Edgar Filing: CAPITAL ONE FINANCIAL CORP

form10q.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2010

¨	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

(Not applicable)

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

________________________

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 T No o

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

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.

Large accelerated filer T

Accelerated filer o

Non-accelerated filer o

Smaller reporting company o

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

As of July 31, 2010, there were 456,773,296 shares of the registrant’s Common Stock, par value $.01 per share, outstanding.

TABLE OF CONTENTS

PART I—Financial Information				1
Item 1.	Financial Statements			57
	Consolidated Statements of Income			57
	Consolidated Balance Sheets			58
	Consolidated Statements of Changes in Stockholders’ Equity			59
	Consolidated Statements of Cash Flows			60
	Notes to Consolidated Financial Statements			61
		Note 1 —	Summary of Significant Accounting Policies	61
		Note 2 —	Loans Acquired in a Transfer	64
		Note 3 —	Discontinued Operations	65
		Note 4 —	Business Segments	66
		Note 5 —	Investment Securities	68
		Note 6 —	Loans Held for Investment, Allowance for Loan and Lease Losses and Unfunded Lending Commitments, Loan Modifications and Restructurings	75
		Note 7 —	Fair Value of Financial Instruments	78
		Note 8 —	Goodwill and Other Intangible Assets	86
		Note 9 —	Deposits and Borrowings	88
		Note 10 —	Shareholders’ Equity and Earnings Per Common Share	89
		Note 11 —	Mortgage Servicing Rights	91
		Note 12 —	Derivative Instruments and Hedging Activities	92
		Note 13 —	Securitizations	97
		Note 14 —	Commitments, Contingencies and Guarantees	107
		Note 15 —	Other Variable Interest Entities	111
		Note 16 —	Subsequent Events	112

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		1
	I.	Introduction	1
	II.	Impact from Adoption of New Consolidation Accounting Standards	4
	III.	Executive Summary and Business Outlook	6
	IV.	Critical Accounting Policies and Estimates	9
	V.	Recent Accounting Pronouncements	11
	VI.	Off-Balance Sheet Arrangements and Variable Interest Entities	12
	VII.	Consolidated Financial Performance	12
	VIII.	Consolidated Balance Sheet Analysis and Credit Performance	16
	IX.	Business Segment Financial Performance	27
	X.	Liquidity and Funding	36
	XI.	Market Risk Management	39
	XII.	Capital	40
	XIV.	Supervision and Regulation	42
	XV.	Enterprise Risk Management	45
	XVI.	Forward-Looking Statements	46
	XVII.	Supplemental Statistical Tables	48
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		57
Item 4.	Controls and Procedures		57
PART II—Other Information			114
Item 1.	Legal Proceedings		114
Item 1A.	Risk Factors		114
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		114
Item 3.	Defaults upon Senior Securities		115
Item 5.	Other Information		115
Item 6.	Exhibits		115

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INDEX OF MD&A TABLES AND SUPPLEMENTAL TABLES

Table	Description	Page
—	MD&A Tables:
1	Consolidated Corporate Financial Summary and Selected Metrics	2
2	Business Segment Results	3
3	Net Interest Income	12
4	Non-Interest Income	13
5	Non-Interest Expense	12
6	Securities Available for Sale	13
7	Loan Portfolio Composition	14
8	30+ Day Performing Delinquencies	15
9	Nonperforming Loans	16
10	Net Charge-Offs	17
11	Loan Modifications and Restructurings	17
12	Summary of Allowance for Loan and Lease Losses	19
13	Allocation of the Allowance for Loan and Lease Losses	20
14	Credit Card Business Results	23
15	Commercial Banking Business Results	26
16	Consumer Banking Business Results	27
17	Liquidity Reserves	30
18	Deposits	30
19	Borrowing Capacity	32
20	Interest Rate Sensitivity Analysis	34
21	Capital Ratios	35

—	Supplemental Statistical Tables:
A	Statements of Average Balances, Income and Expense, Yields and Rates	42
B	Interest Variance Analysis	44
C	Managed Loan Portfolio	45
D	Composition of Reported Loan Portfolio	47
E	Delinquencies	47
F	Net Charge-Offs	48
G	Nonperforming Assets	48

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PART I—FINANCIAL INFORMATION

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

You should read this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) in conjunction with our unaudited condensed consolidated financial statements and related notes, and the more detailed information contained in our 2009 Annual Report on Form 10-K (“2009 Form 10-K”). This discussion contains forward-looking statements that are based upon management’s current expectations and are subject to significant uncertainties and changes in circumstances. For additional information, see “Forward-Looking Statements” below. Our actual results may differ materially from those included in these forward-looking statements due to a variety of factors including, but not limited to, those described in this report in “Part II —Item 1A. Risk Factors” and in our 2009 Form 10-K in “Part I—Item 1A. Risk Factors.”

I. INTRODUCTION

Capital One Financial Corporation (the “Company”) is a diversified financial services company with banking and non-banking subsidiaries that market a variety of financial products and services. The Company and its subsidiaries are hereafter collectively referred to as the “We”, “Us” or “Our.” We continue to deliver on our strategy of combining the power of national scale lending and local scale banking. Our principal subsidiaries include:

·	Capital One Bank (USA), National Association (“COBNA”) which currently offers credit and debit card products, other lending products and deposit products.

·	Capital One, National Association (“CONA”) which offers a broad spectrum of banking products and financial services to consumers, small businesses and commercial clients. On July 30, 2009, we merged Chevy Chase Bank, F.S.B. (“Chevy Chase Bank”) into CONA.

Our revenues are primarily driven by lending to consumers and commercial customers and by deposit-taking activities, which generate net interest income, and by activities that generate non-interest income, including the sale and servicing of loans and providing fee-based services to customers. Customer usage and payment patterns, credit quality, levels of marketing expense and operating efficiency all affect our profitability. Our expenses primarily consist of the cost of funding our assets, our provision for loan and lease losses, operating expenses (including associate salaries and benefits, infrastructure maintenance and enhancements, and branch operations and expansion costs), marketing expenses and income taxes. We had $127.1 billion in total loans outstanding and $117.3 billion in deposits as of June 30, 2010, compared with $136.8 billion in total managed loans outstanding and $115.8 billion in deposits as of December 31, 2009.

We prepare our consolidated financial statements using generally accepted accounting principles in the U.S. (“U.S. GAAP”). We refer to the presentation as “reported basis.” Effective January 1, 2010, we prospectively adopted two new accounting standards that resulted in the consolidation of a substantial portion of our securitization trusts. Prior to January 1, 2010, we also presented and analyzed our results on a non-GAAP “managed basis.” Our managed basis presentation assumed that loans that had been securitized and accounted for as sold in accordance with U.S. GAAP remained on our consolidated balance sheets. As a result of the adoption of the new consolidation accounting standards, our reported and managed basis presentations are generally comparable for periods beginning after January 1, 2010. We provide more information on the impact from the adoption of the new consolidation accounting standards on our reported financial statements and our non-GAAP managed basis financial results below under “Impact from Adoption of New Consolidation Accounting Standards.”

Table 1 presents selected consolidated financial data and metrics for the three and six months ended June 30, 2010 and 2009, and as of June 30, 2010 and December 31, 2009. We present both reported and managed basis financial information for periods prior to 2010.

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Table 1: Consolidated Corporate Financial Summary and Selected Metrics

	Three Months Ended June 30,															Six Months Ended June 30,
	2010			2009						% Change						2010			2009(1)						% Change

(Dollars in millions)	Reported			Reported			Managed			Reported			Managed			Reported			Reported			Managed			Reported			Managed
Income statement data:
Net interest income	$	3,097		$	1,945		$	2,957			59	%		5	%	$	6,325		$	3,738		$	5,707			69	%		11	%
Non-interest income		807			1,232			1,190			(35	)		(32	)		1,868			2,322			2,175			(20	)		(14	)
Total revenue(2)		3,904			3,177			4,147			23			(6	)		8,193			6,060			7,882			35			4
Provision for loan and lease losses		723			934			1,904			(23	)		(62	)		2,201			2,213			4,036			(1	)		(46	)
Restructuring expenses(3)		—			43			43			(100	)		(100	)		—			61			61			(100	)		(100	)
Other non-interest expense		2,000			1,879			1,879			6			6			3,847			3,606			3,606			7			7
Income (loss) from continuing operations before taxes		1,181			321			321			268			268			2,145			180			180			1,092			1,092
Provision for income taxes		369			92			92			301			301			613			34			34			1,703			1,703
Income (loss) from continuing operations, net of tax		812			229			229			255			255			1,532			146			146			949			949
Loss from discontinued operations, net of tax(4)		(204	)		(6	)		(6	)		**			**			(288	)		(31	)		(31	)		**			**
Net income	$	608		$	223		$	223			173	%		173	%	$	1,244		$	115		$	115			982	%		982	%
Net income (loss) available to common shareholders	$	608		$	(277	)	$	(277	)		319	%		319	%	$	1,244		$	(449	)	$	(449	)		377	%		377	%

