital or our cost of complying with applicable laws and regulations.

The Credit CARD Act (amending the Truth-in-Lending Act) and related changes to Regulation Z impose a number of restrictions on credit card practices impacting rates and fees and also update the disclosures required for open-end credit. Overlimit fees may not be imposed without prior consent of the customer, and the number of such fees that can be charged for the same violation is constrained. The amount of any penalty fee or charge must be “reasonable and proportional” to the violation. In addition, the ability of a card issuer to increase rates charged

on pre-existing card balances has been significantly restricted. Card issuers are generally prohibited from raising rates on pre-existing balances when generally prevailing interest rates change. Moreover, the circumstances under which a card issuer can raise the interest rate on pre-existing balances of a customer whose risk of default increases are restricted. As a result, the rules implementing the Credit CARD Act could make the card business generally less resilient in future economic downturns.

Under the various state and federal statutes and regulations, we are required to observe various data security and privacy-related requirements, including establishing information security and data security breach response programs and properly authenticating customers before processing or enabling certain types of transactions or interactions. Future federal and state legislation and regulation could further restrict how we collect, use, share and secure customer information. The failure to observe any one or more of these requirements could subject us to litigation or enforcement actions and impact some of our current or planned business initiatives.

Certain laws and regulations, and any interpretations and applications with respect thereto, may benefit consumers, borrowers and depositors, but not stockholders. The legislative and regulatory environment is beyond our control, may change rapidly and unpredictably and may negatively influence our revenue, costs, earnings, growth and capital levels. Our success depends on our ability to maintain compliance with both existing and new laws and regulations. For a description of the laws and regulations to which we are subject, please refer to “Supervision and Regulation” in “Item 1. Business.”

We May Experience Increased Delinquencies And Credit Losses.

Like other lenders, we face the risk that our customers will not repay their loans. Rising losses or leading indicators of rising losses (such as higher delinquencies, higher rates of non-performing loans, higher bankruptcy rates, lower collateral values or elevated unemployment rates) may require us to increase our allowance for loan and lease losses, which may degrade our profitability if we are unable to raise revenue or reduce costs to compensate for higher losses. In particular, we face the following risks in this area:

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Missed Payments. Our customers may miss payments. Loan charge-offs (including from bankruptcies) are generally preceded by missed payments or other indications of worsening financial condition for our customers. Customers are more likely to miss payments during an economic downturn or prolonged periods of slow economic growth. In addition, we face the risk that consumer and commercial customer behavior may change (for example, an increase in the unwillingness or inability of customers to repay debt), causing a long-term rise in delinquencies and charge-offs.

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Estimates of Inherent losses. The credit quality of our portfolio can have a significant impact on our earnings. We allow for and reserve against credit risks based on our assessment of credit losses inherent in our loan portfolios. This process, which is critical to our financial results and condition, requires complex judgments, including forecasts of economic conditions. We may underestimate our inherent losses and fail to hold a loan loss allowance sufficient to account for these losses. Incorrect assumptions could lead to material underestimates of inherent losses and inadequate allowance for loan and lease losses. In addition, our estimate of inherent losses impacts the amount of allowances we build to account for those losses. In cases where we modify a loan, if the modifications do not perform as anticipated we may be required to build additional allowance on these loans. The increase or release of allowances impacts our current financial results.

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Underwriting. Our ability to assess the credit worthiness of our customers may diminish. If the models and approaches we use to select, manage and underwrite our consumer and commercial customers become less predictive of future charge-offs (due, for example, to rapid changes in the economy, including the unemployment rate), our credit losses may increase and our returns may deteriorate.

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Business Mix. Our business mix could change in ways that could adversely affect credit losses. We engage in a diverse mix of businesses with a broad range of credit loss characteristics. Consequently, changes in our business mix may change our charge-off rate.

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Charge-off Recognition. The rules governing charge-off recognition could change. We record charge-offs according to accounting and regulatory guidelines and rules. These guidelines and rules, including the FFIEC Account Management Guidance, could require changes in our account management or loss allowance practices and cause our charge-offs to increase for reasons unrelated to the underlying performance of our portfolio. Such changes could have an adverse impact on our financial condition or results of operation.

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Industry Practices. Our charge-off and delinquency rates may be negatively impacted by industry developments, including new regulations applicable to our industry.

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Collateral. Collateral, when we have it, could be insufficient to compensate us for loan losses. When customers default on their loans and we have collateral, we attempt to seize it where permissible and appropriate. However, the value of the collateral may not be sufficient to compensate us for the amount of the unpaid loan, and we may be unsuccessful in recovering the remaining balance from our customers. Particularly with respect to our commercial lending and home loan activities, decreases in real estate values adversely affect the value of property used as collateral for our loans and investments. Thus, the recovery of such property could be insufficient to compensate us for the value of these loans. Borrowers may be less likely to continue making payments on loans if the value of the property used as collateral for the loan is less than what the borrower owes, even if the borrower is still financially able to make the payments.

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New York Concentration. Although our lending is geographically diversified, approximately 48% of our commercial loan portfolio is concentrated in the New York metropolitan area. The regional economic conditions in the New York area affect the demand for our commercial products and services as well as the ability of our customers to repay their commercial loans and the value of the collateral securing these loans. An economic downturn or prolonged period of slow economic growth in the New York region could have a material adverse effect on the performance of our commercial loan portfolio and our results of operations.

We May Experience Increased Losses Associated With Mortgage Repurchases and Indemnification Obligations.

Certain of our subsidiaries, including GreenPoint Mortgage Funding, Inc. (“GreenPoint”), Capital One Home Loans and Capital One, N.A., as successor to Chevy Chase Bank, may be required to repurchase mortgage loans that have been sold to investors in the event there are certain breaches of certain representations and warranties contained within the sales agreements. We may be required to repurchase mortgage loans that we sell to investors in the event that there was improper underwriting or fraud or in the event that the loans become delinquent shortly after they are originated. These subsidiaries also may be required to indemnify certain purchasers and others against losses they incur in the event of breaches of representations and warranties and in various other circumstances, including securities fraud claims, and the amount of such losses could exceed the repurchase amount of the related loans. Consequently, we may be exposed to credit risk associated with sold loans.

We have established reserves in our consolidated financial statements for potential losses that are considered to be both probable and reasonably estimable related to the mortgage loans sold by our originating subsidiaries. The adequacy of the reserve and the ultimate amount of losses incurred will depend on, among other things, the actual future mortgage loan performance, the actual level of future repurchase and indemnification requests, the actual success rate of claimants, developments in litigation related to us and the industry, actual recoveries on the collateral and macroeconomic conditions (including unemployment levels and housing prices). Due to uncertainties relating to these factors, there can be no assurance that our reserves will be adequate or that the total amount of losses incurred will not have a material adverse effect upon our financial condition or results of operations. For additional information related to our mortgage loan repurchase and indemnification obligations and related reserves and our estimate of the upper end of the reasonably possible future losses from representation and warranty claims beyond the current accrual levels as of December 31, 2011, see “Note 21—Commitments, Contingencies and Guarantees.”

We May Not Be Able to Maintain Adequate Capital Levels or Liquidity, Which Could Have a Negative Impact on Our Financial Results.

As a result of the Dodd-Frank Act and international accords, financial institutions will become subject to new and increased capital and liquidity requirements. Although it is not yet clear what form these requirements will take or how they will apply to us, it is possible that we could be required to increase our capital levels above the levels in our current financial plans. These new requirements could have a negative impact on our ability to lend, grow deposit balances or make acquisitions and on our ability to make capital distributions in the form of increased dividends or share repurchases. Higher capital levels could also lower our return on equity.

Recent developments in capital and liquidity requirements that may impact us include the following:

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In December 2010, the Basel Committee on Banking Supervision published a final framework (commonly known as Basel III) on capital and liquidity. The key elements of the capital proposal include: raising the quality, consistency and transparency of the capital base; strengthening the risk coverage of the capital framework; introducing a leverage ratio that is different from the U.S. leverage ratio measures; promoting the build-up of capital buffers; and imposing a capital surcharge for global systemically important institutions. The liquidity framework includes two standards for liquidity risk supervision, one standard promoting short-term resilience and the other promoting longer-term resilience. How U.S. banking regulations will be modified to reflect these international standards remains unclear, particularly given the forthcoming capital and other prudential requirement regulations under the Dodd-Frank Act and the current Prompt Corrective Action framework. We expect, however, that minimum capital and liquidity requirements for us and other institutions will increase as a result of Basel III, the Dodd-Frank Act and related activity.

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Because we are a consolidated bank holding company with consolidated assets of $50 billion or greater, we are subject to certain heightened prudential standards under the Dodd-Frank Act, including requirements that may be recommended by the Financial Stability Oversight Council and implemented by the Federal Reserve. As a result, we expect to be subject to more stringent standards and requirements than those applicable for smaller institutions, including risk-based capital requirements, leverage limits and liquidity requirements. In December 2011, the Federal Reserve released proposed rules beginning to implement the enhanced prudential requirements, including a detailed liquidity framework. If finalized as proposed, these requirements would increase our liquidity requirements and associated compliance and operational costs.

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The Basel II final rules as implemented in the United States are mandatory for those institutions with consolidated total assets of $250 billion or more or consolidated total on-balance-sheet foreign exposure of $10 billion or more. We expect to become subject to these rules at the end of 2012 as a result of the acquisition of ING Direct. Prior to full implementation of the Basel II framework, organizations must complete a qualification period of four consecutive quarters, known as the parallel run, during which they must meet the requirements of the rule to the satisfaction of their primary U.S. banking regulator. Based on current growth estimates, we would expect to enter parallel run January 1, 2015. This will require

completing a written implementation plan and building processes and systems to comply with the rules. Compliance with the Basel II rules will require a material investment of resources. In addition, our current analysis suggests that our risk-weighted assets will increase under the Basel II framework, and therefore we would need to hold more regulatory capital in order to maintain a given capital ratio.

See “Item 1. Business—Supervision and Regulation” for additional information.

We Face Risk Related To Our Operational, Technological And Organizational Infrastructure.

Our ability to grow and compete is dependent on our ability to build or acquire necessary operational, technological and organizational infrastructure. We are in the process of completing significant development projects to complete the systems integration of prior acquisitions and to build a scalable infrastructure in both our Retail Banking and Commercial Banking businesses. We anticipate making additional infrastructure changes and upgrades in connection with the integration of ING Direct and the pending acquisition of HSBC’s U.S. credit card business. Our pending acquisition of the HSBC U.S. credit card business in particular involves the transfer of intellectual property, servicing platforms, infrastructure, contact centers and a significant number of employees. We expect that decoupling and transitioning these assets, infrastructure and systems from HSBC’s current systems and operations and integrating them into our own business operations will be a highly complex process. These infrastructure changes, upgrades and integrations may cause disruptions to our existing and acquired businesses, including, but not limited to, systems interruptions, transaction processing errors, interruptions to collection processes and system conversion delays, all of which could have a negative impact on us. In addition, we expect to enter into numerous transitional service arrangements with HSBC entities that will provide for services associated with the decoupling and transition of the business. Under these arrangements, HSBC will provide certain services to us and we will provide certain services to HSBC. These transitional service arrangements will continue for various dates until the separation of the business from HSBC is complete, and during that time we will rely on the ability of the applicable HSBC entities to provide these services. The complexities and requirements of these arrangements will increase the operational risk associated with the transition and integration of the business, and this increased risk could lead to unanticipated expenses, disruptions to our operations or other adverse consequences.

While we expect the pending acquisition of HSBC’s U.S. credit card business will close in the second quarter of 2012, the complexities of the decoupling and transition could present risks of delay to our anticipated closing timing. Any significant delay in closing the acquisition could have a negative impact on our results of operations due to increased costs or a delay in our realization of the anticipated benefits of the acquisition.