Per common share data:
Basic earnings per share	$	1.34		$	(0.66	)	$	(0.66	)		303	%		303	%	$	2.75		$	(1.11	)	$	(1.11	)		347	%		347	%
Diluted earnings per share		1.33			(0.66	)		(0.66	)		302			302			2.73			(1.11	)		(1.11	)		346			346

Average balances:
Loans held for investment	$	128,203		$	104,682		$	148,013			23	%		(13	)%	$	131,222		$	104,016		$	147,649			26	%		(11	)%
Investment securities		39,022			37,499			37,499			4			4			38,525			35,871			35,871			7			7
Interest-bearing deposits		104,163			107,033			107,033			(3	)		(3	)		104,083			104,047			104,047			—			—
Total deposits		118,484			119,604			119,604			(1	)		(1	)		118,011			115,967			115,967			2			2
Other borrowings		6,375			10,399			10,399			(39	)		(39	)		6,900			9,537			9,537			(28	)		(28	)

Selected metrics:
Revenue margin(5)		8.94	%		8.43	%		8.68	%	51bps			26bps				9.19	%		8.21	%		8.36	%	98bps			83bps
Net interest margin(6)		7.09			5.16			6.19			193			90			7.09			5.06			6.05			204			105
Risk-adjusted margin(7)		5.01			5.46			4.31			(45	)		70			5.00			5.15			4.04			(15	)		96
Net charge-off rate(8)		5.36			4.28			5.64			108			(28	)		5.69			4.34			5.52			135			17
Return on average assets(9)		1.63			0.52			0.42			111			121			1.51			0.17			0.14			134			137
Return on average equity(10)		13.24			3.31			3.31			993			993			12.71			1.06			1.06			1,165			1,165
Period-end 30 + day performing delinquency rate		3.81			3.71			4.10			10			(29	)		3.81			3.71			4.10			10			(29	)

____________

**Not meaningful.

(1)	Effective February 27, 2009, we acquired Chevy Chase Bank. Accordingly, our results for the first three and six months of 2009 include only a partial impact from Chevy Chase Bank.

(2)

Billed finance charges and fees not recognized as revenue because we have established an allowance for estimated uncollectible amounts totaled $261 million and $572 million for the three months ended June 30, 2010 and 2009, respectively, and $616 million and $1.1 billion for the six months ended June 30, 2010 and 2009, respectively.

(3)	In 2009, we completed the restructuring of our operations that was initiated in 2007 to reduce expenses and improve our competitive cost position.

(4)	Discontinued operations reflect ongoing costs, which primarily consist of loan repurchase representation and warranty charges, related to the mortgage origination operations of GreenPoint’s wholesale mortgage banking unit, which we closed in 2007.

(5)	Calculated by dividing annualized revenues for the period by average loans held for investment during the period.

(6)	Calculated by dividing annualized net interest income for the period by average interest-earning assets.

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(7)	Calculated by dividing annualized total revenues less net charge-offs for the period by average interest-earning assets.

(8)	Calculated by dividing annualized net charge-offs for the period by average loans held for investment during the period.

(9)	Calculated by dividing annualized net income (loss) available to common stockholders for the period by average total assets.

(10)	Calculated by dividing annualized net income (loss) available to common stockholders for the period by average equity.

We evaluate our financial performance and report our results through three operating segments: Credit Card, Consumer Banking and Commercial Banking.

·	Credit Card: Consists of our domestic consumer and small business card lending, domestic 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 consumer and small businesses, national deposit gathering, national automobile lending and consumer mortgage 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 Commercial Banking business results also include the results of a national portfolio of small ticket commercial real-estate loans that are in run-off mode.

Table 2 summarizes our results by business segments for the three and six months ended June 30, 2010 and 2009. We report our business segment results based on income from continuing operations, net of tax. In 2009, we realigned our organizational structure and business segment reporting to reflect our operating results by product type and customer segment and to integrate the operations of Chevy Chase Bank. We revised our reportable segments and the results for our segments for all periods presented to conform to the organizational and segment reporting changes.

Table 2: Business Segment Results

	Three Months Ended June 30,
	2010												2009
	Total Revenue (1)						Net Income (Loss)(2)						Total Revenue (1)					Net Income (Loss)(2)
(Dollars in millions)	Amount			% of Total			Amount			% of Total			Amount		% of Total			Amount			% of Total
Credit Card	$	2,636			67	%	$	568			70	%	$	2,695		65	%	$	173			76	%
Consumer Banking		1,097			28			305			38			1,052		25			81			35
Commercial Banking		379			10			77			9			328		8			33			14
Other(3)		(206	)		(5	)		(138	)		(17	)		72		2			(58	)		(25	)
Total continuing operations	$	3,906			100	%	$	812			100	%	$	4,147		100	%	$	229			100	%

	Six Months Ended June 30,
	2010												2009
	Total Revenue (1)						Net Income (Loss)(2)						Total Revenue (1)						Net Income (Loss)(2)
(Dollars in millions)	Amount			% of Total			Amount			% of Total			Amount			% of Total			Amount			% of Total
Credit Card	$	5,467			67	%	$	1,057			69	%	$	5,372			68	%	$	176			121	%
Consumer Banking		2,309			28			610			40			1,939			25			107			73
Commercial Banking		733			9			28			2			614			8			50			34
Other(3)(4)		(311	)		(4	)		(163	)		(11	)		(43	)		(1	)		(187	)		(128	)
Total continuing operations	$	8,198			100	%	$	1,532			100	%	$	7,882			100	%	$	146			100	%

____________

(1)

Total revenue consists of net interest income and non-interest income. Total company revenue displayed for 2009 is based on our non-GAAP managed basis results. For more information on this measure and a reconciliation to the comparable GAAP measure, see “Exhibit 99.3— Reconciliation to GAAP Financial Measures.”

(2)	Represents net income from continuing operations, net of tax.

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(3)	Other includes our corporate treasury function, the net impact of our funds transfer pricing inter-segment allocation process, brokered deposits, certain unallocated costs, and gains and losses from securitizations.

(4)	During the first quarter of 2009, Chevy Chase Bank was included within the Other category.

II. IMPACT FROM ADOPTION OF NEW CONSOLIDATION ACCOUNTING STANDARDS

Impact on Reported Financial Information

Effective January 1, 2010, we prospectively adopted two new accounting standards that have a significant impact on our accounting for entities previously considered to be off-balance sheet arrangements. The adoption of these new accounting standards resulted in the consolidation of our credit card securitization trusts, one of our installment loan trusts and certain option-adjustable rate mortgage (“option-ARM”) loan trusts originated by Chevy Chase Bank. Prior to January 1, 2010, transfers of our credit card receivables, installment loans and certain option-adjustable rate mortgage loans to our securitization trusts were accounted for as sales and treated as off-balance sheet. At the adoption of these new accounting standards on January 1, 2010, we added to our reported consolidated balance sheet approximately $41.9 billion of assets, consisting primarily of credit card loan receivables underlying the consolidated securitization trusts, along with approximately $44.3 billion of related debt issued by these trusts to third-party investors. We also recorded an after-tax charge to retained earnings on January 1, 2010 of $2.9 billion, reflecting the net cumulative effect of adopting these new accounting standards. This charge primarily related to the addition of $4.3 billion to our allowance for loan and lease losses for the newly consolidated loans and the recording of $1.6 billion in related deferred tax assets. The initial recording of these amounts on our reported balance sheet as of January 1, 2010 had no impact on our reported income. We provide additional information on the impact on our financial statements from the adoption of these new accounting standards in “Note 1—Summary of Significant Accounting Policies” and “Note 13—Securitizations.” We discuss the impact on our capital ratios below in “Capital.”

Although the adoption of these new accounting standards does not change the economic risk to our business, specifically our exposure to liquidity, credit and interest rate risks, the prospective adoption of these rules has a significant impact on our capital ratios and the presentation of our reported consolidated financial statements, including changes in the classification of specific income statement line items. The most significant changes to our reported consolidated financial statements are outlined below:

Financial Statement		Accounting and Presentation Changes
Balance Sheet		· Significant increase in restricted cash, securitized loans and securitized debt resulting from the consolidation of securitization trusts. · Significant increase in the allowance for loan and lease losses resulting from the establishment of a loan loss reserve for the loans underlying the consolidated securitization trusts. · Significant reduction in accounts receivable from securitizations resulting from the reversal of retained interests held in securitization trusts that have been consolidated.

Statement of Income		· Significant increase in interest income and interest expense attributable to the securitized loans and debt underlying the consolidated securitization trusts. · Changes in the amount recorded for the provision for loan and lease losses, resulting from the establishment of an allowance for loan and lease losses for the loans underlying the consolidated securitization trusts. · Amounts previously recorded as servicing and securitization income are now classified in our results of operations in the same manner as the earnings on loans not held in securitization trusts.

Statement of Cash Flows		· Significant change in the amounts of cash flows from investing and financing activities.

Beginning with the first quarter of 2010, our reported consolidated income statements no longer reflect securitization and servicing income related to newly consolidated loans. Instead, we report interest income, net charge-offs and certain other income associated with securitized loan receivables and interest expense associated with the debt securities issued from the trust to third party investors in the same income statement categories as loan receivables and corporate debt. Additionally, we no longer record initial gains on new securitization activity since the majority of our securitized loans will no longer receive sale accounting treatment. Because our securitization transactions are being accounted for under the new consolidation accounting rules as secured borrowings rather than asset sales, the cash flows from these transactions are presented as cash flows from financing activities rather than as cash flows from operating or investing activities. Notwithstanding this change in accounting, our securitization transactions are structured to legally isolate the receivables from the Company, and we do not expect to be able to access the assets of our securitization trusts. We do, however, continue to have the rights associated with our retained interests in the assets of these trusts.

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Because we prospectively adopted the new consolidation accounting standards, our historical reported results and consolidated financial statements for periods prior to January 1, 2010 reflect our securitization trusts as off-balance sheet in accordance with the applicable accounting guidance in effect during this period. Accordingly, our reported results and consolidated financial statements subsequent to January 1, 2010 are not presented on a basis consistent with our reported results and consolidated financial statements for periods prior to January 1, 2010. This inconsistency limits the comparability of our post-January 1, 2010 reported results to our prior period reported results.

Impact on Non-GAAP Managed Financial Information

In addition to analyzing our results on a reported basis, management historically evaluated our total company and business segment results on a non-GAAP “managed” basis. Our managed presentations reflected the results from both our on-balance sheet loans and off-balance sheet loans and excluded the impact of card securitization activity. Our managed presentations assumed 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. Our managed results also reflected differences in accounting for the valuation of retained interests and the recognition of gains and losses on the sale of interest-only strips. Our managed results did not include the addition of an allowance for loan and lease losses for the loans underlying our off-balance sheet securitization trusts. Prior to January 1, 2010, we used our non-GAAP managed basis presentation to evaluate the credit performance and overall financial performance of our entire managed loan portfolio because the same underwriting standards and ongoing risk monitoring are used for both securitized loans and loans that we own. In addition, we used the managed presentation as the basis for making decisions about funding our operations and allocating resources, such as employees and capital. Because management used our managed basis presentation to evaluate our performance, we also provided this information to investors. We believed that our managed basis information was useful to investors because it portrayed the results of both on- and off-balance sheet loans that we managed, which enabled investors to understand the credit risks associated with the portfolio of loans reported on our consolidated balance sheet and our retained interests in securitized loans.

In periods prior to January 1, 2010, certain of our non-GAAP managed measures differed from the comparable reported measures. The adoption on January 1, 2010 of the new consolidation accounting standards resulted in accounting for the loans in our securitization trusts in our reported financial statements in a manner similar to how we account for these loans on a managed basis. As a result, our reported and managed basis presentations are generally comparable for periods beginning after January 1, 2010.

We believe that investors will be able to better understand our financial results and evaluate trends in our business if our period-over-period data are reflected on a more comparable basis. Accordingly, unless otherwise noted, this MD&A compares our reported GAAP financial information as of and for the three months and six months ended June 30, 2010 with our non-GAAP managed based financial information as of and for the three months and six months ended June 30, 2009 and as of December 31, 2009. We provide a reconciliation of our non-GAAP managed based information for periods prior to January 1, 2010 to the most comparable reported GAAP information in “Exhibit 99.3— Reconciliation to GAAP Financial Measures.”

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III. EXECUTIVE SUMMARY AND BUSINESS OUTLOOK

Financial Highlights

We reported net income attributable to common shareholders of $608 million ($1.33 per diluted share) in the second quarter of 2010, which included the benefit of a $1.0 billion reduction in our allowance for loan and lease losses. In comparison, we reported net income of $636 million ($1.40 per diluted share) in the first quarter of 2010 and a net loss of $277 million ($(0.66) per diluted share) in the second quarter of 2009. We generated net income of $1.2 billion ($2.73 per diluted share) in the first six months of 2010, compared with a net loss of $449 million ($(1.11) per diluted share) in the first six months of 2009. As noted above, the presentation of our results on a non-GAAP managed basis prior to January 1, 2010 assumed 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. These classification differences resulted in differences in certain revenue and expense components of our results of operations on a reported basis and our results of operations on a managed basis, although net income for both bases was the same.

The $28 million, or 4%, decrease in our net income in the second quarter of 2010 from the first quarter of 2010 was attributable to a decline in total revenue and an increase in non-interest expense and loss from discontinued operations, which were offset by a decrease in our provision for loan and lease losses. Total revenue decreased by $385 million, or 9%, in the second quarter of 2010 from the first quarter of 2010, primarily due to a decline in average loans as a result of the expected continued run-off of our installment loan, mortgage loan and small-ticket commercial real estate loan portfolios, charge-offs and weaker consumer loan demand. We experienced increases in non-interest expense and loss from discontinued operations due in part to recording additional mortgage loan repurchase claims expense of $404 million in the second quarter of 2010, compared with $224 million in the first quarter of 2010. The significant increase in our representation and warranty reserves in the second quarter of 2010 was primarily attributable to a refinement we made in estimating our mortgage representation and warranty reserves. During the second quarter, we were able to extend the timeframe, in most instances, over which we estimate repurchase liability to the full life of the loans sold by our subsidiaries. We provide additional information on this change below in “Critical Accounting Policies and Estimates.” The unfavorable impact from these items was offset by a $755 million decrease in our provision for loan and lease losses, attributable to continued improvement in credit performance trends across our portfolios. The continued improvement in credit performance reflects the slowly improving economy, coupled with actions taken by us over the past several years to improve underwriting standards and exit portfolios with unattractive credit metrics.

Our financial strength and capacity to absorb risk remained high during the second quarter of 2010. Our Tier-1 risk-based capital ratio of 9.9% as of June 30, 2010, was up 30 basis points from 9.6% at the end of the first quarter of 2010 and comfortably above the regulatory well-capitalized minimum. Our tangible common equity to tangible managed assets (“TCE ratio”), a non-GAAP measure, increased to 6.1%, up 60 basis points from 5.5% at the end of the first quarter of 2010.

Below are additional highlights of our performance for the second quarter and first six months of 2010. These highlights generally are based on a comparison of our reported results for the second quarter and first six months of 2010 to our managed results for the second quarter and first six months of 2009. The highlights of changes in our financial condition and credit performance are generally based on our reported financial condition and credit statistics as of June 30, 2010, compared with our financial condition and credit performance on a managed basis as of December 31, 2009. We provide a more detailed discussion of our results of operation, financial condition and credit performance in “Consolidated Financial Performance,” “Consolidated Balance Sheet Analysis and Credit Performance” and “Business Segment Financial Performance.”

Credit Card: Our Credit Card business generated net income of $568 million and $1.1 billion in the second quarter and first six months of 2010, respectively, up from $173 million and $176 million in the second quarter and first six months of 2009, respectively. The primary drivers of the improvement in our Credit Card business results were an increase in the net interest margin and a significant decrease in the provision for loan and lease losses. The increase in the net interest margin was attributable to the combined impact of higher asset yields and lower funding costs. The increase in the average yield on our credit card loan portfolio reflected the benefit of pricing changes that we implemented during 2009, while the decrease in our funding costs reflected the continued shift in the mix of our funding to lower cost consumer deposits from higher cost wholesale sources. The decrease in the provision for loan and lease losses was due to more favorable credit quality trends as well as a decline in outstanding loan balances. Of the $1.0 billion reduction in the allowance in the second quarter of 2010, $665 million was attributable to our Credit Card business.

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Consumer Banking: Our Consumer Banking business generated net income of $305 million and $610 million in the second quarter and first six months of 2010, up from $81 million and $107 million in the second quarter and first six months of 2009, respectively. The significant improvement in profitability in our Consumer Banking business was attributable to improved credit conditions and consumer credit performance, particularly within our auto loan portfolio. Although our mortgage portfolio includes the distressed portfolio we acquired from Chevy Chase Bank, the fair value that we recorded for this portfolio at the date of acquisition already includes an estimate of credit losses expected to be realized over the remaining lives of the loans. The credit performance of these loans has been relatively consistent with our estimate of credit losses at the acquisition date.

Commercial Banking: Our Commercial Banking business generated net income of $77 million and $28 million in the second quarter and first six months of 2010, compared with net income of $33 million and $50 million in the second quarter and first six months of 2009. Lending and loan commitments have increased in our Commercial Banking business. The stress on our commercial real estate portfolio from the weak economy, however, continues to have an adverse impact on our Commercial Banking business, although we are seeing some signs that commercial real-estate values are beginning to stabilize.

Total Loans: Total loans held for investment decreased by $9.7 billion, or 7%, during the first six months of 2010 to $127.1 billion as of June 30, 2010, from $136.8 billion as of December 31, 2009. This decrease was primarily due to charge-offs and run-off of loans in our Credit Card and Consumer Banking businesses.