Similar to other large corporations, we are exposed to operational risk that can manifest itself in many ways, such as errors related to failed or inadequate processes, faulty or disabled computer systems, fraud by employees or persons outside of our company and exposure to external events. In addition, we are heavily dependent on the strength and capability of our technology systems which we use to manage our internal financial and other systems, interface with our customers and develop and implement effective marketing campaigns. Our ability to develop and deliver new products that meet the needs of our existing customers and attract new ones and to run our business in compliance with applicable laws and regulations depends on the functionality and reliability of our operational and technology systems. Any disruptions or failures of our operational and technology systems, including those associated with improvements or modifications to such systems, could cause us to be unable to market and manage our products and services or to report our financial results in a timely and accurate manner, all of which could have a negative impact on our results of operations.

In some cases, we and the businesses we are acquiring outsource the maintenance and development of operational and technological functionality to third parties. These third parties may experience errors or disruptions that could adversely impact us and over which we may have limited control. Any increase in the amount of our infrastructure that we outsource to third parties may increase our exposure to these risks.

In addition, our on-going investments in infrastructure, which may be necessary to maintain a competitive business, integrate newly acquired businesses such as ING Direct and HSBC’s U.S. credit card business and establish scalable operations, may increase our expenses. Further, as our business develops, changes or expands, additional expenses can arise as a result of a reevaluation of business strategies, management of outsourced services, asset purchases or other acquisitions, structural reorganization, compliance with new laws or regulations or the integration of newly acquired businesses. If we are unable to successfully manage our expenses, our financial results will be negatively affected.

We Could Incur Increased Costs or Reductions In Revenue Or Suffer Reputational Damage In the Event Of The Theft, Loss or Misuse Of Information, Including As A Result Of A Cyber-Attack.

Our products and services involve the gathering, storage and transmission of sensitive information regarding our customers and their accounts. Our ability to provide such products and services, many of which are web-based, relies upon the management and safeguarding of information, software, methodologies and business secrets. To provide these products and services, we use information systems and infrastructure that we and third party service providers operate. We also have arrangements in place with retail partners and other third parties where we share and receive information about their customers who are or may become our customers. As a financial institution, we also are subject to and examined for compliance with an array of data protection laws, regulations and guidance, as well as to our own internal privacy and information security policies and programs. If unauthorized persons were somehow to get access to personal, confidential or proprietary information, including customer information, in our possession or to our proprietary information, software, methodologies and business secrets, it could result in significant legal and financial exposure, supervisory liability, damage to our reputation or a loss of confidence in the security of our systems, products and services that could adversely affect our business.

Information security risks for large financial institutions like us have generally increased in recent years in part because of the proliferation of new technologies, the use of the Internet and telecommunications technologies to conduct financial transactions and the increased sophistication and activities of organized crime, perpetrators of fraud, hackers, terrorists, activists and other external parties. As noted above, our operations rely on the secure processing, transmission and storage of confidential information in our computer systems and networks. Our businesses rely on our digital technologies, computer and email systems, software and networks to conduct their operations. In addition, to access our products and services, our customers may use computers, personal smartphones, tablet PC’s and other mobile devices that are beyond our security control systems. Although we believe we have a robust suite of authentication and layered information security controls, our technologies, systems, networks and our customers’ devices may become the target of cyber-attacks or other attacks that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of our or our customers’ confidential, proprietary or other information, including their access credential to accounts with online functionality, or that could result in disruptions to the business operations of us or our customers or other third parties. Further, a breach or attack affecting one of our third-party service providers or partners could impact us through no fault of our own.

Because the methods and techniques employed by perpetrators of fraud and others to attack, disable, degrade or sabotage platforms, systems and applications change frequently and often are not fully recognized or understood until after they have been launched, we and our third-party service providers and partners may be unable to anticipate certain attack methods in order to implement effective preventative measures. Should a cyber-attack against us succeed on any material scale, market perception of the effectiveness of our security measures could be harmed, and we could face the aforementioned risks. Though we have insurance against some cyber-risks and attacks, it may not be sufficient to offset the impact of a material loss event.

The Growth Of Our Online Banking Business Presents Certain Risks.

As a result of our strategic decisions and recent acquisitions, including ING Direct, we have grown our online banking business significantly over the past few years. Today, we operate one of the largest online banking

businesses in the world, with over $128 billion in deposits as of December 31, 2011. While online banking represents a significant opportunity for customers in terms of greater and more flexible access to banking services at reduced costs, it also presents significant risks. In addition to the software, infrastructure and cyber-attack risks discussed above, we face risks related to online banking, including:

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We face strong competition in the online banking market. Aggressive pricing throughout the industry may adversely affect the retention of existing balances and the cost-efficient acquisition of new deposit funds and may affect our growth and profitability. When general economic conditions improve, new competitors may forcefully enter the market and pursue a discount pricing strategy in order to attract loan origination volume, particularly if the new entrants target high quality loans. In addition, the effects of a competitive environment may be exacerbated by the flexibility of online banking and the increasing financial and technological sophistication of our customer base. Customers could close their online accounts or reduce balances or deposits in favor of products and services offered by competitors. These shifts, which could be rapid, could result from general dissatisfaction with our products or services, including concerns over pricing, online security or our reputation. For example, once we transition from the “ING Direct” brand for the online banking business we recently acquired, the new brand may not be as readily accepted by customers as we anticipate, and these customers may not accept our branding, image, name, reputation, policies or level of service or may be dissatisfied with perceived differences regarding how they manage their online accounts after the transition, and as a result may transfer their accounts and business to a competitor.

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Our online businesses are dependent on our ability to process, record and monitor a large number of complex transactions. If any of our financial, accounting, or other data processing systems fail or have other significant shortcomings, we could be materially adversely affected. Third parties with which we do business could also be sources of operational risk, particularly in the event of breakdowns or failures of such parties’ own systems. Any of these occurrences could diminish our ability to operate one or more of our online banking businesses, or result in potential liability to clients, reputational damage and regulatory intervention, any of which could result in a material adverse effect. We may be subject to disruptions of our operating systems arising from events that are wholly or partially beyond our control, which may include, for example, computer viruses or electrical or telecommunications outages, cyber-attacks, as discussed above, natural disasters, other damage to property or physical assets or events arising from local or larger scale politics, including terrorist acts. Such disruptions may give rise to losses in service to customers and loss or liability to us.

We May Fail To Realize All Of The Anticipated Benefits Of Our Mergers And Acquisitions, Which Failure Could Result in Adverse Effects On Our Results Of Operations or Dilution Of Our Common Stockholders.

We have engaged in merger and acquisition activity over the past several years and may continue to engage in such activity in the future. We have explored, and expect to continue to explore, opportunities to acquire financial services companies and financial assets and to enter into strategic partnerships as part of our growth strategy. For example, as described under “Recent Acquisition and Disposition Activity—ING Direct,” we announced the ING Direct acquisition in June 2011 and the acquisition of HSBC’s U.S. credit card business in August 2011. In addition, we entered into credit card partnership agreements with, Kohl’s Corp., Sony Corporation and Hudson’s Bay Company during the past two years, including the acquisition of the related credit card loan portfolios, and we acquired Chevy Chase Bank in February 2009. We continue to evaluate and anticipate engaging in, among other merger and acquisition activity, additional strategic partnerships and selected acquisitions of financial institutions and other financial assets, including credit card and other loan portfolios.

Any merger, acquisition or strategic partnership we undertake will entail certain risks, which may materially and adversely affect our results of operations. If we experience greater than anticipated costs to integrate acquired businesses into our existing operations or are not able to achieve the anticipated benefits of any merger, acquisition or strategic partnership, including cost savings and other synergies, our business could be negatively affected. In addition, it is possible that the ongoing integration processes could result in the loss of key

employees, errors or delays in systems implementation, the disruption of our ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect our ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits of any merger, acquisition or strategic partnership. Integration efforts also may divert management attention and resources. These integration matters may have an adverse effect on us during any transition period.

In addition, we may face the following risks in connection with any merger, acquisition or strategic partnership, including the ING Direct acquisition and the pending acquisition of HSBC’s U.S. credit card businesses:

•

New Businesses and Geographic or Other Markets. Our merger, acquisition or strategic partnership activity may involve our entry into new businesses and new geographic areas or other markets which present risks resulting from our relative inexperience in these new businesses or markets. These new businesses or markets may change the overall character of our consolidated portfolio of businesses and could react differently to economic and other external factors. We face the risk that we will not be successful in these new businesses or in these new markets.

•

Identification and Assessment of Merger and Acquisition Targets and Deployment of Acquired Assets. We cannot assure you that we will identify or acquire suitable financial assets or institutions to supplement our organic growth through acquisitions or strategic partnerships. In addition, we may incorrectly assess the asset quality and value of the particular assets or institutions we acquire. Further, our ability to achieve the anticipated benefits of any merger, acquisition or strategic partnership will depend on our ability to assess the asset quality and value of the particular assets or institutions we partner with, merge with or acquire. We may be unable to profitably deploy any assets we acquire.

•

Regulatory Approval. Any future and pending merger or acquisition may be subject to regulatory or governmental approvals, which will require, among other things, review of our resulting financial condition, our ability to manage our resulting size, competitive considerations and our service to the community. We cannot assure you that we will receive any regulatory or governmental approvals. If such regulatory approvals of a merger or acquisition are not granted or are granted with conditions that become applicable to the parties, delayed or failed implementation of our strategic objectives could result, including failure to realize the anticipated benefits of the proposed merger or acquisition. In addition, governmental authorities from which approvals are typically required frequently have broad discretion in administering governing regulations. These governmental authorities may impose requirements, limitations or costs, or require divestitures or place restrictions on the conduct of our or another party’s business after the completion of merger or acquisition transaction.

•

Dilutive Issuances. We may issue common stock, other equity securities or debt in connection with future mergers and acquisitions, including in public offerings to fund such mergers and acquisitions or to provide adequate capital for the additional assets acquired. Issuances of our common stock, other equity securities or debt, whether as consideration for such mergers or acquisitions or to raise necessary funds or capital, may have a dilutive effect on earnings per share and our common stockholders’ equity.

•

Accuracy of Assumptions. In connection with any merger, acquisition or strategic partnership, we may make certain assumptions relating to the proposed merger or acquisition that may be, or may prove to be, inaccurate, including as the result of the failure to realize the expected benefits of any merger, acquisition or strategic partnership. The inaccuracy of any assumptions we may make could result in unanticipated consequences that could have a material adverse effect on our results of operations or financial condition. Assumptions we might make when considering a proposed merger, acquisition or strategic partnership may relate to numerous matters, including:

—

projections of a target or partner company’s future net income and our earnings per share;

—

our ability to issue equity and debt to complete any merger or acquisition;

—

our expected capital structure and capital ratios after any merger, acquisition or strategic partnership;

—

projections as to the amount of future loan losses in any target or partner company’s portfolio;

—

the amount of goodwill and intangibles that will result from any merger, acquisition or strategic partnership;

—

certain purchase accounting adjustments that we expect will be recorded in our financial statements in connection with any merger, acquisition or strategic partnership;

—

cost, deposit, cross-selling and balance sheet synergies in connection with any merger, acquisition or strategic partnership;

—

merger, acquisition or strategic partnership costs, including restructuring charges and transaction costs;

—

our ability to maintain, develop and deepen relationships with customers of a target or partner company;

—

our ability to grow a target or partner company’s customer deposits and manage a target or partner company’s assets and liabilities;

—

higher than expected transaction and integration costs and unknown liabilities as well as general economic and business conditions that adversely affect the combined company following any merger or acquisition transaction;

—

the extent and nature of regulatory oversight over a target or partner company;

—

projected or expected tax benefits or assets;

—

accounting matters related to the target or partner company, including accuracy of assumptions and estimates used in preparation of financial statements such as those used to determine allowance for loan losses, fair value of certain assets and liabilities, securities impairment and realization of deferred tax assets;

—

our expectations regarding macroeconomic conditions, including the unemployment rate, housing prices, the interest rate environment, the shape of the yield curve, inflation and other economic indicators; and other financial and strategic risks associated with any merger or acquisition.

•

Target Specific Risk. Assets and companies that we acquire will have their own risks that are specific to a particular asset or company. These risks include, but are not limited to, particular or specific regulatory, accounting, operational, reputational and industry risks, any of which could have a material adverse effect on our results of operations or financial condition. Indemnification rights, if any, may be insufficient to compensate us for any losses or damages resulting from such risks. In addition to regulatory approvals discussed above, certain of our merger, acquisitions or partnership activity may require third-party consents in order for us to fully realize the anticipated benefits of any such transaction.

•

Termination Fees. Termination of agreements relating to the acquisition of an entity or assets, or merger with another entity, may, under certain circumstances, result in termination fees that could have a material adverse effect on our results of operations or financial condition.

Reputational Risk and Social Factors May Impact Our Results.

Our ability to originate and maintain accounts is highly dependent upon the perceptions of consumer and commercial borrowers and deposit holders and other external perceptions of our business practices or our financial health. Adverse perceptions regarding our reputation in the consumer, commercial and funding markets could lead to difficulties in generating and maintaining accounts as well as in financing them. In particular, negative perceptions regarding our reputation could lead to decreases in the levels of deposits that consumer and commercial customers and potential customers choose to maintain with us. Negative public opinion could also result from actual or alleged conduct in any number of activities or circumstances, including lending practices, regulatory compliance, inadequate protection of customer information, or sales and marketing, and from actions taken by regulators or other persons in response to such conduct.

In addition, a variety of social factors may cause changes in borrowing activity, including credit card use, payment patterns and the rate of defaults by accountholders and borrowers domestically and internationally. These social factors include changes in consumer confidence levels, the public’s perception regarding consumer debt, including credit card use, and changing attitudes about the stigma of bankruptcy. If consumers develop or maintain negative attitudes about incurring debt, or if consumption trends decline, our business and financial results will be negatively affected.

Damage To Our Brands Could Impact Our Financial Performance.

Our brands have historically been very important to us. As with many financial services institutions, maintaining and enhancing our brand will depend largely on our ability to be a technology leader and to continue to provide high-quality products and services. Negative public perception of our brands could result from actual or alleged conduct in any number of activities, including lending practices, corporate governance, regulatory compliance and the use and protection of customer information, as well as from actions taken by government regulators and community organizations in response to that conduct. If we fail to maintain and enhance our brands, or if we incur excessive expenses in this effort, our business, results of operations and financial condition could be materially and adversely affected. Our online banking brands may also be negatively impacted by a number of factors, including service outages, product malfunctions, data privacy, lack of training, security issues and integration difficulties from recent acquisitions.

We Face Intense Competition in All of Our Markets.

We operate in a highly competitive environment, and we expect competitive conditions to continue to intensify. We face intense competition both in making loans and attracting deposits. We compete on the basis of the rates we pay on deposits and the rates and other terms we charge on the loans we originate or purchase, as well as the quality of our customer service. Price competition for loans might result in origination of fewer loans or earning less on our loans. We expect that competition will continue to increase with respect to most of our products. Some of our competitors are substantially larger than we are, which may give those competitors advantages, including a more diversified product and customer base, the ability to reach out to more customers and potential customers, operational efficiencies, more versatile technology platforms, broad-based local distribution capabilities, lower-cost funding and larger existing branch networks. In addition, some of our competitors are not subject to the same regulatory requirements or legislative scrutiny to which we are subject, which also could place us at a competitive disadvantage.

We have recently expanded our partnership business with the addition of Kohl’s, Hudson’s Bay Company and Sony, and we expect to add a significant number of partnerships with the pending acquisition of HSBC’s U.S. credit card business. The market for key business partners, especially in the Card business, is very competitive, and we cannot assure you that we will be able to grow or maintain these partner relationships. We face the risk that we could lose partner relationships, even after we have invested significant resources, time and expense in acquiring and developing the relationships. The loss of any of our business partners could have a negative impact on our results of operations, including lower returns, excess operating expense and excess funding capacity.

In such a competitive environment, we may lose entire accounts or may lose account balances to competing firms, or we may find it more costly to maintain our existing customer base. Customer attrition from any or all of our lending products, together with any lowering of interest rates or fees that we might implement to retain customers, could reduce our revenues and therefore our earnings. Similarly, customer attrition from our deposit products, in addition to an increase in rates or services that we may offer to retain those deposits, may increase our expenses and therefore reduce our earnings.

If We Do Not Adjust to Rapid Changes in the Financial Services Industry, Our Financial Performance May Suffer.

Our ability to deliver to stockholders strong financial performance and returns on investment will depend in part on our ability to expand the scope of available financial services to meet the needs and demands of our customers. With our recent acquisition of ING Direct and our pending acquisition of HSBC’s U.S. credit card business, we expect to market new products to our growing customer base. Our ability to sell more products to customers is a key part of our strategy to grow revenue and earnings. Many of our competitors are also focusing on cross-selling, which could limit our ability to execute our cross-sell strategy or require lower interest rates or fees on our lending products or offer higher interest rates on deposits, as well as affect our ability to maintain existing customers. This increasingly competitive environment is primarily a result of changes in regulation, changes in technology and product delivery systems, as well as the accelerating pace of consolidation among financial service providers.

Fluctuations in Market Interest Rates Or Volatility in the Capital Markets Could Adversely Affect Our Revenue and Expense, the Value of Assets and Obligations, Our Cost of Capital or Our Liquidity.

Like other financial institutions, our business may be sensitive to market interest rate movement and the performance of the capital markets. Changes in interest rates or in valuations in the debt or equity markets could directly impact us. For example, we borrow money from other institutions and depositors, which we use to make loans to customers and invest in debt securities and other earning assets. We earn interest on these loans and assets and pay interest on the money we borrow from institutions and depositors. Fluctuations in interest rates, including changes in the relationship between short-term rates and long-term rates and in the relationship between our funding basis rate and our lending basis rate, may have negative impacts on our net interest income and therefore our earnings. In addition, interest rate fluctuations and competitor responses to those changes may affect the rate of customer prepayments for mortgage, auto and other term loans and may affect the balances customers carry on their credit cards. These changes can reduce the overall yield on our earning asset portfolio. Changes in interest rates and competitor responses to these changes may also impact customer decisions to maintain balances in the deposit accounts they have with us. In addition, changes in valuations in the debt and equity markets could have a negative impact on the assets we hold in our investment portfolio. Finally, such market changes could also have a negative impact on the valuation of assets for which we provide servicing.

We assess our interest rate risk by estimating the effect on our earnings under various scenarios that differ based on assumptions about the direction and the magnitude of interest rate changes. We take risk mitigation actions based on those assessments. We face the risk that changes in interest rates could materially reduce our net interest income and our earnings, especially if actual conditions turn out to be materially different than those we assumed. See “MD&A—Market Risk Management” for additional information.

Our Business Could Be Negatively Affected If It Is Unable to Attract, Retain and Motivate Skilled Senior Leaders.

Our success depends, in large part, on our ability to retain key senior leaders, and competition for such senior leaders can be intense in most areas of our business. The executive compensation provisions of the Dodd-Frank Act and the regulations issued thereunder, and any further legislation, regulation or regulatory guidance restricting executive compensation, may limit the types of compensation arrangements that we may enter into with our most senior leaders and could have a negative impact on our ability to attract, retain and motivate such leaders in support of our long-term strategy. These laws and regulations may not apply in the same manner to all financial institutions, and we therefore may face more restrictions than other institutions and companies with whom we compete for talent. If we are unable to retain talented senior leadership, our business could be negatively affected.

Our Businesses are Subject to the Risk of Increased Litigation.

Our businesses are subject to increased litigation risks as a result of a number of factors and from various sources, including the highly regulated nature of the financial services industry, the focus of state and federal prosecutors on banks and the financial services industry, the structure of the credit card industry and business practices in the mortgage lending business. Substantial legal liability against us could have a material adverse effect or cause significant reputational harm to us, which could seriously harm our business. For a description of the litigation risks that we face, see “Note 21—Commitments, Contingencies and Guarantees.”

We Face Risks from Unpredictable Catastrophic Events.

Despite our substantial business contingency plans, the impact from natural disasters and other catastrophic events, including terrorist attacks, may have a negative effect on our business and infrastructure, including our information technology systems. The impact of such events and other catastrophes on the overall economy may also adversely affect our financial condition and results of operations.

We Face Risks from the Use of Estimates in Our Financial Statements.

Pursuant to United States Generally Accepted Accounting Principles, we are required to use certain assumptions and estimates in preparing our financial statements, including, but not limited to, estimating our allowance for loan and lease losses and the fair value of certain assets and liabilities. If the assumptions or estimates underlying our financial statements are incorrect, we may experience unexpected material losses. For a discussion of our use of estimates in the preparation of our consolidated financial statements, see “Note 1—Summary of Significant Accounting Policies.”

Our Ability To Receive Dividends From Our Subsidiaries Could Affect Our Liquidity And Ability To Pay Dividends.

We are a separate and distinct legal entity from our subsidiaries. Dividends to us from our direct and indirect subsidiaries, including our bank subsidiaries, have represented a major source of funds for us to pay dividends on our common stock, make payments on corporate debt securities and meet other obligations. There are various federal law limitations on the extent to which the Banks can finance or otherwise supply funds to us through dividends and loans. These limitations include minimum regulatory capital requirements, federal banking law requirements concerning the payment of dividends out of net profits or surplus, Sections 23A and 23B of the Federal Reserve Act and Regulation W governing transactions between an insured depository institution and its affiliates, as well as general federal regulatory oversight to prevent unsafe or unsound practices. If our subsidiaries’ earnings are not sufficient to make dividend payments to us while maintaining adequate capital levels, our liquidity may be affected and we may not be able to make dividend payments to our common stockholders, to make payments on outstanding corporate debt securities or meet other obligations, each and any of which could have a material adverse impact on our results of operations, financial position or perception of financial health.

The Soundness of Other Financial Institutions Could Adversely Affect Us.

Our ability to engage in routine funding and other transactions could be adversely affected by the stability and actions of other financial services institutions. Financial services institutions are interrelated as a result of trading, clearing, servicing, counterparty and other relationships. With our recent acquisition of ING Direct and our pending acquisition of HSBC’s U.S. credit card businesses, we have exposure to increasing numbers of financial institutions and counterparties. These counterparties include institutions and counterparties that may be exposed to various risks over which we have little or no control, including European or U.S. sovereign debt that is currently or may become in the future subject to significant price pressure, rating agency downgrade or default risk.

In addition, we routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds and other institutional clients, resulting in a significant credit concentration with respect to the financial services industry overall. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions.

Likewise, adverse developments affecting the overall strength and soundness of our competitors, the financial services industry as a whole and the general economic climate or sovereign debt could have a negative impact on perceptions about the strength and soundness of our business even if we are not subject to the same adverse developments. In addition, adverse developments with respect to third parties with whom we have important relationships also could negatively impact perceptions about us. These perceptions about us could cause our business to be negatively affected and exacerbate the other risks that we face.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

Our corporate real estate portfolio is used to support our business segments. We own our 587,000 square foot headquarters building in McLean, Virginia which houses our executive offices and northern Virginia staff. We own approximately 316 acres of land in Goochland County, Virginia which contains nearly 1.2 million square feet of office space to house various business and staff groups. Additionally, we own 139 acres of land in Plano, Texas which includes nearly 600,000 square feet of office space to support our Auto Finance business and other functions.

Our Commercial and Consumer Banking segments utilize approximately 3.1 million square feet in owned properties and 3.0 million square feet in leased locations across the District of Columbia, Louisiana, New Jersey, Maryland, New York, Texas and Virginia for office and branch operations.