Charge-off and Delinquency Statistics: Although net charge-off and delinquency rates remain elevated, these rates continued to show signs of improvement in the second quarter of 2010. The net charge-off rate decreased to 5.36% in the second quarter of 2010, from 6.01% in the first quarter of 2010, and the 30+ day performing delinquency rate decreased to 3.81%, from 4.22% in the first quarter of 2010. Based on strong credit performance trends, such as the significant decline in the 30+ day performing delinquency rate from 4.73% at the end of 2009, we believe our net-charge offs peaked in the first quarter of 2010.

Allowance for Loan and Lease Losses: As a result of the adoption of the new consolidation accounting guidance, we increased our allowance for loan and lease losses by $4.3 billion to $8.4 billion on January 1, 2010. The initial recording of this amount on our reported balance sheet as of January 1, 2010 reduced our stockholders’ equity but had no impact on our reported results of operations. After taking into consideration the $4.3 billion addition to our allowance for loan and lease losses on January 1, 2010, our allowance for loan and lease losses decreased by $1.6 billion during the first six months of 2010, to $6.8 billion as of June 30, 2010. The $1.6 billion decrease in our allowance was attributable to an overall improvement in credit quality trends, as well as a decrease in the balance of our loan portfolio. The allowance as a percentage of our total reported loans was 5.35% as of June 30, 2010, compared with 5.96% as of March 31, 2010 and 4.55% as of December 31, 2009.

Business Environment and Significant Developments

We continue to operate in an environment of significant economic and regulatory uncertainty. We currently believe that the economic recovery will remain fragile and modest at best.

The recent enactment of the Dodd−Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), as well as other legislative and regulatory changes, could have a significant impact on us by, for example, requiring us to change our business practices, requiring us to establish more stringent capital, liquidity and leverage ratio requirements, limiting our ability to pursue business opportunities, imposing additional costs on us and limiting fees we can charge. For example, the Dodd-Frank Act may affect our qualifying Tier 1 regulatory capital. 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.

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 as of the time we filed this Quarterly Report on Form 10-Q, the regulatory environment and our business strategies. The statements contained in this section are based on our current expectations regarding the Company’s outlook for its 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 “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2009 Form 10-K. Certain statements are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those in our forward-looking statements. See “Forward-Looking Statements” in this Quarterly Report on Form 10-Q and “Item 1A. Risk Factors” of our 2009 Form 10-K for factors that could materially influence our results.

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Total Company Expectations

Total Loans: The pace of loan balance decline has slowed, reflecting the decline in charge-offs and gradual abatement of expected portfolio run-offs. We believe our portfolio balances will reach a bottom over the next several quarters, stabilize and begin to grow modestly in 2011. The timing and pace of expected growth will depend on broader economic trends that impact overall consumer and commercial demand. Although we are uncertain of the exact magnitude and timing of a pick-up in demand, we believe we are well positioned to gain market share in our Domestic Card business and to grow modestly in our Commercial Banking business. We expect the securitized debt obligation to decline further in the second half of 2010, to approximately $23.9 billion by the end of 2010, which would represent a decrease of 51% from the balance as of January 1, 2010.

Earnings: Over the next several quarters, we expect our quarterly margins to decline, driven primarily by a continued decline in our Domestic Card revenue margin, as well as the stabilization of funding costs. While we expect our marketing expenses to continue to increase in the second half of 2010, the extent of the increase will depend on growth opportunities. We expect that our operating expenses, excluding marketing expenses, will remain at approximately the same level in the second half of 2010 as in the first half of 2010. We believe that the combined impact of these expected trends will result in a decline in our quarterly “pre-provision” earnings (earnings excluding our provision for loan and lease losses) into 2011. As we move past the early part of 2011, we expect that our quarterly pre-provision earnings will begin to grow in 2011.

Based on favorable credit performance and economic trends, we expect a continued decline in the level of charge-offs. Given the historically high levels of allowance coverage and improvement in credit performance, coupled with the decline in outstanding loans, we expect continued reductions in our allowance for loan and lease losses over the remainder of 2010. We believe the reductions in our allowance will cushion the bottom-line impact of the expected decline in pre-provision earnings.

Capital: We expect our TCE ratio to follow an upward trajectory. We previously indicated, however, that the trends in our Tier 1 capital and TCE ratios would diverge in 2010 and early 2011 as a result of our adoption of the new consolidation accounting standards. As permitted under the capital rules issued by banking regulators in January 2010, we elected to phase in the impact from the adoption of the new consolidation accounting standards on risk-based capital over 2010 and the first quarter of 2011. During the phase-in period, we expect that our Tier 1 ratios will continue to be adversely affected by (i) a decrease in the numerator resulting from the disallowance of a portion of the deferred tax assets associated with the increase in our allowance for loan and lease losses from consolidation and (ii) an increase in the denominator through the first quarter of 2011 due in part to the new consolidation accounting standards.

Despite the near-term decline in our Tier 1 capital ratios, we expect our Tier 1 ratios will remain above well-capitalized minimum levels throughout the regulatory capital phase-in period for the new consolidation standards. Once the phase-in period is complete in early 2011 and as credit loss levels continue to normalize, we expect the pro-cyclical Tier 1 ratios to more than proportionately follow the upward trajectory of the TCE ratios.

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Business Segment Expectations

Credit Card Business

As a result of increasing new originations, reduced charge-offs and the gradual abatement of the run-off of installment loans in our Credit Card business, we believe credit card loan balances will stabilize in the second half of 2010. Over the next few quarters, we expect that quarterly Domestic Card revenue margin will decline to around 15% by the end of 2010 or early 2011, as the major impacts from the Credit CARD Act and cyclical forces are fully absorbed. While the over-limit fee impact has been largely reflected in the first and second quarter results of our Credit Card business, there are three primary factors contributing to the expected downward pressure on the Domestic Card revenue margin, with each factor accounting for approximately one-third of the expected revenue margin decline. These factors include the following:

As higher-margin loan account balances pay down or charge-off, we expect that these accounts will be partially replaced by new loan originations with lower introductory promotional rates. These reduced rates will decrease our average asset yields, which we expect will reduce our net interest margin.

The credit-related benefit to revenue we experienced in the first and second quarters of 2010 from the recognition of previously billed finance charges and fees is likely to diminish, as the backlog of billed but unrecognized finance charges has decreased significantly due to the more favorable credit performance trends.

·	We expect a reduction in late fees as a result of the August 22, 2010 implementation of the Federal Reserve “reasonable and proportional” fee regulations related to the CARD Act. We expect a partial quarter impact in the third quarter of 2010 and a full quarter impact in the fourth quarter of 2010.

Longer term, the Domestic Card revenue margin may decline modestly as credit conditions continue to improve. As a result, we expect that the Domestic Card revenue margin will remain at a level consistent with overall healthy returns.

Consumer Banking Business

We continue to expect an overall decline in the balance of loans in our Consumer Banking business, primarily attributable to the run-off of our mortgage loan portfolios. We expect the balance of loans in our mortgage portfolio, which largely remains in a run-off mode, to continue to decline during 2010. We are beginning to approach a point where our new auto loan originations are close to offsetting the run-offs from our previous business. We expect consumer deposit balances to continue to grow with an improved mix away from time deposits.

Commercial Banking Business

Although the use of committed lines of credit in our Commercial Banking business remains low by historical standards, the level of loan originations and commitments has begun to increase. Based on recent activity, we expect modest growth in our commercial banking portfolio over the remainder of 2010. While the credit performance of our commercial loan portfolio appears to be stabilizing, we believe that the rate of charge-offs and nonperforming loans is likely to fluctuate over the next few quarters due to continuing economic uncertainty. We expect commercial deposit volumes to show further growth with a continued focus on our core client relationships.

IV. CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in accordance with 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—Significant Accounting Policies” of our 2009 Form 10-K.

We have identified the following accounting policies as our most critical accounting policies and estimates because they involve significant judgments and assumptions about highly complex and inherently uncertain matters, and the use of reasonably different estimates and assumptions could have a material impact on our reported results of operations or financial condition.

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·	Fair value measurement, including the assessment of other-than-temporary impairment of available-for-sale securities;

·	Representation and Warranty Reserve;

·	Allowance for loan and lease losses;

·	Valuation of goodwill and other intangibles;

·	Finance charge, interest and fee revenue recognition;

·	Derivative and hedge accounting;

·	Loss contingency reserves; and

·	Income taxes.

We evaluate our critical accounting estimates and judgments on an ongoing basis and update them as necessary based on changing conditions. The use of fair value to measure our financial instruments is fundamental to the preparation of our consolidated financial statements because we account for and record a substantial portion of our assets and liabilities at fair value. Accordingly, we provide information below on financial instruments recorded at fair value on our consolidated balance sheets. We also discuss below refinements we made in the second quarter of 2010 in estimating our loss contingency reserves for mortgage loan repurchase claims pursuant to representation and warranty provisions, which had a material impact on the amount of the loan repurchase expense we recorded in the second quarter of 2010. Management has discussed any significant changes in judgments or assumptions with the Audit and Risk Committee of the Board of Directors.