Our corporate real estate portfolio also includes leased or owned space totaling, in the aggregate, 3.4 million square feet in Richmond, Toronto, Melville, New York City and various other locations.

Item 3. Legal Proceedings

The information required by Item 3 is included in “Note 21—Commitments, Contingencies and Guarantees.”

Item 4. Mine Safety Disclosures

Not applicable.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information

Our common stock is listed on the NYSE and is traded under the symbol “COF.” As of January 31, 2012, there were 15,242 holders of record of our common stock. The table below presents the high and low closing sales prices of our common stock as reported by the NYSE and cash dividends per common share declared by us during each quarter indicated.

Sales Price

Cash
Dividends

Quarter Ended

High

Low

2011:

December 31

47.07

37.75

0.05

September 30

54.31

37.63

0.05

June 30

56.21

47.87

0.05

March 31

52.76

43.68

0.05

2010:

December 31

42.78

36.55

0.05

September 30

45.00

37.12

0.05

June 30

46.73

38.02

0.05

March 31

43.02

34.63

0.05

Dividend Restrictions

For information regarding our ability to pay dividends, see the discussion under “Item 1. Business—Supervision and Regulation—Dividends and Transfers of Funds,” “MD&A—Capital Management—Dividend Policy,” and “Note 13—Regulatory and Capital Adequacy,” which we incorporate herein by reference.

Securities Authorized for Issuance Under Equity Compensation Plans

Information relating to compensation plans under which our equity securities are authorized for issuance is presented in Part III of this report under “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”

Common Stock Performance Graph

The following graph shows the cumulative total stockholder return on our common stock compared with an overall stock market index, the S&P Composite 500 Stock Index (“S&P 500 Index”), and a published industry index, the S&P Financial Composite Index (“S&P Financial Index”), over the five-year period commencing December 31, 2006, and ending December 31, 2011. The stock performance graph assumes that $100 was invested in our common stock and each index and that all dividends were reinvested. The stock price performance on the graph below is not necessarily indicative of future performance.

Comparison of 5-Year Cumulative Total Return

(Capital One, S&P 500 Index and S&P Financial Index)

LOGO


	2006		2007		2008		2009		2010		2011
Capital One	$	100.00	$	61.62	$	43.02	$	53.30	$	59.47	$	59.35
S&P 500 Index		100.00		103.53		63.69		78.62		88.67		88.67
S&P Financial Index		100.00		79.16		34.08		39.12		43.36		35.38

Recent Sales of Unregistered Securities

We did not have any sales of unregistered equity securities in 2011. On June 16, 2011, we entered into a purchase and sale agreement with the ING Sellers to acquire ING Direct. On February 17, 2012, in connection with the closing of the acquisition, we issued 54,028,086 shares of common stock to ING Bank N.V. as partial consideration for the acquisition in reliance on the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended.

Issuer Purchases of Equity Securities

The following table presents information related to repurchases of shares of our common stock during the fourth quarter of 2011.

Total
Number of
Shares
Purchased⁽¹⁾

Average
Price Paid
per Share

Total Number of
Shares Purchased as
Part of Publicly
Announced
Plans

Maximum
Amount That May
Yet be Purchased
Under the Plan
or Program

October 1-31, 2011

22,309

45.44

—

November 1-30, 2011

—

December 1-31, 2011

2,313

46.07

—

Total

24,622

45.50

—

⁽¹⁾	Shares purchased represent shares purchased and share swaps made in connection with stock option exercises and the withholding of shares to cover taxes on restricted stock lapses.

Item 6. Selected Financial Data

We prepare our consolidated financial statements using generally accepted accounting principles in the U.S. (“U.S. GAAP”), which we refer to as our reported results. Below we present selected consolidated financial data from our reported results of operations for the five-year period ended December 31, 2011, as well as selected consolidated balance sheet data as of the end of each year within this five-year period. Certain prior period amounts have been reclassified to conform to the current period presentation. The historical financial information presented may not be indicative of our future performance.

Prior to January 1, 2010, we also presented and analyzed our results on a non-GAAP “managed basis.” Our managed presentation assumed that securitized loans accounted for as sales and reported as off-balance sheet in accordance with applicable accounting guidance in effect prior to January 1, 2010, remained on balance sheet, and the earnings from the loans underlying these trusts are reported in our results of operations in the same manner as the earnings from loans that we own. While our managed presentation resulted in differences in the classification of revenues in our income statement, net income on a managed basis was the same as reported net income.

Effective January 1, 2010, we prospectively adopted two new accounting standards related to the transfer and servicing of financial assets and consolidations that changed how we account for our securitization trusts. The adoption of these new accounting standards, which we refer to in this Report as “new consolidation accounting standards,” resulted in the consolidation of substantially all of our securitization trusts. As a result, our reported and managed based presentations are generally comparable for periods beginning after January 1, 2010. See “MD&A—Supplemental Tables” and “Exhibit 99.1” for additional information on our non-GAAP measures.

Five-Year Summary of Selected Financial Data


																Change
	Year Ended December 31,															2011 vs.			2010 vs.
(Dollars in millions, except per share data)	2011			2010			2009⁽¹⁾			2008			2007			2010			2009
Income statement
Interest income	$	14,987		$	15,353		$	10,664		$	11,112		$	11,078			(2	)%		44	%
Interest expense		2,246			2,896			2,967			3,963			4,548			(22	)		(2	)

Net interest income		12,741			12,457			7,697			7,149			6,530			2			62
Non-interest income		3,538			3,714			5,286			6,744			8,054			(5	)		(30	)

Total revenue		16,279			16,171			12,983			13,893			14,584			1			25
Provision for loan and lease losses		2,360			3,907			4,230			5,101			2,636			(40	)		(8	)
Non-interest expense⁽²⁾		9,332			7,934			7,417			8,210			8,078			18			7

Income from continuing operations before income taxes		4,587			4,330			1,336			582			3,870			6			224
Income tax provision		1,334			1,280			349			497			1,278			4			267

Income from continuing operations, net of tax		3,253			3,050			987			85			2,592			7			209
Loss from discontinued operations, net of tax⁽³⁾		(106	)		(307	)		(103	)		(131	)		(1,022	)		(65	)		198

Net income (loss)		3,147			2,743			884			(46	)		1,570			15			210
Preferred stock dividends, accretion of discount and other⁽⁴⁾		(26	)		—			(564	)		(33	)		—			100			(100	)

Net income (loss) available to common stockholders	$	3,121		$	2,743		$	320		$	(79	)	$	1,570			15	%		757	%

Common share statistics
Basic earnings per common share:
Income from continuing operations, net of tax	$	7.08		$	6.74		$	0.99		$	0.14		$	6.64			5	%		581	%
Loss from discontinued operations, net of tax⁽³⁾		(0.23	)		(0.67	)		(0.24	)		(0.35	)		(2.62	)		66			179

Net income (loss) per common share	$	6.85		$	6.07		$	0.75		$	(0.21	)	$	4.02			13	%		709	%

Diluted earnings per common share:
Income from continuing operations, net of tax	$	7.03		$	6.68		$	0.98		$	0.14		$	6.55			5	%		582	%
Loss from discontinued operations, net of tax⁽³⁾		(0.23	)		(0.67	)		(0.24	)		(0.35	)		(2.58	)		(66	)		179

Net income (loss) per common share	$	6.80		$	6.01		$	0.74		$	(0.21	)	$	3.97			13	%		712	%

Dividends per common share	$	0.20		$	0.20		$	0.53		$	1.50		$	0.11			—	%		(62	)%
Common dividend payout ratio		2.92	%		3.32	%		66.80	%		722.06	%		2.68	%		(40	)bps		6,348	bps
Stock price per common share at period end	$	42.29		$	42.56		$	38.34		$	31.89		$	47.26			(1	)%		11	%
Book value per common share at period end		64.51			58.62			59.04			68.38			65.18			10			(1	)
Total market capitalization at period end		19,301			19,271			17,268			12,412			17,623			*	*		12


																Change
	Year Ended December 31,															2011 vs.			2010 vs.
	2011			2010			2009⁽¹⁾			2008			2007			2010			2009
Average balances
Loans held for investment	$	128,424		$	128,526		$	99,787		$	98,971		$	93,542			*	*%		29	%
Interest-earning assets		175,341			175,741			145,310			133,084			121,420			*	*		21
Total assets		199,718			200,114			171,598			156,292			148,983			*	*		17
Interest-bearing deposits		109,644			104,743			103,078			82,736			73,765			5			2
Total deposits		126,694			119,010			115,601			93,508			85,212			6			3
Borrowings		38,022			49,620			23,522			31,096			30,102			(23	)		111
Stockholders’ equity		28,579			24,941			26,606			25,278			25,203			15			(6	)
Performance metrics
Purchase volume⁽⁵⁾	$	135,120		$	106,912		$	102,068		$	113,835		$	115,181			26	%		5	%
Revenue margin⁽⁶⁾		9.28	%		9.20	%		8.94	%		10.44	%		12.01	%		8	bps		26	bps
Net interest margin⁽⁷⁾		7.27			7.09			5.30			5.38			5.38			18			179
Net charge-off rate⁽⁸⁾		2.94			5.18			4.58			3.51			2.10			(224	)		60
Return on average assets⁽⁹⁾		1.63			1.52			0.58			0.05			1.74			11			94
Return on average total stockholders’ equity⁽¹⁰⁾		11.38			12.23			3.71			0.34			10.28			(85	)		852
Non-interest expense as a % of average loans held for investment⁽¹¹⁾		7.27			6.17			7.43			8.30			8.64			110			(126	)
Efficiency ratio⁽¹²⁾		57.33			49.06			56.21			52.29			54.44			827			(715	)
Effective income tax rate		29.08			29.56			26.16			85.47			33.02			(48	)		340
Full-time equivalent employees (in thousands), period end		30.5			25.7			25.9			23.7			27.0			19	%		(1	)%

																Change
	December 31,															2011 vs.			2010 vs.
	2011			2010			2009⁽¹⁾			2008			2007			2010			2009
Balance sheet
Loans held for investment	$	135,892		$	125,947		$	90,619		$	101,018		$	101,805			8	%		39	%
Interest-earning assets		179,817			172,024			139,724			141,386			128,725			5			23
Total assets		206,019			197,503			169,646			165,913			150,590			4			16
Interest-bearing deposits		109,945			107,162			102,370			97,327			71,715			3			5
Total deposits		128,226			122,210			115,809			108,621			82,761			5			6
Borrowings		39,561			41,796			21,014			23,178			37,526			(5	)		99
Stockholders’ equity		29,666			26,541			26,590			26,612			24,294			12			*	*
Credit quality metrics
Period-end loans held for investment	$	135,892		$	125,947		$	90,619		$	101,018		$	101,805			8	%		39	%
Allowance for loan and lease losses		4,250			5,628			4,127			4,524			2,963			(24	)		36
Allowance as a % of loans held for investment		3.13	%		4.47	%		4.55	%		4.48	%		2.91	%		(134	)bps		(8	)bps
30+ day performing delinquency rate		3.35			3.52			3.98			4.21			3.50			(17	)		(46	)
Capital ratios
Tier 1 common equity ratio⁽¹³⁾		9.7	%		8.8	%		10.6	%		12.5	%		8.8	%		90	bps		(180	)bps
Tier 1 risk-based capital ratio⁽¹⁴⁾		12.0			11.6			13.8			13.8			10.1			40			(220	)
Total risk-based capital ratio⁽¹⁵⁾		14.9			16.8			17.7			16.7			13.1			(190	)		(90	)
Tangible common equity (“TCE”) ratio⁽¹⁶⁾		8.2			6.9			8.0			5.6			5.8			130			(110	)


																Change
	December 31,															2011 vs.			2010 vs.
	2011			2010			2009⁽¹⁾			2008			2007			2010			2009
Managed metrics⁽¹⁷⁾
Average loans held for investment	$	128,424		$	128,622		$	143,514		$	147,812		$	144,727			*	*%		(10	)%
Average interest-earning assets		175,341			175,815			185,976			179,348			170,496			*	*		(5	)
Period-end loans:
Period-end on-balance sheet loans held for investment	$	135,892		$	125,947		$	90,619		$	101,018		$	101,805			8			39
Period-end off-balance sheet securitized loans		—			—			46,184			45,919			49,557			—			(100	)

Total period-end managed loans	$	135,892		$	125,947		$	136,803		$	146,937		$	151,362			8			(8	)

Period-end total loan accounts (in millions)		70.0			37.4			37.8			45.4			49.1			87			(1	)
30+ day performing delinquency rate		3.35	%		3.52	%		4.62	%		4.38	%		3.77	%		(17	)bps		(110	)bps
Net charge-off rate		2.94			5.18			5.87			4.35			2.88			(224	)		(69	)
Non-interest expense as a % of average loans held for investment⁽¹¹⁾		7.27			6.17			5.17			5.01			5.58			110			100
Efficiency ratio		57.33			49.06			43.35			43.14			47.30			827			571

**	Change is less than one percent.

⁽¹⁾

Effective February 27, 2009, we acquired Chevy Chase Bank. Our financial results subsequent to February 27, 2009 include the operations of Chevy Chase Bank. While our 2011 and 2010 results include the full year impact of the Chevy Chase Bank acquisition, our 2009 results include only a partial year impact.