Fair Value

The fair value accounting rules provide 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. Each financial asset or liability is assigned to a level based on the lowest level of any input that is significant to its fair value measurement. 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.

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

Our financial instruments recorded at fair value on a recurring basis represented approximately 21% of our total reported assets of $197.5 billion as of June 30, 2010, compared with 26% of our total reported assets of $169.6 billion as of December 31, 2009. Financial assets for which fair values were measured using significant Level 3 inputs represented approximately 4% of these financial instruments (1% of total assets) as of June 30, 2010, and approximately 14% (4% of total assets) as of December 31, 2009. The decreases in the percentage of financial instruments measured at a fair value on a recurring basis and the percentage of financial instruments measured using Level 3 inputs were primarily attributable to the increase in our assets from the adoption of the new consolidation accounting standards, as the consolidated loans are generally classified as held for investment and are therefore not measured at fair value on a recurring basis. 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 7—Fair Value of Financial Instruments.”

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Representation and Warranty Reserve

The representation and warranty reserve is available to provide for probable losses inherent with the sale of mortgage loans by certain of our subsidiaries in the secondary market. In the normal course of business, certain representations and warranties with respect to the characteristics of the mortgage loans and the origination process are made to investors at the time of sale. A subsidiary may be required to repurchase mortgage loans in the event of certain breaches of these representations and warranties. In the event of a repurchase, the subsidiary is typically required to pay the then unpaid principal balance of the loan together with interest and certain expenses (including, in certain cases, legal costs incurred by the purchaser and/or others), and the subsidiary then recovers the loan or, if the loan has been foreclosed, the underlying collateral. A subsidiary is exposed to any losses on the repurchased loans after giving effect to any recoveries on the collateral. In some instances, a subsidiary may agree to make cash payments to make an investor whole on losses or to settle repurchase claims. In addition, our subsidiaries may be required to indemnify certain purchasers and others against losses they incur as a result of breaches of representations and warranties. In some cases, the amount of such losses could exceed the repurchase amount of the related loans.

The evaluation process for determining the adequacy of the representation and warranty reserve and the periodic provisioning for estimated losses is performed on a quarterly basis. Factors currently considered in the evaluation process for establishing the reserve include: identity of counterparty, trends in repurchase requests, the number of currently open repurchase requests, the status of any litigation arising from the repurchase requests, current and future level of loan losses to the extent the losses can reasonably be determined, trends in success rates (i.e. the probability that repurchase requests lead to payments) where such trends are meaningful, estimated future success rates, estimated gross loss per claim and estimated value of the underlying collateral. The estimate for the reserve is refined as additional information becomes available with respect to the various factors. During the second quarter of 2010, we were able to extend the timeframe, in most instances, over which we estimate repurchase liability to the full life of the loans sold by our subsidiaries.

Changes in the reserve are included in non-interest income for continuing operations or discontinued operations for changes related to GreenPoint Mortgage. Losses incurred on loans that we are required to either repurchase or make payments to the investor under the indemnification provisions are charged against the reserve. The representation and warranty reserve is included in other liabilities.

As of June 30, 2010 and December 31, 2009, the representation and warranty reserve was $853 million and $238 million, respectively, which are included within other liabilities and of which $630 million and $210 million were part of discontinued operations, respectively. For the six month periods ended June 30, 2010 and 2009, the amounts recorded in non-interest expense for the representation and warranty reserve were $628 million and $27 million, respectively, of which $433 million and $26 million were part of discontinued operations, respectively. See “Note 14- Commitments Contingencies and Guarantees” for additional discussion related to GreenPoint representation and warranty claims.

We provide additional information on our critical accounting policies and estimates in our 2009 Form 10-K in “Part I-Item 7. MD&A—Critical Accounting Estimates.”

V. RECENT ACCOUNTING PRONOUNCEMENTS

New accounting pronouncements or changes in existing accounting pronouncements may have a significant effect on our results of operations, financial condition, stockholders’ equity, capital ratios or business operations. As discussed above, effective January 1, 2010, we adopted two new accounting standards that had a significant impact on the manner in which we account for our securitization transactions, our consolidated financial statements and our capital ratios. These new accounting standards eliminated the concept of qualified special purpose entities (“QSPEs”), revised the accounting for transfers of financial assets and changed the consolidation criteria for variable interest entities (“VIEs”). Under the new accounting guidance, the determination to consolidate a VIE is based on a qualitative assessment of which party to the VIE has “power” combined with potentially significant benefits or losses, instead of the previous quantitative risks and rewards model. Consolidation is required when an entity has the power to direct matters which significantly impact the economic performance of the VIE, together with either the obligation to absorb losses or the rights to receive benefits that could be significant to the VIE. The prospective adoption of this new accounting guidance resulted in our consolidating substantially all our existing securitization trusts that had previously been off-balance sheet and eliminated sales treatment for new transfers of loans to securitization trusts.

We provide additional information on the impact of these new accounting standards above in “Impact from Adoption of New Consolidation Accounting Standards” and in “Note 1—Summary of Significant Accounting Policies.” We also identify and discuss the impact of other significant recently issued accounting pronouncements, including those not yet adopted, in “Note 1—Summary of Significant Accounting Policies.”

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VI. OFF-BALANCE SHEET ARRANGEMENTS AND VARIABLE INTEREST ENTITIES

In the ordinary course of business, we are involved in various types of transactions with limited liability companies, partnerships or trusts that often involve special purpose entities (“SPEs”) and VIEs. Some of these arrangements are not recorded on our consolidated balance sheets or may be recorded in amounts different from the full contract or notional amount of the transaction, depending on the nature or structure of, and accounting required to be applied to, the arrangement. Because these arrangements involve separate legal entities that have significant limitations on their activities, they are commonly referred to as “off-balance sheet arrangements.” These arrangements may expose us to potential losses in excess of the amounts recorded in the consolidated balance sheets. Our involvement in these arrangements can take many forms, including securitization and servicing activities, the purchase or sale of mortgage-backed or other asset-backed securities in connection with our mortgage portfolio, and loans to VIEs that hold debt, equity, real estate or other assets. Under previous accounting guidance, we were not required to consolidate the majority of our securitization trusts because they were QSPEs. Accordingly, we considered these trusts to be off-balance sheet arrangements.

In June 2009, the Financial Accounting Standards Board (“FASB”) issued two new accounting standards that eliminated the concept of QSPEs, revised the accounting for transfers of financial assets and changed the consolidation criteria for VIEs. As discussed above in “Impact from Adoption of New Consolidation Accounting Standards,” these standards were effective January 1, 2010 and adopted prospectively, which resulted in the consolidation of our credit card securitization trusts, one installment loan trust and certain option-ARM loan trusts originated by Chevy Chase Bank for which we provide servicing.

Our continuing involvement in unconsolidated VIEs primarily consists of certain mortgage loan trusts and community reinvestment and development entities. The carrying amount of assets and liabilities of these unconsolidated VIEs was $1.2 billion and $259 million, respectively, as of June 30, 2010, and our maximum exposure to loss was $1.2 billion. We provide a discussion of our activities related to these VIEs in “Note 15—Other Variable Interest Entities.”

VII. CONSOLIDATED FINANCIAL PERFORMANCE

The section below provides a comparative discussion of our consolidated corporate financial performance for the three months and six months ended June 30, 2010 and 2009. Following this section, we provide a discussion of our business segment results. You should read this section together with our “Executive Summary and Business Outlook” where we discuss trends and other factors that we expect will affect our future results of operations.

Net Interest Income

Net interest income represents the difference between the interest income and applicable fees earned on our interest-earning assets, which includes loans held for investment and investment securities, and the interest expense on our interest-bearing liabilities, which includes 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 debt, 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.

Table 3 below displays the major sources of our interest income and interest expense for the three and six months ended June 30, 2010 and 2009. 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. We provide additional supplemental tables in “Supplemental Statistical Tables” to assist in analyzing changes in our net interest income. Table A under “Supplemental Statistical Tables” presents, for each major category of our interest-earning assets and interest-bearing liabilities, the average outstanding balances, the interest earned or paid and the average yield or cost during the period. Table B under “Supplemental Statistical Tables” presents a rate/volume analysis that shows the variance in our net interest income between periods and the extent to which that variance is attributable to (i) changes in the volume of our interest-earning assets and interest-bearing liabilities or (ii) changes in the interest rates of these assets and liabilities.

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Table 3: Net Interest Income

	Three Months Ended June 30,						Six Months Ended June 30,
	2010		2009 (1)				2010		2009 (1)
(Dollars in millions)	Reported		Reported		Managed		Reported		Reported		Managed
Interest income:
Loans held-for-investment:
Consumer loans(2)(3)	$	3,178	$	1,853	$	3,184	$	6,445	$	3,670	$	6,289
Commercial loans		298		384		384		689		758		758
Total loans held for investment, including past-due fees		3,476		2,237		3,568		7,134		4,428		7,047
Investment securities		342		412		412		691		808		808
Other		17		68		17		40		131		33
Total interest income		3,835		2,717		3,997		7,865		5,367		7,888

Interest expense:
Deposits		368		560		560		767		1,187		1,187
Securitized debt obligations		212		74		342		454		165		717
Senior and subordinated notes		72		57		57		140		115		115
Other borrowings		86		81		81		179		162		162
Total interest expense		738		772		1,040		1,540		1,629		2,181
Net interest income	$	3,097	$	1,945	$	2,957	$	6,325	$	3,738	$	5,707

____________

(1)	Effective February 27, 2009, we acquired Chevy Chase Bank. Accordingly, our results for the first six months of 2009 include only a partial impact from Chevy Chase Bank.

(2)	Interest income on credit card, auto, mortgage and retail banking loans is reflected in consumer loans.

(3)	Interest income generated from small business credit cards is included in consumer loans.

Our reported net interest income of $3.1 billion for the second quarter of 2010 increased by 5% from managed net interest income of $3.0 billion for the second quarter of 2009, driven by a 15% (90 basis point) expansion of our net interest margin to 7.09%, which was partially offset by a 9% decrease in our average interest-earning assets.

Our reported net interest income of $6.3 billion for the first six months of 2010 increased by 11% from managed net interest income of $5.7 billion for the first six months of 2009, driven by a 17% (104 basis point) expansion of our net interest margin to 7.09%, which was partially offset by a 5% decrease in our average interest-earning assets.

The increase in net interest margin in the second quarter and first six months of 2010 was primarily attributable to significant reduction in our average cost of funds, coupled with an increase in the average yield on our interest-earning assets. Our cost of funds continued to benefit from the shift in the mix of our funding to lower cost consumer and commercial banking deposits from higher cost wholesale sources. In addition, the overall interest rate environment, combined with our disciplined pricing, drove a decrease in our average deposit interest rates. The increase in the average yield on our interest-earning assets reflected the benefit of pricing changes that we implemented during 2009, which contributed to an increase in the average yields on our loan portfolio, as well as improved credit conditions, which allowed us to recognize a greater proportion of uncollected finance charges in income during the second quarter of 2010.

The decrease in our average interest-earning assets in the second quarter and first six months of 2010 reflected the combined impact of the run-off of our installment loan and mortgage loan portfolios, elevated charge-offs and a decline in credit card account loan balances.

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Non-Interest Income

Non-interest income consists of servicing and securitizations income, service charges and other customer-related fees, interchange income and other non-interest income. Table 4 displays the components of non-interest income for the three and six months ended June 30, 2010 and 2009. Prior to the adoption of the new consolidation accounting standards on January 1, 2010, our reported non-interest income included servicing fees, finance charges, other fees, net charge-offs and interest paid to third party investors related to our securitization trusts as a component of non-interest income. In addition, when we created securitization trusts, we recognized gains or losses on the transfer of loans to these trusts and recorded our initial retained interests in the trusts. Beginning January 1, 2010, unless we qualify for sale accounting under the new consolidation accounting standards, we will no longer recognize a gain or loss or record retained interests when we transfer loans into securitization trusts. The servicing fees, finance charges, other fees, net of charge-offs and interest paid to third party investors related to our consolidated securitization trusts are now reported as a component of net interest income instead of as a component of non-interest income.

Table 4: Non-Interest Income

	Three Months Ended June 30,									Six Months Ended June 30,
	2010			2009 (1)						2010			2009(1)
(Dollars in millions)	Reported			Reported			Managed			Reported			Reported			Managed
Non-interest income:
Servicing and securitizations	$	21		$	363		$	(130	)	$	(15	)	$	816		$	(259	)
Service charges and other customer-related fees		496			492			725			1,081			998			1,505
Interchange		333			126			344			644			267			688
Net other-than-temporary impairment		(26	)		(10	)		(10	)		(57	)		(10	)		(10	)
Other		(17	)		261			261			215			251			251
Total non-interest income	$	807		$	1,232		$	1,190		$	1,868		$	2,322		$	2,175

____________

(1)	Effective February 27, 2009, we acquired Chevy Chase Bank. Accordingly, our results for the first six months of 2009 include only a partial impact from Chevy Chase Bank.

Non-interest income of $807 million for the second quarter of 2010 decreased by $383 million, or 32%, over managed non-interest income of $1.2 billion for the second quarter of 2009. Non-interest income of $1.9 billion for the first six months of 2010 decreased by $307 million, or 14%, over managed non-interest income of $2.2 billion for the second quarter of 2009.

The decrease in non-interest income in the second quarter and first six months of 2010 was primarily attributable to a reduction in over-limit fees as result of provisions under the CARD Act, a decline in the fair value of our mortgage servicing rights due to the run-off of our mortgage portfolio and enhancements in valuation inputs and assumptions, increased loan repurchase charges related to mortgage representation and warranty claims and an increase in other-than-temporary impairment losses. We recorded other-than-temporary losses in the second quarter and first six months of 2010 on certain non-agency mortgage-related securities as a result of further deterioration in the credit performance of these securities resulting from the continued weakness in the housing market and high unemployment. In addition, we recorded other-than-temporary impairment on certain other non-agency mortgage-related securities because of our intent to sell these securities.

We provide additional information on representation and warranty claims in “Critical Accounting Polices and Estimates” and in “Consolidated Balance Sheet Analysis and Credit Performance—Potential Mortgage Representation and Warranty Liabilities.” We provide additional information on other-than-temporary recognized on our available-for-sale securities in “Note 5—Investment Securities.”

Provision for Loan and Lease Losses

We build our allowance for loan and lease losses through the provision for loan and lease losses. Our provision for loan and lease losses in each period is driven by charge-offs and the level of allowance for loan and lease losses that we determine is necessary to provide for probable credit losses inherent in our loan portfolio as of each balance sheet date. Table 12 below under “Consolidated Balance Sheet Analysis—Summary of Allowance for Loan and Lease Losses” summarizes changes in our allowance for loan and lease losses and details the provision for loan and lease losses recognized in our income statement and the charge-offs recorded against our allowance for loan and lease losses for the three and six months ended June 30, 2010 and 2009.

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We recorded a provision for loan and lease losses of $723 million and $2.2 billion for the second quarter and first six months of 2010, respectively, compared with a provision for loan and lease losses on a managed basis of $1.9 billion and $4.0 billion for the second quarter and first six months of 2009, respectively. The decrease in our provision expense for loan and lease losses reflected the significant reduction in our allowance for loan and lease losses during the second quarter and first six months of 2010, attributable to continued improvement in credit performance trends across our portfolios.

Non-Interest Expense

Non-interest expense consists of ongoing operating costs, such as salaries and associated employee benefits, communications and other technology expenses, supplies and equipment and occupancy costs, and miscellaneous expenses. Marketing expenses also are included in non-interest expense. Table 5 displays the components of non-interest expense for the three and six months ended June 30, 2010 and 2009.

Table 5: Non-Interest Expense

	Three Months Ended June 30,				Six Months Ended June 30,
	2010		2009		2010		2009
(Dollars in millions)	Reported		Reported/Managed(1)		Reported		Reported/Managed(1)
Non-interest expense:
Salaries and associated benefits	$	650	$	634	$	1,296	$	1,188
Marketing		219		134		399		297
Communications and data processing		164		195		333		394
Supplies and equipment		129		128		253		247
Occupancy		117		115		237		215
Restructuring expense		0		43		0		61
Other(2)		721		673		1,329		1,265
Total non-interest expense	$	2,000	$	1,922	$	3,847	$	3,667

____________

(1)	Non-interest expense reported and managed amounts were the same for the three and six months ended June 30, 2009.

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

Non-interest expense of $2.0 billion for the second quarter of 2010 was up $78 million, or 4%, from the first quarter of 2009, and non-interest expense of $3.8 billion for the first six months of 2010 was up $180 million, or 5%, from the first six months of 2009. The increase in non-interest expense was primarily attributable to higher marketing costs, legal reserves and non-income tax-related accruals.

Income Taxes

Our effective income tax rate from continuing operations was 31.2% in the second quarter of 2010, up from 28.7% in the second quarter of 2009, and 28.6% for the first six months of 2010, up from 18.9% for the first six months of 2009. The variance in our effective tax rate between periods is due in part to fluctuations in our pre-tax earnings, which affects the relative tax benefit of tax-exempt income, tax credits and permanent tax items. The increase in our effective tax rate reflected a higher proportion of income earned. We recorded a $50 million tax benefit from the settlement of certain pre-acquisition tax liabilities related to North Fork and resolution of certain tax issues before the U.S. Tax Court during the first six months of 2010, which partially offset the increase in our effective tax rate for this period.

We provide additional information on items affecting our income taxes and effective tax rate in our 2009 Form 10-K under “Note 18—Income Taxes.”