⁽²⁾	Non-interest expense for 2008 includes goodwill impairment of $811 million related to the Auto Finance division of our Consumer Banking business.

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

⁽⁴⁾	Preferred stock dividends in 2009 and 2008 were attributable to our participation in the U.S. Department of Treasury’s Troubled Asset Relief Program (“TARP”). See “Note 12—Stockholders’ Equity” for additional information.

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

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

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

⁽⁸⁾	Calculated based on 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

⁽⁹⁾	Calculated based on income from continuing operations, net of tax, for the period divided by average total assets for the period.

⁽¹⁰⁾	Calculated based on income from continuing operations, net of tax, for the period divided by average stockholders’ equity for the period.

⁽¹¹⁾	Calculated based on non-interest expense, excluding restructuring and goodwill impairment charges, for the period divided by average loans held for investment for the period.

⁽¹²⁾	Calculated based on non-interest expense, excluding restructuring and goodwill impairment charges, for the period divided by total revenue for the period.

⁽¹³⁾

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

⁽¹⁴⁾

Tier 1 risk-based capital ratio is a regulatory measure calculated based on Tier 1 capital divided by risk-weighted assets. See “MD&A—Capital Management” and “MD&A—Supplemental Tables—Table F: 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 “MD&A—Capital Management” and “MD&A—Supplemental Tables—Table F: 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 “MD&A—Supplemental Tables—Table F: 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⁾	See “MD&A—Supplemental Tables” in this report and Exhibit 99.1 for a reconciliation of non-GAAP managed measures to comparable U.S. GAAP measures.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)

This MD&A should be read in conjunction with our audited consolidated financial statements as of December 31, 2011 and related notes. 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 “Item 1. Business—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 “Item 1A. Risk Factors.”

INTRODUCTION

We are a diversified financial services holding company with banking and non-banking subsidiaries that offer a broad array of financial products and services to consumers, small businesses and commercial clients through branches, the internet and other distribution channels. We continue to deliver on our strategy of combining the power of national scale lending and local scale banking.

Our revenues are primarily driven by lending to consumers and commercial customers and by deposit-taking activities, which generate net interest income, and by activities that generate non-interest income, such as fee-based services provided to customers, merchant interchange fees with respect to certain credit card transactions, gains and losses and fees associated with the sale and servicing of loans. Our expenses primarily consist of the cost of funding our assets, our provision for 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 expect expenses associated with the integration of the ING Direct and the pending acquisition of the HSBC U.S. credit card business to represent a significant portion of our expenses in 2012.

•

Table 1 summarizes our business segment results, which we report based on income from continuing operations, net of tax, for 2011, 2010 and 2009. We provide a reconciliation of our total business segment results to our consolidated results using U.S. GAAP in “Note 20—Business Segments” of this Report.

Table 1: Business Segment Results


	Year Ended December 31,
	2011												2010												2009
	Total Revenue⁽¹⁾						Net Income (Loss)⁽²⁾						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			Amount		% of Total			Amount			% of Total
Credit Card	$	10,431			64	%	$	2,277			70	%	$	10,614			66	%	$	2,274			75	%	$	11,289		67	%	$	978			99	%
Consumer Banking		4,956			31			809			25			4,597			28			905			30			3,986		24			244			25
Commercial Banking		1,647			10			532			16			1,473			9			160			5			1,316		8			(213	)		(22	)
Other⁽³⁾		(755	)		(5	)		(365	)		(11	)		(507	)		(3	)		(289	)		(10	)		245		1			(22	)		(2	)

Total from continuing operations	$	16,279			100	%	$	3,253			100	%	$	16,177			100	%	$	3,050			100	%	$	16,836		100	%	$	987			100	%

⁽¹⁾	Total revenue consists of net interest income and non-interest income. Total revenue displayed for 2009 is based on our non-GAAP managed basis results. For a reconciliation of this non-GAAP measure to the comparable U.S. GAAP measure, see Exhibit 99.1.

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

⁽³⁾	Includes the residual impact of the allocation of our centralized Corporate Treasury group activities, such as management of our corporate investment portfolio and asset/liability management, to our business segments as well as other items as described in “Note 20—Business Segments.”

EXECUTIVE SUMMARY AND BUSINESS OUTLOOK

We continued to operate in an environment of elevated economic and regulatory uncertainty during 2011. The overall economic recovery remained modest and fragile. The unemployment rate remained persistently high and the housing market continued to struggle, due in part to the large backlog of homes in the foreclosure process and high rate of delinquent loans. The ongoing and expected development of new regulations and regulatory organizations resulting from the Dodd-Frank Act contributed to continued regulatory uncertainty. Despite the challenges presented by these conditions, we experienced loan growth and stabilization in credit performance during 2011.

Financial Highlights

We reported net income of $3.1 billion ($6.80 per diluted share) in 2011, with each of our three business segments contributing to our earnings. In comparison, we reported net income of $2.7 billion ($6.01 per diluted share) in 2010.

Our capital levels continued to increase during 2011, with total stockholders’ equity up $3.1 billion from year-end 2010. Our Tier 1 risk-based capital ratio under Basel I was 12.0% as of December 31, 2011, up 40 basis points from December 31, 2010, and our Tier 1 common equity ratio, a non-GAAP measure, was 9.7% as of December 31, 2011, up 90 basis points from the prior year period, reflecting strong internal capital generation as well as the continued decline in the amount of disallowed deferred tax assets. Our stockholders’ equity and capital ratios as of December 31, 2011 do not reflect any impact from the equity forward sale agreements executed in July 2011 referenced below, as they had not been settled in whole or in part as of that date. We present the calculation of our regulatory capital ratios and a reconciliation of our supplemental non-GAAP capital measures below under “MD&A—Supplemental Tables.”

In 2011, we acquired HBC’s existing $1.4 billion credit card loan portfolio and Kohl’s existing $3.7 billion private-label credit card loan portfolio. In June 2011, we entered into a definitive agreement with the ING Sellers to acquire ING Direct and closed the acquisition on February 17, 2012. In addition, in August 2011 we entered into a purchase agreement with HSBC to acquire substantially all of the assets and assume liabilities of HSBC’s credit card and private-label credit card business in the United States for an estimated cash premium of $2.6 billion as of June 30, 2011. We provide additional information on the ING Direct and HSBC acquisitions below.

We took several actions during the year to manage the anticipated impact of the ING Direct acquisition on our market risk exposure and regulatory capital requirements. From the date we entered into the agreement to acquire ING Direct to early August 2011, interest rates declined substantially, which resulted in an increase in the estimated fair value of the ING Direct net assets and liabilities. In order to capture some of the anticipated benefits to regulatory capital on the closing date attributable to this decline in interest rates, in early August 2011, we entered into various interest-rate swap transactions with a total notional principal amount of approximately $23.8 billion. We subsequently rebalanced the hedge in October 2011 adding an additional $1 billion in notional principal for a total combined notional principal amount of approximately $24.8 billion. These combined swap transactions were intended to mitigate the effect of a rise in interest rates on the fair values of a significant portion of the ING Direct assets and liabilities during the period from when we entered into the swap transactions to the anticipated closing date of the ING Direct acquisition in early 2012. Although the interest-rate swaps represented economic hedges, they were not designated for hedge accounting under U.S. GAAP. Therefore, we recorded changes in the fair value of these interest-rate swaps in earnings. In 2011, we recorded a mark-to-market loss of $277 million related to these interest-rate swaps, which was attributable to the decline in interest rates. This $277 million loss was largely offset by a gain of $259 million related to the sale of approximately $9.2 billion of investment securities, consisting predominantly of agency mortgage-backed securities (“MBS”). In conjunction with the acquisition of ING Direct on February 17, 2012, we terminated the $24.8 billion in interest-rate swaps related to the acquisition. At termination, the fair value of the swaps was a net loss of $355 million. Based on current estimates, we believe the interest-rate swaps related to the acquisition were effective in meeting our hedging objective. For additional information, see “Market Risk Profile” and “Note 11—Derivative Instruments and Hedging Activities.”

Below are additional highlights of our performance for 2011. These highlights generally are based on a comparison between our 2011 and 2010 results. The changes in our financial condition and credit performance are generally based on our financial condition and credit performance as of December 31, 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: Our earnings of $3.1 billion in 2011 increased by $404 million, or 15%, from 2010. The increase in net income was primarily attributable to significantly lower credit costs due to improvements in loan credit quality. The increase in net income for 2011 also reflected a substantial reduction in the provision for mortgage repurchase losses for legacy mortgage-related representation and warranty claims. These factors were partially offset by higher operating expenses primarily due to continued investment in growing our businesses, accelerating the building of our infrastructure and increased marketing expenditures.

•

Total Loans: Period-end loans held for investment increased by $10.0 billion, or 8%, in 2011, to $135.9 billion as of December 31, 2011, from $125.9 billion as of December 31, 2010. The increase was primarily attributable to growth in our Credit Card, Commercial Banking, and Auto Finance businesses, which included the additions of the $1.4 billion HBC credit card loan portfolio in the first quarter of 2011 and the $3.7 billion Kohl’s private-label credit card loan portfolio in the second quarter of 2011. Excluding the impact of the additions of the HBC and Kohl’s credit card loan portfolios, total loans increased by $4.9 billion, or 4%, in 2011, due to strong purchase volume growth across the Domestic Card business, a significant increase in auto loan originations and steady loan growth in our Commercial Banking business. The impact from these factors was partially offset by the continued expected run-off of installment loans in our Credit Card business and legacy home loans in our Consumer Banking business, other loan paydowns and charge-offs.

•

Charge-off and Delinquency Statistics: Our net charge-off rate declined by 224 basis points to 2.94% in 2011, from 5.18% in 2010. The 30+ day delinquency rate also declined during the year to 3.95% as of December 31, 2011, from 4.23% as of December 31, 2010. The improvement in overall credit trends reflected the impact from strong underlying credit performance and tighter underwriting standards.

•

Allowance for Loan and Lease Losses: We reduced our allowance by $1.4 billion in 2011 to $4.3 billion as of December 31, 2011. In comparison, after taking into consideration the allowance build resulting from the January 1, 2010 adoption of the new consolidation accounting standards, we reduced our allowance by $2.8 billion in 2010. The significant reduction in the allowance release in 2011 from the allowance release in 2010 reflected the impact of stabilizing credit trends in 2011. While our net-charge off rate improved by 224 basis points in 2011 from 2010, the allowance coverage ratio decreased by only 134 basis points to 3.13% as of December 31, 2011, from 4.47% as of December 31, 2010.

•

Representation and Warranty Reserve: Our representation and warranty reserve totaled $943 million as of December 31, 2011, compared with $816 million as of December 31, 2010. This reserve, which 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, 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 $212 million in 2011, compared with a provision of $636 million in 2010.

Business Segments

•

Credit Card: Our Credit Card business generated net income from continuing operations of $2.3 billion in 2011, the same level as net income from continuing operations in 2010. Our Credit Card business results for

2011 reflected the benefit from improved credit performance, which resulted in a significant decrease in the provision for loan and lease losses. The provision decrease, however, was offset by an increase in non-interest expense attributable to increased operating and integration costs related to the acquisitions of the credit card loan portfolios of Sony, HBC and Kohl’s and increased marketing expenditures. New account originations have continued to grow in our Credit Card business, due in part to these acquisitions.

•

Consumer Banking: Our Consumer Banking business generated net income from continuing operations of $809 million in 2011, compared with net income from continuing operations of $905 million in 2010. The decrease in net income for 2011 reflected the impact of the absence 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 primarily attributable to growth in auto loans. These factors were partially offset by an increase in total revenue resulting from a shift in our loan product mix toward higher priced auto loans, coupled with lower cost deposit growth through our retail banking branches. Strong growth in auto loan originations during 2011 more than offset a continued run-off in legacy home loans.

•

Commercial Banking: Our Commercial Banking business generated net income from continuing operations of $532 million in 2011, compared with net income from continuing operations of $160 million in 2010. The improvement in results for our Commercial Banking business reflected an increase in revenues, a modest decrease in non-interest expense and a decrease in the provision for loan and lease losses due to the improvement in credit quality. As a result of the improvement in credit quality, we reduced the allowance for loan and lease losses for our Commercial Banking business by $146 million during 2011 to $711 million as of December 31, 2011. We continued to experience steady loan and deposit growth in our Commercial Banking business.

Business Environment and Significant Recent Developments

Recent Business and Regulatory Developments

The challenging economic environment continued through 2011 due to concerns about the U.S. debt ceiling and subsequent downgrade of the U.S. debt, the continued elevated U.S. unemployment rate and the European debt crisis. These concerns resulted in increased economic uncertainty and market volatility. We believe actions we took in underwriting and managing our business through the recession, including focusing on our most resilient businesses, have continued to drive our strong credit performance. As a result, we believe our internal portfolio credit metrics remain strong, and expect normal seasonality to re-emerge after a long period of cyclical improvement in 2011. We provide more information on recent regulatory developments in “Supervision and Regulation” in “Item 1. Business” of this Report.

Acquisition-Related Developments

ING Direct

We completed the acquisition of ING Direct on February 17, 2012. The aggregate consideration paid was 54,028,086 shares of common stock and approximately $6.3 billion in cash. The ING Direct acquisition consists of assets, which include cash and cash equivalents, investment securities and loans with a total estimated fair value of $92.2 billion as of December 31, 2011 and deposits of approximately $83.0 billion as of December 31, 2011.

Equity and Debt Offerings

On July 19, 2011, we closed a public offering of four different series of our senior notes, 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.

On February 16, 2012, we settled forward sale agreements that we entered into with certain counterparties acting as forward purchasers in connection with a public offering of shares of our common stock on July 19, 2011. Pursuant to the forward sale agreements, we issued 40 million shares of our common stock. After underwriter’s discounts and commissions, the net proceeds to the company were at a forward sale price per share of $48.17 for a total of approximately $1.9 billion.

We used the net proceeds of these offerings, along with cash sourced from current liquidity, to fund the $6.3 billion in cash consideration paid in connection with the ING Direct acquisition.

HSBC Acquisition— U.S. Credit Card Business

In August 2011, we entered into a purchase agreement to acquire substantially all of the assets and assume liabilities of HSBC’s credit card and private-label credit card business in the United States for a premium estimated at $2.6 billion as of June 30, 2011. We currently expect the HSBC acquisition to close in the second quarter of 2012, subject to customary closing conditions, including certain governmental clearances and approvals. Pursuant to the purchase agreement, we have the option, subject to certain conditions, to pay up to $750 million of the consideration to HSBC in the form of our common stock (valued at $39.23 per share).

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 Annual Report on Form 10-K. 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 “Item 1. Business” and “MD&A” of this report. Certain statements are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those in our forward-looking statements. Forward-looking statements do not reflect (i) any change in current dividend or repurchase strategies, (ii) the effect of any acquisitions, divestitures or similar transactions, except for the forward-looking statements specifically discussing the ING Direct acquisition or the pending acquisition of HSBC’s U.S. credit card business, or (iii) any changes in laws, regulations or regulatory interpretations, in each case after the date as of which such statements are made. See “Forward-Looking Statements” in “Item 1. Business” of this report for factors that could materially influence our results.

Total Company Expectations

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 rewards 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 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 existing loan portfolio returned to growth in the second half of 2011, reflecting seasonal consumer spending trends and increasing balances in our private-label partnerships. We expect loan balances to increase in 2012 with the addition of the ING Direct and HSBC loan portfolios. The timing and pace of expected loan growth, excluding growth from acquired loans, will depend on broader economic trends that impact overall consumer and commercial demand.

The growth in non-interest expenses in the 2011, which was more pronounced in the fourth quarter of 2011, was primarily due to the continued investment in growing our businesses and building our infrastructure. In 2012, we expect that operating expenses will increase significantly as a result of integration and direct operating costs associated with the acquisition of ING Direct and the pending acquisition of HSBC’s U.S. credit card business. We believe our marketing investments in 2011 were in equilibrium with current market opportunities. We expect that any changes in marketing expenditures in 2012 would be driven by changes in the level and attractiveness of market opportunities.

As noted above, we closed the acquisition of ING Direct in the first quarter of 2012 and expect to close the acquisition of the U.S. credit card business of HSBC in the second quarter of 2012. We expect these acquisitions will have a material impact on our reported results of operations and financial condition. While we continue to expect that the combined acquisitions will deliver compelling financial performance and strategic benefit in 2013 and beyond, we anticipate a potentially significant negative impact from the acquisitions to our 2012 earnings per share. The expected negative impact will result from, among other things, the impact to common shares outstanding resulting from our settlement of the equity forward sale agreements and the issuance of common stock to the ING Sellers in the first quarter of 2012 as well as an additional planned equity issuance of approximately $1.25 billion discussed below under “Capital Management—Pending HSBC U.S. Credit Card Business Acquisition,” integration and other merger related expenses, purchase accounting impacts and provision for loan losses as we build allowance for acquired current revolving credit accounts. Purchase accounting impacts include, for example, amortization of acquired intangible assets (such as core deposit intangibles, purchased credit card relationships and contract intangibles) and the amortization of fair value marks.

Business Segment Expectations

Credit Card Business

In Domestic Card, we returned to modest growth with expected seasonal patterns in the second half of 2011. New account growth is a leading indicator of future growth in loans and revenues as spending and balances build on these accounts over time. Because of the strong growth trends in purchase volumes and new accounts, we expect that our Domestic Card business will continue to post strong returns in 2012, with modest underlying growth reflecting seasonal patterns. We expect to add significant new customer relationships and loan portfolios with the acquisition of the HSBC U.S. credit card business, which we expect to close in the second quarter of 2012. After this initial increase in loan volumes, the HSBC U.S. credit card business acquisition may diminish our Domestic Card growth trajectory due to the expected run-off of portions of the HSBC credit card portfolio.

Consumer Banking Business

In our Consumer Banking business, we expect the strong 2011 trajectory in loans and revenues will continue in our Auto Finance business in 2012. We also believe we have reached a cyclical low point for Auto Finance charge-offs, and that seasonal patterns will drive quarterly credit trends in 2012. Our Retail Banking business added significant new customer relationships, loans and deposits with the acquisition of ING Direct, and we expect the acquisition will have a significant impact on Consumer Banking loan and deposit growth trajectories. We expect that the growth in auto loans will be more than offset by a sizeable run-off of the ING Direct home loan portfolio and the continuing run-off of our legacy home loan portfolio, which will drive a declining trend in Consumer Banking loan volumes.

Commercial Banking Business

Our Commercial Banking business continues to grow loans, deposits, and revenues as we attract new customers and deepen relationships with existing customers. Commercial Banking credit metrics improved and stabilized in 2011. Although we anticipate some quarterly fluctuations in nonperforming loan and charge-off rates, we expect our Commercial Banking business to continue the strong and steady performance trends it delivered throughout 2011.

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.”

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:

•

Loan loss reserves

•

Representation and warranty reserve

•

Asset impairment

•

Fair value

•

Derivative and hedge accounting

•

Income taxes

We evaluate our critical accounting estimates and judgments on an ongoing basis and update them as necessary based on changing conditions. Management has reviewed and approved these critical accounting policies and has discussed these policies with the Audit and Risk Committee of the Board of Directors.

Loan Loss Reserves

We maintain an allowance for loan and lease losses that represents management’s estimate of incurred credit losses inherent in our held-for investment loan portfolio as of each balance sheet date. We maintain a separate reserve for the uncollectible portion of billed finance charges and fees on credit card loans.

Allowance for Loan and Lease Losses

We have an established process, using analytical tools, benchmarks and management judgment, to determine our allowance for loan and lease losses. We calculate the allowance for loan and lease losses by estimating incurred losses for segments of our loan portfolio with similar risk characteristics. The allowance totaled $4.3 billion as of December 31, 2011, compared with $5.6 billion as of December 31, 2010.

We generally review and assess our allowance methodologies and adequacy of the allowance for loan and lease losses on a quarterly basis. Our assessment involves evaluating many factors including, but not limited to, historical loss and recovery experience, recent trends in delinquencies and charge-offs, risk ratings, the impact of bankruptcy filings, the value of collateral underlying secured loans, account seasoning, changes in our credit evaluation, underwriting and collection management policies, seasonality, general economic conditions, changes in the legal and regulatory environment and uncertainties in forecasting and modeling techniques used in estimating our allowance for loan and lease losses. Key factors that have a significant impact on our allowance for loan and lease losses include assumptions about unemployment rates, home prices, and the valuation of commercial properties, consumer real estate, and autos.

Although we examine a variety of externally available data, as well as our internal loan performance data, to determine our allowance for loan and lease losses, our estimation process is subject to risks and uncertainties, including a reliance on historical loss and trend information that may not be representative of current conditions and indicative of future performance. Accordingly, our actual credit loss experience may not be in line with our expectations. For example, as a result of improving credit performance trends during 2011 and 2010, charge-offs

began to decrease and we recorded significant allowance releases of $1.4 billion in 2011 and $2.8 billion in 2010. We provide additional information on the methodologies and key assumptions used in determining our allowance for loan and lease losses for each of our loan portfolio segments in “Note 1—Summary of Significant Accounting Policies.” We provide information on the components of our allowance, disaggregated by impairment methodology, and changes in our allowance in “Note 6—Allowance for Loan and Lease Losses.”

Finance Charge and Fee Reserve

We recognize finance charges and fees on credit card loans as revenue when the amounts are billed to the customer and include these amounts in the loan balance, net of the estimated uncollectible amount of finance charges and fees. We continue to accrue finance charges and fees on credit card loans until the account is charged-off; however, when we do not expect full payment of billed finance charges and fees, we reduce the balance of our credit card loan receivables by the amount of finance charges billed but not expected to be collected and exclude this amount from revenue. Revenue was reduced by $371 million, $950 million and $2.1 billion in 2011, 2010 and 2009, respectively, for the estimated uncollectible amount of billed finance charges and fees. The finance charge and fee reserve totaled $74 million as of December 31, 2011, compared with $211 million as of December 31, 2010.