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VIII. CONSOLIDATED BALANCE SHEET ANALYSIS AND CREDIT PERFORMANCE

Total assets of $197.5 billion as of June 30, 2010, after taking into consideration the $41.9 billion of assets added to our balance sheet on January 1, 2010 as a result of the adoption of the new consolidation standards, decreased by $14 billion, or 8%, during the first six months of 2010. Total liabilities of $172.2 billion as of June 30, 2010, after taking into consideration the $44.3 billion of securitization debt added to our balance sheet on January 1, 2010 as a result of the adoption of the new consolidation standards, decreased by $15.2 billion, or 11%, during the first six months of 2010. Our stockholders’ equity, after taking into account the cumulative effect after-tax charge of $2.9 billion to retained earnings on January 1, 2010 from the adoption of the new consolidation accounting standards, increased by $1.6 billion during the first six months of 2010, to $25.3 billion as of June 30, 2010. The increase in stockholders’ equity was primarily attributable to our net income of $1.2 billion for the first six months of 2010.

Following is a discussion of material changes, excluding the impact from our January 1, 2010 adoption of the new consolidation accounting standards, in the major components of our assets and liabilities during the first six months of 2010.

Investment Securities

Our investment securities portfolio, which had a fair value of $39.4 billion and $38.8 billion, as of June 30, 2010 and December 31, 2009, respectively, consists of the following: U.S. Treasury and U.S. agency debt obligations; agency and non-agency mortgage related securities; other asset-backed securities collateralized primarily by credit card loans, auto loans, student loans, auto dealer floor plan inventory loans, equipment loans and home equity lines of credit; municipal securities; and limited Community Reinvestment Act (“CRA”) equity securities. Our investment securities portfolio continues to be heavily concentrated in securities that generally have lower credit risk and high credit ratings, such as securities issued and guaranteed by the U.S. Treasury and government sponsored entities or agencies. Our investments in U.S. Treasury and agency securities, based on fair value, represented approximately 72% of our total investment securities portfolio as of June 30, 2010, compared with 76% as of December 31, 2009.

All of our investment securities were classified as available for sale as of June 30, 2010 and reported in our consolidated balance sheet at fair value. Table 6 presents, for the major categories of our investment securities, the amortized cost and fair value as of June 30, 2010 and December 31, 2009.

Table 6: Investment Securities Available for Sale

	June 30, 2010				December 31, 2009

(Dollars in millions)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
U.S. Treasury debt obligations	$	376	$	391	$	379	$	392
U.S. Agency debt obligations(1)		379		399		455		477
Collateralized mortgage obligations (“CMO”):
Agency(2)		13,429		13,903		8,174		8,300
Non-agency		1,293		1,148		1,608		1,338
Total CMOs		14,722		15,051		9,782		9,638
Mortgage-backed securities (“MBS”):
Agency(2)		12,599		13,154		19,429		19,858
Non-agency		873		783		1,011		826
Total MBS		13,472		13,937		20,440		20,684
Asset-backed securities(3)		9,036		9,175		7,043		7,192
Other securities(4)		415		471		440		447
Total	$	38,400	$	39,424	$	38,539	$	38,830

____________

(1)

Consists of debt securities issued by Fannie Mae and Freddie Mac with amortized costs of $151 million and $227 million, respectively, and fair values of $157 million and $241 million, respectively, as of June 30, 2010.

(2)

Consists of mortgage-related securities issued by Fannie Mae, Freddie Mac and Ginnie Mae with amortized costs of $14.3 billion, $6.3 billion and $2.2 billion, respectively, and fair values of $14.8 billion, $6.5 billion and $2.3 billion, respectively, as of June 30, 2010. The Fannie Mae, Freddie Mac and Ginnie Mae investments exceeded 10% of our stockholders’ equity as of June 30, 2010.

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(3)

Consists of securities collateralized by credit card loans, auto loans, auto dealer floor plan inventory loans, equipment loans, and home equity lines of credit. The distribution among these asset types was approximately 77.2% credit card loans, 6.6% auto loans, 10.1% student loans, 4.3% auto dealer floor plan inventory loans, 1.6% equipment loans, and 0.2% home equity lines of credit as of June 30, 2010. In comparison, the distribution was approximately 76.3% credit card loans, 14.0% auto loans, 6.9% student loans, 1.7% auto dealer floor plan inventory loans, 0.8% equipment loans and 0.3% home equity lines of credit as of December 31, 2009. Approximately 81.2% of the securities in our asset-backed security portfolio were rated AAA or its equivalent as of June 30, 2010, compared with 84.2% as of December 31, 2009.

(4)

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

Unrealized gains and losses on our available-for-sale securities are recorded net of tax as a component of accumulated other comprehensive income (“AOCI”). We had gross unrealized gains of $1.3 billion and gross unrealized losses of $261 million on available-for sale securities as of June 30, 2010, compared with gross unrealized gains of $840 million and gross unrealized losses of $549 million as of December 31, 2009. The increase in gross unrealized gains and decrease in gross unrealized losses in the first six months of 2010 was primarily driven by a tightening of credit spreads, attributable to the improvement in credit performance and increased liquidity, and lower interest rates. Of the $261 million gross unrealized losses as of June 30, 2010, $255 million related to securities that had been in a loss position for more than 12 months.

We evaluate available-for-sale securities in an unrealized loss position as of the end of each quarter for other-than-temporary impairment based on a number of criteria, including the extent and duration of the decline in value, the severity and duration of the impairment, recent events specific to the issuer and/or industry to which the issuer belongs, the payment structure of the security, external credit ratings and the failure of the issuer to make scheduled interest or principal payments, the value of underlying collateral, our intent and ability to hold the security and current market conditions.

Other-than-temporary impairment is recognized in earnings if one of the following conditions exists: (1) a decision to sell the security has been made; (2) it is more likely than not that we will be required to sell the security before the impairment is recovered; or (3) the amortized cost basis is not expected to be recovered. If, however, we have not made a decision to sell the security and we do not expect that we will be required to sell prior to recovery of the amortized cost basis, only the credit component of other-than-temporary impairment is recognized in earnings. The noncredit component is recorded in other comprehensive income (“OCI”). The credit component is the difference between the security’s amortized cost basis and the present value of its expected future cash flows discounted based on the original yield, while the noncredit component is the remaining difference between the security’s fair value and the present value of expected future cash flows.

We recognized net other-than-temporary impairment on available-for-sale securities of $26 million and $52 million in the second quarter and first six months of 2010, respectively, due in part to deterioration in the credit performance of certain securities resulting from the continued weakness in the housing market and high unemployment and our decision to sell certain other securities before recovery of the impairment amount.

We provide additional information on our available-for-sale securities in “Note 5—Investment Securities.”

Total Loans

Total loans that we manage consist of held-for-investment loans recorded on our balance sheet and loans held in our securitization trusts. Prior to our January 1, 2010 adoption of the new consolidation standards, a portion of our managed loans were accounted for as off-balance sheet. Loans underlying our securitization trusts are now reported on our consolidated balance sheets in restricted loans for securitization investors. Our total reported loans declined by $9.7 billion, or 7%, during the first six months of 2010 to $127.1 billion as of June 30, 2010, from managed loans of $136.8 billion as of December 31, 2009. The decline was primarily due to the run-off of loans in businesses that we either exited or repositioned early in the economic recession and charge-offs. The run-offs are related to installment loans in our Credit Card business and mortgage loans in our Consumer Banking business. Table 7 represents the composition of our loan portfolio, by business segments, as of June 30, 2010 and December 31, 2009.

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Table 7: Loan Portfolio Composition

	June 30, 2010		December 31, 2009
(Dollars in millions)	Reported On-Balance Sheet		Reported On-Balance Sheet		Off-Balance Sheet		Total Managed
Credit Card business:
Credit card loans:
Domestic credit card loans	$	49,625	$	13,374	$	39,827	$	53,201
International credit card loans		7,249		2,229		5,951		8,180
Total credit card loans		56,874		15,603		45,778		61,381
Installment loans:
Domestic installment loans		4,888		6,693		406		7,099
International installment loans		20		44		—		44
Total installment loans		4,908		6,737		406		7,143
Total credit card		61,782		22,340		46,184		68,524

Consumer Banking business:
Automobile		17,221		18,186		—		18,186
Mortgage		13,322		14,893		—		14,893
Other retail		4,770		5,135		—		5,135
Total consumer banking		35,313		38,214		—		38,214
Total consumer(1)		97,095		60,554		46,184		106,738

Commercial Banking business:
Commercial and multifamily real estate(2)		13,580		13,843		—		13,843
Middle market		10,203		10,062		—		10,062
Specialty lending		3,815		3,555		—		3,555
Total commercial lending		27,598		27,460		—		27,460
Small-ticket commercial real estate		1,977		2,153		—		2,153
Total commercial banking		29,575		29,613		—		29,613
Other:
Other loans		470		452		—		452
Total company	$	127,140	$	90,619	$	46,184	$	136,803

____________

(1)	Consumer loans consist of all of the loans within our Credit Card business and our Consumer Banking business.

(2)	Includes construction and land development loans totaling $2.6 billion and $2.5 billion as of June 30, 2010 and December 31, 2009, respectively.

Credit Performance

We closely monitor economic conditions and loan performance trends to manage and evaluate our exposure to credit risk. Key metrics that we track and use in evaluating the credit quality of our loan portfolio include delinquency rates, nonperforming loans, non accrual loans, loans classified as criticized and charge-off rates. High unemployment, the decline in home prices and continued weak economic conditions have adversely affected the ability of consumers and businesses to meet their debt obligations, which has contributed to elevated rates of delinquencies, nonperforming loans and charge-offs. We present information in the section below on the credit performance of our total loans, including the key metrics that we use in tracking changes in the credit quality of our loan portfolio.

Delinquent and Nonperforming Loans

We consider the entire balance of an account to be delinquent if the minimum contractually required payment is not received by the due date. Our policies for classifying loans as nonperforming and placing them on nonaccrual status are as follows:

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Credit card loans: We continue to classify credit card loans as performing until the loan is charged-off. We also continue to accrue finance charges and fees on credit card loans until the account is charged-off. We reduce, however, the carrying amount of credit card loan balances by the amount of finance charges and fees billed but not expected to be collected and exclude this amount from revenue.

Consumer loans: If we determine that collectability of principal and interest is reasonably assured, we classify delinquent consumer loans as performing and continue to accrue interest until the loan is 90 days past due for auto and mortgage loans and until the loan is 120 days past due for other non-credit card consumer loans. If we determine that collectability is not reasonably assured, or the loan is 90 days past due for auto and mortgage loans and 120 days past due for other non-credit card consumer loans, we consider the loan to be nonperforming and it is placed on nonaccrual status.

·	Commercial loans: We classify commercial loans as nonperforming and place them on nonaccrual status at the earlier of the date we determine that the collectability of interest or principal on the loan is not reasonably assured or the loan is 90 days past due.

Loans acquired from Chevy Chase Bank: Loans that we acquired from Chevy Chase Bank were recorded at fair value, including those considered to be impaired at the date of purchase. We therefore do not classify loans that we acquired from Chevy Chase Bank as delinquent or nonperforming unless they do not perform in accordance with our expectations as of the purchase date.

Table 8 compares 30+ day performing loan delinquency rates, by loan category, as of June 30, 2010, December 31, 2009 and June 30, 2009. Delinquency rates for all loan categories, except commercial and multifamily real estate, showed signs of improvement during the first six months of 2010, reflecting positive trends in credit conditions. In addition, expected seasonal trends and the diminishing initial adverse impact from the pricing changes we made during 2009 contributed to a reduction in the delinquency rate for domestic credit cards.

Table 8: 30+ Day Performing Delinquencies(1)

	June 30, 2010					December 31, 2009(2)					June 30, 2009(2)
(Dollars in millions)	Amount		Rate			Amount		Rate			Amount		Rate
Credit Card business:
Domestic credit card and installment	$	2,617		4.80	%	$	3,487		5.78	%	$	3,087		4.77	%
International credit card and installment		438		6.03			539		6.55			578		6.69
Total credit card		3,055		4.95			4,026		5.88			3,665		4.99

Consumer Banking business:
Automobile		1,334		7.74			1,824		10.03			1,770		8.89
Mortgage		91		0.68			188		1.26			161		0.97
Retail banking		41		0.87			63		1.23			49		0.91
Total consumer banking		1,466		4.15			2,075		5.43			1,980		4.73

Commercial Banking business:
Commercial and multifamily real estate		138		1.01			84		0.61			79		0.56
Middle market		13		0.13			46		0.46			29		0.24
Specialty lending		42		1.10			60		1.69			58		1.79
Small ticket commercial real estate		100		5.07			121		5.59			112		4.47
Total commercial banking		293		0.99			311		1.05			278		0.92

Other:
Other loans		30		6.29			53		11.60			64		9.26
Total company	$	4,844		3.81	%	$	6,465		4.73	%	$	5,987		4.10	%

____________

(1)

Loans acquired from Chevy Chase Bank are not classified as delinquent unless they do not perform in accordance with our expectations as of the purchase date. We do, however, include these loans in the denominator used in calculating our delinquency rates. The 30 day+ delinquency rates, excluding loans acquired from Chevy Chase Bank, for mortgage, retail banking, total consumer banking and commercial banking were 1.14 %, 0.91%, 4.93% and 1.02%, respectively, as of June 30, 2010, compared with 2.18%, 1.30%, 6.56% and 1.08%, respectively, as of December 31, 2009.

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(2)	Delinquency statistics are based on our total loan portfolio, which we previously referred to as our “managed” loan portfolio. The total loan portfolio includes loans recorded on our balance sheet and loans held in our securitization trusts.

Table 9 presents the amount of nonperforming loans and the ratio of nonperforming loans to total loans, by loan category, as of June 30, 2010 and December 31, 2009. The increase in our nonperforming loan ratio to 1.03% as of June 30, 2010, from 0.94% as of December 31, 2009 was primarily attributable to our mortgage and other loan portfolios. The weak economy, decline in property values and high unemployment continued to have an adverse impact on our commercial and mortgage loan portfolios.

Table 9: Nonperforming Loans (1)(2)

	June 30, 2010					December 31, 2009( 3)
(Dollars in millions)	Amount		% of Loans Held for Investment			Amount		% of Loans Held for Investment
Consumer Banking business:
Automobile	$	85		0.49	%		143		0.79
Mortgage		478		3.59			323		2.17
Retail banking		79		1.66			87		1.69
Total consumer banking		642		1.82			553		1.45

Commercial Banking business:
Commercial and multifamily real estate		359		2.64			429		3.10
Middle market		120		1.18			104		1.03
Specialty lending		63		1.65			74		2.08
Small-ticket commercial real estate		60		3.03			95		4.41
Total commercial banking		602		2.04			702		2.37
Other		66		14.04			34		7.52
Total company	$	1,310		1.03	%	$	1,289		0.94	%

____________

(1)

Loans acquired from Chevy Chase Bank are not classified as nonperforming unless they do not perform in accordance with our expectations as of the purchase date. We do, however, include these loans in the denominator used in calculating our nonperforming loan ratios. The nonperforming loan ratios, excluding loans acquired from Chevy Chase Bank, for commercial and multifamily real estate, middle market, total commercial banking, mortgages, retail banking and total consumer banking were 2.72, 1.23, 2.09, 5.99, 1.76 and 2.16, respectively, as of June 30, 2010, compared with 3.18, 1,07, 2.43, 3.75, 1.78 and 1.75, respectively, as of December 31, 2009.

(2)

As permitted by regulatory guidance issued by The Federal Financial Institutions Examination Council (“FFIEC”), we continue to classify credit card loans as performing until the loan is charged off. Excluding credit card loans from the denominator, our nonperforming loans as a percentage of loans held for investment would 2.00% and 1.89% as of June 30, 2010 and December 31, 2009.

(3)	Nonperforming loans are based on our total loan portfolio, which we previously referred to as our “managed” loan portfolio. The total loan portfolio includes loans recorded on our balance sheet and loans held in our securitization trusts.

Net Charge-Offs

Our net charge-offs consist of the unpaid principal balance of loans that are charged off net of recoveries of principal amounts. We exclude accrued and unpaid finance charges and fees and fraud losses from net charge-offs. Our charge-off time frame for loans varies based on the loan type. We generally charge-off credit card loans when the account is 180 days past due from the statement cycle date. We charge-off consumer loans at the earlier of the date when the account is 120 days past due (90 days for auto) or upon repossession of the underlying collateral. We generally charge-off mortgage loans when the account is 180 days past due. The charge-off amount is based on the estimated home value as of the date of the charge-off. We update our home value estimates quarterly and recognize additional charge-offs for declines in home values below our initial estimate at the date mortgage loans are charged-off. We charge-off commercial loans when we determine that amounts are uncollectible. Credit card loans in bankruptcy are charged-off within 30 days of notification, and other non-credit card consumer loans are charged off within 60 days. Credit card and other non-credit card consumer loans of deceased account holders are charged-off within 60 days of notification. Costs incurred to recover charged-off loans are recorded as collection expense and included in our consolidated statements of income as a component of other non-interest expense. Our net charge-offs do not include losses related to the loans we acquired from Chevy Chase Bank, which we considered to be impaired at the date of purchase. We recorded the purchased impaired Chevy Chase Bank loan portfolio at fair value at acquisition, which already takes into account estimated credit losses.

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Table 10 presents our net charge-off rates, by business segment, for the three months and six months ended June 30, 2010 and 2009. We present the dollar amount of charge-offs by loan category below in Table 12 under “Summary of Allowance for Loan and Lease Losses.”

Table 10: Net Charge-Offs

	Three Months Ended June 30,										Six Months Ended June 30,
(Dollars in millions)	2010					2009(1)					2010					2009(1)
	Amount		Rate			Amount		Rate			Amount		Rate			Amount		Rate
Credit card	$	1,463		9.36	%	$	1,713		9.24	%	$	3,156		9.84	%	$	3,319		8.75	%
Consumer banking(2)(3)		131		1.47			238		2.23			326		1.76			539