Our methodology for estimating the uncollectible portion of billed finance charges and fees is consistent with the methodology we use to estimate the allowance for incurred principal losses on our credit card loan receivables. Accordingly, the estimation process is subject to similar risks and uncertainties, including a reliance on historical loss and trend information that may not be representative of current conditions and indicative of future performance. Changes in key assumptions may have a material impact on the amount of billed finance charges and fees we estimate as uncollectible in each period.

We determine the adequacy of the uncollectible finance charge and fee reserve on a quarterly basis, primarily based on the use of a roll-rate methodology. We refine our estimation process and key assumptions used in determining our loss reserves as additional information becomes available. In the third quarter of 2011, we revised the manner in which we estimate expected recoveries of finance charge and fee amounts previously considered to be uncollectible. Our revised recovery assumptions better reflect the post-recession pattern of relatively low delinquency roll-rates combined with increased recoveries of finance charges and fees previously considered uncollectible. This change in assumptions resulted in reduction in our uncollectible finance charge and fee reserves of approximately $83 million as of September 30, 2011, and in a corresponding increase in revenues. We also applied these revised assumptions to the estimated recovery of principal charge-offs in determining our allowance for loan and lease losses. The revision, however, had an insignificant impact on the overall determination of our allowance for lease and loan losses.

Representation and Warranty Reserve

In connection with their sales of mortgage loans, certain subsidiaries entered into agreements containing varying representations and warranties about, among other things, the ownership of the loan, the validity of the lien securing the loan, the loan’s compliance with any applicable loan criteria established by the purchaser, including underwriting guidelines and the ongoing existence of mortgage insurance, and the loan’s compliance with applicable federal, state and local laws. We may be required to repurchase the mortgage loan, indemnify the investor or insurer, or reimburse the investor for credit losses incurred on the loan in the event of a material breach of contractual representations or warranties.

We have established representation and warranty reserves for losses that we consider to be both probable and reasonably estimable associated with the mortgage loans sold by each subsidiary, including both litigation and non-litigation liabilities. The reserve-setting process relies heavily on estimates, which are inherently uncertain, and requires the application of judgment. In establishing the representation and warranty reserves, we consider a variety of factors, depending on the category of purchaser and rely on historical data. We evaluate these estimates on a quarterly basis.

During 2010, we made significant refinements to our process for estimating our representation and warranty reserve, due primarily to increased counterparty activity and our ability to extend the timeframe, in most instances, over which we estimate the repurchase liability for mortgage loans sold by our subsidiaries to GSEs and those mortgage loans placed into Active Insured Securitizations to the full life of the mortgage loans. Prior to the second quarter of 2010, we generally estimated the amount of probable repurchase requests to be received over the next 12 months. As a result of these refinements, we recorded a substantial increase in our representation and warranty repurchase reserve in the first and second quarters of 2010. Approximately $407 million of the provision for representation and warranty reserves of $636 million recorded in 2010 resulted from the extension of our repurchase liability estimates to the full life of the loan effective in the second quarter of 2010. The remaining $229 million related primarily to changing counterparty activity in the form of updated estimates around active and probable litigation, most of which occurred in the first quarter of 2010.

Our aggregate representation and warranty mortgage repurchase reserves, which we report as a component of other liabilities in our consolidated balance sheets, totaled $943 million as of December 31, 2011, compared with $816 million as of December 31, 2010. The adequacy of the reserves and the ultimate amount of losses incurred by us or one of our subsidiaries will depend on, among other things, actual future mortgage loan performance, the actual level of future repurchase and indemnification requests, the actual success rates of claimants, developments in litigation, actual recoveries on the collateral and macroeconomic conditions (including unemployment levels and housing prices). See “Consolidated Balance Sheet Analysis—Potential Mortgage Representation & Warranty Liabilities” below and “Note 21—Commitments, Contingencies and Guarantees” for additional information.

Asset Impairment

We review other assets for impairment on a regular basis. This process requires significant management judgment and involves various estimates and assumptions. Our investment securities and goodwill and intangible assets represent a significant portion of our other assets. Accordingly, below we describe our process for assessing impairment of these assets and the key estimates and assumptions involved in this process.

Investment Securities

We regularly review investment securities for other-than-temporary impairment using both quantitative and qualitative criteria. If we intend to sell a security in an unrealized loss position or it is more likely than not we will be required to sell a security before its anticipated recovery, the entire difference between the amortized cost basis of the security and its fair value is recognized in earnings. If we do not intend to sell the security and it is not more likely than not that we will be required to sell the security before recovery of our amortized cost, we evaluate other qualitative criteria to determine whether a credit loss exists. Our evaluation requires significant management judgment and a consideration of many factors, including, but not limited to, the extent and duration of the impairment; the health of and specific prospects for the issuer, including whether the issuer has failed to make scheduled interest or principal payments; recent events specific to the issuer and/or industry to which the issuer belongs; the payment structure of the security; external credit ratings; the value of underlying collateral and current market conditions. Quantitative criteria include assessing whether there has been an adverse change in expected future cash flows. For equity securities, our evaluation criteria include the length of time and magnitude of the amount that each security is in an unrealized loss position. See “Note 4—Investment Securities” for additional information.

Goodwill and Other Intangible Assets

As a result of our acquisitions, principally Hibernia Corporation in 2005, North Fork Bancorporation in 2006, and Chevy Chase Bank in 2009, we have goodwill and other intangible assets. Goodwill resulting from business combinations prior to January 1, 2009 represents the excess of the purchase price over the fair value of the net assets of businesses acquired. Goodwill resulting from business combinations after January 1, 2009, is generally

determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. We had goodwill of $13.6 billion recorded on our consolidated balance sheets as of December 31, 2011 and 2010, respectively. Other intangible assets consist primarily of core deposit intangibles. Other intangible assets, which we report on our consolidated balance sheets as a component of other assets, totaled $610 million and $733 million as of December 31, 2011 and 2010, respectively. Goodwill and other intangible assets together represented 7% of our total assets as of December 31, 2011 and 2010.

Goodwill is not amortized but must be allocated to reporting units and tested for impairment on an annual basis or in interim periods if events or circumstances indicate potential impairment. A reporting unit is a business segment or one level below. Our reporting units for purposes of goodwill impairment testing are Domestic Card, International Card, Auto Finance, other Consumer Banking and Commercial Banking. We perform our annual goodwill impairment test for all reporting units as of October 1 each year using a two-step process. First, we compare the fair value of each reporting unit to its current carrying amount, including goodwill. If the fair value of the reporting unit is in excess of the carrying value, the related goodwill is considered not to be impaired and no further analysis is necessary. If, however, the carrying value of the reporting unit exceeds the fair value, there is an indication of potential impairment and a second step of testing is performed to measure the amount of impairment, if any, for that reporting unit.

Estimating the fair value of reporting units and the assets, liabilities and intangible assets of a reporting unit is a subjective process that involves the use of estimates and judgments, particularly related to cash flows, the appropriate discount rates and an applicable control premium. Management judgment is required to assess whether the carrying value of the reporting unit can be supported by the fair value of the individual reporting unit. There are widely accepted valuation methodologies, such as the market approach (earnings multiples and/or transaction multiples) and/or discounted cash flow methods, that are used to estimate the fair value of reporting units. In applying these methodologies, we utilize a number of factors, including actual operating results, future business plans, economic projections, and market data. We also may engage an independent valuation specialist to assist in our valuation process.

In estimating the fair value of the reporting units in step one of the goodwill impairment analyses, fair values can be sensitive to changes in the projected cash flows and assumptions. In some instances, minor changes in the assumptions could impact whether the fair value of a reporting unit is greater than its carrying amount. Furthermore, a prolonged decrease or increase in a particular assumption could eventually lead to the fair value of a reporting unit being less than its carrying amount. Also, to the extent step two of the goodwill analyses is required, changes in the estimated fair values of individual assets and liabilities may impact other estimates of fair value for assets or liabilities and result in a different amount of implied goodwill, and ultimately the amount of goodwill impairment, if any.

In conducting our goodwill impairment test for 2011, we determined the fair value of our reporting units using a discounted cash flow analysis, a form of the income approach. Our discounted cash flow analysis required management to make judgments about future loan and deposit growth, revenue growth, credit losses, and capital rates. We relied on each reporting unit’s internal cash flow forecast and calculated a terminal value using a growth rate that reflected the nominal growth rate of the economy as a whole and appropriate discount rates for the respective reporting units. We adjusted cash flows as necessary to maintain each reporting unit’s equity capital requirements. The cash flows were discounted to present value using reporting unit specific discount rates that were largely based on our external cost of equity, adjusted for risks inherent in each reporting unit. We corroborated the key inputs used in our discounted cash flow analysis with market data, where available, to validate that our assumptions were within a reasonable range of observable market data.

Based on the results of step one of our 2011 goodwill impairment test, we determined that the fair value of each of our reporting units, including goodwill, significantly exceeded the carrying value for each reporting unit. Fair value as a percentage of carrying value for our five reporting units ranged from 118% to 243%, with the

International reporting unit being at the low end of this range. As such, none of our reporting units was at risk of failing step one of the impairment test. Accordingly, the goodwill for each of our reporting units was considered not impaired. Therefore, the second step of impairment testing was not required.

As part of the annual goodwill impairment test, we assessed our market capitalization based on the average market price relative to the aggregate fair value of our reporting units and determined that any excess fair value in our reporting units at that time could be attributed to a reasonable control premium compared to historical control premiums seen in the industry. Continued market volatility and uncertainty regarding overall economic conditions have led to a decline in market capitalization in recent years resulting in significantly higher control premiums than what had been seen historically. We will continue to regularly monitor our market capitalization in 2012, overall economic conditions and other events or circumstances that may result in an impairment of goodwill in the future.

Intangible assets with definite useful lives are amortized over their estimated lives and evaluated for potential impairment whenever events or changes in circumstances suggest that an asset’s or asset group’s carrying value may not be fully recoverable. An impairment loss, generally calculated as the difference between the estimated fair value and the carrying value of an asset or asset group, is recognized if the sum of the estimated undiscounted cash flows relating to the asset or asset group is less than the corresponding carrying value. We did not recognize impairment on our other intangible assets in 2011, 2010 or 2009.

We provide additional information on the nature of and accounting for goodwill and intangible assets, including the process and methodology used to conduct goodwill impairment testing, in “Note 8—Goodwill and Other Intangible Assets.”

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 20% of our total reported assets of $206.0 billion as of December 31, 2011, compared with 22% of our total reported 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 December 31, 2011 and 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 19—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 functions, 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. For example, in cases where we rely on third party pricing services to obtain fair value measures, we analyze pricing variances among different pricing sources and validate the pricing used by comparing the information to additional sources, including dealer pricing indications in transaction results and other internal sources. 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.

Derivative Instruments and Hedging Activities

We primarily use derivative instruments to manage our exposure to interest rate risk, and to a lesser extent, foreign currency risk. Our derivatives are designated as either qualifying accounting hedges or free-standing derivatives. Free-standing derivatives consist of customer-accommodation derivatives and economic hedges that we enter into for risk management purposes that are not linked to specific assets or liabilities or to forecasted transactions and, therefore, do not qualify for hedge accounting. Qualifying accounting hedges are designated as fair value hedges, cash flow hedges or net investment hedges. Although all derivative financial instruments, whether designated for hedge accounting or not, are reported at their fair value on our consolidated balance sheets, the accounting for changes in the fair value of derivative instruments differs based on whether the derivative has been designated as a qualifying accounting hedge and the type of accounting hedge.

To obtain and maintain hedge accounting, we must be able to establish at hedge inception and throughout the hedge term that the hedging instrument is highly effective at offsetting exposures to the hedged risk attributable to the hedged item both retrospectively and prospectively and ensure documentation meets stringent requirements. We apply critical and complex judgment regarding the data and values used in assessing hedge effectiveness and in interpreting the results of tests performed to assess hedge effectiveness especially when the regression analysis method is used. Without hedge accounting, we may experience significant volatility in our earnings as we would be required to recognize all changes in the fair value of our derivative instruments in earnings. We provide detail on derivatives gains and losses recognized in our earnings in 2011, 2010 and 2009 and amounts related to cash flow hedges recorded in AOCI as of December 31, 2011 and 2010 in “Note 11—Derivative Instruments and Hedging Activities.”

Income Taxes

Our annual provision for income tax expense is based on our income, statutory tax rates and other provisions of tax law applicable to us in the various jurisdictions in which we operate. Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities. Significant judgment is required in determining our tax expense and in evaluating our tax positions, including evaluating uncertainties. We review our tax positions quarterly and adjust the balances as new information becomes available.

Our income tax expense consists of two components: current and deferred taxes. Our current income tax expense approximates taxes to be paid or refunded for the current period. It also includes income tax expense related to our uncertain tax positions and revisions of our estimate of accrued income taxes resulting from the resolution of income tax controversies. Our deferred income tax expense results from changes in our deferred tax assets and liabilities between periods.

Deferred tax assets and liabilities represent decreases or increases in taxes expected to be paid in the future because of future reversals of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as from net operating loss and tax credit carryforwards. Deferred tax assets are recognized subject to management’s judgment that realization is “more likely than not.” We evaluate the recoverability of these future tax deductions by assessing the adequacy of expected taxable income from all sources, including taxable income in carryback years, reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. These sources of income rely heavily on estimates. We use our historical experience and our short and long-range business forecasts to provide insight.

At December 31, 2011, we have recorded deferred tax assets, net of deferred tax liabilities and valuation allowances, of approximately $2.3 billion, a decrease of $399 million from $2.7 billion at December 31, 2010. We have recorded a valuation allowance of $89 million and $130 million as of December 31, 2011 and 2010, respectively. We expect to fully realize the net deferred tax asset amounts at the end of 2011. If changes in circumstances lead us to change our judgment about our ability to realize deferred tax assets in future years, we will adjust our valuation allowances in the period that our change in judgment occurs and record a corresponding increase or charge to income.

We provide additional information on income taxes in “Consolidated Results of Operations” and in “Note 18—Income Taxes.”

CONSOLIDATED RESULTS OF OPERATIONS

As indicated above under “Item 6. Selected Financial Data,” our reported results prior to January 1, 2010 are not presented on a basis consistent with our reported results subsequent to January 1, 2010 as a result of our adoption of the new consolidation accounting standards. Our reported results subsequent to January 1, 2010 are more comparable to our managed results because we assumed for our managed based reporting that our securitized loans had not been sold and that the earnings from securitized loans were classified in our results of operations in

the same manner as the earnings on loans that we owned. Accordingly, the section below provides a comparative discussion between our reported results of operations for 2011 and 2010 and between our reported results of operations for 2010 and our managed results for 2009. Our net income on a managed basis for 2009 is the same as our reported net income; however, there are differences in the classification of certain amounts in our managed income statement, which we identify in our discussion. See “MD&A-Supplemental Tables” for a reconciliation of our non-GAAP managed based information for periods prior to January 1, 2010 to the most comparable reported U.S. GAAP information.

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. Prior to the adoption of the new consolidation accounting standards on January 1, 2010, our reported net interest income did not include interest income from loans in our off-balance sheet securitization trusts or the interest expense on third-party debt issued by these securitization trusts. Beginning January 1, 2010, servicing fees, finance charges, other fees, net charge-offs and interest paid to third party investors related to consolidated securitization trusts are included in net interest income. 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 2 below presents, for each major category of our interest-earning assets and interest-bearing liabilities, the average outstanding balances, interest income earned or interest expense incurred, and average yield or cost in 2011, 2010 and 2009 based on our reported results. Table 3 presents this information based on our managed results, which are the same as our reported results for 2011 and 2010.

Table 2: Average Balances, Net Interest Income and Net Interest Yield (Reported Basis)⁽¹⁾


	Year Ended December 31,
	2011								2010								2009
(Dollars in millions)	Average Balance			Interest Income/ Expense⁽²⁾		Yield/ Rate			Average Balance			Interest Income/ Expense⁽²⁾		Yield/ Rate			Average Balance			Interest Income/ Expense⁽²⁾		Yield/ Rate
Assets:
Interest-earning assets:
Consumer loans:⁽³⁾
Domestic⁽⁴⁾	$	88,769		$	10,948		12.33	%	$	91,451		$	11,228		12.28	%	$	67,160		$	6,901		10.28	%
International		8,645			1,360		15.73			7,499			1,212		16.16			2,613			348		13.32

Total consumer loans⁽⁴⁾		97,414			12,308		12.63			98,950			12,440		12.57			69,773			7,249		10.39
Commercial loans⁽⁴⁾		31,010			1,466		4.73			29,576			1,494		5.06			30,014			1,508		5.02

Total loans held for investment		128,424			13,774		10.73			128,526			13,934		10.84			99,787			8,757		8.78

Investment securities		39,513			1,137		2.88			39,489			1,342		3.40			36,910			1,610		4.36
Other interest-earning assets:
Domestic		6,756			63		0.93			7,140			75		1.05			7,506			290		3.86
International		648			13		2.01			586			2		0.34			1,107			7		0.63

Total other interest earning assets		7,404			76		1.03			7,726			77		1.00			8,613			297		3.45

Total interest-earning assets	$	175,341		$	14,987		8.55	%	$	175,741		$	15,353		8.74	%	$	145,310		$	10,664		7.34	%

Cash and due from banks		1,926								2,132								3,481
Allowance for loan and lease losses		(4,865	)							(7,257	)							(4,470	)
Premises and equipment, net		2,731								2,718								2,718
Other assets		24,585								26,780								24,559

Total assets	$	199,718							$	200,114							$	171,598

Liabilities and Equity:
Interest-bearing liabilities:
Deposits:
Domestic	$	109,644		$	1,187		1.08	%	$	104,743		$	1,465		1.40	%	$	102,337		$	2,070		2.02	%
International⁽⁵⁾		—			—		—			—			—		—			741			23		3.10

Total deposits		109,644			1,187		1.08		$	104,743		$	1,465		1.40		$	103,078		$	2,093		2.03
Securitized debt obligations:
Domestic		17,012			348		2.05			29,275			686		2.34			5,516			282		5.11
International		3,703			74		2.00			4,910			123		2.51			—			—		—

Total securitized debt obligations		20,715			422		2.04			34,185			809		2.37			5,516			282		5.11
Senior and subordinated notes		9,244			300		3.25			8,571			276		3.22			8,607			260		3.02
Other borrowings:
Domestic		4,226			306		7.24			5,092			333		6.54			7,958			321		4.03
International		3,837			31		0.81			1,772			13		0.73			1,441			11		0.76

Total other borrowings		8,063			337		4.18			6,864			346		5.04			9,399			332		3.53

Total interest-bearing liabilities	$	147,666		$	2,246		1.52	%	$	154,363		$	2,896		1.88	%	$	126,600		$	2,967		2.34	%

Non-interest bearing deposits		17,050								14,267								12,523
Other liabilities		6,423								6,543								5,869

Total liabilities		171,139								175,173								144,992
Stockholders’ equity⁽⁶⁾		28,579								24,941								26,606

Total liabilities and stockholders’ equity	$	199,718							$	200,114							$	171,598

Net interest income/spread				$	12,741		7.03	%				$	12,457		6.86	%				$	7,697		5.00	%

Impact of non-interest bearing funding							0.24								0.23								0.30

Net interest margin							7.27	%							7.09	%							5.30	%

⁽¹⁾	Certain prior period amounts have been reclassified to conform to the current period presentation.

⁽²⁾	Past due fees included in interest income totaled approximately $1.1 billion, $1.1 billion and $652 million for 2011, 2010 and 2009, respectively.

⁽³⁾	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.

⁽⁴⁾

In the first quarter of 2011, we revised 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 2010 were as follows: domestic consumer loans ($11.4 billion and 12.51%); total consumer loans ($12.7 billion and 12.79%); and commercial loans ($1.3 billion and 4.32%).

⁽⁵⁾	The U.K. deposit business, which was included in international deposits, was sold during the third quarter of 2009.

⁽⁶⁾	Includes a reduction of $2.9 billion recorded on January 1, 2010, in conjunction with the adoption of the new consolidation accounting guidance.

Table 3: Average Balances, Net Interest Income and Net Interest Yield (Managed Basis)⁽¹⁾


	Year Ended December 31,
	2011								2010								2009
(Dollars in millions)	Average Balance			Interest Income/ Expense⁽²⁾		Yield/ Rate			Average Balance			Interest Income/ Expense⁽²⁾		Yield/ Rate			Average Balance			Interest Income/ Expense⁽²⁾		Yield/ Rate
Assets:
Interest-earning assets:
Consumer loans:⁽³⁾
Domestic⁽⁴⁾	$	88,769		$	10,948		12.33	%	$	91,547		$	11,234		12.27	%	$	105,095		$	11,778		11.21	%
International		8,645			1,360		15.73			7,499			1,212		16.16			8,405			1,149		13.67

Total consumer loans⁽⁴⁾		97,414			12,308		12.63			99,046			12,446		12.57			113,500			12,927		11.39
Commercial loans⁽⁴⁾		31,010			1,466		4.73			29,576			1,496		5.06			30,014			1,508		5.02

Total loans held for investment		128,424			13,774		10.73			128,622			13,942		10.84			143,514			14,435		10.06

Investment securities		39,513			1,137		2.88			39,489			1,342		3.40			36,910			1,610		4.36
Other interest-earning assets:
Domestic		6,756			63		0.93			7,118			75		1.05			4,938			65		1.32
International		648			13		2.01			586			2		0.34			614			3		0.49

Total other interest earning assets		7,404			76		1.03			7,704			77		1.00			5,552			68		1.22

Total interest-earning assets	$	175,341		$	14,987		8.55	%	$	175,815		$	15,361		8.74	%	$	185,976		$	16,113		8.66	%

Cash and due from banks		1,926								2,133								3,481
Allowance for loan and lease losses		(4,865	)							(7,257	)							(4,470	)
Premises and equipment, net		2,731								2,718								2,718
Other assets		24,585								26,776								24,953

Total assets	$	199,718							$	200,185							$	212,658

Liabilities and Equity:
Interest-bearing liabilities:
Deposits:
Domestic	$	109,644		$	1,187		1.08	%	$	104,743		$	1,465		1.40	%	$	102,337		$	2,070		2.02	%
International⁽⁵⁾		—			—		—			—			—		—			741			23		3.10

Total deposits		109,644			1,187		1.08		$	104,743		$	1,465		1.40		$	103,078		$	2,093		2.03
Securitized debt obligations:
Domestic		17,012			348		2.05			29,354			690		2.35			40,931			1,191		2.91
International		3,703			74		2.00			4,910			123		2.51			5,686			148		2.60

Total securitized debt obligations		20,715			422		2.04			34,264			813		2.37			46,617			1,339		2.87
Senior and subordinated notes		9,244			300		3.25			8,571			276		3.22			8,607			260		3.02
Other borrowings:
Domestic		4,226			306		7.24			5,093			333		6.54			7,957			321		4.03
International		3,837			31		0.81			1,772			13		0.73			1,441			11		0.76

Total other borrowings		8,063			337		4.18			6,865			346		5.04			9,398			332		3.53

Total interest-bearing liabilities	$	147,666		$	2,246		1.52	%	$	154,443		$	2,900		1.88	%	$	167,700		$	4,024		2.40	%

Non-interest bearing deposits		17,050								14,267								12,523
Other liabilities		6,423								6,534								5,829

Total liabilities		171,139								175,244								186,052
Stockholders’ equity⁽⁶⁾		28,579								24,941								26,606